Thomas White Global Investing
Brazil
Brazil Stamp
March 19, 2010
A Postcard from the Americas
Brazil: Cotton Dispute Threatens Trade War

Cargo ship docked near port in Brazil

Brazil and the U.S. have a 30-day period to negotiate a solution to the eight-year old dispute before Brazil’s tariff changes come into effect.

On March 8, Brazil announced that it would impose duties worth $591 million on 102 U.S. goods ranging from cotton to cars to cosmetics. Then one week later, it upped the scales a little further by stating that it may suspend patents and intellectual property rights on U.S. manufactured items such as chemicals, prescription drugs, music, books, movies and software. These events bring to the fore a simmering dispute between Brazil and the U.S., a trade war that dates back to 2002, and which has now snowballed into an international fight of unimagined proportions.

Eight years ago, Brazil complained to the World Trade Organization (WTO) about the U.S. policy that offers subsidies to its cotton growers, a practice that protects them from price fluctuations and helps the U.S. maintain its position as the world’s second-largest cotton producer. The WTO agreed with Brazil’s complaints and awarded the Latin American country the right to impose up to $829 million in trade retaliations. It is only now that a frustrated Brazil has decided to cash in on the WTO’s rare ruling allowing such counter retaliation.

As with most delicate trade issues, there is often a flipside to the story. While Brazil’s trade woes focus on subsidies, such as the one supporting U.S. cotton producers, and restrictive tariff rate quotas (TRQs) on commodities such as orange juice, ethanol and sugar, the U.S. is primarily concerned with intellectual property rights enforcement and investment rules, as well as Brazil’s high tariffs on U.S. capital goods, namely machinery, electronics and industrial chemicals.

Yet, cross retaliation is definitely not the best way to resolve a long-standing dispute, and Brazil admits as much. Lytha Spindola, executive secretary of Brazil’s Foreign Trade Chamber, told Reuters that “after nearly eight years and no concrete proposals to help solve this dispute, Brazil must insist on its rights.” And Brazil is clear to underscore its biggest grievance. U.S. cotton and cotton products would be charged a 100% import tariff, the highest on the list. Even cars, one of the most important industries in the U.S., are expected to see a hike in import duties to Brazil from 35% to 50%. Equally startling is Brazil’s decision to ‘suspend certain obligations’ related to honoring intellectual property rights in the key software and pharmaceutical sectors. The U.S., predictably, is not amused, but has stated that there is still “room for negotiation.” Brazil too has left that door open, and it remains to be seen if the Latin American country will impose such retaliatory measures on an inarguably powerful trading partner. Bilateral trade between Brazil and the United States dropped to $36 billion last year from $53 billion in 2008, but there is no denying that a protracted standoff is to the detriment of both countries.

When queried about her reaction to the trade war, a weary Hillary Clinton wryly commented that she feels like she has “walked into a movie that’s been going on for years,” in an obvious reference to the eight-year long saga. Brazilian President Luiz Inacio da Silva struck a more defiant tone, justifying Brazil’s measures, but has asked President Obama to ‘quickly’ bring an end to the ‘cotton fighting.’ And really, an end is what this long-running epic deserves. As she may hope, Hillary Clinton’s movie needs ‘a happier ending.’

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