As we mentioned in an earlier article, the cotton case against the U.S. won by Brazil in the World Trade Organization maintains a caveat that allows the Brazilian government to retaliate against the U.S. and includes increasing tariffs on multiple U.S. products and as a last resort, restricting U.S. intellectual property (IP) rights (patents & copyrights).
Specifically, Brazil initiated and won a dispute over the current marketing assistance loan (MAL), counter cyclical payment (CCP), and export credit guarantee programs. Under a Framework Agreement reached in June 2010, Brazil agreed not to proceed with retaliatory measures; the U.S. agreed to annual payments of $147.3 million to the Brazilian cotton industry and quarterly discussions on potential limits of trade-distorting U.S. farm subsidies.
Both parties recognize that changes to the MAL and CCP programs must occur in the 2012 Farm Bill to avoid Brazilian retaliation. That means the future viability of MAL and CCP will likely come under intense debate in upcoming congressional Farm Bill and budget hearings.
Here are four scenarios to consider:
One. The Congress extends the current Farm Bill.
In general, the Farm Bill is reauthorized every five years. However, in most recent years Congress has not met the 5-year reauthorization schedule on time and has had to rely on short-term extensions of current law. It seems as though the 2012 Farm Bill is headed down the same path. Consider, 2012 is an election year for the U.S. President, one-third of the U.S. Senate and the U.S. House of Representatives and thus presents lawmakers with a shortened legislative year. Given the many constituencies and complexities of the Farm Bill this makes it virtually impossible to complete it in a politically-charged election year. How does Brazil respond to an extension of current law which includes keeping the very programs the WTO has determined to be trade distortive?
Two. The Congress maintains MAL and CCP.
If a lack of political fortitude prevails and the Congress decides to maintain the MAL and CCP programs there may be pressures from commodity groups to change the existing programs. Consider, under current law established loan rates and target prices are nowhere near current market prices nor costs of production (corn MAL rate = $1.95/bushel; corn CCP target price = $2.63/bushel; and CBOT corn price for Sept. delivery = $6.45/bushel). If Congress signals that it is seriously considering increasing loan rates and target prices to better reflect today’s costs and market prices, it may give Brazil further justification to break the Framework Agreement and quickly proceed with retaliatory trade measures. This scenario also presents increased budget exposure during an economic decline in commodity markets.
Three. Congress changes the MAL and CCP programs to make them less trade distortive.
In 2008 (then) Secretary of Agriculture, (now) U.S. Senator Mike Johanns (R-NE) offered a potential solution to resolve the WTO dispute. His proposal set the marketing loan rates at 85% of the Olympic 5-year moving average of US farm prices for each program crop. At the time this was introduced, it was estimated to save $450 million each year over a ten year period. Among U.S. government officials, this method is generally thought to be less trade distortive, unfortunately the Brazilians have the final say in this matter.
Four. Congress eliminates both the MAL and CCP programs causing producers to rely more on crop insurance.
Already the cyclical nature of the MAL and CCP give rise to the question of their future need. CBO’s March 2011 projections for net loans under the MAL are just under $1.5 billion for the 10-year period 2012-2021. CBO assumes that, with a growing world population (estimated to increase from 6 billion to 9 billion people by 2050), commodity prices should remain strong well into the future.
Your Products are at Risk!
Lawmakers must decide on how to change farm programs in the 2012 Farm Bill, otherwise Brazil is entitled to retaliatory measures, including cross-retaliation, imposing trade tariffs against up to $829 million in U.S. goods and $268 million in eligible cross-retaliatory countermeasures. If Brazil believes that the 2012 Farm Bill continues trade distorting policies, they can increase tariffs on a variety of U.S. products and commodities.
Early last year, Brazil released a list of 102 goods originating from the U.S. that would be subject to import tariffs of up to 100%. This was followed by an initial list of U.S. patents and intellectual property rights that it would restricted likely as a measure of last resort.
If Brazil enacts retaliatory measures (i.e. if they don’t get their way in the upcoming Farm Bill), your company’s products including cellular phones, audio components, video equipment, medical equipment, fabrics, food processing systems, fruits & vegetable products, beauty products, or pharmaceuticals could be subjected to high import tariffs.
Cansler Consulting & the Farm Bill
As an agricultural lobbying firm, Cansler Consulting is well versed in the intricacies of the 2012 Farm Bill and all the factors and agendas involved. If your organization needs its interests protected during this time of decision, please contact us today at (202) 714-2822 for a consultation today to see how we can help your organization build support where it needs it most.