The US-Cotton Case — The Truth Behind Brazil’s Cross-Retaliation Against US Intellectual Property

By Pedro Paranaguá

The United States awards subsidies to its cotton industry, including export subsidies. According to Brazil, such subsidies distort competition and violate World Trade Organization (WTO) rules that have been agreed to by all WTO member countries, including the US. Brazil filed a complaint with the WTO dispute settlement system challenging the cotton subsidies.

In 2005, WTO’s Appellate Body ruled that the US policies in fact violate WTO rules.

The Appellate Body ruled that the US should remove the adverse effects of certain benefits or withdraw such subsidies within six months, and that the US should comply with WTO rules.

The US did not comply with the WTO decision within the six month period, and continued to award subsidies to its cotton industry (in violation of the WTO decision). In response, in 2005, Brazil requested authorisation from the WTO to adopt countermeasures as foreseen by the WTO to induce the US to comply. A panel of WTO arbitrators granted Brazil’s request.

Accordingly, such measures taken by Brazil not only have a punishing character for the breaching of mutually agreed WTO rules, but especially they are compensatory for the illegal damages caused by the US in violation of WTO rules. Above all, the main goal of the measures is to make the US comply with the agreed rules, and therefore withdraw subsidies contrary to WTO rules.

In November 2009, the WTO arbitrators authorised Brazil to adopt countermeasures not only in goods, but also on services and intellectual property, a decision permitted by the WTO system.

To implement the WTO authorisation, on February 11, 2010 Brazil’s President issued Provisional Measure (MP) No. 482 (in Portuguese), providing for the suspension of measures or other obligations concerning intellectual property rights and other rights when WTO members fail to comply with their multilateral obligations.

Following the WTO’s authorisation and MP No. 482, on March 08, 2010 Brazil’s Chamber of Commerce (Camex) published a list of goods [pdf] (in Portuguese) (not including intellectual property) that will have their import tax rates increased to U.S. goods.

The list of goods amounts [doc] to retaliation of $591 million. The remaining compensation amount that Brazil is entitled to – $238 million (of a total of $829 million authorised by the WTO) – will be implemented on intellectual property rights and services.

This is the so-called cross-retaliation. That is, the case involves subsidies to cotton goods in the US – in violation of WTO rules – but Brazil has the right and was authorised to set compensation not only in goods, but also in regard to intellectual property rights.

It is important to clarify that at the time of the negotiations that led to the creation of the WTO in the late 1980s and early 1990s, industrialised countries – notably the US, but also the European Union and Japan – supported the cross-retaliation in one direction only: if there were violations to commitments on intellectual property rights, the violating country would be subject to retaliation in other sectors, such as trade in goods, just as occurred in the unilateral (and illegal) measures undertaken by the US before the WTO, including against Brazil.

The head of the delegation of Brazil in Geneva at the time of the negotiations, Ambassador Celso Amorim, played a key role to achieve a balanced outcome of the negotiations. Cross-retaliation in the opposite direction was thus agreed upon and allowed.

Accordingly, on March 15, 2010 Brazil issued Camex Resolution 16/2010 [pdf] (in Portuguese) for open public consultation (in Portuguese) on the measures that Brazil may take on intellectual property rights, calling on interested parties to express their views within 20 days. The Brazilian government is being cautious and transparent, and is promoting a democratic participation in the process.

The cross-retaliation may (and should) be put forward where it is determined that the suspension of concessions in the same sector will have no effect or will not be efficient, or when it is more harmful to the country authorised to establish such measures. In practical terms, should the raising of import tax on some goods from the US be harmful to Brazil, the latter is entitled to, for example, refrain from paying royalties for patented and copyrighted goods – a form of suspension of concessions and obligations on intellectual property rights.

In other words, the WTO rules provide that if the US does not comply with the rules of the organisation, as decided by the WTO Dispute Settlement Body, Brazil has the right to suspend its obligations to the US, and this can be done in another field, such as intellectual property rights.

Potential Benefits to Society, Multilateral System

If used wisely, cross-retaliation may be very beneficial to society, the industrial sector and the Brazilian consumers, who will pay less or even will not have to pay anything to buy or use, for instance, a patented product (from a US company). Society will be able to save millions with software licences, expensive books published by US publishers such as medical books, which can be made available for free on the internet, or seeds protected by plant breeders’ rights may be freely used for food production, and so on.

Cross-retaliation is a measure that benefits (i) consumers and Brazilian society, (ii) the local industry (e.g. the generics industry will be allowed to introduce patent-protected medicines), (iii) the domestic private sector harmed by the illegal measures, which will compensate the losses suffered by the illegal US subsidies, (iv) the Brazilian government, which will make sure the international rules are observed by everyone, including and especially the most powerful countries (the main advantage of multilateralism), and (v) the international community, which will benefit from the fact that one of the most powerful countries will be obliged to comply with the rules agreed by all WTO members.

Accordingly, what is more interesting in the cross-retaliation scheme is that the measure serves as an incentive for the US to comply with the WTO rules, as decided by the Appellate Body, in particular by withdrawing its illegal cotton subsidies and ending the harm to Brazilian producers (or to other WTO members).

Yet, it is important to recall that retaliation measures are not (and should not be) permanent, but rather limited in time. It only lasts as long as the US does not comply with the WTO decision and its rules.

Effective Means for Compliance

How does this incentive for compliance work? The US entertainment, biotechnology, information technology, chemical and pharmaceutical industries, among others, will protest such countermeasures by Brazil – even though Brazil is duly following in full the WTO rules. These US industries will not receive royalties (until the US complies with the WTO decision) from copyrighted music, film, books, software and patents for drugs or technologies such as spare automobile parts protected by industrial design or cotton harvester machines or machines used in the textile industry, not to mention the patents on genetically modified cotton seed varieties or patents on pesticides used in cotton farming. In this sense, Brazil can take measures that will directly benefit the producers of cotton in Brazil.

And precisely because these US industries are so economically and politically powerful (and depend on IP royalties to maximise their profits), they will pressure the US government to withdraw the cotton subsidies contrary to the WTO rules. Accordingly, Brazil is taking the best possible measures consistent with the WTO system to incentivize the US to comply with world trade rules in line with the WTO rulings against the US.

It should be reiterated that the idea of retaliation comes from the US. The US used and abused this system unilaterally and illegally over the years (against the rules of the WTO). Now, years later, the US government and its private sector are afraid to taste its own formula.

Of course Brazil may be subject to occasional malicious or incomplete interpretations, implying that Brazil does not respect US intellectual property rights. To be sure, however, Brazil is following exactly the WTO rules, as decided in the US cotton subsidies case.

Indeed, if there is someone who is not complying with the rules, it is certainly the US, and not Brazil.

Pedro Paranaguá is lecturer-in-law at Fundação Getulio Vargas (FGV), Rio-Brazil, and consultant in intellectual property- related issues. He holds a Master’s degree (merit) in intellectual property law from the University of London, and is a doctorate candidate at Duke University School of Law.