a. Brazil's specific charges and the WTO panel's findings. 3. Phase I V : WTO arbitration of Brazil's request for retaliatory countermeasures. 6. Phase II: Brazil's WTO Dispute Settlement Case Against the U.S. Cotton Program

In 2002, Brazil—a major cotton export competitor—expressed its growing concerns about U.S. cotton subsidies by initiating a WTO dispute settlement case (DS267) against certain features of the U.S. cotton program. U.S. trade officials argued that the U.S. export credit guarantee programs were consistent with WTO obligations. However, Brazil argued that U.S. program changes were insufficient and, on August 21, 2006, requested the establishment of a WTO compliance panel to review whether the United States had fully complied with panel and AB rulings. Under the prohibited subsidies arbitration case, Brazil was seeking two countermeasures: 
1. a one-time countermeasure in relation to the Step 2 program of $350 million based on U.S. government payments made under the Step 2 program in marketing year 2005 (this corresponds roughly to the period that elapsed between the expiration of the prohibited subsidy compliance period on July 1, 2005, and the effective repeal of the Step 2 program by the U.S. Congress on August 1, 2006); and 2. annual countermeasures proportionate to the entire annual amount of GSM 102 export credit guarantees issued to all countries for export transactions involving unscheduled products—rice, pork, and poultry—valued at $1.155 billion during FY2006 (initially Brazil valued this countermeasure at $1.294 million) and composed of three parts: a. an interest rate subsidy component amounting to $234.7 million; b. the additional export sales obtained by the United States as a result of these discounts, including sales to creditworthy foreign obligors, referred to as marginal additionality and valued at $62.3 million; and c. the additional export sales to noncreditworthy foreign obligors, referred to as full additionality and valued at $855 million. Under the combined prohibited and actionable subsidy cases, Brazil asked for:
4. the right to engage in cross-retaliation (i.e., countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents, as well as services), stating that retaliation in goods would not be practicable or effective due to limited trade in goods between Brazil and the United States. As a result, the panel ruled that Brazil would be entitled to cross-retaliation, if (and only if) the overall retaliation amount (combining both the variable and fixed components) to which it would otherwise be entitled exceeds a variable annual threshold (described below). Brazil Targets Goods and Services for Countermeasures

On December 21, 2009, Brazil announced that it was authorized by the WTO to impose trade retaliation against up to $829.3 million in U.S. goods in 2010 (based on 2008 U.S. trade data). Brazil and United States Reach Framework Agreement

On June 17, 2010, U.S. and Brazilian trade negotiators concluded the Framework for a Mutually Agreed Solution to the Cotton Dispute in the WTO (WT/DS267) for moving forward in the dispute settlement case. The framework agreement—which lays out a number of "steps and discussions"—represents a path forward toward the ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTO-sanctioned trade retaliation by Brazil against U.S. goods and services. As a result, Brazil has suspended trade retaliation pending U.S. compliance with the framework agreement measures. Changes to Trade-Distorting Domestic Cotton Support Programs

The framework agreement includes quarterly discussions on potential limits to trade-distorting U.S. cotton subsidies (recognizing that actual changes to cotton-specific subsidies require legislation by Congress and are not likely to happen outside of the 2012 farm bill debate). The GSM-102 semi-annual operational reviews will coincide with the relevant quarterly cotton program discussions. Both parties to the dispute have said that a final mutually agreed solution would not be possible until after the 2012 farm bill, when the nature of any changes to U.S. domestic cotton subsidies has been made clear. Payments to the Brazilian Cotton Institute

The United States has agreed to pay $147.3 million annually into a Brazilian fund (known as the Brazilian Cotton Institute) for technical assistance and capacity building for Brazil's cotton sector. The two sides also discussed the average length of loan tenors made under the GSM-102 program.
The so-called "Brazil cotton case" is a long-running World Trade Organization (WTO) dispute settlement case (DS267) initiated by Brazil—a major cotton export competitor—in 2002 against specific provisions of the U.S. cotton program. In September 2004, a WTO dispute settlement panel found that certain U.S. agricultural support payments and guarantees—including (1) payments to cotton producers under the marketing loan and counter-cyclical programs, and (2) export credit guarantees under the GSM-102 program—were inconsistent with WTO commitments. In 2005, the United States made several changes to both its cotton and GSM-102 programs in an attempt to bring them into compliance with WTO recommendations. However, Brazil argued that the U.S. response was inadequate. A WTO compliance panel ruled in favor of Brazil's non-compliance charge against the United States in December 2007, and the ruling was upheld on appeal in June 2008.
In August 2009, a WTO arbitration panel—assigned to determine the appropriate level of retaliation—announced that Brazil's trade countermeasures against U.S. goods and services could include two components: (1) a fixed amount of $147.3 million in response to U.S. cotton program payments, and (2) a variable amount based on U.S. GSM-102 program spending. In response to Brazil's argument that insufficient trade in goods occurred between the two countries, the arbitrators also ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliation involves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents. Based on the arbitrators' formulas, using 2008 data, Brazil announced in December 2009 that it would impose trade retaliation starting on April 6, 2010, against up to $829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory countermeasures.
The threat of sanctions led to intense negotiations between Brazil and the United States to find a mutual agreement and avoid the trade retaliation. In April 2010, the two parties reached a preliminary memorandum of understanding (MOU) spelling out certain actions which, if undertaken by the United States, would lead to suspension of Brazil's threatened retaliation. Then, on June 17, 2010, U.S. and Brazilian trade negotiators concluded the Framework for a Mutually Agreed Solution to the Cotton Dispute in the WTO (WT/DS267). The framework agreement—which lays out a number of "steps and discussions"—represents a path forward toward the ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTO-sanctioned trade retaliation by Brazil against U.S. goods and services. As a result, Brazil has suspended trade retaliation pending U.S. compliance with the framework agreement measures. Key aspects of the framework agreement include (1) payment by the United States of a $147.3 million annual fund to a newly created "Brazilian Cotton Institute" to provide technical assistance and capacity-building for Brazil's cotton sector, (2) quarterly discussions on potential limits of trade-distorting U.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill), and (3) near-term modifications to the operation of the GSM-102 program coupled with a semi-annual review of whether U.S. GSM-102 program implementation satisfies certain performance benchmarks.
These U.S. commitments are intended to delay any trade retaliation until after the 2012 farm bill, when potential changes to U.S. cotton programs will be evaluated. However, in the interim, several failed legislative attempts have been made to ban U.S. payments to the Brazil Cotton Institute.