Brief Historical Overview of the WTO Case

The so-called "Brazil-U.S. cotton case" is a long-running 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 addition, certain U.S. agricultural export programs were found to be illegal under WTO rules. In December 2007, a WTO compliance panel ruled in favor of Brazil's noncompliance charge against the United States, and the ruling was upheld on appeal in June 2008. 2. The two countries signed a new memorandum of understanding (MOU) that spelled out the terms of the agreement: 
Brazil relinquishes its rights to countermeasures against U.S. trade or any further proceedings in the dispute; the United States agreed to new rules governing fees (i.e., must be risk-based fees with an additional fee component for longer tenors of greater than 12 but less than 18 months, or of 18 months) and tenor (i.e., maximum tenor of 18 month) for the GSM-102 export credit guarantee program; Brazil agreed to a temporary Peace Clause with respect to any new WTO actions against U.S. cotton support programs while the 2014 farm bill ( P.L. 113-79 ) is in force or against any agricultural export credit guarantees under the GSM-102 program as long as the program is operated consistent with the agreed terms; the United States would make a one-time final payment of $300 million to the Brazil Cotton Institute (BCI) with explicit use-of-fund conditions that included an expansion of the uses beyond technical and capacity-building activities related to cotton production in Brazil as defined under the Framework Agreement—additional uses are for infrastructure and for research conducted in conjunction with a U.S. institution (the provision was included in the 2014 farm bill); and both counties agreed to routine semi-annual reporting of compliance with the terms of the MOU. U.S. Policy Changes in Response to the Cotton Case

Since 2005, the United States has made several changes to both its cotton and export credit guarantee programs in an attempt to bring them into compliance with WTO recommendations. Modified or Eliminated Export Credit Guarantee Programs

In order to address the issue of export credit guarantees containing an implicit export subsidy prohibited under WTO rules—that is, the idea that benefits returned under the program are insufficient to cover the operating costs and losses of program implementation—several steps were taken by both USDA and Congress. However, Brazil continued to argue that the U.S. policy response was inadequate. Policy Changes Made in the 2014 Farm Bill (P.L. 113-79 ). These changes have resulted in cotton being singled out and treated differently from all other U.S. program crops. U.S. cotton no longer has access to the price and income support programs offered for other program crops, but instead will rely on a within-year, market-based insurance guarantee as its primary support measure. Under the new cotton program, producers have to pay into the program in order to participate, a loss (albeit at the county level) has to occur before a payment is made, and the sum of program payments is prohibited from exceeding the value of the crop insured in order to minimize any potential incentive. 1. 2. Stacked Income Protection Plan (STAX) . A Final Resolution

On October 1, 2014, Brazil and the United States reached an agreement to resolve the long-running cotton dispute in the World Trade Organization (WTO). Conclusion

In the end, the successful resolution of the WTO cotton dispute avoided a trade war between two of the world's major agricultural trading nations, the United States and Brazil, while resulting in substantial and substantive changes in U.S. domestic support programs for upland cotton and the U.S. export credit guarantee program in general.
On October 1, 2014, Brazil and the United States reached an agreement to resolve the long-running cotton dispute in the World Trade Organization (WTO). The two countries signed a new memorandum of understanding (MOU) that spelled out the terms of the agreement: Brazil relinquishes its rights to countermeasures against U.S. trade or any further proceedings in the dispute; the United States agreed to new rules governing fees and tenor for the GSM-102 export credit guarantee program; Brazil agreed to a temporary Peace Clause with respect to any new WTO actions against U.S. cotton support programs while the 2014 farm bill (P.L. 113-79) is in force or against any agricultural export credit guarantees under the GSM-102 program as long as the program is operated consistent with the agreed terms; the United States would make a one-time final payment of $300 million to the Brazil Cotton Institute (BCI) with explicit use-of-fund conditions; and both counties agreed to routine semi-annual reporting under the MOU.
The cotton dispute settlement case (DS267) was 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 ruled that (1) certain U.S. agricultural support payments for cotton distorted international agricultural markets and should be either withdrawn or modified to end the market distortions; and (2) U.S. Step-2 payments and agricultural export credit guarantees for cotton and other unscheduled commodities were prohibited subsidies under WTO rules and should be withdrawn.
In 2005, the United States made several changes to both its cotton and export credit guarantee 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 Brazil's favor and was upheld on appeal. The United States made additional changes to its export credit program in the 2008 farm bill, but Brazil found the overall level of changes to fall short of the WTO ruling. The threat of retaliation led Brazil and the United States to negotiate a temporary agreement, referred to as the Framework Agreement (June 17, 2010), to avoid trade retaliation with the understanding that the WTO cotton dispute would be resolved definitively within the context of the next U.S. farm bill.
In this regard, the 2014 farm bill (P.L. 113-79) included several substantive changes to both U.S. cotton support programs and the export credit guarantee program. These changes have resulted in cotton being singled out and treated differently from all other U.S. program crops. Cotton no longer has access to the price and income support programs offered for other program crops, but instead will rely on a within-year, market-based insurance guarantee—referred to as the Stacked Income Protection Program or STAX—as its primary support measure. Under this new cotton program, producers would have to pay into the program in order to participate, a loss (albeit at the county level) would have to occur before an indemnity payment would be made, and the sum of program indemnity payments under STAX and any other crop insurance policy would be prohibited from exceeding the value of the insured crop to minimize any production incentive. In addition, U.S. export credit guarantee programs have been substantially reformed, including a shortened tenor (i.e., contract length) of only 24 months—down from 36 months—and increased user fees to ensure that the program's operating costs are fully covered by fees so as to avoid any implicit subsidy. New farm legislative language also included expanded flexibility for USDA to negotiate with Brazil concerning the compliance of export credit guarantee implementation.