After years and years of legal wrangling, we are finally getting to the point where the rubber meets the road. I've made a series of posts [1, 2, 3] practically spanning the existence of this blog describing how the United States' agricultural subsidies have made it (rightly) vulnerable to trade partners' complaints. Here we have case DS267. These have come in the form of export credit guarantees, marketing loans, and counter-cyclical payments (see this backgrounder if you're new to these terms). Brazil has for a while taken exception to these supports granted to US farmers, something which still bedevils the completion of the long-running Doha Development Agenda. The pattern went like this: Brazil sued over these subsidies at the WTO, subsequently won, was then faced with US appeals that it was complying, and lastly the US was still found to be in violation.What is notable here is how Brazil has been cleared to use cross-retaliation given that it was not practicable to apply offsetting sanctions of US agricultural products. Brazil originally requested that about $2.5 billion of US exports be subject to cross-retaliation, although the WTO has allowed a lesser amount of $800 million. Still, what is in question are arguably the creme de la creme of US export wares in our IP conscious age--information technology and pharmaceutical products--stuff that make up a considerable part of America's "competitive advantage" broadly construed. These include products whose patents have been in the crosshairs of LDCs for understandable reasons. Here's a recent WSJ write-up after Brazil was entitled to use cross-retaliation on Sept. 1:
...the ruling opened an important door to retaliatory measures that, under certain circumstances, could punish American pharmaceuticals companies and other owners of intellectual property.Hit 'em where it hurts is the operating principle here. For, not only is the offending agricultural lobby but also the IT and pharma sectors. In classic divide and conquer fashion, LDCs can use cross-retaliation to leverage other US interests to basically act on their behalf since they too have sizable lobbying machineries. From the ICTSD:
The WTO panel said Brazil could target other American goods for retaliation if U.S. cotton supports rise significantly beyond current levels for its 25,000 farmers. Brazil, which has a robust pharmaceuticals and generic-drug industry, has targeted patented U.S. drugs for potential retaliation. That means the country could allow domestic drug makers to manufacture copies of U.S. pharmaceuticals that are still under patent protection.
The issue of "cross retaliation" in global trade disputes is contentious. Many smaller countries need U.S. capital goods in order to grow, leaving them without effective tools to fight back with when the WTO finds that U.S. trade policy has injured the smaller nations.
The WTO cotton ruling for Brazil is, therefore, "the big banana in terms of smaller countries having effective means of retaliation," said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington. "This will cause the intellectual-property community a few shakes and quivers"...Some experts said the possibility of retaliating against the U.S. by flouting U.S. patents on medicines, films and other intellectual property gives Brazil an important new weapon.
By lifting patent and trademark protection on pharmaceutical products and software - rather than simply raising tariffs on imported goods - Brazil could spur US domestic interests to pressure Washington to comply with the original ruling.The USTR spokesperson had the following to say in anticipation of Brazil hitting back:
Cross-retaliation under TRIPS can be a very powerful tool, especially for developing countries, as it does not trigger some of the adverse effects such as increased consumer prices caused by higher tariffs or greater costs for domestic producers who may be obliged to switch to other suppliers. Such retaliatory measures allow smaller WTO member states to create pressure against economically powerful trading partners that would most likely be unharmed by the suspension of concessions in goods alone. Brazil constitutes a relatively small market for the US, accounting for less than three percent of total US exports.
Based on the recent reports, Brazil might set a precedent for the suspension of IPRs. Cross-retaliation under TRIPS has been authorised in only two previous cases: Ecuador was granted permission to do so in a dispute with the EU over banana tariffs, and Antigua was allowed to do the same in a dispute with the US over its internet gambling laws. However the developing country complainants in both instances have not imposed such retaliation measures, despite strong urging from some of their domestic interests. Thus, the current case could be a crucial test of how cross-retaliation in IP could work in practice...
Brazil’s Foreign Minister Celso Amorim said that Brazil would carefully examine how to impose the maximum leverage with its sanctions. “We’ll be having meetings all along next week and hopefully in ten, 15 days we can have a list,” he told Reuters. ”We are going to choose the sectors that least affect us and most affect the US,”[my emphasis] Amorim added, according to the Estado news agency.
"While we remain disappointed with the outcome of this dispute, we are pleased that the Arbitrators awarded Brazil far below the amount of countermeasures it asked for. In its first requests for countermeasures in the Cotton dispute, Brazil asked for more than $4 billion in annual countermeasures. During the arbitration proceedings, Brazil argued for more than $2 billion annually. Further, we are grateful that the Arbitrators denied Brazil's request for unlimited ability to suspend concessions on intellectual property or services. And we are pleased that the Arbitrators denied Brazil's request for an additional one-time $350 million in countermeasures in connection with the repealed Step 2 payment program for cotton.As a last ditch effort, US Trade Representative Ron ("Cap'n") Kirk is in Brazil begging for mercy as the title of this post suggests. The important thing to remember is that Brazil hasn't announced which American exports will be subject to cross-retaliation yet. You can bet your bottom dollar that Kirk is keen on meeting up with the boys from Brazil to suggest which ones not to cross-retaliate against such as via the suspension of drug patents. (The course I'd think inflicts maximum US damage while limiting that to Brasilia as it develops its homegrown generic-making industry; we'll wait and see.) From Agence-France Presse:
"At this time, we do not know when or if Brazil will move to obtain final authorization to suspend concessions or when or if Brazil would act on any such authorization. The [Obama] Administration will be actively consulting within the U.S. Government and with stakeholders on how to move forward."
The top US trade official urged Brazil Wednesday to go easy on up to 800 million dollars in trade reprisals it can impose on the United States under a WTO ruling on US cotton subsidies. US Trade Representative Ron Kirk, speaking to Brazilian businessmen ahead of a meeting on Thursday with Brazilian Foreign Minister Celso Amorim, said he hoped Brazil's permitted retaliation would be "deliberate and thoughtful."Charm offensive and all, this story is not yet over. Aside from the determination of sectors for cross-retaliation, the 2008 US farm bill still has healthy supports LDCs may find objectionable, leaving possible room for further action on US agriculture. As for the Doha Round, I somehow don't think this continuing row bodes well. Rest assured that there are many unhappy campers with US trade policy the world over.
The top US trade official urged Brazil Wednesday to go easy on up to 800 million dollars in trade reprisals it can impose on the United States under a WTO ruling on US cotton subsidies. US Trade Representative Ron Kirk, speaking to Brazilian businessmen ahead of a meeting on Thursday with Brazilian Foreign Minister Celso Amorim, said he hoped Brazil's permitted retaliation would be "deliberate and thoughtful."
He declined to go into detail about his talks with Amorim, saying he did not want to "constrain" the discussions. "I don't want to prejudge anything," he said. Brazil has yet to announce what US products, services and intellectual properties it will hit under the authorization from the World Trade Organization delivered August 31.
