Of Cotton Subsidies and Essential Medicines

On Monday, the World Trade Organization [glossary] granted partial approval to Brazil’s proposal to impose countervailing sanctions against U.S. goods after the United States failed to comply with an earlier order to end illegal subsidies to cotton farmers. The ruling is the latest development in a trade dispute that stenches back several years. In 2002, Brazil failed suit against the United States, claiming that U.S. subsidies [glossary] to cotton farmers violated WTO rules and cost Brazil more than $3 billion per year in revenue lost due to distorted global prices. Brazil won its case in 2004, but the U.S. Congress has been slow to remove the subsidies.

Under WTO rules, Brazil would has the right to impose countervailing tariffs against U.S. exports to Brazil, up to the amount that the WTO certified Brazil is losing due to U.S. policy, in this case $3 billion. But for countries in the developing world, such an option is often unpalatable for two reasons. First, the imposition of tariffs could lead to higher consumer prices for goods, which can be politically unpopular. Second, the relative size of the markets means that Brazil’s loss of access to U.S. markets has a greater impact than the U.S.’s loss of access to Brazilian markets, even if the two losses are equal in absolute terms. Consequently, developing countries have made significantly less use of the WTO’s dispute resolution system and, even when victorious, have been more hesitant to use countervailing tariffs to enforce WTO decisions.

But Brazil’s proposal was an interesting one. After the United States continued to refuse to remove the trade distorting subsidies, it appealed to the WTO for an alternative recourse. Brazil proposed to impose the WTO penalty not by imposing tariffs on U.S. goods exported to Brazil, but by infringing patents on U.S. pharmaceutical products.

Brazil’s proposal is interesting in three respects. First, it makes the WTO’s dispute resolution system much more accessible to the countries of the global south. Enforcement, which has historically been difficult for countries in the global south, would be become more feasible. Second, it hits the United States in an area of much greater significance. The United States has long pushed for stronger intellectual property protections worldwide, campaigning against expanding the World Health Organization’s essential medicines list, for example. The political value of a ruling against U.S. pharmaceutical interests would be much higher as a result. Finally, and most importantly, such a ruling would link the agricultural subsidies dispute—which has been at the center of WTO talks in recent years—directly to the health and medicines debate. Farmers in the global south, whose lose an estimated $300 billion per year as a result of agricultural subsidies in the global north, could potentially benefit as a result of access to cheaper generic medicines manufactured in the global south.

So, on Monday, the WTO ruled. It denied Brazil’s request to bypass intellectual property protections, but confirmed that such a request could, in principle, be granted in the future. Indeed, last year, the WTO granted Antigua the right to do precisely that in its trade dispute over U.S. gambling laws. In the Brazilian case, the WTO decided that the current level of subsidies is not high enough to warrant such a radical step. A small victory for both sides, perhaps, but certainly a warning to the United States that intellectual property rights may be an effective tool to influence U.S. trade policy.

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