Two behemoths of the global economy finally reach a deal to resolve a trade dispute that has rumbled on for a decade. Good news, right? No. The settlement of Brazil’s WTO case against the US over cotton subsidies, announced last week, raises the profoundly disturbing possibility that yet another part of the multilateral governance of trade is now being undermined.

The issue dates from 2004, when Brazil won a famous victory at the WTO’s dispute settlement process against US subsidies to cotton farmers, the first big victory for an emerging market country. The arbitration panel authorised Brazil to retaliate with trade restrictions totalling $830m. Washington dragged out the case by every means possible – first appealing against the decision, then wrongly claiming it had changed its subsidies to comply with the ruling, then saying that the matter could only be dealt with in the multilateral so-called “Doha round”, and then finally and absurdly, paying Brazilian cotton farmers nearly $150m per year in protection money from 2010 onwards to avert trade sanctions.

With last week’s agreement, the US has thrown in the towel on persuading its cotton farmers to accept reform, and Brazil has taken the money and run. On top of the total of nearly $450m in hush money it has paid over three years, Washington gave Brazilian farmers a lump sum of $300m in return for Brasilia ending the case, an unprecedented way to resolve WTO litigation.

The US has also made some small tweaks to its cotton subsidies in the five-year farm bill that passed through Congress earlier this year. But the idea that this might make the new payouts compliant with WTO law spectacularly fails the laugh test: no country pays out $300m to buy off a legal challenge it thinks it can successfully defend.

In effect, the US has bribed its way out of a legal obligation because it does not have the courage to confront its own subsidy-addled cotton-growers. This is not just a continuing rip-off of US taxpayers. It erects a flashing neon warning over the credibility of the WTO’s dispute settlement system in achieving trade liberalisation, particularly bad news given that the organisation’s negotiating arm is more or less defunct.

The WTO dispute settlement system is a legal arrangement with a public policy goal. It permits governments to litigate – on behalf of wronged groups of its producers – against foreign governments that are violating WTO rules. The arrangements are modelled on international commercial arbitration, with ad hoc panels – not necessarily lawyers – making rulings. The key difference with private arbitration is that the judgments always require defendants actually to change their policies rather than simply pay out damages.

The public policy advantage of this arrangement is that if the defendant complies, the world ends up not just with the plaintiff’s companies happier but the global trading system being freer and fairer for everyone. Just as with the organisation’s negotiating function, which trades off one country’s export interest against another’s to achieve reciprocal liberalisation, the genius of WTO dispute settlement is that it harnesses mercantilist sentiment to advance free trade. When it works, the system achieves the rare combination of making both lawyers rich and economists happy.

This fortunate state of affairs will end abruptly if cash payments become the norm. Rich countries will simply buy their way out of WTO obligations. The wider benefits of liberalisation – to defendant countries’ taxpayers and consumers and to the functioning of world markets – will be lost.

In the case of cotton, the big losers are a group of west African cotton-growing countries, particularly the “Cotton Four” of Mali, Chad, Burkina Faso and Benin, where between 2-3m households depend on cotton earnings and millions more are reliant on the income it brings. It is no exaggeration to say that the lower prices created by US subsidies almost certainly cost thousands of lives a year as desperately poor people who grow cotton as their main cash crop are unable to pay for food, clean water and healthcare.

As it happens, there are actually only about 10,000 cotton farmers in the US, and yet they have been able to prevent the US complying with the 2004 ruling. Cotton farmers have an outsize influence in Congress thanks to their location in several small southern states, each with its two senators. At the behest of the cotton lobby, Congress has scared successive administrations away from even trying to comply. Roberto Azevêdo, then the Brazilian ambassador to the WTO and now its director-general, told a Washington audience in 2012 that it was extraordinarily difficult to talk with the US over cotton – “It’s very weird – I’ve never negotiated like this in my professional life” – because the congressional lawmakers with the power to resolve the issue were not at the table.

Nowhere are the complaints of NGO campaigners about “trade injustice” a closer approximation to the truth than with cotton in west Africa. The greatest economy the world has ever seen, led by world-class companies in the 21st century sectors of software, the internet, aerospace, biotech and financial services, is being forced to stick a knife into the world trading system and betray millions of the poorest people in the world because of a small cabal of rich, well-organised welfare-scrounging farmers.

Given though they were to partisan one-sided analyses of trade issues, the WTO is badly missing the persistent campaigning pressure of NGOs against farm subsidies when the Doha round of trade talks was still alive. The Oxfam of 2004 would have pounced on this malign settlement like a vengeful jaguar and given it the savage mauling it deserves.

With that pressure reduced, the hope that the WTO dispute settlement system can be a tool to rebalance the world trading system towards the world’s poorest countries has taken a serious blow. It is hard to blame the Brazilians for settling: extracting three-quarters of a billion dollars from the US with a single legal case is a remarkable achievement. But the agreement leaves the west Africans stranded. American subsidies will continue to flow – even more so now that cotton prices have fallen to their lowest in nearly five years – and African farmers will continue to suffer.

In theory, Brazil has created WTO jurisprudence for the African countries to bring their own case against the US. Yet such actions cost millions of dollars, especially given the proven US ability to drag litigation out for years. With those countries often dependent on Washington for development and humanitarian aid, and west Africa currently asking America for help combating the Ebola virus, there is a high hurdle to clear to start a WTO case. And while the tweaks to the US farm bill are almost certainly not enough to meet WTO law, they will at least make any future litigation more complicated.

This case should be brought up whenever officials from the US trade representative’s office orate piously about the rule of law and free trade. The US in this matter has proven to be a selfish, craven malefactor that prefers to buy its way out of legal obligations than to confront a tiny, cosseted elite bloated with taxpayer cash. The settlement undermines the ability of poorer emerging market countries to benefit from the multilateral trading system. It is a profoundly retrograde step.

Back to beyondbrics

Get alerts on Emerging markets when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article