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WTO Rules U.S. Cotton Subsidies & EU Sugar Subsidies Are Illegal

WTO Rules Against EU Sugar, U.S. Cotton Support, Backing Brazil

Sept. 8 (Bloomberg) -- The World Trade Organization ruled as much as half
of European Union sugar exports are illegal and separately confirmed that $3
billion in U.S. cotton subsidies violate WTO rules, handing Brazil two
victories in its fight against rich-nation farm aid.

The disputes are part of efforts by developing and food exporting nations
to push wealthy governments to slash spending on farmers. In an outline
accord for a global trade agreement reached in Geneva last month, the WTO's
147 members agreed to scrap agricultural export aid by a date to be set,
dismantle import tariffs and cut domestic farm subsidies.

``We didn't bring these cases to interfere with the WTO negotiations, but
without them'' the EU and U.S. ``would never change their policies,''
Brazil's ambassador to the WTO, Luiz Felipe de Seixas Correa, said in a
telephone interview. ``The cases are an important element for pressure.''

The EU said it may appeal today's decision, which follows a preliminary
Aug. 4 ruling, after a joint complaint by Brazil, Australia and Thailand.
WTO arbitrators supported claims that EU sugar aid distorts world market
prices because surplus production enjoying production subsidies must be
exported.

The separate decision against the U.S. confirms a confidential June report
that found American cotton aid overshoots payment limits. WTO judges deemed
the payments to 35,000 American cotton farmers unfair because they exceed
caps the U.S. agreed to a decade ago. The U.S. plans to appeal.

Repercussions

If upheld by the WTO on appeal, the case would force the U.S. to change its
farm-payment legislation and may prompt a series of similar cases from other
developing countries. The loss may also force some U.S. cotton farmers, who
produced $5.6 billion of the fiber in 2003, to plant other crops.

The European Commission, the EU's regulatory arm, said in a statement
issued in Brussels that the bloc's planned ``radical overhaul'' of its sugar
program would ``substantially cut back EU sugar exports and export refunds,
abolish intervention, reduce EU production and the internal sugar price.''

``This ruling adds more pressure on the commission to move forward with its
proposals and make cuts,'' said Alain Beaumont, secretary general of the
Brussels-based Committee of Industrial Users of Sugar, whose members include
Coca-Cola Co., Kraft Foods Inc., Cadbury Schweppes Plc and Unilever. ``The
problem is that this will hurt the most efficient EU producers. Is that what
we want?''

Australian Reaction

The sugar decision ``means WTO members cannot continue to circumvent their
export subsidy commitments by the use of indirect subsidies,'' Australian
Trade Minister Mark Vaile said in a faxed statement. The verdict ``strikes
at the very heart of the grossly distorted global sugar trade,'' he said.

Last month's agreement on an outline global trade accord shows the two
cases have already begun to have an effect at the WTO, said John Weekes, a
senior policy adviser at law firm Sidley Austin Brown & Wood in Geneva and
former Canadian ambassador to the WTO.

``Negotiators were already aware of these cases and are going to be
watching very closely what happens in the next stage,'' he said. ``These may
be issues that are too big to be resolved in the dispute system.''

U.S. Trade Representative Robert Zoellick also said the dispute system may
not be able to solve the cotton case, which would be better handled as part
of trade negotiations.

`Negotiation, Not Litigation'

``Some aspects of the panel report belong in negotiation and not
litigation,'' he said in an e-mailed statement. The cotton case was the
first targeting domestic farm payments and an appeal will delay any
requirement for the U.S. to comply with the ruling until the second half of
next year.

Without the subsidies, U.S. cotton production would have shrunk by nearly
30 percent and world prices jumped by more than 12 percent, according to the
research done on behalf of the Brazilian government by Daniel Sumner, a
University of California at Davis economist.

Six EU sugar producers including Suedzucker AG and Tate & Lyle Plc received
a total of 819 million euros ($986 million) in EU aid last year, U.K. aid
agency Oxfam says. The 25-nation EU is the world's second-largest sugar
exporter after Brazil.

Total EU sugar production from July 2002 to June 2003 was 17.2 million
metric tons. Sugar exports from the then 15-nation EU amounted to 4.83
million tons in that period, of which more than half -- 2.64 million tons --
was surplus and received no export subsidy. Those exports, known as known as
``C sugar,'' illegally benefit from subsidies to other sugar, the WTO says.

Higher Prices?

Jose Pessoa, president of Sao Paulo-based sugar and ethanol producer Grupo
Jose Pessoa, said the ruling may boost prices as subsidized European
producers are driven out of markets in Asia and Africa. European producers,
he said, receive up to $500 of subsidies for every ton of sugar they sell,
or more than double the market price.

``With those subsidies, the Europeans could pretty much give their sugar
away, and we couldn't compete,'' Pessoa said in a telephone interview from
Sao Paulo.

The commission's plans to overhaul EU sugar payments proposes paring the
guaranteed price for sugar made from domestic beet and imported cane by a
third and trim the annual beet production by 16 percent.

Aligning output more closely with demand would result in a cut of 2 million
metric tons a year in subsidized exports of sugar, the commission says.

``We believe the EU and U.S. will abide by the rulings,'' Brazil's Seixas
Correa said. ``They both have an interest in maintaining the credibility of
the dispute system.''