GENEVA/WASHINGTON (Reuters) - The United States lost an appeal on Monday in its long-running dispute with Brazil over U.S. subsidies for cotton farmers at the World Trade Organization (WTO).
The ruling opens the way for Brazil to seek WTO approval for more than $1 billion a year in sanctions on U.S. imports, which it has suggested it could impose on services or by suspending U.S. intellectual property rights.
In a 184-page ruling, the appeal body, the WTO's top court, recommended that the WTO's dispute settlement body should request the United States to bring its measures into line with international trade rules.
The appeal body backed findings on almost all counts, issued in December last year by another dispute panel, that the United States had not complied with earlier rulings in the case brought by Brazil in 2002.
Last December's compliance ruling confirmed that U.S. marketing loan and counter-cyclical payments had led to an increase in U.S. production and exports of cotton that depressed world prices.
Washington had appealed the ruling, arguing that changes to its farm programs had brought them into line with WTO rules.
The Bush administration on Monday said it was "very disappointed" by the new ruling, suggesting that higher cotton prices made the case irrelevant.
"The United States has not been, and is not, making any payments tied to cotton production. Therefore, there is no basis to say that U.S. payments are today having any impact on cotton prices," Sean Spicer, a spokesman for U.S. Trade Representative Susan Schwab, said in a statement.
U.S. cotton subsidies have become one of the most contentious issues in the WTO's Doha trade talks, which seek to expand world trade and give a leg-up to developing countries.
Developing country producers, especially in Africa, believe the U.S. subsidies depress prices and squeeze their own poor farmers out of the market.
African producers are calling for an 82 percent cut in the round to U.S. trade-distorting cotton subsidies -- bigger than the 66-73 percent proposed for other U.S. farm supports.
Washington has yet to file a counterproposal, but there is strong political backing across Southern states for continued support for the politically influential industry.
The U.S. government paid cotton farmers $2 billion to $4 billion in trade-distorting subsidies in most recent years.
But price-linked subsidies have fallen in step with higher cotton prices, which have risen over the past year due mainly to lower cotton sowings and expectations that world cotton demand will increase at a steady cadence.
Based on the spot price of cotton futures in New York, fiber contracts were trading around 46 cents a lb in May 2007. They hit a 12-year top over 90 cents in March and closed last Friday at 65.74 cents.
The U.S. cotton industry said the ruling was "out of date and out of touch with existing market conditions."
"It is simply not the case that world cotton prices are currently suppressed or were ever suppressed," the National Cotton Council said in a statement.
The Memphis-based group also noted that one trigger for subsidies, the cotton target price, had been lowered in the 2008 U.S. farm law enacted in late May.
The new farm law sets the target price for upland cotton at 71.25 cents per lb from 2008, down slightly from the earlier level of 72.4 cents per lb.
But the new law also introduces an incentive of 4 cents a lb for cotton mills, which critics complain is merely a revival of a subsidy eliminated after Brazil's earlier WTO victory.