"In late 2002, Brazil initiated a World Trade Organization (WTO) dispute settlement case (DS267) against specific provisions of the U.S. cotton program. On September 8, 2004, a WTO dispute settlement (DS) panel ruled against the United States on several key issues in case DS267. On October 18, 2004, the United States appealed the case to the WTO's Appellate Body (AB) which, on March 3, 2005, confirmed the earlier DS panel findings against U.S. cotton programs. Key findings include the following: (1) U.S. domestic cotton subsidies have exceeded WTO commitments of the 1992 benchmark year, thereby losing the protection afforded by the 'Peace Clause,' which shielded them from substantive challenges; (2) the two major types of direct payments made under U.S. farm programs -- Production Flexibility Contract payments of the 1996 Farm Act and the Direct Payments of the 2002 Farm Act -- do not qualify for WTO exemptions from reduction commitments as fully decoupled income support and should therefore count against the 'Peace Clause' limits; (3) Step-2 program payments are prohibited subsidies; (4) U.S. export credit guarantees are effectively export subsidies, making them subject to previously notified export subsidy commitments; and (5) U.S. domestic support measures that are 'contingent on market prices' have resulted in excess cotton production and exports that, in turn, have caused low international prices and have resulted in 'serious prejudice' to Brazil."
CRS Report for Congress, RL32571
U.S. Department of State: http://www.state.gov/