Editor’s note — Brazil’s government paid domestic cotton producers a subsidy in 2006, ostensibly to compensate them for differences in the real/dollar exchange rate for exported cotton. But outside observers say the action takes some of the shine off Brazil’s WTO victory against U.S. cotton subsidies, which later led to the repeal of the U.S. Step 2 program. Today, Brazil is preparing to defend its action against an official challenge should it come. Sao Paulo, Brazil, journalist Sergio Osse takes a closer look.

Brazil’s international negotiators are in an awkward position, worried about the implications Brazil’s own cotton subsidies might have in the international forum.

Although the government maintains the aid is legal under WTO rules and regulations, the country is gathering information to support its case should it be formally challenged.

But the biggest interest Brazil has in victory is plain politics.

The aid that prompted American denouncement is called Pepro, which in Portuguese means “equalizing premium over prices to producer.” According to its critics, Pepro could, in fact, constitute not an exchange rate compensation, but a subsidy for exporting cotton. Not coincidently, it was on this basis that Brazil won a case against the United States for — drum roll — subsidies to cotton producers.

Itamaraty, the Brazilian Foreign Ministry, has told its negotiators to gather as much information about Pepro as possible to prove that the aid does not resemble the U.S. subsidy recently condemned within WTO.

The potential political loss in this case far exceeds the potential financial loss for Brazil. Since the country has placed itself in a role of worldwide denouncer of illegal subsidies and protectionism, it wouldn’t look good for it to be challenged internationally for doing exactly what it denounces.

According to a Brazilian official, Pepro was used as a “temporary solution” to aid exports without breaking international agreements or regulations. But Brazilian officials indicate it does place Brazil in a “delicate position” to challenge Americans and cotton subsidies.

One indication is that Pepro is not only a price-correcting tool, but also guarantees prices above the international average price for Brazilian cotton growers.

This fits right in WTO’s “black box,” dealing with harmful trade subsidies. Although the international price average in April was about 51 cents per pound, Brazilians were getting paid 67 cents a pound, a difference paid by the Brazilian government of 16 cents per pound.

The Brazilian Agriculture Ministry though, doesn’t agree that Pepro is illegal. For its officials, the subsidy acts only as a “bridge” to support farmers until WTO’s final decision on U.S. compensations owed through WTO. The ministry argues that without Pepro, there would be a huge wave of bankruptcy among cotton growers.

According to officials, the price correction system is supporting more than 51 percent of Brazilian cotton producers this year. During price auctions this year, producers were granted the right to sell 728,900 tons of cotton through the system. Total Brazilian production for this year is estimated at 1.422 million tons.

To finance Pepro, the Brazilian government will need around $270.2 million. Since 2005, Brazil has already paid $463.4 million in cotton subsidies.

Between 15 percent and 20 percent of Brazil’s cotton growers’ income comes from official aid. Among other commodity growers in Brazil, this share doesn’t get past 6 percent of total earnings.

According to market specialists, this year’s cotton exports from Brazil should top 470,000 tons, an overall record. Last year Brazilian cotton growers sold 304,500 tons to foreign buyers. The present record was set in 2005 at 391,000 tons exported.

Americans haven’t yet challenged the Brazilian subsidy in the WTO. There were, to this moment, no bilateral consultations — neither official nor informal. On the other hand, the American private sector has increased its pressure on Brazil to reduce all its export subsidies, agricultural and otherwise.

Brazil’s high export income is pointed to by American companies as an indication that something must be wrong.

The standard position of Brazil’s government is that “Brazilian’s subsidies are infinitely smaller than American’s in volume; they do not harm international price averages and are consistent with the country’s commitments within WTO.”

In the Agriculture Ministry’s opinion, “the United States wants Brazil to scrap its aids to farmers while maintaining its own.”

Recently, the Organization for Economic Cooperation and Development (OECD) presented a study that shows that Brazilian subsidies indeed are increasing, even though Brazilian subsidies are on average “much smaller” than that of wealthy nations.

According to OECD, 4 percent of farm income in Brazil came from subsidies in 2004. This share rose to 6 percent in 2005. In the United States (2003-05), farm income from subsidies was 16 percent, compared to 34 percent in the European Union.