In a significant development, a panel that deals with disputes at the World Trade Organisation has sided with Brazil and ruled against the subsidies provided by the US to its cotton growers.
The interim ruling, if confirmed in June, can have a significant impact on the US policy on farm subsidies and improve the incomes of farmers in many poorer countries.
Under the WTO agreement on agriculture, member countries are required to cap their cotton subsidies at the 1992 levels but the US breached the cap in the years 1999 and 2001.
The 'peace clause' in the WTO Agreement on Agriculture did not cover immunity from challenges to subsidies granted in excess of the cap.
Brazil challenged these measures at WTO, claiming that its farmers lost sales worth $600 million because of the dumping of subsidised cotton by US.
Brazil, the world's fifth-largest cotton producer, alleged that the US managed to keep its spot as the world's second-largest producer only because the government paid $12.47 billion in subsidies to farmers between August 1999 and July 2003. The US sells cotton at less than 77 per cent of the cost and its subsidised exports account for more than 40 per cent of global trade in cotton.
The US argued that its subsidies are 'decoupled' from production and that since the farmers are paid only on the basis of the acreage and past production, there is no incentive to produce more.
In other words, the US insisted that its subsidies were within the WTO disciplines and that it had not distorted the prices artificially. The panel rejected these arguments.
It is reasonably certain that the US will appeal against the panel rulings but alarm bells have started ringing there as well as in Europe and Japan.
They apprehend that Brazil's victory might encourage more disputes at WTO, especially against US subsidies on soya, corn, etc, and European subsidies on sugar.
The US cotton subsidies were a major source of worry for cotton producing West African countries like Chad, Mali, Benin, Burkina Faso and Togo.
When there countries complained last year at the WTO ministerial conference in Cancun that the dumping of subsidised cotton prevents their more efficient cotton growers from selling their goods, the US showed little interest in addressing their concerns.
Now, the US has to take these complaints more seriously. If the panel ruling prompts the US, EU and Japan to cut their farm subsidies, the farmers in poorer countries can get better access in international markets and improve their incomes.
The panel rulings might make it difficult for the rich countries to defend their subsidies at the trade talks that were launched at Doha.
So, they might as well offer subsidy cuts to get the talks, which were mired in controversies related to farm subsidies, moving and ask for concessions in return from others.
However, if the rich countries move away from WTO and turn towards more bilateral trade treaties and free trade agreements, the WTO can suffer a further setback.
India is not a part of any major trading bloc and so, has a greater stake in the primacy of WTO. So, while Brazil's victory over US might be a welcome development, India has to examine what matching concessions can be offered to get the trade talks moving and strengthen the WTO.