The World Trade Organization (“WTO”) has already ruled against the United States of

America’s actions to support upland cotton growers through export finance programs
which are deemed by the WTO to be subsidies, and in providing “Counter Cyclical
Payments”, where growers are eligible to receive payments from the government when
the market price goes below the target price.

The case was opened with the WTO in 2003, and the USA has until 2012 to correct the
matter. Having said this, there are obviously no restrictions on the Brazilian government
to retaliate against the American subsidies, and this week, the Brazilian Chamber of
Foreign Trade divulged a list of retaliatory actions that encompass increased import
duties on imports of goods and services from the USA.

Figure 1 represents the balance of trade between Brazil and the USA. It will be seen that
a change is occurring, as the USA, prior to 2009 was a net importer from Brazil, but in
2009 became a net exporter. No doubt the fall in Brazilian exports is a combination of
weakness in the US economy, as well as the strong Real. Notwithstanding the 2009
result of a US$ 4.4 billion deficit for Brazil, the balance over the six years in cogitation
is heavily in favor of Brazil, with a US$ 32.1 billion surplus.

Figure 1
Brazil/ USA Trade Balance
Brazil Exports Brazil Imports Balance
2004 $ 20,099,235,401 $ 11,357,061,637 $ 8,742,173,764
2005 $ 22,539,731,876 $ 12,666,508,176 $ 9,873,223,700
2006 $ 24,524,748,524 $ 14,657,479,678 $ 9,867,268,846
2007 $ 25,065,048,413 $ 18,723,280,625 $ 6,341,767,788
2008 $ 27,423,048,800 $ 25,627,961,850 $ 1,795,086,950
2009 $ 15,601,628,031 $ 20,028,209,516 $ (4,426,581,485)
Total $ 135,253,441,045 $ 103,060,501,482 $ 32,192,939,563
Source: MDIC

The Brazilians have selected 102 products for retaliation including Automobiles, beauty
creams and combed cotton. Based upon 2009 imports, this has the potential to affect
US$ 830 million of US imports each year (US$ 591 in products, and US$ 239 in
services). The increase in tariffs will also affect the import of wheat to Brazil (US$ 45.4
million in 2009), where tariffs will increase from 10% to 30%. Brazil has various other
sources of wheat supply, including Argentina, Uruguay and Canada.

The declared desire of the Brazilian government is actually to change the basis upon
which the US government provides guarantees and subsidies to its agricultural sector
through its Agricultural Law, which has provisions that infringe WTO norms.

With this action, the Brazilian Government has strengthened its hand in negotiations
with the USA, both in terms of changes to the USA`s regime of agricultural subsidies,
but also to the timing i.e. the Brazilians are not prepared to sit back and wait until 2012.

The initial reaction of the US Government has been conciliatory, but will await the visit
to Brazil of its chief trade negotiator, from the Office of the US Trade Representative,
Ron Kirk for substantive discussions.