When the World Trade Organisation (WTO) finally ruled in favour of Brazil in its long fight with the US over its damaging cotton subisidies, the verdict was a double victory for developing countries. America’s cotton subsidies have hurt a number of developing nations, particularly a clutch of sub-Saharan countries, and this in itself is cause for celebration.
The more significant aspect of the arbitration panel’s ruling is that it allows cross retaliation by Brazil against intellectual property rights (IPR) which is protected by the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or on services. This means Brazil can suspend IPR rights of American companies. If it does so, it will in all probability override the patents of US pharmaceuticals companies with whom it has waged a bitter battle in the past decade and allow generic manufacturers to make cheaper versions of patented medicines.
Cross-retaliation is permitted in those cases where retaliating in the same sector as the violation could damage the economy of the winning country. Rather than raise tariffs on US goods, which could hurt its domestic industry or its consumers, Brazil can go in for suspension of TRIPS protection for American goods.
This is not the first time that cross-retaliation has been part of a WTO disputes settlement; it is, however, the first time that a major economy like Brazil gets to use this weapon. In earlier cases, the tiny state of Antigua and Barbuda was allowed to cross retaliate in a dispute over Internet gambling and so was Ecuador in a dispute with the European Union over access for its banana exports. Both states have chosen not to do so.
Will Brazil seek to extract its full pound of flesh from the US? Some blood, it seems, will be spilled before the dispute is settled. To start with, the WTO ruling is as complex as it can get. While Brazil had sought $2.5 billion in annual retaliatory trade sanctions, the US, after delaying compliance with a WTO ruling decision that found it had violated trade rules, had claimed that a figure of $20-30 million would meet the case. Last fortnight’s ruling does specify annual sanctions that can be imposed by Brazil but the ruling allows wide differences of interpretation as a result of which the two sides have come up with their own estimates of what the sanctions should cost.
Brazil says that it is entitled to about $800 million in sanctions, including $340 million of cross-retaliation against IPR or services. The US, for its part, believes the sanctions should amount to no more than $300 million, and that any retaliation on the patents front is unlikely in the near future. Some would view that as a challenge to Brazil, which has been in the vanguard of the fight against the excesses of the Western patent system, specially on patents for pharmaceuticals. In the past decade, the South American nation’s battles over the exorbitant prices charged by big pharma on HIV/AIDS drugs have resulted in tense confrontations in which Brazil has threatened a compulsory licence. This is a provision in the TRIPS agreement that allows countries facing a public health crisis to override patents and manufacture generic versions of the required drug.
It is unlikely that Brazil will be in a tearing hurry to avail itself of the cross-retaliation option which is possible only if compensation in a given year rises above a certain level of imports of US goods. According to one figure that is doing the rounds, cross-retaliation would be possible only if Brazil’s annual tariff sanctions exceed $ 409.7 million.
There are other snags ahead. Brazil would need to think carefully about how IP cross-retaliation could turn out to be a double-edged weapon. Most countries are signatories to international treaties on IPR and this could lead to conflicting claims and obligations. While that is the bigger concern, there could be more practical problems, such as identifying which IPR or patent to break and how to reap the benefits of it. Is Brazil’s generics industry prepared to make the required drugs at short notice? Does it have a law in place to enable such manufacture? Perhaps, it is more prepared for this eventuality than one generally suspects. If a Brazilian newspaper report is to be believed, the government has already prepared a contingency plan to provide an enabling environment. It says a presidential decree would be passed immediately to allow Brazilian pharma companies to produce patented US drugs.
Brazil may well set a precedent on cross-retaliation but it is certain to watch its step carefully since they are aware that a lot hinges on how they handle the issue. This is a test case for cross-retaliation on IP and no country has a greater interest in this than India.