From Step 2 To STAX: How Brazil’s WTO Cotton Fight Reshaped U.S. Policy — And Helped a Rival Exporter Surge
Brazil’s WTO cotton case reshaped U.S. policy — and global competition
Brazil’s successful challenge to the U.S. cotton “Step 2” subsidy regime (and related supports) forced Washington to rework cotton policy over the next decade. As the U.S. shifted from traditional price-linked payments toward insurance-style support, Brazil scaled a highly competitive export machine — fueling a long-running debate over whether post-Step-2 U.S. policy changes inadvertently opened the door for Brazil’s export inroads.
When Brazil took the United States to the World Trade Organization (WTO) over cotton subsidies in the early 2000s, the case looked — at first — like a technical trade-law skirmish about program design. In hindsight, it became one of the most consequential agricultural disputes in modern WTO history: it pushed the U.S. to unwind a signature cotton subsidy, restructure broader cotton supports, and eventually cut a landmark settlement deal.
Along the way, Brazil transformed from an up-and-coming competitor into an export heavyweight — eventually overtaking the U.S. in export leadership in some recent seasons — raising an uncomfortable question in U.S. cotton country: did the policy “fix” that followed Step 2 make it easier for Brazil to capture market share?
What “Step 2” was — and why it mattered
The Step 2 program was designed to keep U.S. cotton competitive in world markets by issuing payments tied to price relationships involving U.S. cotton and competing foreign growths. In practice, it provided payments to U.S. exporters and domestic mills under certain market conditions — effectively lowering the cost of U.S. cotton and supporting U.S. demand channels.
Brazil argued that Step 2 — along with other elements of U.S. cotton support — violated WTO rules and caused “serious prejudice” by depressing world prices and displacing competitors. The dispute is formally known as United States — Subsidies on Upland Cotton (DS267).
WTO findings across the case (panel and appellate stages) validated key parts of Brazil’s complaint, putting the U.S. on the clock: comply, negotiate, or face retaliation.
The first big U.S. policy shoe drops: eliminating Step 2
The most direct — and symbolically important — change was Step 2’s elimination. Congress moved to terminate the program effective Aug. 1, 2006, a step widely presented as part of U.S. compliance efforts. A Congressional Research Service review of the dispute notes that Step 2 was eliminated by statute and that the program had totaled nearly $3.9 billion in payments from 1991 through 2006.
Ending Step 2 closed off the most obvious WTO target, but it didn’t end the cotton fight. Brazil continued to press claims tied to broader U.S. cotton support mechanisms and sought leverage through the WTO retaliation process.
The long tail: retaliation threat, negotiated payments, and the 2014 settlement
By the end of the 2000s, Brazil had won the right (under WTO procedures) to retaliate — an unusual and politically potent outcome in an agriculture case, made more sensitive by the possibility of cross-sector retaliation. The result: a phase of negotiated détente.
That détente culminated in a definitive settlement in 2014, when the U.S. and Brazil reached an agreement to end the dispute. USDA announced a one-time $300 million final contribution to Brazil’s Cotton Institute (IBA) as part of a memorandum of understanding.
In trade terms, it was a “pay-and-settle” finale to a battle that had already reshaped U.S. cotton program architecture.
How U.S. cotton policy shifted after Step 2
Step 2’s elimination solved one WTO exposure — but the broader lesson in Washington was that traditional, price-linked commodity programs could become trade-law liabilities, especially in crops with large export footprints and high visibility in world-level disputes.
Over the following farm bills, U.S. cotton policy moved away from the earlier blend of direct/counter-cyclical supports and toward risk-management structures more akin to insurance. Analysts noted that the 2014 Farm Bill brought major changes to cotton support, including eliminating certain traditional payment structures for cotton and creating STAX (Stacked Income Protection Plan) as a cotton-specific insurance-style tool.
Supporters argued this was modernization: less distortionary, more defensible in trade terms, better aligned with producer risk.
Critics countered that the shift changed producer incentives and sector behavior in ways that mattered for competitiveness — especially as Brazil’s production and logistics scaled rapidly.
Brazil’s cotton ascent: from challenger to export powerhouse
Brazil’s cotton expansion wasn’t simply a mirror image of U.S. policy change. It reflected large investments in yield, technology, farm scale, and a powerful second-crop production model in key regions — plus aggressive market development in Asia.
But whatever the causes, the output is now hard to ignore. USDA’s Foreign Agricultural Service has documented Brazil’s recent export surge, with China, Vietnam, and Bangladesh as major buyers.
And market reporting has described Brazil overtaking the U.S. as a top exporter in the 2023–24 season amid expanded planting and strong yields.
The debate inside the U.S.: did post-Step-2 policy changes help Brazil make export inroads?
This is where the argument among U.S. observers gets pointed — and where it’s important to separate hard causation from plausible mechanisms.
Some U.S. critics contend that once Step 2 disappeared, U.S. cotton lost a policy tool that (by design) directly boosted competitiveness in export channels and domestic mill demand during certain price relationships. In their telling, the post-Step-2 evolution — especially the move toward insurance-style support — didn’t replace that export-facing function. Instead, it buffered farm revenue volatility without directly shoring up demand the way Step 2 had, leaving U.S. cotton more exposed to global price cycles and competition.
They also argue that shifting the policy center of gravity toward insurance can subtly change acreage responsiveness and marketing behavior, making the U.S. less “aggressively priced” in certain windows — precisely when Brazil, with scale and improving logistics, was showing up as a reliable supplier to Asia.
On the other side, many economists and trade-policy hands argue the U.S. had little choice: after DS267, Step 2 was simply too risky to sustain, and clinging to similar mechanisms would have invited recurring retaliation. In this view, Brazil’s export rise is better explained by its productivity gains, farm scale, currency dynamics, and supply-chain improvements than by the absence of a single U.S. program. The WTO case may have removed one U.S. advantage, they say — but it didn’t “create” Brazil’s competitiveness.
What the Step 2 saga ultimately changed
Two things can be true at once:
- The WTO case forced the U.S. to materially change cotton policy. Step 2’s elimination (effective Aug. 1, 2006) and the eventual 2014 settlement are concrete markers of that shift.
- Brazil’s growth into a major cotton exporter is real and measurable. Recent USDA analysis underscores how quickly Brazil’s export volumes expanded and how concentrated its demand growth has been in Asian textile hubs.
The unresolved question — whether the post-Step-2 U.S. policy path helped Brazil gain export share — will likely remain a debate, because it sits at the intersection of trade law, farm-bill politics, exchange rates, logistics, and agronomic performance.
But the larger legacy is clearer: DS267 taught every major agricultural exporter that subsidy design isn’t just domestic politics — it’s competitive strategy under enforceable global rules. And in cotton, Brazil proved that a WTO victory can be paired with on-the-ground production and export execution — turning a legal win into a lasting market presence.
Cotton’s return to Title I — at a cost to base acres
After years of operating largely outside the traditional Title I commodity safety net, cotton growers pushed hard for reintegration in a subsequent farm bill, arguing that insurance-only tools left the crop exposed during prolonged price downturns and failed to provide parity with competing commodities.
That reintegration ultimately came — but not without a significant policy concession.
In a later farm bill, Congress restored cotton’s eligibility for Title I support programs, including Price Loss Coverage–style protections for seed cotton. To make that possible under budget rules and WTO sensitivities, lawmakers redefined cotton as “seed cotton” for program purposes and required cotton producers to relinquish a portion of their historical base acres to re-enter the Title I framework.
In effect, cotton was allowed back into the core commodity safety net only by shrinking its footprint inside it.
Under the restructuring, former cotton base acres were converted into seed-cotton base, but total base acres across all commodities were capped. That meant cotton producers seeking Title I coverage had to share — or surrender — base acreage capacity with other crops on the farm, reducing cotton’s long-standing dominance in base-acre allocations in key producing regions.
Supporters of the change argued the tradeoff was necessary and overdue. Bringing cotton back under Title I restored access to predictable counter-cyclical protection, aligned cotton with other major row crops, and reduced reliance on insurance-only fixes that some producers viewed as ill-suited for deep, multi-year price slumps.
Critics, however, contended the compromise diluted cotton’s political and programmatic standing just as global competition — especially from Brazil — was intensifying. They argue that forcing cotton to “buy back in” by giving up base acres weakened the crop’s safety net relative to rivals that faced no comparable acreage concessions, further constraining U.S. producers’ ability to respond aggressively to export competition.
Why the base-acre tradeoff still matters today
The base-acre concession remains a quiet but consequential legacy of the post–Step 2 era. While the WTO dispute forced the U.S. to dismantle export-linked supports like Step 2, the later Title I reintegration required cotton to absorb domestic budget discipline that other crops largely avoided.
Taken together, these changes reshaped cotton policy from both ends:
- International pressure eliminated direct export-oriented subsidies.
- Domestic budget rules capped cotton’s footprint inside the commodity safety net.
For critics of post–Step 2 policy, this two-sided squeeze helps explain why Brazil — free to expand acreage, leverage scale, and aggressively court Asian textile demand — was able to make sustained export inroads just as U.S. cotton policy became more constrained and internally rebalanced.
For defenders, the changes reflect political and legal reality: cotton survived as a supported U.S. crop by adapting its policy architecture, not by clinging to tools that had become untenable in a WTO-enforced trading system.
Either way, cotton’s path back into Title I underscores the broader lesson of the Step 2 saga: once trade law reshapes farm policy, there is no full reset — only negotiated compromises, and those compromises can echo through global markets for decades.
| Brazil Cotton: Myth vs. Reality on “Playing Clean” — And Where the Hard Questions Actually AreBrazil’s cotton boom is powered by real agronomics and scale — but also by advantaged credit, tax incentives, and contested land-use/traceability issues that U.S. growers argue tilt the field. Brazil’s rise is not “policy pure,” but neither is it reducible to one shadowy scheme. It’s a blend of (1) genuine productivity and logistics gains, plus (2) state-backed finance and incentives, and (3) ongoing controversyover land-use, enforcement, and supply-chain integrity in certain regions. Myth 1: “Brazil’s cotton dominance is purely market-based.” Reality: Brazil’s competitiveness is real — and policy support is meaningful.Rural credit support at scale: Brazil’s national Crop Plan / Plano Safra is explicitly designed to expand agricultural credit and investment, with a large share in subsidized rural credit.Export-related tax incentives: Brazil has maintained/expanded export tax-credit mechanisms such as REINTEGRA (tax credits calculated on export revenue for eligible exporters in certain periods). What this means for cotton: Cheap/available capital matters in a crop with big working-capital needs (inputs, ginning, storage) and long marketing chains. It doesn’t automatically equal “illegal dumping,” but it can be trade significant. Myth 2: “The WTO cotton case was just a steppingstone to Brazil’s own distortion scheme.” Reality: The WTO win removed U.S. vulnerabilities; Brazil’s rise then accelerated with investment, scale, and policy-enabled financing.The U.S. and Brazil ultimately settled the long-running WTO cotton dispute in 2014, ending the case and Brazil’s countermeasure rights. After that, Brazil’s export machine kept building — suggesting the WTO case was part of the story, but not the only engine. Bottom Line: The WTO case helped reshape U.S. policy space. Brazil’s later export dominance reflects execution + enabling policy, not a single “WTO-to-dominance” trick. Myth 3: “U.S. technology is being sold cheaper into Brazil — so Brazil must be subsidizing it.” Reality: The “cheaper equipment” anecdote is plausible without proving foul play. Common drivers include local manufacturing economics, financing terms (including rural credit), tax structure, and currency cycles. The “cheaper” outcome can happen even when the sticker price is higher — because effective cost of ownership is shaped by credit/subsidy design. What’s fair to say: Brazil’s credit architecture can make machinery and inputs feel “cheaper” in practice — without it being an explicit export subsidy. Myth 4: “Brazil is just bulldozing rainforest for cotton.” Reality: The sharper concern is often Cerrado + Matopiba, not always the Amazon rainforest — but land-use controversy is real.An April 2024 investigation alleged links between cotton supply chains and illegal deforestation/land grabbing/community harm in Brazil’s Cerrado; major brands and the Better Cotton system came under scrutiny. Better Cotton acknowledged the controversy and published/updated an action plan addressing land use, deforestation, and community impacts in Matopiba, while later commissioning audits and considering due diligence upgrades. What’s fair to say: Even when deforestation claims are disputed farm-by-farm, the governance/verification gap is the issue U.S. producers are pointing to: if compliance/traceability is weaker, costs can be lower. Myth 5: “Brazil’s environmental standards are lax by definition.” Reality: Standards can be strict on paper; enforcement and incentives are the swing factors. A current Reuters example in soy shows how state tax incentives can pressure companies’ sustainability choices — firms reportedly weighing leaving the Amazon Soy Moratorium to preserve Mato Grosso tax benefits. Different crop, same lesson: incentives and enforcement can shape land-use outcomes and market behavior. The blunt takeaway: Brazil’s cotton rise is partly “clean” competitiveness (scale, yields, logistics) and partly policy-enabled (credit and incentives). On the environmental/land-use side, there’s enough documented controversy to say the concern isn’t just coffee-shop talk — but it’s also not uniform across all farms or regions. |
| Buying American Cotton Act (BACA): A Demand-Side Boost for U.S. CottonUnlike farm-bill safety-net tools, the Buying American Cotton Act targets demand — using federal purchasing power to reinforce U.S. cotton use, traceability, and market stability.When cotton advocates refer to BACAin this context, they mean the Buying American Cotton Act (S 1919) — a proposal aimed squarely at strengthening demand for U.S.-grown cotton, not restructuring base acres or Title I programs.The bill would require that cotton products purchased with federal funds — such as uniforms, textiles, and related goods — be made with U.S.-grown cotton, subject to standard availability and cost considerations. The goal is to ensure that taxpayer dollars reinforce domestic production rather than flow indirectly to foreign cotton suppliers.How this could help U.S. cotton producers1. Creates reliable, price-insensitive demand Federal procurement represents a steady, long-term buyer that is less sensitive to short-term price swings. By anchoring a portion of demand to U.S. cotton, the act could help stabilize market conditions during downturns — particularly when export demand softens.2. Supports production scale and supply-chain certainty Cotton competes globally not just on price, but on volume, reliability, and logistics. Guaranteed domestic demand helps maintain U.S. production scale, which in turn supports gins, warehouses, merchants, and transportation networks that underpin export competitiveness.3. Strengthens U.S. cotton’s identity and traceability The act reinforces the “grown in the USA” value proposition at a time when traceability, labor standards, and sustainability claims are becoming more important to buyers. Federal procurement requirements can cascade through supply chains, encouraging mills and manufacturers to preserve U.S. cotton identity rather than blend indiscriminately with foreign fiber.4. Avoids WTO exposure tied to price-linked subsidies Supporters emphasize that the Buying American Cotton Act is demand-side and procurement-based, not a direct production or price subsidy. That distinction matters after the WTO cotton dispute, because it avoids recreating the kinds of export-linked or price-contingent supports that triggered retaliation risks in the past.Why industry groups see it as complementary — not duplicativeUnlike policy tools such as PLC, insurance, or base-acre adjustments, this BACA does not change planting incentives or payment formulas. Instead, it works alongside farm bill programs by:Reinforcing domestic consumptionSupporting downstream textile and manufacturing jobsReducing reliance on volatile export markets aloneFor producers frustrated by years of policy constraint and intensifying competition from Brazil, the bill is viewed as a rare opportunity to strengthen cotton without reopening old subsidy fights.The bottom line: The Buying American Cotton Act (S 1919) is pitched as a quiet but strategic lever: use federal purchasing rules to lock in demand, sustain U.S. cotton’s supply chain, and reinforce the industry’s long-term viability. For supporters, it’s not about protectionism — It’s about ensuring that when the federal government buys cotton products, American cotton producers share directly in that demand. |
