In a landmark decision, the WTO ruled against American cotton subsidies in a case brought by Brazil, officials from the two countries said on Friday.
The decision could eventually lead the US to reduce subsidies for its entire farm sector and encourage other countries to challenge such aid in wealthy nations, analysts said.
The WTO report, which was not made public, upheld a preliminary ruling in April that supported Brazil's claim that the more than US$3 billion in subsidies the US pays its cotton farmers distorts global prices and violates international trade rules.
"We are very satisfied with the panel's decision," Roberto Aze-vedo, who heads the trade disputes department at Brazil's foreign ministry, said in a phone interview from Brasilia.
"Once this is all over with, we expect the United States to comply with the ruling," he said.
In Washington, Bush administration officials criticized the decision, arguing that the best way to address distortions in world agriculture trade was through negotiations, not litigation. The officials also said the US would appeal, a process that could drag on for months, and possibly more than a year.
"We believe US farm programs were designed to be, and are, fully consistent with our WTO obligations," Richard Mills, a spokesman for the US trade representative, Robert Zoellick, said in a telephone interview.
"We will defend U.S. agricultural interests in every form we need to, and we have no intention of unilaterally disarming," he added, referring to the US$19 billion in annual subsidies paid out to American farmers.
The WTO ruling is not expected to be made public until late August. An arbitration panel will then decide what damages are due and to what extent Brazil can retaliate if the US does not comply with the ruling.
In its complaint, Brazil, the world's fifth-largest cotton producer, used data from the US Department of Agriculture to argue that the subsidies led to increased American cotton output, robbing Brazil of potential export markets and undermining the livelihoods of its farmers.
If Washington scrapped the subsidies, Brazil estimated, American cotton exports would fall 41 percent and production would drop 29 percent. That, in turn, would lead to a 12.6 percent increase in world cotton prices, helping struggling cotton farmers from Brazil to West Africa.
Brazil also claimed that the US was providing illegal export subsidies to American agribusiness companies, who were given US$1.7 billion to buy American cotton from 1999 to 2001, the period covered in the WTO challenge. The combined aid has helped make the US the world's top cotton exporter, with more than 40 percent of the world market.
As the first successful challenge of a wealthy nation's agricultural subsidies, the cotton case could help energize global trade talks, which have been stalled for more than a year over agriculture.
The decision also sets a precedent that could encourage more WTO complaints from other developing countries that feel unfairly punished by the US$300 billion in annual farm subsidies and supports paid to farmers in the world's richest nations.
"This has a value as a precedent that goes very far and broad," said Gary Hufbauer, a trade specialist at the Institute for International Economics in Washington.
"It opens the doors for countries who are affected by agricultural subsidies to challenge a lot of other subsidies: sugar, corn, almost any product.," he said.