In a landmark decision that has not yet been made public, the WTO ruled that U.S. subsidies to some 25,000 cotton farmers distort world prices, violate global trade rules and price developing nations' goods out of markets, Brazil said.
"The WTO agreed with a substantial part of Brazil's arguments," Clodoaldo Hugueney, Brazil's top WTO negotiator, told reporters. "This (WTO) panel is going to show how important it is that you really change this policy of developed nations."
A statement from the Office of the U.S. Trade Representative said, "we have serious concerns with aspects of the panel's report."
Brazil's decision to take the issue to the WTO in February 2003 was the first challenge to a rich country's domestic farm policy.
The international aid agency Oxfam calculates that West African countries that rely on cotton exports have lost hundreds of millions of dollars in needed export earnings because of U.S. policy.
"This would be a huge victory, not just for Brazil, but particularly for 10 million poor African farmers whose livelihoods have been crippled by unfair competition," Oxfam said in a statement on the WTO ruling.
The interim ruling could lead to a wave of challenges against other farm subsidies in the United States, Europe and Japan. The ruling could also weaken their defense of aid to farmers in the current Doha Round of global free trade talks.
"This could mean problems for all domestic subsidy programs, for corn, wheat, rice, everything that receives big direct payments from the United States Treasury," Ken Cook, the president of the Environmental Working Group, a nonprofit organization that posted a database of subsidies on its Web site that Brazil used, told The New York Times.
Due to a confidentiality clause, Brazil and the United States did not release the exact details of the WTO decision.
The two countries have until May 10 to respond to the decision before a final version is made public in mid-June. The WTO then has up to three months to review any appeals.
Brazil accused the United States of breaking trade rules by paying more subsidies to cotton farmers than allowed and giving export subsidies to manufacturing industries that also aided the cotton industry.
The United States gave nearly $4 billion in cotton payments in the 2001-2002 season for a crop valued at $3 billion.
The ability of U.S. farmers to sell cotton below cost meant Brazilian farmers lost $600 million in sales during the 2001 season alone, Brazil argued.
The WTO says subsidies must be capped at 1992 levels. Brazil said U.S. aid to cotton farmers between 1999-2001 exceeded that limit. The United States countered that certain subsidies were not linked directly to production, did not distort trade and therefore do not count toward the WTO subsidy cap.
Both the United States and European Union want to make use of such "decoupled" subsidies. If the WTO rules they do distort trade, rich nations could lose a key defense for their domestic agricultural subsidies.
As the issue continues to play out in the WTO, Brazil and other poor nations were clearly buoyed by their early victory.
"This is a precedent," Roberto Azevedo, the top legal adviser to Brazil's foreign ministry, told reporters. "This is a war that must continue."