Brazil's foreign minister, Antonio Patriota, said on Thursday he could not rule out retaliation if the United States stopped paying Brazil monthly compensation for controversial cotton subsidies.
The dispute flared up days before the arrival of U.S. Secretary of State John Kerry, who is to plan an October state visit to Washington by President Dilma Rousseff.
The payments to Brazil could be suspended under automatic spending cuts that would take effect if the Obama administration and Congress fail to agree on the size of the U.S. deficit for the fiscal year starting Oct. 1.
Ties between the two countries have been roiled by recent revelations of U.S. spying on Brazil's Internet communications.
"We are going to study our options and one option that cannot be excluded is cross-retaliation," Patriota told reporters in Rio de Janeiro, where he met with Canada's foreign minister John Baird. "We are facing an interesting situation that will require a decision by Brazil," he said.
Brazil, the United States' top trade partner in South America, has already identified possible targets for retaliation. In March 2010, before Washington agreed to the payments, the Brazilian government published a list of some 100 U.S. goods that could be subjected to import tariffs.
The list included a tariff increase on cars to 50 percent from 35 percent, a rise on non-hard wheat tariffs to 30 percent from 10 percent and a 48 percent levy on milk powder, up from 28 percent.
Cotton would be charged a 100 percent import tariff, the highest on the list. The foreign ministry estimated the annual impact of the retaliation would be $591 million. Brazil was also considering lifting patent protection on U.S. products.
Brazil won a challenge against U.S. cotton subsidies at the World Trade Organization in 2004 that led to an agreement under which Brazil said it would not impose $830 million in sanctions against U.S. products if the United States paid into an assistance fund for Brazilian cotton farmers.
The temporary resolution, under which the United States has paid Brazil $147 million a year since 2010, was supposed to last for a couple of years while Washington wrote a new farm law that would eliminate long-standing U.S. cotton subsidies. The U.S. Congress is months behind schedule in drawing up the legislation.
The Obama administration did not propose carrying the payments beyond September on the expectation that a new farm bill would end the dispute.
U.S. Secretary of Agriculture Tom Vilsack visited Brazil earlier this week, accompanied by Senate Agriculture Committee chair Debbie Stabenow, and told Brazilian authorities that the cotton compensation payments would be temporarily suspended because of the automatic spending cuts.
Vilsack told the Brazilians he does not have the authority to make the payments and that they would have to wait until the new farm law resolved the dispute, according to the agriculture newsletter, The Hagstrom Report. The Brazilians said their patience was not endless, the newsletter reported.