Reuters/Rio de Janeiro

Brazil’s Foreign Minister, Antonio Patriota, said he could not rule out retaliation if the US stopped paying Brazil monthly compensation for controversial cotton subsidies. The dispute flared up days before the arrival of US 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 US deficit for the fiscal year starting October 1.

Ties between the two countries have been roiled by recent revelations of US 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 US’ 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 US goods that could be subjected to import tariffs.

The list included a tariff increase on cars to 50% from 35%, a rise on non-hard wheat tariffs to 30% from 10% and a 48% levy on milk powder, up from 28%.

Cotton would be charged a 100% import tariff, the highest on the list. The foreign ministry estimated the annual impact of the retaliation would be $591mn. Brazil was also considering lifting patent protection on US products.

Brazil won a challenge against US cotton subsidies at the World Trade Organisation in 2004 that led to an agreement under which Brazil said it would not impose $830mn in sanctions against US products if Washington paid into an assistance fund for Brazilian cotton farmers.