The United States suffered complete defeat on Thursday in a dispute with Brazil over cotton subsidies that has sent waves through global free trade talks.
The World Trade Organization's appellate body upheld core findings by judges who ruled last year that U.S. subsidies to cotton farmers broke trade rules, depressed world prices and hurt Brazilian producers.
The WTO's top court rejected an appeal by the United States, which will have to bring its subsidies into line with the rules, although that could take time.
"The Appellate Body recommends ... the United States to bring its measures, found to be inconsistent (with trade rules), into conformity with its obligations," it said in a published ruling.
The dispute, which echoes wider complaints by developing countries against rich nation farm policies, goes to the heart of efforts to reform global farm trade — a crucial part of the WTO's Doha Round of free trade negotiations.
The WTO decision comes as trade ministers from some 30 member states, most of them developing countries, are meeting in Mombasa, Kenya, in a bid to inject momentum into the round, which faces looming deadlines.
The United States will "work closely with Congress and our farm community on our next steps," Rich Mills, spokesman for the U.S. trade representative, said in a brief statement.
He reaffirmed the U.S. view that such issues were best handled within the Doha talks aimed at addressing "market access, export competition and domestic support, including for cotton".
There was no immediate reaction from Brazil.
Similar cases
Defeat for the United States could lead to similar cases being brought for other products, with Brazilian soybean producers studying a possible complaint.
Brazil, joined by Australia and Thailand, has already won a case against the European Union over sugar, which is also being appealed.
Activists say U.S. policy costs cotton producers in poor African states such as Benin and Chad, where cotton is a vital crop, hundreds of millions of dollars a year because subsidies drive down world prices.
According to Oxfam, an activist group, the United States spends more on propping up its 25,000 cotton farmers than it does in aid to the whole of Africa in a year.
Urging Washington to respond quickly to the WTO ruling, Oxfam said: "Eliminating cotton subsidies is necessary to ... bring relief to the millions of struggling farmers in poor countries."
