The US and Cotton: Yes, We’re Insane!

By Adrian Ineichen

A never-ending tragedy took its most recent step in early April 2010: After having been defeated in all WTO dispute settlement and panel rulings in the case DS267, and having faced the threat of retaliatory tariffs as well as suspension on some of its patents by Brazil, the US cajoled Brazil into a temporary deal in which it agrees to subsidize Brazilian cotton producers with $147.3mn per year while reducing American export loans, to buy Brazil’s tolerance of continued US subsidies to US cotton producers. As additional sweetener, the US evaluates the import of beef from Brazilian states such as Santa Catarina (7% of whose exports are cotton…) which are free of foot-and-mouth disease.

For years the US has illegally subsidized and continues to subsidize its cotton with various impacts such as artificially suppressed world prices, and artificially bloated US cotton exports (among others due to exports credits for non-creditworthy foreigners which results in steady losses to the US government under export credit guarantee schemes).

Hooray, we go to Africa with USAID to help its peoples develop their economies (and their cotton production!) but we give them no chance to export their products or even to remain competitive as soon as they are anywhere near that, as we strike them with protectionist barriers that prevent them from selling to us, while we’re subsidizing our own stuff from spoiled domestic producers most of which would otherwise be capable to survive in the market anyway. It seems we excel in setting new standards for hypocrisy.

[If you do not believe that, check out the USAID press release from June 15, 2006 which announced an additional $20mn for the “West African Cotton Improvement Program (WACIP), designed to increase yields and incomes of cotton producers in West Africa.” The program is supported by the US Trade Representative (the key office in trade negotiations, contributing to protect US cotton producers) and the US Department of Agriculture (the same dudes who are also chief subsidy distributors to US farmers)]

So, we subsidize US cotton producers, we pay African cotton growers development assistance and we started to bribe Brazil’s acquiescence of that by paying their cotton producers subsidies. We have not yet taken over the Chinese cotton market (the biggest in the world, which is a net importer, to make apparel). Instead, the Chinese benefit from the US-subsidized world cotton prices and export textile on a large scale, but in return we forced China to accept textile and apparel export restrictions to the US for 2006-2008. To circumvent that and exploit cheap labor and lower tariffs which Western countries offer poor states such as Bangladesh and Cambodia, China increasingly sources its textile businesses out to poorer countries in Asia.

Any questions? Welcome to trade politics.

But How Has It All Begun? – A Journey Through the WTO’s Dispute Settlement Mechanism …

Back to the US and Brazil: In 2002, Brazil filed a complaint against the US cotton subsidies, which, in that year, were with $3.3bn more than twice as high as the allowed limit of $1.6bn (basing on the 1992 amount which has been accepted via WTO article 13 “peace clause”). Both the dispute settlement panel in September 2004 and the appellate body in March 2005 ruled in this case DS267 against the US.

The US production flexibility contracts (PFC) and direct payments (DP) challenged by Brazil were actionable subsidies and found inconsistent with WTO law (both GATT 1994 and the agreement on subsidies and countervailing measures “SCM Agreement”). Further, American price-contingent subsidies (marketing loan program payments, user marketing (Step 2) payments, market loss assistance payments, and counter-cyclical payments) constituted significant price suppression globally. Step 2 payments to American users were discriminating in favor of domestic (US) goods. The disputed US export credit programs (GSM-102, GSM-103 and Supplier Credit Guarantee Program (SCGP)) were seen as export subsidies of the types prohibited by the SCM Agreement.

After Brazil repeatedly pushed for authorization to suspend tariff concessions and to impose other compensations (amounting to $3bn) against the US, Brazil and the US went into WTO arbitration, which both later on jointly suspended several times. In October 2006, after repeated requests by Brazil, a WTO compliance panel (pursuant to Art. 21.5 of the Dispute Settlement Understanding DSU) was formed to investigate whether the US had sufficiently complied with the DS267 rulings.

After the WTO appellate body ruling of March 2005, the US has taken measures to temporarily fix the disputed programs. GSM-102 and SCGP started to use risk-based fees to reduce its losses and hence the subsidy character of its guarantees. In August 2006, the “Step 2” cotton program was eliminated. In June 2008, the new farm bill 2008 was enacted which eliminated the GSM-103 and SCGP programs. Despite having undertaken reforms, the US has not fully complied with the ruling, and Brazil objected to America’s price-contingent programs.

The compliance panel in December 2007 and its appellate body in June 2008 found that the US has not sufficiently complied with the earlier rulings (since 2005).

The (revised) US GSM-102 program was (still) considered to constitute an export subsidy as it is apparently not designed to cover its operating costs and losses, and its continuation was in violation of earlier WTO rulings. Further, American market loans and counter-cyclical payments for upland cotton producers resulted in significant price suppression which posed “serious prejudice to the interests of Brazil” (Appellate Body, DS267).

After the compliance rulings, Brazil requested the resumption of the arbitration process in fall 2008 which resulted in the arbitration report of August 2009. That report authorized Brazil’s retaliation although at lower levels than requested.

In December 2009, Brazil announced that it will impose retaliatory measures of up to $829.3m against US goods in 2010, consisting of penalty duties, and cross-retaliation against US copyrights and patents.
Policy Implications – “Never-ending…”

Apparently, the US was under time pressure to get Brazil into the deal, which was reached one day before the Brazilians would have started their $830m heavy WTO-authorized sanctions. Even though America could avert retaliation in a last-minute action, the big problems with cotton subsidies persist. US taxpayer dollar are stuffed down the throats of foremost wealthy American cotton producers who then throw up to 70% (or $4bn) of their production unto the world market. This undercuts otherwise potentially competitive cotton growers in developing countries and thwarts our development assistance.

The case is also interesting because Brazil would have been the first country to be authorized to violate intellectual property rights as cross-retaliation against unfair (US) trade practices. Future cases against unfair (Western) trade policies may increasingly see the spread of this potentially very effective tool of cross-retaliation (i.e. trade countermeasures not in the same sector as the original case of disputed goods/services) in wider areas of services and intellectual property which could hurt Western businesses and innovations significantly.

Many poor countries have apparently followed the case with great interest. Among others, the African Cotton Initiative, a group consisting of Benin, Burkina Faso, Chad and Mali, proposed the complete elimination of cotton subsidies, and appear keen to employ measures towards that goal. The fact that Brazil has won all rulings in DS267 against the US cotton program may invite more developing countries to file suits against controversial rich country trade measures.

On a larger level, the question is whether the US has declared its agricultural support properly. DS267 has shown that the US wrongly labeled some of the illegal subsidies as “green box” (which are allowed under WTO law), instead of labeling them “amber box” or even “red box” (for partially allowed support up to a ceiling and illegal support, respectively). The WTO cases DS357 filed by Canada in January 2007 and DS365 filed by Brazil in July 2007 against US agricultural support measures may lead to new revelations and may spark a review (and potentially also a reduction) of illegal agricultural support measures which would then necessitate broader policy reforms (in the US, but likely also in other developed countries with agricultural support measures).

Finally, there is the question of how to reconcile domestic policies with international assistance. A 2007 study Oxfam-sponsored study by Daniel Sumner (UC Davis) that takes into account the recent “step 2” program reform shows that a modest cut in US cotton subsidies could lead to modest increase in world cotton prices which in turn could help cotton subsistence growers in poor West African countries and help them feed themselves by not distorting their business opportunities. A complete abolishment of US cotton subsidies would yield a world price increase of 6 to 14% of cotton, may help to account for negative externalities of excessive cotton production (such as waste of water), and may help developing countries to exploit their comparative advantages while reducing the US taxpayers’ burden.

In any case, agri-protectionism is “une affaire à suivre.”
For Further Reading

About the US-Brazilian agreement of April 2010:
http://www.nytimes.com/2010/04/07/business/07trade.html?ref=global
http://www.cotton.org/issues/2009/panelsummary.cfm

USAID support for West African cotton production:
http://www.usaid.gov/press/releases/2006/pr060615.html

Thought- and smile provoking comment:
http://www.time.com/time/nation/article/0,8599,1978963,00.html

Oxfam’s press release on the US-Brazilian cotton dispute (2007):
http://www.oxfam.org/node/173

US Department of Agriculture, Baseline Projections in Trade (e.g. for cotton):
http://www.ers.usda.gov/Briefing/Baseline/trade.htm

China: Textile Industrial Park in Cambodia:
http://www.allbusiness.com/asia/1001389-1.html

The WTO Dispute Settlement Case 267 (Brazil’s case against US Cotton program):
http://www.wto.org/english/tratop_E/dispu_e/cases_e/ds267_e.htm

WTO Gateway on Agricultural Issues:
http://www.wto.org/english/tratop_e/agric_e/agric_e.htm

Text of the Agreement on Agriculture:
http://www.wto.org/english/docs_e/legal_e/14-ag.pdf

Overview of the Boxes of Agricultural Support:
http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm

WTO Gateway to the Agreement on Subsidies and Countervailing Measures (SCM Agreement):
http://www.wto.org/english/tratop_e/scm_e/scm_e.htm

Text of the SCM Agreement:
http://www.wto.org/english/docs_e/legal_e/24-scm.pdf

Text of the WTO Dispute Settlement Understanding (DSU):
http://www.wto.org/english/docs_e/legal_e/28-dsu.pdf

The US Supplier Credit Guarantee Program (SCGP):
http://www.fas.usda.gov/info/factsheets/scgp.asp

The US Export Credit Guarantee Program (GSM-102):
http://www.fas.usda.gov/info/factsheets/gsm102-03.asp

Hanrahan, C. E. (2004, January 16). “The African Cotton Initiative and WTO Agriculture Negotiations”, CRS Report RS21712. Retrieved April 20, 2010 from: http://www.nationalaglawcenter.org/assets/crs/RS21712.pdf

Morrison, W. M. (2009, June 23). “China-U.S. Trade Issues”, CRS Report RL33536. Retrieved April 24, 2010 from: http://www.fas.org/sgp/crs/row/RL33536.pdf

Schnepf, R. (2010, January 4). “Brazil’s WTO Case Against the U.S. Cotton Program”, CRS Report, RL32571. Retrieved April 23, 2010 from: https://www.uschamber.com/assets/busbc/crs_brazil_wto_subsidies.pdf