AN interesting drama has just played out in Geneva, with potentially significant implications for the ongoing Doha Round trade negotiations. A judgment has finally been made by the World Trade Organisations (WTO) Dispute Settlement Body in a case brought by Brazil against the United States on cotton subsidies.
This is a dispute of long-standing, and indeed the cotton subsidies provided by the U.S. government have been a focus of much outcry at several ministerial meetings of the WTO. Brazil first made a complaint about these subsidies in 2002 and it was joined by a number of other developing countries including India.
In 2004, the WTO ruled in Brazils favour, accepting that around $3 billion that was paid to U.S. cotton farmers amounted to a violation of WTO rules and artificially suppressed international prices of cotton.
Despite that verdict, the U.S. government continued with its subsidies, and while it changed the names of some and rearranged others, it even added some more, on the grounds that the earlier payments were WTO-compatible and the new payments came under the acceptable Green Box that is allowed under WTO rules. Brazil persisted with its complaint, which was supported by the WTO again in 2005, to the extent of allowing Brazil to retaliate by imposing some trade sanctions on the U.S. At that point, however, Brazil chose to arrive at a negotiated settlement with the U.S., which is its largest trading partner.
This did not work either, so Brazil once again approached the WTO in 2006. However, it agreed to suspend the arbitration process while the WTO examined whether the U.S. had complied with earlier rulings against its subsidies.
Meanwhile, in 2007, the U.S. Farm Bill implicitly mocked this process by blatantly confirming the existing subsidies and adding more. When the U.S. lost its appeal in the WTO in October 2007, Brazil asked for the arbitration process to resume.
The final verdict in this long saga has now been pronounced, with the WTO agreeing with Brazil that the U.S. cotton subsidies violated various elements of the Agreement on Agriculture and caused serious prejudice to potential exports of cotton of other countries (including Brazil) by depressing prices.
It also noted that the U.S. had refused to comply with several earlier rulings of the Dispute Settlement Body. It, therefore, allowed Brazil to retaliate, to suspend concessions or other obligations on U.S. trade equivalent to up to $147.3 million (103 million euros) a year.
In addition, the WTO said that it would allow sanctions against U.S. cotton subsidies that breached trade rules in the form of an annual amount to be determined according to a specific mathematical equation calculated at $147.4 million for 2006. While this is significantly less than the $2.5 billion worth of sanctions that Brazil had sought, it is significantly more than what the U.S. had been willing to concede.
What is the essence of the Brazilian case against the U.S.? While it may seem like a specific issue, in fact it has a much wider relevance to the agricultural negotiations in the Doha Round of the WTO talks. U.S. cotton subsidies have been among the most contested issues in these negotiations. And the ruling, in turn, has significant implications for the future pattern of trade disputes since it allows for cross-retaliation in services trade.
The U.S. is the worlds largest cotton exporter, exporting at least half of its annual cotton crop. In 2001-03, U.S. cotton exports accounted for 40 per cent of world trade, and it is estimated that U.S. cotton subsidies averaged $3 billion a year in this period.
In an earlier submission to the WTO, Brazil had claimed that an even larger amount, close to $12.5 billion, had been provided as cotton subsidies by the U.S. government between 1999 and 2002. This would amount to more than 130 per cent of the value of production in the U.S.
These subsidies artificially increased cotton production in the U.S., stimulated exports and, therefore, depressed the world market price of cotton. The impact of such subsidies on prices and world market share of other exporters is obvious given the dominant position of the U.S. in world cotton exports. Some of the main subsidies that have been at the heart of the dispute are the following:
Direct payments, based on the value of production and yields during a previous production period. The U.S. government had argued that this support was decoupled from production, and, therefore, eligible for the permissible Green Box, but actually it links payments to recent output levels.
Counter-cyclical payments, triggered by lower world prices, thus enhancing production at the very time it would otherwise be declining.
Loan deficiency payments and marketing loan gains, triggered when world prices fall below $0.52 a pound.
Step 2 subsidies, which aim to keep U.S. export prices in line with low-cost competitors and are provided both to exporters of U.S. cotton and to domestic mills using U.S. cotton, so as to eliminate differences between U.S. internal prices and the international price.
The U.S. argued that under WTO rules, these are not export subsidies because they do discriminate between exporters and domestic users. But actually, despite their relatively small size, these are among the most damaging subsidies, because they give U.S. exporters a clear advantage over their competitors.
The Export Credit Guarantee Programme (ECGP), under which importers can borrow in dollars at U.S. interest rates, and banks lending to them have the loans guaranteed by the U.S. government. This gives U.S. exporters an enormous advantage over rival exporters in countries with shortages of hard currency and high interest rates.
The U.S. government had further argued that it should be a beneficiary of the so-called Peace Clause, which was agreed upon when the Agreement on Agriculture was adopted at the end of the Uruguay Round in 1994. This was an agreement between governments not to challenge one anothers agricultural subsidies, subject to a proviso that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year. However, since the level of subsidies the U.S. provided to cotton farming in 2001 was double that provided in 1992, the U.S. had lost any claim to such Peace Clause protection. It is often believed that U.S. farm subsidies go towards supporting small family-run farms, but actually they mainly support large corporate farming.
While the average subsidy per acre of cotton amounted to $230 in 2001, around half the farms did not receive any subsidy. According to U.S. Department of Agriculture data, the largest 10 per cent of farms receive two-thirds of all the subsidies going to agriculture, and nearly three-quarters of the cotton subsidies. In 2001, the largest 10 cotton farms received $21 million in subsidies. One corporate farm alone Tyler Farms based in Arkansas, covering 40,000 acres received $6 million in cotton subsidies in that year.
To put these numbers in perspective, U.S. cotton subsidies in 2001 were estimated to be more than the entire gross domestic product (GDP) of Burkina Faso, a country in which more than two million people depend on cotton production and over half of the cotton farmers live below the poverty line. They were three times more than the entire United States Agency for International Development (USAID) budget for Africas 500 million people.
Oxfam has estimated that the value of the cotton subsidies amounted to one-fourth of the value of all U.S. aid to the continent. They also administered what amounts to a significant external shock to cotton-producing countries of Sub-Saharan Africa, who also happen to be among the heavily indebted poor countries.
Thus, Burkina Faso lost 1 per cent of GDP and 12 per cent of export earnings; Mali lost 1.7 per cent of GDP and 8 per cent of export earnings; and Benin lost 1.4 per cent of GDP and 9 per cent of export earnings. (Cultivating Poverty: The impact of U.S. cotton subsidies on Africa, Oxfam Briefing Paper No 30, 2003.)
It is obvious from this that Brazil is not the only country suffering from the adverse impact of U.S. cotton subsidies, nor even the worst affected. Yet, while these other countries have frequently complained about this in WTO meetings, they have not brought a case against the U.S. in this matter. There are several reasons for this.
There is enormous expense involved in bringing such cases to the WTO, which can be exorbitant for a small poor country. These countries are typically dependent upon the U.S. for aid or debt relief, and, therefore, try to avoid antagonising the U.S. government. Most of all, since the U.S. has such a poor track record of following WTO rules, it is not clear how even winning the case would help. The WTO would allow the countries concerned to impose some sanctions on U.S. exports, but given existing power equations these are most unlikely to occur.
This is why the recent ruling in the Brazil-U.S. dispute is going to attract so much attention among many smaller WTO members. A crucial aspect of the ruling is that it allows Brazil to impose some sanctions on services and intellectual property activities as well. It is being reported that, as a result, Brazil is preparing to infringe patents on U.S. pharmaceutical products as part of its retaliation. This will open up a whole new range of possibilities in terms of developing country responses at the WTO. This space is definitely worth watching.