A trade blow to the U.S.

Print edition : May 21, 2004

THE U.S. government, it is believed, hands out $4 billion as subsidies to cotton farmers, for produce that is valued at no more than $3 billion. At the Cancun ministerial meeting of the World Trade Organisation (WTO) last September, four African countries - Chad, Burkina Faso, Benin and Mali - sought to inscribe specific disciplines against these subsidies into the final agreement. But cotton subsidies in the U.S. proved an elusive target.

Luiz Inacio Lula da Silva, President of Brazil. The Brazilian government has declared it is "very happy with the results" of the interim WTO ruling on U.S. cotton subsidies.-EVARISTO SA/AFP

Bobbing and weaving expertly through the thicket of issues under negotiations, the U.S. trade delegation always managed to change the subject. That option may soon be closed off. Late-April, the disputes settlement body of the WTO ruled the U.S. cotton subsidies a breach of agreed trade rules. The ruling remains confidential and the U.S. has signalled that it intends to appeal the matter before the higher body within the trade watchdog. But few rulings have been reversed on appeal. And the case against the U.S. cotton subsidies is by all accounts a powerful one.

A study by the University of California, which Brazil relied upon in bringing its case against the U.S., estimates that in the absence of the subsidy element, U.S. cotton exports would be 40 per cent lower, and world prices, 17 per cent higher. If this exercise in forecasting speaks of the potential gains to other countries from curbing U.S. subsidies, an estimate by the Institute for Agriculture and Trade Policy, a research and advocacy body based in the U.S. city of Minneapolis, points to the magnitude of the loss they have suffered.

Under the subsidy regime, it has pointed out, U.S. cotton exports increased from 24 per cent of the world trade to 40 per cent between 1996 and 2003. Over the same period, prices crashed to just under one dollar for a kilogram. At this level, developing country farmers, whose average cost of production is 60 per cent higher, have no prospect of securing a fair share of the market. The WTO ruling has come at a remarkably unpropitious time for the U.S. economic insecurities are running high in the country.

In the popular perception, among the main contributory factors to the bad times, are the outsourcing of manufacturing and services jobs and the relatively low import tariffs that the U.S. maintains. U.S. Trade Representative Robert Zoellick has been seeking in part to accommodate this public mood by taking on board all the reservations of the U.S. electorate and inscribing them into the agenda for negotiations. Thus, on a recent visit to India, he warned that outsourcing of software and services jobs to this country could become an issue unless India moved rapidly to provide better market access for U.S. agricultural produce. This amounted to a rewriting of the rulebook. Zoellick essentially was linking an issue that was not on the WTO agenda to another that has been there by consensus for long years. But that has always been accepted practice for the U.S. in WTO councils.

The ruling on cotton subsidies preceded by just a few days, a "mini-ministerial" meeting of the WTO convened at Zoellick's initiative in London. These informal gatherings have no authority to take binding decisions, but they bring together around 25 of the main trading nations in an effort to sort out the more thorny issues. Smaller gatherings, the U.S. believes, allow for a more focussed discussion than the 147-member WTO. True to form, the U.S. has written the agenda for the London mini-ministerial entirely to its convenience.

Although touted as an effort to get a general agreement on agricultural trade, the meeting is slated only to discuss the issue of market access, that is, tariffs on agricultural produce. The key issues of subsidies and domestic support, which are of particular interest to developing countries, have been left off the agenda. But with the WTO ruling, these inconvenient issues have forced themselves back into the reckoning. This represents a bad break for the U.S. and also threatens its claims to be a leader of trade negotiations that is continually setting the agenda.

Initial reactions from the Bush administration were dismissive of the WTO ruling. All U.S. farm support programmes, said a spokesman for the President, were designed to be fully compliant with WTO norms. This is a claim that has been sustained for some time only because the U.S. and the European Union, have between them contrived to put decoupled income support to the farm sector outside the framework of WTO disciplines.

Brazil's complaint against the U.S. cotton subsidies was the first occasion when an internal support measure in an industrialised country was subject to a challenge at the WTO. That it has managed to win its case could well be the beginning of a sustained phase of agitation by developing countries, within established rules, against the double standards of the industrialised world.

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