WTO report on US cotton subsidies

Hit with a brick could sum­ma­rize this sto­ry. The WTO Dis­pute Pan­el report con­demn­ing US Cot­ton Sub­si­dies is 3cm thick and weighs more than a kilo. Key points: some mar­ket­ing sup­ports built into the 2002 Farm Bill are ille­gal export sub­si­dies that must be elim­i­nat­ed. Some income sup­ports in the Farm Bill that the USA claimed were not trade dis­tort­ing do, in fact, fall into the trade-dis­tort­ing cat­e­go­ry. The USA can­not pro­tect its non-con­form­ing cot­ton sub­si­dies from attack by appeal to the WTO’s ‘Peace Clause’. The adverse find­ing will be “appealed”:http://www.ustr.gov/Document_Library/Press_Releases/2004/September/WTO_Panel_Issues_Mixed_Verdict_in_Cotton_Case.html by the Unit­ed States, so the finale of this dra­ma is at least six months off. But the “rec­om­men­da­tions of the dis­putes Panel”::http://www.wto.org/english/tratop_e/dispu_e/DS267 in this case, if they stand appeal, require the USA to change its cot­ton sup­ports pro­gram to com­ply with WTO rules and to cease grant­i­ng export sub­si­dies imme­di­ate­ly. Per­haps more sign­f­i­cant, how­ev­er, is that the find­ings jeop­ar­dise the use of the Unit­ed States’ mar­ket­ing loans that enable pro­duc­ers of rice, wheat, corn and oilseeds to ben­e­fit from the sale of stocks to the US gov­ern­ment at the estab­lished ‘loan rate’ when­ev­er the (adjust­ed) world price lev­el for that crop is low­er than the loan rate. Alter­nate­ly, the pro­duc­ers cov­ered by mar­ket­ing loans can take out a ‘loan defi­cien­cy pay­ment’ when the world price index falls below the loan rate, with­out tak­ing out a loan or offer­ing stocks as col­lat­er­al. The rec­om­men­da­tions of the WTO Pan­el do not mean that US will cut it’s $2.6 bil­lion annu­al hand-outs to cot­ton farm­ers (Oxfam “claims”:http://www.oxfam.org/eng/pdfs/pp020925_cotton.pdf that just 10 US cot­ton farms received $17m in 2001 from gov­ern­ment sub­si­dies). But the Unit­ed States will have to find more trade-friend­ly ways of spend­ing on cot­ton farming—and, poten­tial­ly on the oth­er major loan rate crops—if they want to con­tin­ue to sub­sidise farm incomes. h4. In a nut­shell Brazil’s com­plaint to the WTO begins with the US 2002 ‘farm bill’, which Brazil says con­tin­ued, and even increased, sub­si­dies to US cot­ton pro­duc­ers in a way that seri­ous­ly hurt oth­er exporters because they depressed world prices and squeezed oth­er com­pet­i­tive pro­duc­ers shares of world mar­kets for Cot­ton. There is a vari­ety of income-relat­ed pay­ments and crop-relat­ed pro­grams for cot­ton, the largest of which are the mar­ket­ing loans. For infor­ma­tion on how mar­ket­ing loans work see “this”:http://www.ers.usda.gov/publications/aer801/aer801c.pdf extract (.pdf file about 28k) from a US Depart­ment of Agri­cul­ture doc­u­ment. The Farm Bill also pro­vid­ed so-called ‘Step 2’ mar­ket­ing payments[1] to US cot­ton pro­duc­ers that act­ed both as export pay­ments and as import sub­sti­tu­tion sub­si­dies. With­out the sub­si­dies, accord­ing to esti­mates that Brazil com­mis­sioned from an agri­cul­tur­al econ­o­mist, Unit­ed States cot­ton pro­duc­tion would have fall­en 29 per­cent in 2001 — 2002 and its cot­ton exports would have dropped 41 per­cent. That would have led to a rise in inter­na­tion­al cot­ton prices of 12.6 per­cent, which would have helped Brazil’s cot­ton farm­ers. In Octo­ber, 2002, Brazil brought a com­plaint to the WTO and a dis­putes pan­el was estab­lished in March of 2003. The Pan­el report­ed to the dis­putants in April but it was not until Sep­tem­ber that the Pan­el deci­sion was pub­lished. It found that sev­er­al of Brazil’s most impor­tant claims were right. Specif­i­cal­ly, the Pan­el said that US cot­ton sub­si­dies were * Con­trary to two sets of WTO rules on export sub­si­dies
## A rule that allows the con­tin­ued use only of cer­tain declared agri­cul­tur­al export subi­si­dies (as long as they are reduced accord­ing to a sched­ule agreed in the 1994 Agree­ment on Agri­cul­ture). The USA, accord­ing to Brazil, had not declared it’s cot­ton export sub­si­dies
## A rule that says that no export sub­sidy may be used in a way that caus­es ‘seri­ous prej­u­dice’ to the inter­ests of anoth­er mem­ber of WTO by, for exam­ple, depress­ing mar­ket prices
* Incon­sis­tent with the rules on domes­tic sub­si­dies because cer­tain income sub­si­dies to farm­ers that the US claims are ‘decou­pled’ from pro­duc­tion decisions—and there­fore exempt from agreed WTO lim­its on the use of trade-dis­tort­ing pro­duc­tion payments—are not exempt because they are in fact linked to pro­duc­tion deci­sions Fur­ther­more, Brazil claimed, the USA’s asser­tion that these prac­tices are immune from attack under the so-called ‘Peace Clause’ of WTO is wrong. The Peace Clause says that, sub­ject to a num­ber of con­di­tions, agri­cul­tur­al sub­sidy pro­grams were tem­porar­i­ly safe from chal­lenge in WTO. But, Brazil claimed, the USA’s pro­grams did not meet the con­di­tions of that immu­ni­ty: par­tic­u­lar­ly the require­ment that the val­ue of the sub­si­dies should not be lift­ed above their 1992 lev­els. The USA had lift­ed its cot­ton pay­ments by more than $600 mil­lion and $1 bil­lion over their 1992 lev­els. h4. Some land­marks The Pan­el report is long and hard-going. Here are a few ‘land­marks’ (para­graph num­bers in the Report of the Pan­el) that will help you to find some of the key points. * 7.364 Pan­el begins con­sid­er­a­tion of ‘green box mea­sures’
* 7.383 Sum­ma­rizes the issue with ‘decou­pled’ pay­ments and whether they are ‘green’
* 7.383 Pan­el con­cludes that Pro­duc­tion Flex­i­bil­i­ty pay­ments are NOT green because they are relat­ed to a pro­duc­tion deci­sion
* 7.414 Not being green box mea­sures they aren’t pro­tect­ed by the Peace Clause
* 7.608 Pan­el also agrees with Brazil that the Unit­ed States domes­tic sup­port mea­sures at issue do not sat­is­fy the Peace Clause con­di­tions because they “grant sup­port to a spe­cif­ic com­mod­i­ty in excess of that decid­ed in the 1992 mar­ket­ing year”
* 7.1191 Begin­ing of Pan­el con­sid­er­a­tion of the impact of the Unit­ed States export subi­si­dies
* 7.1205 Pan­el declines to rely on econo­met­ric work (mod­el­ing) in reach­ing its con­clu­sions
* 7.1275 Is there ‘price supres­sion’ due to Unit­ed States export sub­si­dies?
* 7.1308 [about the Mar­ket­ing Loan and ‘Step 2’ pay­ments] “In our view, the col­lec­tive oper­a­tion of these sub­si­dies was akin to a very large, counter cycli­cal, defi­cien­cy pay­ment laced with addi­tion­al enhance­ments.  We believe that the struc­ture, design and oper­a­tion, par­tic­u­lar­ly of the price­con­tin­gent sub­si­dies, con­sti­tutes strong evi­dence sup­port­ing a find­ing of price sup­pres­sion”
* 8.1 Con­clu­sions and rec­om­men­da­tions fn1. “Step 2” pay­ments bq. Under the FSRI Act of 2002, … Step 2 pay­ments are issued [to domes­tic users and to exporters for doc­u­ment­ed pur­chas­es by domes­tic users and sales for export by exporters] fol­low­ing a con­sec­u­tive four-week peri­od when the low­est price quo­ta­tion for Unit­ed States cot­ton deliv­ered to North­ern Europe exceed­ed the North­ern Europe price quo­ta­tion by any amount and the adjust­ed world price did not exceed 134 per cent (not 130 per cent, as under the FAIR Act of 1996) of the mar­ket­ing loan rate.  Pay­ments are made at a rate per pound equal to the dif­fer­ence between the two price quo­ta­tions dur­ing the fourth week of the peri­od, with no reduc­tion for the thresh­old. (para­graph 7.210 of the Pan­el Report)

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