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 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)
Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.
He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher