Brazil’s Challenge to the U.S. Cotton Subsidies The WTO Cotton Dispute Brazil’s Challenge to the U.S. Cotton Subsidies

Subsidies At Issue Marketing Loan Program ($898 Million In 2002). Counter-Cyclical Payments ($1.309 Billion In 2002). Direct Payments (Not Green Box Support) ($617 Million In 2002). Crop Insurance Subsidies ($194 Million In 2002). Step 2 Subsidies ($415 Million In 2002). Export Credit Guarantees (Supported $349 Million Worth Of U.S. Cotton Exports In 2002). Marketing Loan: guarantees 52 cents per pound Counter-Cyclical Payments: pay up to 13.73 cents per pound (price-triggered) Direct Payments: pay 6.67 cents per pound independent of prices Crop Insurance: subsidized crop insurance premia and providing reinsurance to private insurance companies: steps in when crop fails or prices are low Step 2: pays the difference between the higher US price and the lower world market price Export Credit Guarantees: guarantees up to 3-year financing for cotton exports to developing countries where otherwise financing would not be available.

Subsidy Payments v Crop Values 97 % 54 % 129 % 85 % U.S. Subsidies Value 1999 $3.4 billion $3.5 billion 2000 $2.2 billion $4.1 billion 2001 $4.0 billion $3.1 billion 2002 $2.8 billion $3.3 billion U.S. Subsidies Total: $12.4 billion U.S. Crop Value Total: $14.0 billion Average Subsidization Rate: 89 percent

Green Box Issues: Direct Payments Direct Payments Do Not Meet The Green Box Criteria: Payments Are Eliminated If Fruits Or Vegetables Are Grown.  Payments Based On “Type Of Production.” 2002 Farm Bill Provided For “Updating The Payment Base.”  Payments Not Based On “Fixed Base Period.” Thus, direct payments violate Annex 2 paragraphs (a) [fixed base period] and (b) [not based on the type of production undertaken in any year after the base period] of the Agreement on Agriculture and are therefore not properly “green box.”

The Peace Clause Article 13 Of The WTO Agriculture Agreement Exempts Agricultural Subsidies From Actions Under The WTO Subsidies Agreement, Provided That The Level Of Subsidies Does Not Exceed The 1992 Level. U.S. Subsidies In 1992 Were $2.1 billion. U.S. Subsidies In 1999-2002 Were $3.4, $2.2, $4.0 And $2.8 Billion Respectively.  Peace Clause Is Inapplicable to the Case.

But for the U.S. Cotton Subsidies, Cotton Producers Would Have Lost $872 per Acre Planted to Cotton between 1997-2002 Including U.S. Subsidies, U.S. Producers Made a “Profit” of $106 Kenneth Hood – Former Chairman of the National Cotton Council: “The Delta needs cotton farmers, and they can’t exist without subsidies.” and “Most grain farmers simply don’t need as big a payment as we do to make ends meet.” Source: USDA

Effects of the U.S. Subsidies I Increased U.S. Cotton Production: Subsidies Provide Revenue Floor (Marketing Loan and Counter-Cyclical Payments). Step 2 And Export Credit Guarantees Ensure That U.S. Excess Cotton Is Sold On The World Market. Crop Insurance Reduces Economic Risks Posed By Crop Failures. Direct Payments Contribute To Cover The Cost Of Production.  U.S. Production Increased From 13.3 To 15.5 Million Bales Between 1998 and 2001

Effects of the U.S. Subsidies II Prices go down, production and exports increase Source: USDA

Effects of the U.S. Subsidies III Increased U.S. Cotton Supplies Led to Lower Prices in the United States and Abroad Due to the Integrated Nature of World Cotton Markets 20-Year Average U.S. Farm Price: 59 cents 20-Year Average A-Index International Prices: 72 cents Source: USDA

Effects of the U.S. Subsidies IIII U.S. World Market Share 1998 2000 2002 International Prices Fell Similar to U.S. Prices U.S. World Market Share Increased from 17 percent in 1998 to 42 percent in 2002 Despite: High U.S. Costs of Production Source: USDA

Effects on Brazil / Third Countries Brazilian Producers Lost Revenue Of $478 Million During 1999-2002 Due To Low Cotton Prices. Reduced Investment of Brazilian And Other Low-Cost Cotton Producers Due To Low Cotton Prices. Lost Export Opportunities Due To Excessive U.S. Supplies of Cotton. Increased Poverty In West African Countries Dependent On Cotton Production And Exports.

Professor Sumner’s Econometric Analysis But For The U.S. Subsidies During 1999-2002: U.S. Production Would Be 28.7% Lower. U.S. Exports Would Be 41.2% Lower. World Market Prices Would Be 12.6% or 6.5 Cents Per Pound Higher.  Analysis Based on FAPRI Model Relied On By The U.S. Congress And USDA.

U.S. Cotton Subsidies Violate WTO Commitments U.S. Subsidies Cause Serious Prejudice To The Interests of Brazil And Other Cotton-Producing WTO Members, Contrary To Articles 5 And 6 Of The SCM Agreement. U.S. Subsidies Cause The United States To Have More Than An Equitable Share Of World Export Trade In Cotton, In Violation Of GATT Article XVI.

Significant Price Suppression U.S. Subsidies Cause World Market Prices To Be Significantly Suppressed, i.e. To Be Significantly Lower Than They Would Otherwise Be, Contrary To Article 6.3(c) Of The SCM Agreement. The Price Suppression Affects Brazilian Domestic Prices And Export Prices To The United States And To All Third Country Markets Due To The Integrated Nature Of The World Cotton Market.

Increased U.S. World Market Share The U.S. Subsidies Contributed To An Increase In The U.S. World Market Share For Cotton, Contrary To Article 6.3(d) Of The SCM Agreement. The U.S. World Market Share In 2001-2003 Increased Over Its Previous 3-Year Average This Increase Follows a Consistent Trend.

Inequitable U.S. World Market Share U.S. Cotton Subsidies Contributed To A Large U.S. World Market Share That Is Inequitable Within The Meaning Of GATT Article XVI U.S. High Cost Of Production Compared To Brazil Or African Countries Few, If Any, Subsidies In Other Cotton Producing Countries (Except EU and China)

Conclusions First (And Likely Only) Challenge Under The Peace Clause. First Challenge Of Amber Box Agricultural Subsidies Causing Adverse Effects First Challenge Involving Green Box Provisions. First Challenge to Export Subsidies Specifically for Agricultural Products. (Step 2 and Export Credit Guarantee Programs.)