Analysis of the Brazil-USA cotton dispute

Author:William Ridley
Position:Department of Agricultural Economics and Rural Sociology, University of Idaho, Moscow, Idaho, USA

Purpose – The purpose of this paper is to explain and conceptually analyse the origins and outcomes of the Brazil-USA cotton dispute. Design/methodology/approach – The analysis is conducted using a conceptual framework to show the effects of US policies on Brazil and the world cotton market. The historical context of the conflict is presented, to explain the motivations of both... (see full summary)

I Introduction

While a variety of agricultural commodities are the recipients of subsidies and supports from the US Government, the status of cotton is unique. American cotton producers receive a higher level of subsidy than producers of most other commodities. The subsidies have taken multiple forms over past decades, but many of these subsidies still continue to be paid to cotton producers. The cotton policies ranged from direct payments to producers, including Step 21 and countercyclical payments, to export credit guarantees, to marketing assistance loans and loan deficiency programs for the ostensible purpose of reducing the impacts on producers stemming from low cotton prices.

In 2002, subsequent to the US 1996 Federal Agriculture Improvement and Reform Act and 2002 Farm Security and Rural Investment Act, Brazil requested consultations with the USA, accusing the USA of overly trade-distorting policies, citing subsidies and other farm supports to American cotton producers. Brazil, supported by a contingent of major cotton exporters, including Australia and several African states, complained to the WTO that the policies carried out under the 1996 and 2002 Farm Bills distorted the world cotton market in favour of US cotton producers to the detriment of international cotton producers, a violation of the articles of the WTO Agreement on Agriculture and Agreement on Subsidies and Countervailing Measures. In essence, the case was made that the trade-distorting policies of the US served to lower world cotton prices, having the double effect of increasing the global share of US exports while cutting into the profits of Brazilian, Australian, and African producers. Parallel to Brazilian efforts, in 2005 the USA and the governments of Benin, Burkina Faso, Chad, Mali, and Senegal established the West African Cotton Improvement Program to provide technical assistance and support to West African Cotton producers ( Laws, 2005 ). This accord between the USA and West African cotton producers served to partially mollify the complaints of the respective African countries, and would help to set a precedent for later interactions between the USA and Brazil.

In July of 2005, the WTO Dispute Settlement Body ruled in favour of the Brazilian complaint, declaring the US practices with respect to its cotton production to be “inconsistent with the obligations of the United States under the covered agreements” ( WTO, 2009 ). After disagreeing over the size and scope of the retaliatory measures to be undertaken by Brazil, the arbitration proceedings were suspended in November of 2005, with a hope of finding a negotiated settlement between the two countries, to be resumed at the request of either party.

In 2008, the Brazilian WTO delegation wanted to restart the arbitration, signalling a resumption of the proceedings. As a retaliatory measure for USA. Step 2 payments, a significant motivator for Brazil's original complaints, Brazil sought the right to impose one-time counter-measures to the value of $350 million, but the WTO Dispute Settlement Body denied Brazil's request because the USA eliminated the Step 2 program in 2006. However, with regard to complaints about the US Export Credit Guarantee Program and the continuance of countercyclical payments to cotton producers, the WTO ruled that Brazil be allowed to undertake annual punitive countermeasures against the USA to the amount of $147.3 million for export credit guarantees and $147.4 for other actionable subsidies. While the decided amount was well short of the over $1 billion in countermeasures requested at the arbitration meetings, Brazil was allowed to enact its retaliation in the form of cross-sector countermeasures on popular consumer goods from the USA, including imports of medical products, educational materials, and automobiles ( WTO, 2009 ).

With the WTO ruling, the dispute would have seemed to have run its course: the USA could either put a halt to its trade-distorting programs in its 2008 Farm Bill or Brazil would levy its punitive measures on a variety of American exports. The eventual outcome, however, and the situation that persists today, is markedly different from either of these possibilities. A 2010 meeting between the two countries established an agreement whereby the USA would make payments to Brazil for the explicit purpose of financially assisting the Brazilian cotton industry, in exchange for Brazil indefinitely delaying the imposition of its retaliatory measures.

Rather than eliminate or address the adverse effects of the disputed programs, the latest Farm Bill continues the policy supports much maligned at the WTO. As recently as June 2011, the issue of US cotton subsidies was again raised at a meeting of the WTO agricultural committee, at which India, Canada, and Pakistan voiced concerns regarding US practices. In addition, the concerns of West African cotton producers have mirrored that of Brazil, unaided by a lack of a clear resolution at the WTO. Though the agreement between Brazil and the USA satisfied Brazil's demands, the cotton issue affects numerous countries. The WTO ruled decisively in favour of Brazil's complaints, which could serve to galvanize and embolden international opposition to the cotton policies of the USA, and may be a prelude to further reductions in subsidies provided by developed countries ( Shumaker, 2007 ).

The purpose of this study is to analyse the effects of US policies on world markets, and to explain the origins and current status of the Brazil-US cotton dispute. The paper is organized as follows: Section II explains US cotton policies. Section III analyses their effects on other exporters and the world cotton market. Section IV explains the cotton dispute between Brazil and the USA. Section V presents a history of proceedings between Brazil and the USA at the WTO Dispute Settlement Body. Section VI details the 2010 agreement between the USA and Brazil, and the final section concludes the paper.

II US Cotton policies

In the original complaints, Brazil's grievances related to several programs, all of which served the purpose of subsidizing cotton growers directly or indirectly. As the world's third largest cotton producer, decisions by US policy makers with respect to cotton subsidies can have a profound impact on domestic cotton production, and by extension, the world market. In 2010, the USA accounted for 48 per cent of world cotton exports, up from a figure of 32 per cent in 2002, partly attributable to a steady decline in domestic use ( USDA Foreign Agricultural Service, 2011b ). As domestic use has declined, domestic production has evinced no such tendencies, and US policies may have been responsible for excess supply. For example, over the period of 2000-2010, the average annual value of US cotton production was approximately $4.3 billion, while the average annual value of cotton program outlays was a massive $3.5 billion: US cotton producers received support equivalent to 80 per cent of the value of their production ( Schnepf, 2010 ). Furthermore, 80 per cent of the approximately 4.3 million tons of US cotton produced was exported, representing a tremendous discrepancy between domestic supply and domestic demand ( USDA Foreign Agricultural Service, 2011b ).

While some policies that were the subject of Brazil's complaints were allowed to expire over various Farm Bills, other policies have persisted, including direct payments, export credit guarantees, and marketing loan assistance. A description of the programs and their adverse effects on the world cotton market is presented below.

Direct payments

Direct payments are made to producers with eligible historical production of upland cotton. The payment rate, specified in the 2008 Farm Bill but unchanged from the 2002 Farm Bill, is $0.0667 per pound of cotton. For the crop year starting in 2009, the value of direct payments per base acre of production of upland cotton was higher than those made for every commodity but rice and peanuts ( USDA Economic Research Service, 2009a ).

The direct payment for a given commodity, where payment yield is historical yield per acre for that commodity, is calculated by the formula: Equation 1 where payment acres is equal to: Equation 2

Export credit guarantees

The US Department of Agriculture (USDA) Export Credit Guarantee Program provides guarantees for credit extended by US banks to importers of US agricultural products. The US Commodity Credit Corporation guarantees 98 per cent of the principal and a portion of the interest for the purpose of allowing US banks to provide terms that are competitive with foreign financial institutions, reducing financial risk to lenders and encouraging exports to eligible countries ( USDA Foreign Agricultural Service, 2009 ). In addition, the availability of Export Credit Guarantees encourages exports to buyers of US products in countries where they would otherwise be unable to procure financing for the purchase ( USDA Foreign Agricultural Service, 2011b ).

Step 2 payments

Step 2 payments, though discontinued in August 2006, were...

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