24 May 2004	Monday	04 Rabi-us-Saani 1425

As a matter of principle, the April 27 WTO ruling asking the United States to revise its cotton subsidy programmes since these violate international trade rules, depress world cotton prices and distort the farm trade itself should have prompted Washington to undertake the necessary corrective measures and thus create an environment conducive to ending the lingering deadlock between the developed and developing countries since 2001 over the subsidy issue.

But it is not the kind of behaviour Washington is known for. An instant White House reaction was that it does not intend to do away with the subsidies and as spokesman Scott McClellan said there was nothing wrong with the US cotton programmes.

"These are designed to be fully consistent with our WTO obligations." The WTO verdict, delivered on a Brazil's complaint, is a confidential one and released only to the parties concerned.

The panel, established in March last year, has given six months to the US government to reform its subsidy programme. Brazil and the US will have a chance to comment on the ruling, considered as interim, before it is finalized on June 18. It is obvious that the US will not concede and would prefer to go into appeal after that.

But what is of great curiosity is the US response in case the final WTO verdict remains the same. Usually, as the WTO track record shows, the initial decisions of the dispute settlement panels are upheld by the appeals panels - a recent instance being the steel tariff case filed against the US by the EU and seven other countries and whose final verdict, the same as was the original, came in November last year.

A same verdict in the cotton case, Oxfam said, would be "a huge victory" for the developing world "as it would force Washington to reform its cotton subsidy programme." And if the US still opted to ignore the final verdict, it will be an offending rebuff to the WTO. And the latter will have to impose harsh sanctions against America, as required under its rules.

If the US still remained adamant, refusing to comply with the WTO rules and decisions or adopted manipulative tactics to wriggle out of the crisis, then the WTO - the corporate world's last hope - may suffer a great blow to its credibility as a dispute resolution body.

In fact, the very survival of the organisation depends on its ability to resolve the deadlocks and disputes in a fair manner.

The Bush administration, one may observe, represents the vital interests of the multinational grain corporations at the WTO and in this case it defended these corporations and the practice of agricultural dumping at the dispute panel.

Brazil had, in its complaint, said that subsidies paid to US cotton growers from 1999 to 2002, and also the ones mandated through 2007 in the latest Farm Bill, violate WTO rules. The US share of the world cotton exports is expected to reach 42 per cent this marketing year - the highest since 1960. It was 24 per cent in 1996.

Brazil's legal challenge covers direct payments to the US farms under the 1996 and 2002 farm bill, as well as payments made under emergency supplemental appropriations bills.

The US government argued that direct payments are de-coupled - meaning they are not linked to current production, and thus not trade distorting. But, Brazil argued, the actual effect of these payments is to encourage production.

The ruling also apparently supported Brazil's challenge of the Step 2 programme, under which the US pays to cotton companies to lower export costs.

The ultimate implication of the WTO's landmark ruling could be the re-opening of the US Farm Bill. Although focusing on the cotton alone, the ruling has the same implications for US soybean, corn and wheat programmes, which operate similarly.

Direct payments set forth in the 2002 Farm Bill were intended to comply with WTO rules. Farmers are paid on the basis of past year acreage and yield, not on what they produce in the year they are paid.

Brazil says that because the 2002 Farm Bill locks in the cotton programme through 2007, the programme through 2007 should be found out of compliance. But the WTO Dispute Panel disagreed and only ruled on recent years in which payment levels were available.

Cotton prices are relatively high this year, which means that government payment levels will decline. The WTO rules are still wholly inadequate to getting to the core issue.

Earlier this year, the Institute for Agriculture and Trade Policy, a prestigious US-based trade watchdog, issued a report on US dumping which revealed that in 2002 cotton was exported from the US at 61 per cent below its cost of production.

The export price for US cotton is 37 cents per pound, down from 93 cents per pound in 1995. Such a plunge in the price has particularly hit hard cotton-dependent West African countries like Benin, Mali, Burkina Faso, Chad and Togo causing some $190 million losses in foreign exchange earnings, calculates Oxfam.

Dumping is caused by a non-competitive market and a massive over-production. In the case of cotton, the world's three largest cotton trading companies are all US-based.

Massive overproduction of cotton, encouraged by US farm policies, has driven prices much below the cost of production. Subsidies are an outgrowth of these low prices, but not the cause of low prices.

The Institute is of the view that Brazil case will not solve the problem of agricultural dumping. It will only kick-start a discussion on how to lift prices paid to farmers, so as to cut subsidies and stop dumping.

Under the Agreement on Agriculture, domestic subsidies that encourage production are not to exceed 1992 levels. According to US Department of Agriculture, 1992 government payments to cotton producers were $1.62 billion, while the 1999 payments were $2.3 billion. In 2000, these were $1.57 billion and $2.06 billion for 2001. Data for 2002 and 2003 is not yet publicly available.

However, which government programme should be considered as subsidies is not simple issue and has been a source of contention between Brazil and the US throughout the cotton dispute.

The US Trade Representative has resisted in turning over raw data on US subsidies for cotton farmers to the WTO Dispute Resolution Panel, arguing that many of the payments are de-coupled and thus not relevant to the case. In March, the US finally turned over the data, but it has yet to be made public.

The US argued that its subsidies, insofar as they were decoupled, were protected under the so-called "Peace Clause" in the WTO's Agreement on Agriculture. The Peace Clause calls on member countries to exercise "due restraint" in challenging agriculture subsidies at the WTO as long as these are below 1992 levels of support.

Although the Peace Clause technically expired on December 31, 2003, it is still applicable to the years of cotton subsidy use that Brazil is challenging - 1999-2002.

Brazil had also challenged a provision of the US cotton programme called the Upland Cotton User Marketing Certificate programme or commonly known as Step 2. First established in the 1990 Farm Bill, the "Step 2" programme has paid $1.68 billion over the past eight years to 285 cotton exporters and millers.

These payments are made to those American companies which export or process cotton into fabric or yarn to ensure that US cotton is not disadvantaged despite its cost and are restricted to only a dozen companies.

Brazil said this programme acted essentially as an export subsidy as it enabled the exporters to buy cotton and export at prices below the costs of production.

The US argued that Step 2 payments were not export subsidies because they were not linked with "export performance." It is paid to companies when the lowest US cotton price exceeds the lowest foreign price for a period of four weeks.

With upland cotton prices declining during 1998-2001 period, US production increased from 14 million metric tons in marketing year 1998 to a record 20.3 million tons in 2001.

Hence, the exports also increased significantly during the same period. The US share of the world cotton market increased from 24 per cent in 1996 to 37 per cent in 2001. The International Cotton Advisory Council projects that for 2003-2004, the US share of world cotton exports will reach 42 per cent, the highest since 1960-61.

Brazil said its losses due to US cotton programmes were well in excess of $600 million for marketing year 2001 alone including lost revenue, lost production and losses in Brazil's trade balance.

Under Article 6.3 (d) of the Agreement on Subsidies and Countervailing Measures (ASCM), subsidies are judged to have harmed trading partners if the subsidizing member increases its share of the world market when compared to its average share over the previous three-year period.

The US government did not challenge Brazil's claims with regard to the ASCM because it believed that the first part of Brazil's case - that US. payments exceed 1992 levels and are trade distorting - was 'false'.

According to the International Cotton Advisory Committee, global cotton prices have fallen to their lowest level in three decades which caused the exporting countries $14 billion losses in 2001-2002. The accumulated losses over the last four harvests were $34 billion.

What would happen if subsidies for the five biggest US crops, cotton, corn, soybeans, wheat and rice were eliminated. If the three primary forms of government subsidies - marketing loan payments, counter-cyclical payments, and direct payments - were eliminated, the price of cotton would increase 12 per cent, still not enough to make up the difference in current dumping levels of over 60 per cent.