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).

Subsidy Payments v Crop Values

U.S. Subsidies

Total: $12.4 billion

U.S. Crop Value

Total: $14.0 billion

Average Subsidization Rate: 89 percent

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1999 2000 2001 2002

year

$ b

illio

n

U.S.SubsidiesU.S. CropValue

97 % 54 % 129 % 85 %

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.”

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.

Gap Between U.S. Costs of Production and Market Returns

0

100

200

300

400

500

600

1997 1998 1999 2000 2001 2002

year

$ p

er a

cre

Market Return

Cost of Production

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 IIU.S. Production, Exports and Prices

0

5

10

15

20

25

1998 1999 2000 2001

marketing year

mill

ion

bale

s

0.2

0.3

0.4

0.5

0.6

0.7

US$

per

pou

nd

Production Export Price Received by Farmers

Source: USDA

Effects of the U.S. Subsidies IIIU.S. and International Prices

0

10

20

30

40

50

60

70

80

1997 1998 1999 2000 2001 2002

year

cen

ts p

er

pound

U.S. Farm Price

A-Index

Source: USDA

Effects of the U.S. Subsidies IIIIU.S. World Market Share

17%

83%

42%

58%

1998 2002

Source: USDA

2000

25%

75%

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.)