News section

World Trade Organization's Appellate Body upholds earlier WTO ruling on US cotton subsidies
Economists: WTO ruling will lead to changes in U.S. cotton program
March 9, 2005

Source: BRIDGES Weekly Trade News Digest - Vol. 9, Number 8

The WTO Appellate Body has upheld all major findings of an earlier WTO panel that ruled that US cotton subsidies were in violation of WTO rules on agriculture and subsidies (see BRIDGES Weekly, 15 September 2004, http://www.ictsd.org/weekly/04-09-15/story1.htm).

In its 3 March report, the Appellate Body confirmed that certain US payments to farmers, such as 'product flexibility contracts' (PFC) and 'direct payments' (DP) amounted to trade-distorting domestic support. Furthermore, it said that since they were related to the type of production undertaken, they could therefore not be categorised as permissible 'decoupled payments.'

The Appellate Body further agreed with the panel that the 'export credit guarantees' and 'step 2 marketing payments' offered to US cotton producers were prohibited export subsidies. The 'step 2' programme pays US cotton producers the difference between the domestic cotton price and the world market price to ensure that their cotton can be sold profitably in foreign markets.

Moreover, the Appellate Body upheld the panel's finding that the US export and domestic subsidies challenged by Brazil did not qualify for exemption from WTO challenges under the so- called 'peace clause' under which countries had agreed to refrain from challenging each other's agricultural subsidies. The US had appealed virtually all of the panel's findings including the crucial ones described above.

Brazil, Africa, civil society groups urge US to comply immediately

Responding to the ruling, US Trade Representative spokesman Richard Mills said the US would "study the report carefully and work closely with Congress and our farm community on our next steps." Mr. Mills also reiterated the US' longstanding position that the Bush administration was considering all options, and that negotiation, not litigation, was the most effective way to address the issue of subsidies in the WTO. Following the release of the panel report in September 2004, Brazilian officials had noted that neither the cotton case nor Brazil's challenge against the EC sugar regime had been initiated with the aim of impacting the WTO negotiations. However, Brazilian WTO Ambassador Luiz Felipe de Seixas Correa was reported to have commented that without these cases, the EC and US "would never change their policies'' (see BRIDGES Weekly, 15 September 2004, referred to above).

In a 6 March statement, West African cotton producing countries Benin, Burkina Faso, Chad and Mali welcomed the ruling and urged the US to implement the decision in time for the WTO's Hong Kong Ministerial Conference in December 2005. Speaking to the press, Samuel Amehou, Benin's ambassador to the WTO, pointed out that the ruling "confirms that these subsidies are not fair and must be phased out in a very, very short time." The four countries reiterated their position that the ruling "confirmed the validity" of their repeated calls for the total elimination of cotton subsidies within the context of the Doha Round negotiations. On this point, Amehou emphasised that "two years after the submission of our sectoral initiative on cotton, it is now time to move from the stage of declarations and clarifications and finally move to concrete actions."

International charity Oxfam, which has repeatedly called for the US to abolish its subsidies because of their injurious effects on poor farmers in Africa, has expressed concern over statements by US government officials that say that no reforms may be needed to comply with the cotton ruling. Gawain Kripke, spokesperson for Oxfam's 'Make Trade Fair' campaign in Washington cautioned that "if the US stalls reform, it will cost poor Africans farmers the chance to trade their way out of poverty and perpetuate an unfair system of rules rigged for the rich." Oxfam also expressed concern that failure by the US to implement this decision could stall the WTO Doha Round agriculture negotiations. Within the WTO agriculture talks, a special sub-committee has been established to deal with the issue of cotton (see BRIDGES Weekly, 23 February 2005,
http://www.ictsd.org/weekly/05-02-23/story3.htm)

The WTO panel had ordered the US to immediately withdraw the subsidies it had found to be prohibited export subsidises -- i.e., export credit guarantees and 'step 2' marketing payments -- at the latest within six months of the date of adoption of the panel report or by 1 July 2005. Under WTO rules, the cotton ruling must formally be adopted by the WTO's Dispute Settlement Body (DSB) by the beginning of April. The US will subsequently have 30 days to announce its intentions to comply with the ruling, although it need not reveal the timeframe for doing so. The implementation deadline will be fixed through negotiations between Brazil and the US or, failing that, through WTO arbitration. The arbitration proceedings must normally be completed within 90 days of the DSB's adoption of the ruling.


College STation, Texas
March 11, 2005

Source: Texas A&M University

Economists: WTO Ruling Will Lead to Changes In U.S. Cotton Program

Changes to the U.S. cotton program could come as soon as July 1 after the World Trade Organization appeals panel upheld its ruling that subsidies create unfair trade.

Dr. Parr Rosson, Texas Cooperative Extension economist and director of the Center for North American Studies, said the recent decision raises "an even bigger question" about some provisions of the next Farm Bill.
."It leads us to ask, ‘Who is going to make farm policy in the United States?'" he said. "It's a sovereignty question. That's one question Congress is going to have to wrestle with."

Last year, the WTO agreed with Brazil's claim that U.S. price supports for cotton led to lower world prices. The complaint suggested the price support system created "serious prejudice" to Brazilian farmers by depressing/suppressing world cotton prices.

The WTO appeals panel upheld most of the rulings of the earlier dispute settlement panel.

Rosson said changes could be made to the current Step 2 payment system and export credit guarantees as soon as this summer.

The Step 2 provision is one of three cotton competitiveness provisions intended to keep U.S. cotton competitive in domestic and export markets. Step 2 calls for subsidies paid to U.S. cotton users and exporters, which promotes the marketing of U.S. cotton rather than foreign fiber.

The anticipated changes to the current cotton program will likely raise producer questions on how to best market cotton if prices become volatile.

Dr. John Robinson, Extension cotton marketing economist, said prices could "swing either way" depending on 2005 cotton production in the United States and China.

"Now more than ever, cotton growers should develop a marketing plan that provides some downside price protection while allowing for upside potential," he said.

Robinson suggested some conventional strategies:

  • Purchasing put options on December 2005 futures, preferably for less than 3 cents per pound. The best time to do this is in the March to May time frame, Robinson said.

  • Forward contracting and purchasing call options (March-May time frame)

  • Selling in the cash market in the fall and purchasing July 2005 call options.

Looking ahead, Rosson said other U.S. support programs such as soybeans could also be challenged.

"Brazil has successfully challenged the cotton program," he said "And it remains to be seen if other countries, or Brazil, will challenge other U.S. farm programs."

BRIDGES Weekly Trade News Digest - Vol. 9, Number 8

.

11,602

Back to main news page

The news release or news item on this page is copyright © 2005 by the organization where it originated.
The content of the SeedQuest website is copyright © 1992-2005 by SeedQuest - All rights reserved
Fair Use Notice