Transcript The WTO Cotton Dispute

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
4.5
97 %
54 %
129 %
85 %
4
3.5
$ billion
3
2.5
U.S.
Subsidies
U.S. Crop
Value
2
1.5
1
0.5
0
1999
2000
2001
2002
year
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.”
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
600
500
$ per acre
400
Market Return
300
Cost of Production
200
100
0
1997
1998
1999
2000
year
Source: USDA
2001
2002
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
U.S. Production, Exports and Prices
0.7
20
0.6
15
0.5
10
0.4
5
0.3
0
0.2
1998
1999
Production
Source: USDA
2000
2001
marketing year
Export
Price Received by Farmers
US$ per pound
million bales
25
Effects of the U.S. Subsidies III
U.S. and International Prices
80
70
cents per pound
60
50
U.S. Farm Price
40
A-Index
30
20
10
0
1997
1998
1999
2000
year
Source: USDA
2001
2002
Effects of the U.S. Subsidies IIII
U.S. World Market Share
1998
2000
2002
17%
25%
42%
58%
83%
Source: USDA
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 LowCost 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 19992002:
– 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 20012003 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.)