United States’ Last Chance to Save Cotton Subsidies?

According to the Congressional Research Service (CRS), over the past ten years the United States has given about 24 billion dollars worth of cotton subsidies despite the fact that the World Trade Organization (WTO) ruled that United States cotton subsidies are illegal.1

            The WTO’s dispute over United States cotton subsidies started in 2002 when Brazil brought a lawsuit against the United States. Brazil claimed that the United States failed to comply with its commitments made in both the Uruguay Round Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures, which sought for WTO member nations to reduce agricultural subsidies. In 2004 the WTO found that United States cotton subsidies were inconsistent with WTO commitments and recommended the subsidies be removed in a reasonable amount of time. Specifically, the WTO found payments to cotton producers under the GSM-102 program, a United States Department of Agriculture (USDA) program used to provide guarantees for credit extended by U.S. banks or exporters to approved foreign banks for purchases of U.S. agricultural exports, were illegal.2

            The WTO only prohibits subsidies it finds to be distorting trade and hurting farmers in other countries. The WTO found American cotton subsides were having a distorting effect on the international market by encouraging American farmers to grow more than the equilibrium supply of cotton, thus lowering the world price of cotton. The WTO also found the United States has been export dumping its surplus cotton into the world market, making it difficult for farmers of other countries to compete against the cheap American cotton on the international market.

            In 2005 the United States made several changes to its cotton subsidy program; however, Brazil argued these changes were not adequate and brought another suit against the United States. In 2007 and 2008, the WTO found United States cotton subsidies were still inconsistent with WTO commitments.3 Once again the United States did not comply with the WTO ruling in 2008. In 2009, the Obama administration eliminated some cotton subsidies but they were found not to be trade-distorting subsidies that were ruled illegal by the WTO.4

            The United States needs to take this current ruling seriously because Brazil now has the authority from the WTO to retaliate. In August 2009, a WTO arbitration panel was assigned to determine the appropriate level of retaliation. The WTO arbitration panel gave Brazil the ability to collect 147.3 million dollars in damages from the United States. The WTO arbitration panel also ruled Brazil would be entitled to the right to impose counter measures including punitive tariffs (upwards of 100%) and lift patent protections on 829 million dollars worth of U.S. goods, many of which are non-farm goods.5

            Brazil gave the United States the option to comply with the WTO by April 2010 or face retaliation. In the last hours of negotiations between the United States and Brazil, the two countries reached a framework agreement where the United States agreed to pay Brazil 147.3 million dollars annually to provide technical assistance and capacity building for Brazil’s cotton sector until the “cotton issue” is resolved. In return Brazil agreed to postpone the implementation of the 829 million dollars worth of counter measures. The framework is intended to delay any retaliation by Brazil until after the 2012 Farm Bill is evaluated.6

            Even though the framework agreement between the United States and Brazil established that the United States would revisit the elimination of cotton subsidies in the 2012 Farm Bill, the United States missed a valuable opportunity to eliminate its cotton subsidies in an easier fashion when the United States Congress Joint Select Committee on Deficit Reduction, also known as the Super Committee, failed to act on the Senate and House Agriculture Committees proposal as well as any sort of proposal. The Senate and House Agriculture Committees proposal to the Super Committee would have included 23 billion dollars worth of cuts.7 This could have been the best and easiest way to eliminate cotton subsidies.  If cotton subsidy cuts were included within the Super Committee recommendation it could have been couched as part of as a deficit reduction measure. Eliminating cotton subsidies via the Super Committee would have been undertaken in a 10-year period giving American cotton farmer the ability to slowly wean themselves off of cotton subsidies. The 10-year period would have given American farmers the ability to start growing other crop like organic cotton, since there is a demand in the cotton market.9 More importantly, the Senate and House Agriculture Committees proposal included a shallow-loss revenue insurance program, known as STAX, which was developed by the cotton industry to maximize use of limited budget resources and serves as a basis for the resolution of the United States-Brazil WTO cotton dispute.10

            While it is possible that the United States could eliminate its cotton subsidies through a piece of legislation, it is more likely that the United States would have to eliminate cotton subsidies through the 2012 Farm Bill. Unfortunately, eliminating cotton subsidies through the 2012 Farm Bill is going to be a challenge. The 2012 Farm Bill unlike the recommendation of the Super Committee will be conducted as regular order. This means that the 2012 Farm Bill will have full hearings, full mark-ups, floor debates with amendments, passage, conference committee, more debate, amendments and votes.11 Unfortunately, 2012 is going to be short legislative year because of the congressional and presidential elections which is going to make it that much harder to eliminate cotton subsidies in the 2012 Farm Bill.

            History also proves that trying to eliminate subsidies via the Farm Bill has been ineffective. In March 1996, Congress passed the Federal Agriculture Improvement and Reform Act of 1996, also known as the 1996 U.S. Farm Bill, which threatened to end dairy subsidies by 2003. Instead of enacting a market transition period that would end subsidies, the final bill actually increased dairy subsides. The same thing occurred when Republican presidents proposed cutbacks in the 1970s and 1980s. In each case a bipartisan coalition of agriculturalists in Congress rejected the administration’s plan immediately and then wrote their own Farm Bills to keep existing support levels intact.12

            Even though the elimination of cotton subsidies is going to be challenge, the United States needs to wake up and realize the negative ramifications if the cotton subsidy issue is not taken seriously when the 2012 Farm Bill is debated and passed. If the United States fails to act and does not eliminate its cotton subsidies during a time where its economy is trying to gain momentum and increase growth, paying Brazil 147.3 million dollars a year can only hurt the United States’ chances of growth. If retaliation were to occur it would hurt the chances of growth even further by paralyzing the ability of the United States to effectively trade with Brazil, one of the United States’ biggest trading partners.