FarmPolicy

October 18, 2017

WTO Ruling: U.S. Action on Cotton Subsidies Insufficient

Reuters news reported yesterday that, “A World Trade Organisation panel, ruling in favour of Brazil in a landmark international challenge, has found that the United States has not done enough to reform its cotton subsidies, a US official said on Monday.

“‘The panel found that the changes made by the United States were insufficient to bring the challenged measures..into conformity with US WTO obligations,’ the trade official said, speaking on condition of anonymity.

“News of the final compliance panel report, details of which have not yet been made public, was another coup for Brazil, whose 2002 challenge against US cotton supports at the WTO court has been a watershed, emboldening nations displeased by generous US farm supports and providing ammunition for those who would like to see affluent nations curtail the subsidies they say only impoverish farmers abroad.” (Photo from the BBC Online)

With respect to U.S. action taken to comply with its WTO obligations, recall this USDA press release from July 5, 2005, which stated in part that, “Agriculture Secretary Mike Johanns today announced that the Bush Administration is sending proposed statutory changes to the Congress in the program generally known as the Step 2 cotton program and the export credit guarantee programs to comply with a recent WTO cotton decision in a dispute with Brazil.

“‘By implementing these proposed changes, we are being fully responsive to the WTO decision,’ said Johanns. ‘This step is essential for United States to continue to be a leader in the WTO Doha negotiations, which are crucial to U.S. market access and the long-term prosperity of our farmers and ranchers. We very much appreciate the close cooperation of the industry groups in developing this approach and will work with the Congress as this proposed legislation is considered.’

“The proposed statutory changes would eliminate the Step 2 program, remove a one-percent cap on fees that can be charged under the export credit programs, and terminate the Intermediate Export Guarantee Program (GSM-103).”

In more technical explanation of what action the U.S. took to comply with the WTO decision at the time, the 2005 USDA press release added that, “On June 30, USDA announced that beginning July 1, the Commodity Credit Corporation (CCC) would use a risk-based fee structure for the Export Credit Guarantee Program (GSM-102) and the Supplier Credit Guarantee Program (SCGP). Fee rates are now based on the country risk that CCC is undertaking, as well as the repayment term (tenor) and repayment frequency (annual or semi-annual) under the guarantee. The new structure responds to a key finding by the WTO that the fees charged by the programs should be risk based.

“In addition, the CCC no longer accepts applications for payment guarantees under GSM-103. Any remaining country and regional allocations for GSM-103 coverage under fiscal year 2005 program announcements will be reallocated to the existing GSM-102 program for that country or region.”

However, yesterday’s Reuters article indicated that, “‘The final ruling confirmed Brazil’s view that the US measures were insufficient to comply with the panel’s original decision,’ Brazil’s foreign ministry said in a statement.”

Also, recall that a recent Congressional Research Service (CRS) report (“Brazil’s WTO Case Against the U.S. Cotton Program: A Brief Overview,” by Randy Schnepf (Updated September 13, 2007)) stated in part that, “The legislation authorizing current farm programs expires in late 2007. The House passed its version of the 2007 farm bill — H.R. 2419 — on July 27, 2007. In H.R. 2419, the House proposes several changes specifically relevant to the Brazil cotton case, but also germane to the broader issue of program vulnerability to WTO challenge. Sec. 3002 repeals the GSM 103 and SCGP programs and lifts the 1% origination fee cap on GSM 102 export credit. These statutory changes appear likely to eliminate the ‘subsidy’ component of export credit guarantees and bring them into compliance with WTO rules” (page five).

The CRS report added that, “However, H.R. 2419 appears to do very little in response to the serious prejudice charge related to price-contingent subsidies. Instead, H.R. 2419 extends both current marketing loan provisions (Sec. 1201-1205) and the CCP program (Sec. 1103). The target price for upland cotton is adjusted downward by 2.4 cents to 70 cents per pound, which should lower expected CCC outlays marginally; however, H.R. 2419 offers producers an additional revenue-based CCP option (Sec. 1104) that includes significantly higher per-acre revenue guarantees for cotton than under the 2002 farm bill ($496.93 under H.R. 2419 versus $416.73 under current law). In addition, H.R. 2419 proposes changing the world price used by USDA to determine marketing loan repayment rates from a Northern European price to a Far Eastern price, which presumably would result in larger payments under the provisions of the program. H.R. 2419 (Sec. 1207(c)) also creates a new cotton user payment of 4 cents per pound. This payment is similar to the WTO-illegal Step 2 payment except that cotton from all origins (not just domestic sources) is eligible for the payment. Since the United States imports very little cotton, most payments would still likely go to domestically sourced cotton. As a result, this subtle technical loophole might be subject to a WTO challenge if it survives the congressional legislative process and emerges as part of a new farm bill.

“Finally, H.R. 2419 fails to address the issue surrounding the disqualification of direct payments from WTO’s green box AMS exclusion as decoupled payments due to the planting restriction on fruits, vegetables, and wild rice on program base acres. [For a more detailed look at this issue, see this FarmPolicy update from October 8, 2007] Instead, direct payments are extended with no change to current planting restriction (except for a small pilot program on 10,000 acres in Indiana). This glaring retention of the status quo has important WTO implications, as both Canada and Brazil have recently initiated WTO cases against the United States charging that the United States has exceeded its total AMS limit on several occasion in recent years if direct payments are included in the AMS calculation” (page six).

With respect to U.S. reaction to the reported WTO ruling, yesterday’s Reuters article noted that, “But Washington, which is considering an appeal, argues the subsidies are above board. ‘We are very disappointed with these results. We continue to believe that payments and export credit guarantees under our programs are now fully consistent with our WTO obligations,’ the trade official said.

“Most economists believe that subsidies paid to cotton farmers in the United States, a major exporter, do depress world market prices to some extent.”

The article concluded by saying, “The ruling also comes as US lawmakers wrangle over the 2007 farm bill, which will set agriculture policy, including subsidies, for five years.

“While it’s unclear what the final law will do for cotton farmers, the House of Representatives stirred passions this summer when it passed its version of the bill and included some cotton industry incentives similar to those eliminated in 2006.”

The Associated Press reported today that, “The World Trade Organization has found that the United States failed to scrap illegal subsidies paid to American cotton growers, a ruling that could open the door to billions of dollars in Brazilian trade sanctions against the U.S., trade officials said Monday.

“The result is a major victory for Brazil’s cotton industry and for African countries that have claimed to have been harmed by the American payments.”

The AP article indicated that, “The office of the U.S. Trade Representative in Washington confirmed the ruling. Washington can still appeal it.

“‘The panel found that the changes made by the United States were insufficient to bring the challenged measures — certain support payments under the 2002 Farm Bill and export credit guarantees — into conformity with U.S. WTO obligations,’ it said in an e-mailed statement Monday.

“‘We are very disappointed with these results.’”

The article also explained that, “Brazil has reserved the right to impose annual sanctions of as much as $4 billion on the United States, but it would probably seek less in retaliatory measures because the U.S. has removed some of the offending subsidies.

“If a likely appeal also goes against U.S. cotton programs, Washington can challenge the level of retaliation the WTO authorizes.

“Brazil has said it would target U.S. goods, as well as trademarks, patents and commercial services, under provisions in the global commerce body’s intellectual property and services agreements.”

Dow Jones writer Holly Henschen reported yesterday that, “Neither the U.S. Department of Agriculture nor the National Cotton Council had immediate comment on the ruling.”

Meanwhile, with respect to the Doha round of WTO trade negotiations, Reuters writer Jonathan Lynn reported yesterday that, “Diplomats sought on Monday to overcome the strains in global trade talks with intensified negotiations, but some warned that growing frictions could further delay a deal.

“The World Trade Organization’s (WTO) 151 members will hear this week an update on progress in agriculture, and the industry talks’ chairman Don Stephenson has scheduled meetings to help solve rich-poor tensions that boiled over last week.

“Stephenson, Canada’s ambassador to the WTO, is set to hold intensive talks with small groups of developing countries to ease their tough stance on manufacturing tariffs that triggered sharp rebukes from the United States and European Union.”

On the issue of services, an update posted at the WTO webpage stated that, “Director-General Pascal Lamy, in a speech at the European Services Forum and the London School of Economics conference on 15 October 2007, said that the challenge in services is ‘to shift the negotiations into a higher gear’. He noted that a broad range of studies indicates that ‘the gains from further opening of trade in services far exceed those from opening trade in goods’”.

In a related article regarding agriculture and development, Celia W. Dugger reported in yesterday’s New York Times that, “The World Bank, financed by rich nations to reduce poverty in poor ones, has long neglected agriculture in impoverished sub-Saharan Africa, where most people depend on the farm economy for their livelihoods, according to a new internal evaluation.

“The evaluation was posted late last week [click here for details] on the bank’s Web site at a delicate moment.

“The bank president, Robert B. Zoellick, after 100 days in office, declared in a recent speech that a Green Revolution for Africa was among his top priorities. On Friday, as ministers from around the world gather for the bank’s annual meeting in Washington, it will release its flagship World Development Report, this year devoted to agriculture.”

***

In 2007 Farm Bill news, an update posted this morning at The Hill Online reported that, “Democratic senators on Monday appeared close to averting a showdown on the Senate Agriculture Committee that had threatened completion of a new farm bill this year.

“Chairman Tom Harkin (D-Iowa) is edging closer to an accommodation with other key committee Democrats and Sen. Saxby Chambliss (R-Ga.), the committee’s ranking member, Senate aides said. The deal would protect direct payments to farmers from substantial cuts that Harkin had been contemplating, according to one Senate aide.

“Harkin spokeswoman Kate Cyrul said ‘a good deal of progress’ had been made, and that Harkin was hopeful remaining details would come together to allow for strong bipartisan support at a markup next week.”

The Hill article added that, “Farm lobbyists last week said they believed Conrad [Sen. Kent Conrad (D-ND)] and Chambliss were prepared to offer their own rival farm bill in committee if they were unhappy with Harkin’s approach. These lobbyists also predicted that Conrad and Chambliss would have had enough votes to defeat Harkin’s bill in committee.

“Conrad has received support for his position from Baucus [Sen. Max Baucus (D-Mont.)], who on Oct. 4 moved an agricultural tax package through the Finance Committee. That package included tax credits to pay for a permanent disaster assistance program supported by Conrad and Baucus.

“Agriculture lobbyists said Baucus’s action was meant to step up the pressure on Harkin to move on a bill. Finance members have taken an active role in the farm bill debate, and in addition to Conrad and Baucus, Finance includes Agriculture Committee members Sens. Blanche Lincoln (D-Ark.), Ken Salazar (D-Colo.), Debbie Stabenow (D-Mich.), Mike Crapo (R-Idaho) and Chuck Grassley (R-Iowa).”

In addition, the article indicated that, “Concluding work on a farm bill is important to House Speaker Nancy Pelosi (D-Calif.), who took an unusually active role in crafting the House bill, which was approved in July. Pelosi did so in part to ensure that rural freshman Democrats sitting on the committee could point to the farm bill as an accomplishment in next year’s elections. Pelosi has hailed the House bill as a step toward reforming agricultural subsidies, although critics such as Oxfam and the Environmental Working Group say it does not go far enough.”

***

A news release issued yesterday by the House Ag Committee stated that, “Today, the U.S. House of Representatives approved a resolution that sets an ambitious goal to expand renewable energy production in the United States over the next two decades.

“The 25 by ’25 Resolution (H.CON.RES. 25) expresses the sense of Congress that by the year 2025, at least 25 percent of the total energy consumed in the United States should come from homegrown renewable sources. Currently, renewable energy sources provide about 6% of the United States’ total energy needs.

“‘The 25 by ‘25 Resolution is a statement of our national commitment to support the development of renewable energy sources,’ Agriculture Committee Chairman Collin Peterson said. ‘I believe that we can not only meet but exceed the goal of 25 percent by 2025, but every journey starts with a first step, and this resolution is a very important first step to national energy independence.’”

In more specific news relating to corn-based ethanol production, Seth Slabaugh reported yesterday at the Indianapolis Star Online that, “Indiana could pay a price for joining the ethanol gold rush at a bad time.

“Ethanol production capacity has expanded so rapidly in the United States that there are likely to be some plant shutdowns, cheap resales, consolidations and bankruptcies, an expert says.

“‘It’s not a pleasant scenario,’ said Christopher Hurt, an agricultural economist at Purdue University. ‘We are calling these growing pains. Almost every industry has to go through a period of excess expansion and over-optimism, and then go through a period of negative markets, losses and generally some bankruptcies and some consolidations.’”

And an editorial posted yesterday at The Dallas Morning News Online stated that, “There’s no quarrel about this point: Americans need alternatives to gasoline if we’re going to stem the flow of foreign oil and curb pollution in Dallas-Fort Worth and other major urban/suburban areas.

“But there’s no reason Washington needs to bet so heavily on corn-based ethanol as that alternative. Not when reports show that the supply of ethanol is so great, believe it or not, that there’s a glut of it on the market.

“The most telling statistic shows the average ethanol price plunging from about $2.50 a gallon at the end of last year to about $1.50 now.”

The editorial indicated that, “Actually, the glut presents a wonderful opening. Congress now has a clear and compelling reason to revisit its policies toward this cleaner-burning but energy-intensive-to-produce fuel.

“The Senate Agriculture Committee can get things going by paring back corn subsidies…[S]witchgrass is one of the alternative-fuel sources that many entrepreneurs believe would prove superior to corn in lessening strain on natural resources…[T]he bottom line is the Senate Agriculture Committee has a compelling reason to encourage new ways to produce alternative fuels.”

Keith Good

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