William Gillon Trade Policy Report
Presented to the National Cotton Council of America
August 21, 2008, Peabody Hotel, Memphis, TN
Download Accompanying Slide Presentation as PDF document
After months of extensive and technical negotiations, the Doha Round trade talks remained far from complete. Concerned that the coming US election would delay progress in Doha until mid-to-late 2009, Pascal Lamy, the Director General of the WTO, decided to convene a mini-ministerial in Geneva to try and force a conclusion to the negotiation. The fact that he almost succeeded is a testament to Lamy's considerable influence and determination. The fact that the United States almost found itself with a Doha Agreement that no segment of the U.S. economy could root for demonstrates how far off course this negotiation has gone.
The Doha negotiations have been going on for 7 years. I have reported to the Board previously on US proposals to substantially reduce domestic support for agriculture. US agricultural interests have consistently delivered the message to US negotiators that a Doha agreement must have substantial gains in real market access for US agricultural exports. This demand for a balance between cuts in domestic support and increases in market access was again communicated to the Administration about one week before the start of Lamy's mini-ministerial.
The United States has made bold proposals, offering in October 2005 to cut overall US domestic support to $22 billion in exchange for significant tariff reductions -- this represented a cut of 54%. The US offer at that time insisted that tariff reductions be significant and that there should minimal exceptions to formula tariff cuts.
Fast forward to Geneva in July of this year. The draft negotiating text for Agriculture called for far greater cuts in US domestic support but contained far less in discernable market access. Exceptions to market access requirements have been built upon exceptions. As a result, the US entered the Geneva meetings with little chance of closing enough of these loopholes to make a difference. Still, Administration negotiators went to Geneva with optimism and worked extremely hard for a deal.
When the discussions seemed stalled, Lamy tabled a compromise paper adopting a middle position on many of the remaining areas of disagreement. Lamy’s paper called for --
Greater reductions in US domestic support -- a 70% cut from $48 billion to $14.4 billion in allowable support
Sensitive product exemptions from full tariff reductions on up to 6% of tariff lines for developed countries and by implication up to 8% for developing countries
Special product exemptions for developing countries for up to 13% of tariff lines, with 5% of tariff lines eligible for no tariff cut at all
A Special Safeguard Mechanism for developing countries that would allow developing countries to use safeguards to increase some tariffs above the levels that existed before the Doha negotiation began.
Significant flexibility in tariff reductions for developing countries in the Non-Agricultural Market Access negotiations, along with a promise that the most important trading countries would agree to participate in at least two non-mandatory sectoral initiatives. Just participating in the sectoral would have allowed developing members to attain greater flexibilities from reductions in manufacturing tariffs.
The Lamy paper crossed two lines the US had vowed it would not cross --
No exemption that would allow some lines to be exempt from tariff cut
No provision that would allow a country to increase tariffs above currently negotiated bound rates
The special products provision alone could effectively negate any market access gains that might occur from a formula tariff cut. It allows developing countries to designate 12-13% of their tariff lines as special, to take no tariff cuts on 5% of lines, and to take only a 10% cut in tariffs on special products overall.
To put this in perspective, a 10% cut in a 40% ad valorem tariff leaves a 36% ad valorem tariff. Most economists agree that a developing country could use this level of special product provisions to shield virtually all economically significant tariff lines. This one provision effectively gutted all hope of significant market access gains in developing country markets for the United States. Yet this provision was not the worst part of the proposal and was not at the center of the collapse.
In addition to this and other loopholes, the Lamy proposal would have allowed developing countries to use a special safeguard mechanism to increase tariffs in some instances to levels that are higher than the bound tariff rates currently in place. In other words, the proposal could decrease market access for agriculture. It would be a bizarre outcome if the United States brought back a negotiating text that actually decreased market access for some US agriculture exports.
Incredibly, as you have read, India and some other developing countries were still not satisfied. China also refused to participate in any meaningful way.
US agriculture's message to US negotiators was clear -- the US is giving up $34 billion in allowable domestic support while getting virtually no market access in return and while allowing China to essentially take a free ride through these negotiations. This is unacceptable.
Ambassador Schwab, with the help of Chief USDA Economist Joe Glauber, refused to make any more concessions to India and demanded that China not be allowed to take a pass on market access commitments in either agriculture or NAMA.
If the United States had left Geneva with the Lamy proposal intact, there would be no credible argument that there was a balance between US domestic support reductions and market access gains. The Lamy proposal seems to prove that a Doha Agreement based on the Falconer Text will leave worldwide agriculture with a skewed set of trade rules substantially in favor of large developing countries such as China and Brazil.
Director General Lamy is currently visiting countries around the world (he is in Washington, DC now), suggesting that the negotiators should reconvene in September. But it is hard to see how further negotiations under the Falconer text could lead to a positive outcome. The major parties to this negotiation have fundamentally different beliefs about what the Doha Round should accomplish.
The United States believes this negotiation is about trade liberalization.
Developing countries, led by India, look at the language agreed to in 2004, that the negotiations would provide less than reciprocal market access, and believe that an already skewed world tariff system should be even more skewed in their favor after this round is concluded.
This widely divergent set of expectations is on display when 4 small countries are allowed to place one commodity at the head of the WTO agenda. The WTO process has placed their interests ahead of yours, ahead of corn, ahead of livestock, ahead of all other issues. Lamy's approach in Geneva demonstrates that when the cotton decision does occur, Lamy will try to split the baby, using the current Falconer text to gut the U.S. cotton program.
No matter where prices are, no matter how low U.S. cotton expenditures are, African ministers will still be quoted saying they are being devastated by U.S. cotton subsidies. There is no basis in fact for this spurious claim. World prices have rebounded over the last two years. The U.S. has lost export market share in key markets and the U.S. cotton industry has shrunk.
There has been no acknowledgment of these changes by the C-4 or other Doha members or of the serious internal issues that plague the African cotton sector, and there has been no progress in truly improving the lives of African farmers these past 5 years – even though U.S. production is down and U.S. subsidies are down.
The Doha negotiations are hostage to agendas that are not economically based and that are not economically supportable.
The major agricultural commodity groups, including the Farm Bureau, will be meeting soon in Washington to discuss the Doha Round and hopefully develop suggestions designed to reposition this trade negotiation. Liberalized world markets are important for agriculture around the world. If markets are liberalized, there must be corresponding reductions in trade distorting subsidies, and U.S. agriculture has conceded this trade-off. But a trade negotiation that is founded on providing less than reciprocal market access can't be fixed until the foundation is mended. U.S. agriculture has a chance, now, to put forward suggestions that will move these negotiations to a path where success is more than a theoretical possibility.
Mr. Chairman, I will also update the Board on the status of the Brazil - US WTO case concerning cotton and export credit guarantees.
A WTO Appellate Panel upheld an earlier decision that the U.S. had failed to bring the cotton program and the export credit guarantee program into compliance with earlier WTO rulings. After chastising the Compliance Panel for its shallow analysis of the credit guarantee program, the appellate body remarkably upheld that shallow analysis, agreeing that these programs are prohibited export subsidies - even though the U.S. submitted substantial evidence showing that the programs are covering costs and do not contain a subsidy component.
The cotton component of the Appellate Panel was just as alarming. The Panel stated that while it could not determine the true price impacts of the U.S. cotton program, it had evidence showing those impacts to be between 1.1 and 8 percent. It held that this range - 1.1 to 8 percent - supported a finding of significant price suppression in the world market, relying on earlier Panel rulings that a little movement in world prices could be significant.
There is a marked degree of inconsistency here. The U.S. offers a 68% reduction in domestic support in Doha and it is rejected as being insignificant, while a WTO Panel asserts that a 1.1 percent change in the world price of cotton is in the range of being significant.
As the United States moves into the arbitration phase of this dispute, Brazil will be attempting to prove its claim that the U.S. cotton program is causing $1 billion worth of damage to its cotton industry. Brazil's hurdle here will be the fact that its own expert estimated the price impacts to be around 8% -- and that level of impact cannot rationally be extrapolated to anywhere close to $1 billion in economic impact.
However, the arbitration panel will be interpreting inexact WTO language for the first time, and so far, every panel has simply reasoned that the United States is large, therefore, the impacts must be large.
Unfortunately, I also expect that the coverage of Arbitration will lump Brazil's $3 billion claim against export credit guarantees program with its ridiculous $1 billion claim against cotton.
The NCC plans to work closely with USTR in developing reasonable economic estimates of damage based on previous panel decisions. If a WTO panel awards Brazil $1 billion or more in retaliation authority, Brazil will undoubtedly try to undermine intellectual property rights of U.S. companies, placing cotton and the export credit guarantee program in a position contrary to the U.S. pharmaceutical industry, for example.
The time between this meeting and the Council's 2009 Annual Meeting will be definitive on both of these major issues I have discussed today. We will know by then the level of retaliation that will be granted to Brazil and we will know by then whether the U.S. has taken advantage of the lesson learned in Geneva and sought a different approach to the Doha Round, one that could potentially benefit U.S. agriculture.