International Trade Policy Report
National Cotton Council of America 2010 Annual Meeting
Peabody Hotel - Memphis, TN
Introduction
From a trade policy perspective, 2009 has functioned as a segue between the last, almost disastrous year of the Bush Administration and a still-to-be-developed trade policy for the Obama Administration. Even the arbitration decision in the WTO case involving Brazil is a segue. We finally have a value ascribed to the US trade policies deemed to have injured Brazil, but we are still waiting to see how Brazil retaliates and what impact that may have on US agricultural policy.
Meanwhile, other trade policy debates continue to impact significantly US textile manufacturers. The disaster of the earthquake in Haiti will be another challenge for US textiles as well-meaning economic assistance legislation often ignores potential negative impacts on US jobs and manufacturing.
Possible Trends
The President's State of the Union speech combined with other rumbles and shifts emerging from the US Trade Representative's Office point to a few possible trends for President Obama's trade policy:
- Emphasis on a regional trade strategy involving Southeast Asia
- A new push for growth in exports -- possibly indicating that growth in trade, not necessarily an increase in trade agreements, may become the yardstick against which the Obama Administration wants to be measured
- A love / hate approach to the Doha Negotiations
- Uncertainty on how to push the Korea, Colombia and Panama free trade agreements through a Democratic Congress
The biggest question is whether USTR Ron Kirk's solid statements on trade policy, which are results-oriented and not lectures on free trade, will become the general emphasis of the Obama Administration.
With respect to cotton, the critical questions the industry faces in 2010 are --
- Whether there will be further adjustments in the US export credit guarantee program in response to Brazil's trade retaliation activity;
- Whether there will be further adjustment in the US cotton program in response to Brazil's trade retaliation actions;
- Whether the Doha negotiations will make any substantive headway and again bring the cotton specific subsidy debate back to the front page; and
- How the cotton industry is able to respond to proposed trade preferences in this hemisphere and proposed trade negotiations in Asia that could further cripple the US textile industry.
WTO Case Involving Brazil and the US
Background: In September 2002, Brazil first raised charges against certain aspects of the US cotton program and export credit guarantee program. The case has worked its way through a WTO Dispute Settlement Panel ruling (with a negative finding in March 2005 against the United States) and an Appellate Body (AB) ruling, also with a negative finding against the United States. This was followed by a WTO Compliance Panel ruling in December 2007 that found that the United States had not fully complied with the original panel's and AB's recommendations concerning these programs. In June 2008, an AB upheld the Compliance Panel ruling. None of these panels made prescriptive findings with respect to the “serious prejudice” aspect of the case. That is, no panel had said “make the following changes in US programs and Brazil no longer has a serious prejudice case.” Brazil’s stated position has been that the complete elimination of the US upland cotton marketing loan and counter-cyclical programs will stop serious prejudice.
As a result of its victories in these dispute settlement proceedings, Brazil claimed $1.4 billion in annual retaliation authority for injuries caused by the US cotton program and the old Step 2 program and $1.3 billion in annual retaliation authority for the export credit guarantee program (the GSM program). The GSM decision is based on earlier findings that the GSM program is a prohibited export subsidy with respect to specified unscheduled commodities and rice. Retaliation in a WTO case usually involves a country imposing additional duties on imports from the offending country.
Arbitration
Because Brazil and the United States disagreed over the amount and nature of retaliatory trade sanctions, the parties asked for an arbitration panel (established in October 2008) to review countermeasure proposals. Although the arbitrators' review was scheduled to be completed in the early spring 2009, their report was not issued until August 31. The arbitrators could only consider the level of retaliation to be authorized by Brazil under previous rulings, not whether serious prejudice still exists. Retaliation is usually carried out through the imposition of additional import duties. However, Brazil also asked for the authority to "cross-retaliate"-- to be authorized to violate the intellectual property rights of US companies operating in Brazil, such as seed companies or pharmaceutical companies.
The Arbitration Panel granted the following authorizations:
- $147 million in retaliation authority for the cotton component of the case ($0.00 for Step 2) -- about 10% of what Brazil requested; plus
- $147 million in retaliation authority for export subsidies under GSM -- but this amount was subject to change annually based on a formula that looks at the value of transactions under the GSM program. The $147 million was based on 2006 trade figures. For 2009, the GSM retaliation authority is approximately $650 million.
The Panel also granted authority to "cross-retaliate" on US goods under if the total retaliation authority (adding cotton's $147 million with the formula result for GSM) exceeded $400 million annually.
The Panel was clearly not enamoured with Brazil's $1.4 billion claim against cotton and reacted positively to arguments developed by the US and the Council demonstrating the holes in Brazil's economic analysis.
Unfortunately, the formula adopted by the Panel for the GSM program increases retaliation authority based on the size of the GSM program. While the initial decision was under $400 million, the GSM program was significantly larger in 2008, and the arbitration formula would authorize approximately $650 million in retaliation for 2010 just for GSM. The 2008 GSM retaliation level, when added to the $147 million authorized for cotton, results in a combined retaliation amount of around $800 million, and would justify approximately $400 million of cross-retaliation by Brazil.
In late November, Brazil published a list of 222 items being considered for additional duties under its retaliation authority. As of February 6, Brazil has not formally indicated how it would implement any cross-retaliation.
Brazil Case Issues in 2010
The Arbitration Panel's decision will result in significant pressure on the US government to make changes in both the US cotton program and the US export credit guarantee program in order to end this case. US manufacturers of items that might be affected by any cross-retaliation in Brazil are particularly concerned.
Brazil - US Trade: In 2008, the United States exports to Brazil were $32.3 billion. US imports from Brazil were $30 billion.
Important Imports from the United States in 2008: Machinery ($6.7 billion), Aircraft ($5.6 billion), Electrical Machinery ($3.5 billion), Mineral Fuel ($2.2 billion), and Organic Chemicals ($2.1 billion). US exports of agricultural products to Brazil totalled $677 million in 2008, including wheat ($295 million), cotton ($27 million), dairy products ($24 million) feeds and fodders (excluding pet foods) ($24 million).
NCC Requests new Compliance Panel
The National Cotton Council has called upon the US government to seek another Compliance Panel to rehear the cotton aspect of the Brazil case. Neither the Compliance Panel that operated in 2006 and 2007 nor the Arbitration Panel has considered any program changes that have occurred in US cotton policy in the 2008 Farm Bill. Changes in the cotton program and the impact of US ethanol and bio-fuel mandates have significantly affected US agriculture in general and cotton in particular.
- There has been a 40% decline in US cotton acreage eligible for the cotton marketing loan program since 2005;
- There has been a 45% decline in US cotton production since 2005;
- There has been an 8 percentage point decrease in world market share attributable to the US since 2005;
- The United States is one of the very few major cotton producing countries that has decreased cotton production (compared with 2005) in the face of weak world cotton prices; and
- For every one bale that US production declined in 2008 as compared to 2005, Brazil, China and India combined increased their production by 2.4 bales.
US cotton programs are not having any impact on world cotton prices. With every decline in US cotton production since 2005, other countries more than make up the difference, preventing world cotton prices from recovering. An Appendix to this report sets out in more detail NCC arguments that the US cotton program is not having any detrimental affects on international trade in cotton fiber.
The GSM program has also undergone significant changes that were not considered by the WTO panels. In July 2005, after the first WTO Panel decision against the export credit guarantee program was upheld by the WTO Appellate Body, the Department of Agriculture instituted a number of administrative changes to the export credit guarantee program that were designed to make it operate at no net long-term cost to the government. Many of those changes were incorporated into the 2008 farm bill. In addition, Congress mandated that the Secretary develop an approach to risk evaluation that facilitates accurate country risk designations and adjustments to those designations. Congress also required that, to the maximum extent practicable, risk-based fees be charged to cover the operating costs and losses of the program over the long-term. The 2008 bill removed the 1% cap on fees that the WTO Panels had found objectionable.
Action by the US Government
The US Government has discussed the Arbitration decision with Brazil but the two countries have not made progress in their attempts to reach a settlement. The US Government has provided Brazil and the WTO with updated calculations concerning the GSM program. The US has also indicated it will announce GSM allocations quarterly for 2010, instead of announcing 12 months of allocation at once and has imposed additional restrictions on the GSM program. It is also possible that the Department of Agriculture will direct some GSM business away from Brazilian banks, as this will significantly decrease the retaliation amount authorized by the Panel's formula.
Peru CVD
At the 2009 Annual Meeting we reported to this committee that the Government of Peru was moving forward with a countervailing duty case against US cotton imports into Peru. We helped USTR respond to the Peru allegations. Fortunately, the Peru case did not move forward.
While US exports of shorter-staple cotton to Peru had increased the past few years, those imports did not directly compete with Peruvian production, which is mainly longer staple cotton that would compete with Pima or ELS cotton. Peruvian officials undoubtedly recognized this and ruled against the countervailing duty petition that had been brought by the Peruvian Cotton Producers Association.
China
China is the world’s largest producer, consumer and importer of raw cotton. US cotton exports to China are 30-50% of annual total US cotton exports. During last year's annual meeting we reported that China had implemented a registration and inspection system that would increase the cost of cotton for Chinese mills and result in unnecessary delays for US exports.
US exporters advised Chinese officials of their objections and intention not to register. However to avoid adverse treatment of US exports, shippers and marketing cooperatives did register while working with USDA and USTR to delay implementation and consulting with Chinese officials in an effort to eliminate or modify the registration program. A delegation of ACSA and AMCOT representatives visited Beijing twice during 2009 to discuss the program with US and Chinese officials.
The Council continued to press US officials concerning China's anti-competitive trade practices. The Council advised Secretary Vilsack and officials at USTR of the registration issue, China's use of the TRQ system to keep internal cotton prices above world price levels, the allocation of import quotas to the "cotton processing sector" which requires an equivalent level of textile and apparel exports to offset cotton fiber imports, and other ways in which China continues to distort trade in textiles and apparel. Most significantly, the Council continues to impress upon US Government officials that, as the world's largest user of cotton fiber, the world's largest producer of cotton fiber, and the most significant textile and apparel manufacturer in the world, China cannot continue to maintain a very small, restrictive tariff rate quota for cotton fiber imports.
Imports of textile and apparel products from China are no longer subject to a special safeguard mechanism included in the WTO accession agreement. The US has put a monitoring system in place, and the industry supports initiating countervailing duty action if there is threat of injury from surges of import products. The 2009 recession dampened demand for apparel in general, causing China imports not to surge as they have in the past. Even so, China remains the largest single exporter of textile and apparel products to the US with a 45% market share as of November 2009.
Haiti
The Haitian Hemispheric Opportunity Through Partnership for Encouragement Act (HOPE) was enacted in 2006 providing expanded duty-free, quota-free access to certain apparel products assembled in Haiti -- access beyond that granted in the Caribbean Basin Trade Preferences Act. To qualify, Haitian products are required to have 50% of the value of the finished product be provided by the US, Haiti, any US Free Trade Agreement partner or any country in AGOA, Andean and CAFTA regions. The US textile industry was very concerned that this loose rule of origin would ultimately benefit Asian textile manufacturers more than the apparel industry in Haiti.
HOPE provided that the annual quantity of goods eligible for duty-free benefits will be recalculated for each subsequent 12-month period and that the annual limit for qualifying apparel imported from Haiti under this provision would be capped at 1.3% of the total SME of all apparel articles imported into the US from Haiti. Exports from Haiti under these expanded preference rules during 2009 were only 5.2% of the cap.
The 2008 Farm Bill contained HOPE II, which extended special tariff preferences for Haiti for 10 years, included amendments to rules enacted in 2006 by the HOPE Act. HOPE II further relaxed rules of origin for textile and apparel products from Haiti, creating a benefit for apparel wholly assembled or knit-to-shape in Haiti of textiles that did not meet a regional rule of origin on a 3-1 basis, i.e. for every 3 sme of regional origin fabric used to produce apparel shipped to the US under the preference, 1 sme of third-country fabric would also receive the preferential duty treatment.
The devastation caused by the earthquake in Haiti has prompted Congress to attempt to provide more trade preferences to the country. The Council and the US textile industry is again concerned that outside interests will attempt to use Haiti's moment of crisis as a means to undermine overall U.S. policy in the Caribbean region and to further economic returns to Asian fabric manufacturers.
According to the NCTO, it appears that more than 75% of the apparel manufacturing capacity in Haiti endured little to no damage during the earthquake. Most of these manufacturers are back on line. The bulk of the country’s textile manufacturing sector is located on the border between Haiti and the Dominican Republic away from Port Au Prince. Also, the apparel plants in Port Au Prince are newer and tend to be built to code as required by government standards.
NCTO has been in contact with groups and companies who have apparel operations in Haiti and developed a set of recommendations for Haiti relief based on the assessments of Haiti-based textile operations. Aid should be focused on humanitarian efforts and infrastructure repair and rebuilding and should be directed to the parts of Haiti that need it.
Senators Wyden (D-OR) and Nelson (D-FL) have introduced a bill for Haitian relief that is supported by the US textile industry as it concentrates on infrastructure repair and rebuilding while providing some reasonable level of additional rule-of-origin flexibility. The bill has several innovative approaches to assist in the rapid rebuilding of Haitian apparel exports.
However, other interests in the United States and Asia are seeking to use the devastation in Haiti as a means to get Congress to remove all caps on apparel made from third-country fabric qualifying for preferential tariff treatment. They are pushing this agenda despite the fact that Haiti has not been close to reaching the existing caps on apparel made from third-country fabric. Instead of encouraging Haiti to build up its own manufacturing base, this type of legislation would have the effect of limiting Haiti to purely cut and sew operations using foreign country fabric. It would also undermine the CBTPA preferences that are being utilized by other Caribbean countries.
The committees of jurisdiction want to move legislation very quickly.
Cotton Policy in India
India is the world’s second largest producer of cotton, and has seen significant increases in yields the past several years. As a result, India has become a substantial exporter of cotton fiber and has begun increasing its subsidies to its cotton producers and exporters. In testimony presented to the US International Trade Commission in April, the NCC charged that increases in internal price supports, new export subsidy programs, and a continuing practice of governmental assistance to its textile industry have propelled India's cotton industry upward. The Council argued that these trade-distorting trends needed to be halted and reversed, whether through consultations or formal trade disputes.
India announced increases in its Minimum Support Prices for cotton during 2008. Depending on exchange rates and lint turnout ratios, the minimum support price in India ranges between $0.65 and $0.72 per pound for the most commonly produced qualities of cotton, as compared to international prices ranging between $0.55 and $0.58 per pound during the summer of 2009. This discrepancy between Indian support prices and world prices led the Indian government to authorize the purchase of up to 11.7 million bales from the 2008 cotton crop.
With internal prices higher than the world market and on the heels of a huge government purchase of stocks, India announced a new export subsidy scheme for cotton exports equal to 5 percent of the value of the export. Indian cotton was already generally offered at a 3-5 cent discount compared to similar growths from other countries. The addition of an export subsidy allows India to increase this discount relative to their competitors. The Council also reported that despite India’s membership in the WTO, it had not notified its support levels to the WTO since 2002. The Council urged the United States to press India to make these submissions.
The increase in cotton production in India is also discussed in the paper attached as Appendix A.
Doha Round Trade Negotiations
While 2008 was a hectic year for the Doha Round, 2009 saw very little meaningful activity. There has been little, if any, substantive movement in the negotiating positions of the WTO members. The "short", 11-page summary of the Doha negotiations prepared for this meeting last year is still largely accurate.
While the negotiating texts haven't changed, the US negotiators have changed and so has the apparent US view of the status of the negotiation.
The Council argued throughout 2008 that the negotiating text in agriculture did not meet the goals established by the US in its key negotiating proposal issued in October 2005. The Council's evaluation was echoed by the American Farm Bureau and a few others. There is a clear and obvious problem with the Doha negotiations -- the US is being asked to reduce agricultural support by $34 billion annually while getting virtually no increase in agricultural market access to advanced developing countries in return. US exporters also contend there are insufficient increases in non-agricultural market access, leaving the US with a lose-lose trade negotiation.
Statements by USTR Ron Kirk during a December WTO Ministerial meeting and the level of chagrin evidenced by several trade ministers during the recent World Economic Forum point to an evolving US position that the current Doha texts do not contain enough agricultural and non-agricultural market access on the part of the advanced developing countries. While several countries are suggesting there should be another Ministerial meeting to hammer out the few remaining differences, the US seems determined to avoid such a meeting, viewing it as no more than an attempt to force an agreement in a pressure-filled situation. The US is encouraging countries to conduct bilateral talks to determine the level of market access that is contained in the current negotiating texts. The US apparently hopes that such bilateral negotiations could clarify areas in which countries could provide more market access to US exports.
During the December meeting, Ambassador Kirk said he would target advanced developing countries and "meaningful market opening is required to complete the Round. And we are looking for concrete signs from other members that they are ready to join us in that commitment." During the December meeting Kirk also rejected calls for an early harvest on cotton issues.
In our international trade policy report last year we indicated it was the NCC's hope that the new Administration would conduct a thorough review of the Doha Round to determine whether another approach would be better for the United States. Specifically, the report stated:
We have a new President whose trade team is not in place and whose trade policies are still in formation. It is an appropriate time, after almost 8 years of trying to negotiate a Doha Agreement, to reposition this trade negotiation. Liberalized world markets are important for global agriculture. If markets are liberalized, there must be corresponding reductions in trade distorting subsidies, and US agriculture has conceded this trade-off. But the Doha Round was founded on the premise of providing less than reciprocal market access -- and that is where the negotiations were headed. A reasonable analysis of the current negotiating texts clearly leads to the conclusion that the focus is not reciprocal liberalization or even a worldwide reduction in trade distortions. The focus is on protecting developing countries, many of which have very strong economies, and further opening up the industrial markets of the developed world.
The Obama Administration has taken its time to develop a trade policy in general and has still not offered a lot of specifics concerning the Doha Round. Worse, its proposed Chief Agricultural Negotiator's nomination has been stalled in the Senate. Even though it has been 12 months, it is still probably too early to tell whether this Administration fully agrees with my "reasonable analysis" that Doha is not a balanced agreement.
West Africa
If the Doha Round does move back into the spotlight, West Africa's demands on US cotton policy will again be in the forefront. The C-4 countries are already trying to get countries to agree to discuss cotton now, before a Doha agreement is concluded.
The draft negotiating text continues to call for an 82% reduction in cotton support based on the proposals put forward by the C-4 countries. The Council continues to stress that such a reduction is unacceptable and the text does not contain any meaningful increase in market access for cotton into China, the world's largest market. Without such increased access, the Doha agreement will not provide any help to the world cotton market or the cotton industries in the C-4.
C-4 ministers visited Washington in the summer trying to increase support for their position. The Council communicated to the US Trade Representative the facts about the cotton industries in the C-4 and the dramatic shifts that have taken place in the world cotton market since the C-4 first made demands against US cotton in 2003.
As the appendix to this report demonstrates, it is clear that neither US cotton subsidies nor US cotton production are distorting world markets. US cotton farmers have reacted to market signals by planting significantly less cotton in recent years, demonstrating that US planting decisions are market driven, not program driven. The US share of world cotton production has declined significantly to 12% of total world cotton production – the lowest since 1983. US cotton fiber exports are a direct result of the movement of textile manufacturing capacity from the United States to developing countries.
The C-4's attack on the US cotton industry is misdirected. China and India, the world’s two largest producers, currently dominate and distort world cotton markets. Cotton area in the United States and West Africa is 40% below 2005 levels, while combined area in China and India is higher than in 2005. China has been building government stockpiles and closely controls cotton import quotas. India has increased support levels by 35 to 40% and has introduced a cotton export subsidy that is likely inconsistent with its WTO commitments. Brazil has expanded the use of government subsidies for cotton since 2005. The US and West Africa both need greater access to the world's textile mills, which are largely located in developing countries.
The Council continues to urge support for the West African Cotton Improvement Program (WACIP) noting that fundamental, internal structural changes must occur in the C-4 countries if their farmers are to receive more than 65 percent of world market prices. According to USDA reports, the cotton industry in West Africa “continues to decline despite the best intentions and efforts of national governments and the donor community.” In addition, most of the structural problems remain unchanged.
The gap in production efficiency is widening. Since the mid-1980s, yields in the C-4 countries have declined while yields in other developing countries have shown a marked increase. If C-4 cotton yields had kept pace with other developing countries, an acre of cotton in the C-4 would generate almost twice as much yield and revenue than current production. Finally, the strength in West Africa currency has negated virtually all positive price movement since 2002. Even when world prices moved sharply higher in 2008, prices in CFA Francs were only marginally better than in 2002.
Textile Export Credit Program
The 2009 ITP resolutions included a new provision directing the Council to work toward expanded access to credit for US textile fabric manufacturers and exporters. The economic downturn has harmed the ability of many purchasers of US fabric to obtain enough credit to finance purchases. NCTO and the Council have worked with Congressional offices to develop possible changes to the Small Business Act that would expand the Export Working Capital Loan program to small to medium textile manufacturers. The organizations are also exploring other avenues, such as modifications to EX-IM Bank programs that would help provide this needed financing.
Free Trade Agreements and Regional Negotiations
Regional trade preference agreements continue to be vital to the US textile industry’s ability to compete, especially since the removal of quotas for all WTO member countries on January 1, 2005. While in office, the Bush Administration was extremely active in negotiating free trade agreements. Several agreements negotiated by the Bush Administration have not been advanced through Congress by the Obama Administration. These include agreements with Korea, Colombia, and Panama.
The Obama Administration has announced that it will work to obtain Congressional approval for Korea, Colombia and Panama. However, US officials have also stated that there are a few, fairly difficult issues with the Korea Agreement that must be dealt with before Congress is asked to endorse that agreement.
The US now has free trade agreements with Canada, Mexico, Israel, Australia, Bahrain, Chile, Jordan, Morocco, Oman, Peru, Singapore, and the countries of the CAFTA-DR – Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. During his State of the Union speech, President Obama voiced strong support for the evolving Trans-Pacific Partnership that will involve negotiations with several South East Asian countries, including significant textile producers such as Vietnam.
Trade preferences continue in place until 2015 for countries in Sub-Saharan Africa under the African Growth and Opportunity Act (AGOA). The AGOA preferences have contained relaxed rules of origin for textiles that often allow third countries to benefit from preferences designed for African countries. While still relaxed, some of these rules were tightened beginning in October 2008.
The Council's printed Economic Outlook report contains additional specifics regarding regional trade arrangements and trade preferences.
See Appendix A to this Report
See the Slide Presentation accompanying this Report
William A. Gillon, February 2010