Appendix A - U.S. Cotton Is Not Distorting World Trade
BACKGROUND
Beginning in 2003, four countries from Africa with agricultural sectors dependent on cotton began demanding that the Doha Round of Trade negotiations result in either an elimination of U.S. cotton subsidies or a reduction in those subsidies that greatly exceeded overall, promised reductions in agricultural support. The so-called C-4 countries argued that U.S. cotton subsidies were depressing world cotton prices, causing surplus production of cotton in the U.S. and injuring their producers. In an ill-advised move, the Director General of the WTO put the C-4's demands front and center at the September 2003 Doha Ministerial in Mexico. Ultimately, in December 2005, the U.S. agreed that in a final Doha Round Agricultural Agreement, cotton subsidies would be reduced more and quicker than whatever overall reductions were ultimately agreed.
In 2002, Brazil initiated a dispute settlement proceeding against the U.S. cotton program (among other U.S. agricultural programs) arguing that excessive U.S. subsidies for its cotton producers had suppressed world cotton prices, causing serious prejudice to Brazil's cotton producers. Brazil also argued that some components of the U.S. cotton program were prohibited export subsidies. Brazil won on most of its charges. In response to the finding that the Step 2 program for U.S. cotton was a prohibited export subsidy, the U.S. eliminated the program.
With respect to Brazil's other charges that U.S. cotton programs were suppressing world cotton prices, the U.S. made some minor changes in the U.S. cotton program but also argued that without the Step 2 program, the impact of the U.S. cotton program on world markets would not be significant.
Only a few weeks after the elimination of Step 2, Brazil challenged the U.S. position arguing that the U.S. had not taken the necessary steps to remove the price suppressing effects of its cotton subsidy programs. The U.S. argued that changes were, in fact occurring in the world cotton market. A WTO Compliance Panel, while stating that the connection between the U.S. cotton programs and price suppression was more tenuous, nevertheless ruled in Brazil's favor. Brazil continued to press its case by asking a WTO Arbitration Panel to authorize more than $1.4 billion in countermeasures because of the US cotton program. The United States countered that damages, if any are warranted, should not exceed $30 million. The Arbitration Panel ruled in August that retaliation authority for the cotton program was $147 million annually -- about 10% of that requested by Brazil.
CHANGES IN PROGRAMS AND MARKETS SINCE 2005
As the almost seven-year WTO cotton dispute draws to the end of the primary dispute settlement phase, there is no longer any price suppression case to be made against the U.S. cotton program. The U.S. arguments during the compliance phase of the case have proven accurate -- the impact of U.S. cotton program on the world market is not significant. The demise of the Step 2 program and the responsiveness of U.S. farmers to relative market prices have combined to cause a precipitous decline in U.S. cotton production.
While the U.S. cotton program continues to exist in a slightly modified form, the impact of U.S. cotton subsidies on the world market does not currently exist. Subsidies, either introduced or increased in China, India and Brazil, are exerting greater influences on world cotton prices today.
Africa's case against the U.S. cotton program also has no merit. In the past 4 years, the U.S. has reduced its annual cotton production by over 10 million bales -- but no African cotton production has stepped in to fill the gap. Annual cotton production in the C-4 countries has fallen by 43% since 2005, almost as much as the 45% decline in U.S. cotton production, although the 10 million bale decline in U.S. production is about 8 times the 1.2 million bale decline in the C-4 countries.
The absolute amount of cotton produced in the U.S. has dramatically declined, acreage has declined, and the position of the U.S. in the world market has faltered.
At the same time, cotton production in India has soared as has cotton production in China. Even Brazil has seen a cotton production increase in 2009 as compared with 2005. India has introduced new subsidy programs for its cotton growers. China has increased the value of its internal price support program, keeping internal cotton prices significantly above world price levels, thereby encouraging production in the face of lower world prices. In August 2009, domestic prices for cotton in China were approximately 90 cents per pound, while world market prices hovered in the mid-60 cent range. The increased annual production in India and China in 2009 (as compared with 2005) almost perfectly offsets the huge decline in annual U.S. cotton production that has occurred over the same period. Despite this, Brazil continues to argue injury caused by U.S. cotton producers and C-4 representatives continue to argue that the U.S. cotton program is the source of their economic difficulties.
Both of these arguments are ignoring clear, strong economic facts.
The decline in U.S. cotton production since 2005 is more than double total C-4 cotton production in 2005. Yet, C-4 production has not stepped in to fill the gap, it has declined almost as fast as U.S. production.
There are many reasons for the decline. The rise in cotton production and subsidies in India and China have been partially responsible for dampening world cotton prices. The worldwide recession has also reduced retail textile demand and mill demand for cotton as well. In Africa, internal issues continue to make cotton production difficult. A recent newsletter issued by a large Swiss cotton merchant stated that because West African currency is pegged to the Euro, cotton production is at a competitive disadvantage. Over the past 10 years, cotton prices in U.S. dollars have increased 15%, but in Euros prices have actually decreased 20%. This competitive disadvantage has prevented the internal cotton monopolies in the C-4 countries from providing adequate returns to growers. Inputs are often reduced to a minimum hurting yields. "West Africa is the only area in the world where the yields are on average actually declining," according to the Swiss merchant's cotton market report.
Brazil's claimed injury from U.S. cotton subsidies flies in the face of its increased cotton production concurrent with dramatic U.S. production declines. The U.S. cotton program cannot be proven to be suppressing world cotton prices when every bale by which the U.S. decreases production is replaced by a bale produced by India or China or Brazil, regardless of the movement of world prices. The U.S. is one of the only major cotton producing countries that has significantly decreased cotton acreage in response to soft world prices.
Worldwide production of cotton in 2009 is 10.8 million bales less than in 2005 -- due to soft demand and soft prices. The decline in U.S. cotton production by itself accounts for 99% of that decline.
Prepared by William Gillon, with assistance from Dr. Gary Adams and NCC Economic Services