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Overview of selected trade and economic policies

World cotton trade and production are highly affected by government policy intervention, notably in the US, China and the EU. Direct support to producers through price interventions is of particular concern as regards the efficiency of the global cotton market. According to ICAC, the aggregate level of direct production assistance across all subsidising countries reached $5.8 billions in the season 2001/02. Support was $3.8 in the 2002/03 season.

Direct assistance to cotton producers, 2001/02 - 2002/03

Source: UNCTAD secretariat, based on: "Lower Subsidies This Season" (C. Valderrama, ICAC)

According to ICAC, only the United States and China have subsidised their cotton exports.

Support through export programmes, 2001/02 - 2002/03

Source: UNCTAD secretariat, based on: "Lower Subsidies This Season" (C. Valderrama, ICAC)

It is estimated that cotton subsidies artificially inflated production and depressed world cotton prices, damaging those developing countries that are heavily reliant on cotton exports for their foreign exchange earnings. Many studies have attempted to measure the impact of cotton subsidies, and have estimated the effects of subsidy removal. ICAC concluded that in the absence of direct subsidies, average cotton prices for the 2000/01 and 2001/02 seasons would have respectively been 17 and 31 cents/pound higher. As highlighted in a recent survey (ODI, 2004), different results are sensitive to different assumptions about the cotton market.

For further information on the impact of cotton subsidies, please refer to:
- Understanding the Impact of Cotton Subsidies on Developing Countries (Overseas Development Institute Working Paper, May 2004 - PDF file 657K)
- Cotton: Market Setting, Trade Policies, and Issues (World Bank Policy Research Working Paper, February 2004 - PDF file 617 KB)
- Cultivating Poverty: The Impact of US Cotton Subsidies on Africa (Oxfam Briefing Paper, September 2002 - PDF file 657 KB).

For specific information on cotton policies in the European Union, please refer to:
- EU-25 Cotton and Products, Cotton Policies in the European Union 2005, (USDA, February 2005 - PDF file 657 KB))

Trade disputes and negotiations

Within the World Trade Organization ("WTO"), action by developing countries to redress distortions in the cotton market has taken place in two different, although related, contexts: dispute settlement and negotiations.

Disputes: "US - Upland Cotton" (WT/DS267)

In 2003, Brazil was the first country to submit a formal complaint under the WTO dispute settlement mechanism about US cotton subsidies, claiming that they depressed world cotton prices and injured Brazilian farmers. Without the subsidies, according to estimates that Brazil commissioned from an American agricultural economist, United States cotton production would have fallen by 29% in 2001 - 2002 and its cotton exports would have dropped by 41%. According to these estimates, this contraction would have led to a rise in international cotton prices of 12.6%.

In a landmark ruling, the WTO dispute settlement Panel sided with Brazil on certain major substantive claims. The United States and Brazil each appealed certain issues of law and legal interpretations developed in the Panel Report. Finally, the Appelate Body upheld most of the Panel's findings.

Products at issue:

The dispute principally concerned United States subsidies in respect of upland cotton (Gossypium hirsutum). The term "upland cotton" here means raw upland cotton as well as the primary processed forms of such cotton including cotton lint and cottonseed. Upland cotton would account for approximately 97 per cent of United States cotton production (United States Department of Agriculture, Cotton: Background and Issues for Farm Legislation).

Measures at issue:

It is worh recalling that the WTO Agreement on Subsidies and Countervailing Measures ("SCM Agreement") creates two basic categories of subsidies: those that are prohibited, and those that are actionable. Subsidies contingent, in law or in fact, on export performance ("export subsidies") are prohibited. Other domestic-support measures fall in the "actionable" category. They are subject to challenge, either through multilateral dispute settlement or through countervailing action, in the event that they cause adverse effects to the interests of another Member (including "serious prejudice" arising from export displacement).
The measures as identified in Brazil's request for the establishment of a panel were alleged prohibited or actionable subsidies provided to United States producers, users and/or exporters of upland cotton under various commodity support programmes. They included:

Marketing loans (including marketing loan gains and loan deficiency payments) were the largest of these price- and income-support measures. For further information on their functioning, please refer to this extract (PDF file 28k) from "Analysis of the U.S. Commodity Loan Program / AER-801", US Department of Agriculture, April 2001.

Parties' claims (substantive issues):

Brazil claimed, inter alia, that:
(1) Export credit guarantee programmes constituted prohibited export subsidies;
(2) Step 2 payments for cotton were both prohibited export subsidies and prohibited import substitution policies;
(3) the other U.S. domestic support measures caused (or threatened to cause) serious prejudice to the interests of Brazil by depressing world cotton prices and unfairly expanding or maintaining U.S. world market share.

The US had countered these allegations by arguing, among other things, that its subsidies did not artificially inflate supply or depress prices because they were "decoupled" from production. Their viewpoint was that farmers did not get extra handouts for extra cotton. They were instead paid according to the number of acres they planted and the cotton they produced in the past.

Findings:

Ruling in favour of Brazil, the Panel found that the US domestic support measures contingent on prices (in particular, the marketing loan programme payments, user marketing (Step 2) payments, market loss assistance payments and counter-cyclical payments) caused "serious prejudice" to Brazilian interests by unfairly depressing world cotton prices. Thus, it was recommended that the United States take appropriate steps to remove the adverse effects caused to the interest of Brazil or withdraw the subsidy.
The Panel further held that export credit guarantees and Step 2 payments to exporters of upland cotton were prohibited export subsidies and that Step 2 payments to domestic users of upland cotton were a prohibited import substitution subsidy. Hence, these measures had to be withdrawn "without delay."
The decision has apparently accepted the principles that direct payments to producers may be challenged under WTO rules even if they are formally decoupled from production. The ruling also acknowledges that the SCM Agreement may serve as a legal basis for action over agricultural subsidies (although the Agreement on Agriculture ("AoA") would take precedence).

The Appellate Body upheld most of the Panel's findings. Accordingly, the United States shall bring its cotton policy into line with the Panel's ruling within a reasonable time. If it fails to act, it has to enter into negotiations with Brazil in order to determine mutually-acceptable compensation (if no satisfactory compensation is agreed, Brazil may ask the Dispute Settlement Body for permission to impose limited trade sanctions).

Impact of the ruling:

Effective compliance with this ruling would contribute to restore a level playing field for cotton trade and production. This would help to enhance the competitiveness of agricultural exports from some developing countries.

Some commentators stressed that the ruling would increase pressure on the US to reform its national farm programs. In this regard, on February 2005, the US Agriculture Department considered the possibility to set a firm overall limit of $250,000 on subsidies (which can now exceed $1 million in some cases). Such a proposal would cut federal payments to farmers by $587 million, or about 5 percent, in 2006 and, according to some US estimates, might correspond to a diminution of $5.7 billion in the coming decade. In setting a firm overall limit of $250,000, the plan would tighten requirements for the recipients of such payments to be “actively engaged” in agriculture, and it would generally prevent farmers from claiming additional payments.

It was felt that the ruling would have an impact on negotiations. In that context, the decision could strengthen the case for the reduction and elimination of developed country subsidies in the current Doha round, and weight on developed countries in the talks. It might thus create the necessary momentum in arriving at a successful conclusion of the ongoing agricultural trade talks.

It should also be noted that a number of West African countries, including Burkina Faso, Benin and Mali, are heavily dependent on cotton for the bulk of their export earnings. Nonetheless, African countries did not participate as complainants in the dispute (although Benin and Chad reserved their rights to participate in the Panel proceedings as third parties). The cautious stance of Africa in the cotton dispute has been attributed to political sensitivity (African countries are highly vulnerable to retaliatory action by major trading partners) and lack of resources (disputes are costly and require much legal expertise).

Access the official documents relating to the dispute:

For further information on domestic support in agriculture and WTO rules, please refer to:
"Boxes" in domestic support (WTO Factsheet - PDF file 102 KB)
Agriculture gateway (WTO website section)
Agriculture negotiations gateway (WTO website section)
SCM gateway (WTO website section)

Negotiations: The Cotton initiative

Despite the fact that West and Central African (WCA) countries did not participate as complainants in the dispute, they continue to be actively engaged in the negotiating process.
The "cotton initiative" (see document TN/AG/GEN/4) was originally launched in 2003 in the build-up to the Cancun ministerial by four WCA countries (Benin, Burkina Faso, Chad and Mali). The proponents called for (i) the phase-out of developed countries' subsidies for cotton production and export and (ii) a compensation mechanism to offset the income loss experienced by the least developed countries pending the phase-out.
Although the original proposal had been conceived as a sectoral initiative on a separate track within the trade negotiations, country members agreed, in September 2004, to make discussion on cotton an integral part of agriculture negotiations. However, cotton remains partially singled out within agriculture talks. In order to "ensure appropriate prioritisation of the cotton issue independently from other sectoral initiatives" (July Package on the Doha Round - WT/L/579), WTO Members agreed on 19 November 2004 to establish a sub-committee under the Committee on Agriculture (CoA) dealing specifically with the issue of cotton. The subcommittee on cotton will meet periodically and report to the Special Session of the Committee on Agriculture to review progress. Work shall encompass all trade-distorting policies affecting the sector in all three pillars of market access, domestic support, and export competition.

For more information, please refer to the following websites:
Sahel and West Africa Club (direct access to a range of regional case studies, regional actor and international agency perspectives on cotton);
International Centre for Trade and Sustainable Development (ICTSD) (selection of reports and articles related to cotton);
Technical Centre for Agricultural and Rural Cooperation ACP-EU
Ideas Centre International Trade Development Economic Governance Advisory Services

Cotton issue at the Sixth WTO Ministerial Conference

The final declaration of the Hong Kong Ministerial Conference reiterates the commitment of the July package. Thus, it was agreed that cotton export subsidies, which constitute only a small fraction of distortions affecting the sector, would be eliminated in 2006, and developed countries would give duty- and quota-free access to cotton exports from the least developed countries (LDCs). Duty- and quota-free access, however, is already available in some major markets (for instance, under the EU Everything But Arms and the Canadian Market Access initiatives), while Western African countries currently do not export cotton to the United States market. Furthermore, increased market access and the removal of export subsidy can mainly be seen as a plain enforcement of the decision of the WTO dispute settlement Panel on cotton. It was also agreed that trade-distorting domestic support on cotton production would be cut deeper and faster than other trade-distorting subsidies. The Ministerial Declaration, however, does not specify either the amount or the schedule for the implementation of such cuts.

Referring to the request of the C4 (Chad, Mali, Benin and Burkina Faso) to initiate an emergency fund to help deal with depressed international prices there are no binding commitment in spite of a reference made in the text calling for a mechanism for monitoring the commitments to be made by industrialized countries.

For more information, please consult paragraphs 11, 12 and 21 of Doha Work Programme, WTO Ministerial Declaration (WT/MIN(05)/DEC)

WTO Cotton Sub-Committee

WTO members on 19 November 2004 set up a body to focus on cotton, as required in the 1 August 2004 decision, sometimes called the “July Package”, covering all the WTO negotiations.

The agreement to create a body to focus specifically on cotton is part of WTO member governments’ response to proposals from four African countries — Benin, Burkina Faso, Chad and Mali — to tackle the sector.

In this framework, the African Group has circulated a text (dated 22 April 2005) called “Proposed Elements of Modalities in Connection with the Sectoral Initiative in Favour of Cotton".

For more information on this issue, please consult WTO website.

During the WTO Cotton Sub-Committee on January 31 2006, it was noted that with agreement for developed countries to eliminate export subsidies on cotton by the end of 2006, one of the key proposal of C4 was to set up a way to monitor this accordingly.

Furthermore, a new proposal from C4 (TN/AG/GEN/12) is calling for the reduction in trade-distorting domestic support to be three times higher than the cut agreed for domestic support in general, and the implementation period to be one third as long.

In order to be able to settle a specific rate of reduction of the AMS for cotton, the following formula has been proposed by the "Cotton Four" in the WTO document TN/AG/SCC/GEN/4:

Rc = Rg + ((100-Rg)*100)/3*Rg

Rg = reduction as a percentage; final result for reduction of the AMS
Rc = Reduction for cotton as a percentage; final result for cotton in order to meet the requirement for specificity and more ambition.

Source: Proposed modalities for cotton under the mandate of the Hong Kong ministerial decision, March 1, 2006 (TN/AG/SCC/GEN/4)

The EU stressed the fact that it had proposed duty-free and quota-free market access for cotton exports from all developing countries, not only the least-developed.

The US pointed out that the commitment is definite for cotton products even though the more general duty- and quota-free decision (for all products) allows some exceptions for 3% of products for countries facing difficulties.

For more information on latest development related to US cotton trade policy, you may wish to consult the website of the Office of the United States Trade Representative (USTR)