It was anti-climactic, the World Trade Organization's decision in favor of Brazil's challenge to the United States cotton program.

News of the adverse ruling had been leaked months ago, and reported extensively in the media, but everyone had to await the official translation of the document to confirm the decision.

And says U.S. Trade Representative Robert B. Zoellick, now that the ruling's official, it wasn't as bad as it could've been — in effect, “a mixed verdict.”

The U.S. will appeal aspects of the decision, a lengthy process, and there will be “no immediate impact on U.S. farm programs,” he notes.

National Cotton Council Chairman Woody Anderson says the organization's initial review of the decision indicates that the WTO panel “made some surprising assumptions and reached conclusions we believe are not supportable.

“The council disagrees with the decision, and we do not believe the United States, or for that matter any WTO member, intended that the WTO agreements would be interpreted as this panel has done. Now that the report has been publicly released, we are even more convinced that neither the facts, the economics, nor the agreements support the panel's primary decisions. We look forward to a resolute appeal.”

Since 1992, Anderson notes, the U.S. cotton program has moved toward decoupling payments from production, has a lower loan rate for cotton, and a lower target price. These changes, he says, show that the 2004 cotton program does not support cotton at a higher level than in 1992.

“The panel's finding of ‘serious prejudice’ seems contrary to 33 years of stability in the share of the world market held by United States cotton and, indeed, a loss of market share in 2002. The decision also runs counter to recent findings by an independent Texas Tech study that showed estimated price impacts from the U.S. cotton program ranging from less than one-half of a percent to just over 2 percent.

“That's about a quarter of a cent to 1.2 cents per pound, and it doesn't seem possible that these insignificant price impacts could cause any country serious prejudice.”

Analysis contrasts

Mark Lange, the council's chief executive officer, contrasts the independent Texas Tech analysis to that conducted by Prof. Dan Sumner for Brazil.

“Although we strongly disagree with the panel's final decision, we do note that the panel dismissed the outlandish economic model results offered by Brazil's economic expert. With good reason: the soundness of Brazil's evidence has been severely undermined by the Texas Tech study and a recent study conducted by the Food and Agriculture Organization, which also found minimal price impacts from the U.S. cotton program. In fact, the FAO study also explicitly questioned and rejected many of the assumptions used by Brazil's economic expert.

Record production

“The economic analysis rejected by the panel,” Lange says, “is very similar to the reports constructed by OxFam International that have been picked up by the media and trumpeted as fact. The council is glad that the panel at least saw through this aspect of the economic double-speak offered by Brazil.”

Gary Adams, the council's vice president for economic and policy analysis, notes that, “The panel's report will probably intensify the focus on the U.S. cotton program, even during the appeal. This is unfortunate. While Brazil points an accusing finger at the United States, we are seeing record cotton production throughout the world in 2004, led by dramatic increases in Brazil and China.”

Adams says an 8 percent increase in acreage outside the U.S., together with good weather in virtually every growing region, will result in an unusually large crop. For example, Brazil and China combined are expected to increase cotton production in 2004 by 8.1 million bales over their 2001 production — an increase that is almost twice the size of the 4-million-bale annual cotton crop in West Africa.

Anderson says a more decoupled U.S. cotton program, a lower loan rate, a lower target price, a stable world market share, an unbiased economic study showing minimal price impacts, and Brazil's own dramatic increase in cotton production “all point to a U.S. cotton program that is not causing serious prejudice to Brazil, or any other country in the world.”

Lange says, “Their charges focus on one thing — increased U.S. expenditures under the cotton program. Without a doubt, the U.S. program is costing more than we would like, but these costs are a result of low world prices, not a cause of increased U.S. production.”

Avenues of appeal

William Gillon, the council's international trade counsel, says the U.S. “has several strong avenues in which to pursue its appeal and the council will work closely with U.S. attorneys involved in the case. We expect no immediate changes to the U.S. cotton program. The appeal process will take several more months and, even then, parties will be given a reasonable amount of time in which to comply with any WTO rulings upheld on appeal. It's not appropriate to speculate on possible program changes at this time. We remain hopeful that the initial ruling will be substantially revised by the WTO appellate body.”

In the panel proceedings, the United States successfully defended U.S. decoupled income support payments — such as direct payments under the 2002 farm legislation — as not causing “serious prejudice” to Brazil's interests. Specifically, the panel agreed with the United States that income support provided to U.S. cotton farmers and others that is fully decoupled from production and prices has not suppressed or depressed world cotton prices.

U.S. Trade Representative Zoellick says, “We welcome the panel's findings that U.S. decoupled income support payments have not caused serious prejudice under WTO rules. This report confirms that reforms in our 1996 farm legislation and continued in 2002 have worked and that fully decoupled payments do not cause WTO-inconsistent effects by distorting production or trade.”

“U.S. farmers and ranchers are among the most efficient in the world,” says Secretary of Agriculture Ann M. Veneman. “U.S. farm programs were designed to be fully compliant with our WTO obligations. We will strongly defend the U.S. position and work to insure a level playing field for U.S. producers.”

Many critics have claimed that even decoupled payments spur agricultural production and drive down prices. However, the panel rejected Brazil's arguments, essentially siding with the overwhelming body of agricultural economics literature showing that these payments have no more than minimal effects.

Dispel concerns

The report should dispel concerns that all U.S. support payments distort production and trade, Zoellick says

The panel also sided with the U.S. in rejecting several of Brazil's other claims. For example:

  • The panel found that Brazil had failed to show that U.S. domestic support programs caused an increase in U.S. world market share for upland cotton.

  • It also found that certain U.S. export credit guarantees were consistent with U.S. WTO obligations.

  • And most importantly, in terms of future implications of the ruling, the panel declined to find that U.S. domestic support programs threatened to cause serious prejudice to Brazil's interests from 2003-2007.

However, the panel did side with Brazil on some of its claims that some U.S. farm payments cause adverse effects to Brazil and that other U.S. measures are prohibited, including export credit guarantees for some agricultural commodities.

“We strongly disagree with some aspects of the panel report, which we will be appealing,” Zoellick says. “The facts do not show that U.S. farm programs have distorted trade and caused low cotton prices. Moreover, some aspects of the panel report belong in negotiation and not litigation. We believe the appellate body will agree.”

The U.S. believes that the best way to address any distortions in world agricultural markets is through the WTO agriculture negotiations, Zoellick says. “Multilateral commitments to reduce tariffs and subsidies will increase role of market forces globally, and is the only way to address core issues.”

The United States has been a leader in the Doha Round of trade negotiations, including playing a key role in July on a framework agreement for the agriculture negotiations.

This framework builds on the U.S. comprehensive proposal in 2002 to reform all trade-distorting measures in agriculture.

The U.S. objective, Zoellick says, is to “create new market access opportunities for all countries by achieving specific reform commitments in each of the areas of export subsidies, trade-distorting domestic supports, and market access in all countries.”

e-mail: hbrandon@primediabusiness.com