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The Landscape Has Changed

By Gary Adams
NCC Economist

Today’s U.S. cotton industry landscape, particularly acreage, is strikingly different from the period of time Brazil pointed to in its 2002-launched World Trade Organization case against U.S. cotton.

What is the case’s status?

This past March, U.S. and Brazilian government representatives appeared before a WTO Arbitration Panel in Geneva to debate the size of countermeasures originally proposed by Brazil due to the alleged U.S. failure to comply with a previous WTO Dispute Settlement Panel. That Arbitration Panel was expected to deliver its findings by late April or early May. Brazil is claiming damages of $1.3 billion for the GSM program operating as a prohibited subsidy; $350 million in one-time damages from Step 2 as a prohibited subsidy; and “serious prejudice” damages from the upland cotton marketing loan and counter-cyclical programs of $1 billion.

Are those claims overstated?

The National Cotton Council believes so. We have pointed out to the U.S. Trade Representative and to Congress that Brazil’s damage claims come despite the fact that the Step 2 program ended almost three years ago and export credit programs have been altered or discontinued. In addition, claims of injury due to the cotton program are unreasonable given the realities of the world fiber market and recent declines in U.S. cotton production.

A frustrating aspect of the case is the WTO’s use of the 1999-2005 timeframe for the analysis. Unfortunately, changes in the world and U.S. cotton market and programs since 2005 are not fully appreciated in the current dispute deliberations. For example, Brazil, China and India have added more than 10 million bales to their total cotton production since 2005 while the United States, Pakistan and West Africa collectively have experienced production declines exceeding 10 million bales annually. The United States, in fact, is now planting only 60 percent of the average annual upland cotton acreage in the years 1999 to 2005 – and its share of world production has fallen from 20 to 12 percent. Also different from the 1999-2005 period is that the Food, Conservation and Energy Act of 2008 (farm law) lowered the counter-cyclical target price for upland cotton and changes in the marketing loan premium/discount schedule reduced the average loan value.

What happens after the Arbitration Panel findings are released?

The size of potential damages will be important in determining the scope and type of countermeasures Brazil will be allowed to use. It is possible that any retaliation by Brazil could look beyond agriculture, but it still is disconcerting that the U.S. cotton program has to receive additional attention even after it has seen significant reform in the 2008 farm law, and the industry is experiencing reduced acreage and production. To remedy an adverse ruling from the Arbitration Panel, the United States will need to seek a new Compliance Panel, thus allowing the new data from the changed U.S. cotton landscape to become part of the case’s facts.

Gary Adams is vice president of Economics & Policy Analysis for the National Cotton Council of America. He and other NCC leaders contribute columns on this Cotton Farming page.

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