The US Upland Cotton Dispute Research Paper Sample

Impact of the Brazil Cotton Dispute Settlement on Small Cotton Growers in Brazil

INTRODUCTION
The inequality in conditions brought about by variance in climates, numbers of natural disasters, supporting infrastructures and technologies can create an uneven playing field for farmers and agricultural producers in various parts of the world. This inequality is exacerbated when a state extends more assistance to its own producers than those normally extended by other states. In such cases, the farmers in poorer states or in states where no such assistance are extended are significantly disadvantaged and ultimately suffer the actions of the other state. This was illustrated in the case of the US upland cotton case that was brought to resolution before the World Trade Organization Dispute Settlement Body in 2002. The case aptly illustrated the harm that heavy subsidization of an agricultural sector by one state in a free trade system can bring to agricultural producers in poorer countries. The US upland cotton case showed that unfettered subsidization can lead to suppression of world market prices and the increased marginalization of farmers and producers in poorer states that are not being subsidized by their governments in growing and producing their crops.

The World Trade Agreement came into force in 1995 as a result of the Uruguay Round agreements. The creation of the WTO meant the imposition of agricultural policies that limit farm subsidies, among others. The WTO Agriculture Agreement, for example, prohibits certain type of subsidies while setting a cap on others. Specifically, the Agreement on Subsidies and Countervailing Measures (SCM hereafter) impose rules on subsidies of all kinds of products, including agricultural goods. The SCM prohibits subsidies on export goods, except when they are listed in the Agreement for gradual reduction, and subsidies conditioned on the use of goods for domestic purposes. On the other hand, the Agriculture Agreement classifies domestic subsidies into amber-box policies, green-box policies and blue-box policies. Amber-box policies place a cap on the total subsidies extended to all commodities, while green-box policies are support measures extended by the government to agriculture without taking into account the price and production of commodities. They are usually in the form of support in the areas of research, infrastructure and regional development programs. These support forms are considered the least factors that can cause trade distortion. Finally, the blue-box policies are those the goals of which are to lessen trade distortion (Sumner 5-6).
The International Cotton Advisory Committee estimated in 2002 that about 73% of world cotton production was subsidized. Such was particularly true in the US, China and the European Union, which expended the total amount of $6 billion to subsidize their cotton production. Of that amount, more than half came from the subsidies in the US as a result of which, it was able to boost its cotton exports from 17% of the world share in 1998 to 42% in 2003 (Oduwole 120-121). US subsidies to cotton producers began in 1933 through the Agricultural Adjustment Act and broadly include the following: subsidies based on price markets, such as when market price of cotton falls; a special marketing loan called Step 2 granted to cotton exporters and end-users when domestic prices are greater than world market prices; direct payments to cotton producers extended on an annual basis on the basis of historical acreage and yields; crop insurance, which is based on losses due to calamities and other natural disasters, and; countercyclical payments, which are granted automatically to cotton producers in the event market prices do not meet the target prices (Lakastos 5-6).
In 2002, Brazil, a major cotton exporter, charged that the US had violated its WTO obligations through its domestic and export subsidies extended to upland cotton farmers, producers, users and exporters. Invoking WTO dispute settlement procedures, Brazil initially made consultations with the US regarding the alleged illegal US upland cotton subsidies. The failure of parties to resolve the issue resulted in the filing by Brazil in 2003 of a dispute against the US in the WTO Dispute Settlement Body (Oduwole 122). Brazil specifically challenged the following US measures relative to upland cotton as illegal for being in violation of the Agriculture Agreement and the SCM: the Step 2 program, which pays domestic users the difference between world cotton prices and US domestic prices, and payments made to exporters; export credit guarantees; direct payments, market loss insurance payments, countercyclical payments, among others, because of the prejudicial effect they have on Brazil cotton exports (Sumner 7).

THE SETTLEMENT

In December 2007, the Compliance Panel created by the DSB at the behest of Brazil to track the compliance of the US of the DSB ruling made its report. It found that the US had failed to comply with its obligations of removing or withdrawing the prohibited subsidies (WTO 2014). In 2009, the WTO granted retaliatory rights to Brazil against the US. However, subsequent negotiations between the parties led to a series of memorandum culminating in the Memorandum of Understanding for Final Resolution executed on October 1, 2014. The MOU provides that Brazil gives up its right to impose countermeasures against the US relative to the US upland cotton case and enters into a temporary peace clause with the latter regarding new disputes on US upland cotton programs. On the other hand, the US agrees to new fees and tenor as well as agree to pay Brazil $300 million to be diverted to the Brazil Cotton Institute for certain uses including the development of Brazil cotton production in the areas of research and infrastructure (Schnepf 3, 5).

IMPACT OF THE SETTLEMENT TO SMALL COTTON PRODUCERS IN BRAZIL

The DSB ruling and the subsequent agreements entered into by Brazil and the US in the cotton subsidies case impact greatly on cotton producers in the world, particularly the small cotton producer in Brazil. The impact is generated by two sources: the DSB ruling that found the US to have violated subsidy rules under the Agriculture Agreement and the SCM, and the subsequent MOU between the conflicting parties.
As earlier stated, the world market share in cotton exports of the US ballooned from 17% in 1999 to 47% in 2003. This was attributed to the series of subsidies granted by the government to US cotton exporters, producers and users. This substantial share in the world market implied that the US created a big and influential impact on world market prices of cotton during the given period, and US cotton production was largely influenced by subsidies, such as marketing and countercyclical payments, that were linked to prices of cotton (Coppens 176). The effect of government subsidies to cotton growers, thus, underpinned the increase in US cotton production and the country’s concomitant rise in cotton exports. A study conducted by Sumner in 2008 revealed that US cotton subsidies for the period of 1999-2002 resulted in the suppression of world market prices by as much as 13%. A 13% hike in world cotton prices would have the effect, according to Sumner, of substantially decreasing poverty in poor cotton producing countries and ensuring their economic well-being cotton (cited in Peterson 8). A study also noted that there was a decrease in world cotton prices in 2000-2002 by 20%. Although there were dissenting voices, it was a general consensus that US, as well as other industrialized countries’, subsidies on their cotton growers had the effect of lessening, to a certain extent, world market prices of cotton (Peterson 8-9).
A glut in cotton production can cause a decrease in world market prices in accordance with the law on supply and demand. The law of supply and demand provides that prices are pushed towards equilibrium near where quantity supplied and quantity demanded meet. An extreme shift in either end creates distortion in the market. Thus, where demand exceeds supply, price for the goods in issue are driven upwards, but when supply surpasses demand, the price of the goods goes down (Baumol and Blinder 66). Subsidization engenders increased cotton production in the way certain US subsidies, such as marketing and countercyclical payments, and the Step 2 program, drives US cotton growers to increase and ensure cotton production.
In simpler terms, a small cotton grower in Brazil could have taken advantage of an increased world cotton prices between 1999 and 2002, had US subsidies to its own cotton growers not caused price suppression of the product. Such enhanced price would have gone a long way in alleviating the economic condition of such small cotton grower. A farm-level study conducted by Minot and Daniels in 2002 revealed that a 40% decrease in world cotton prices would result in the spiraling down of rural per capita income by 5-7% and significantly aggravating rural poverty. This finding is true in low-income countries with cotton exportation as a means of income of many of its farmers. On the other hand, several studies, particularly that of Boccanfuso and Savard in 2007 in Mali, showed that the removal of subsidies could result in the increase of income of cotton growers in poor cotton-producing countries and, thus, significantly reduce their poverty (Petersen 9).
The small cotton grower in Brazil is advantaged by the DSB ruling that held that certain US subsidies are in violation of certain provisions of the WTO Agriculture Agreement and the SCM. With the order of compliance directed to the US removing certain subsidies and programs extended to US cotton growers, the small farmer is placed on a level playing field with that of the small cotton grower in the US, at least. It is unlikely that the Brazil government extends to him subsidies of the same magnitude that the US government offers to their cotton farmers and with the order of removal, the small cotton grower in Brazil is not likely to be prejudiced by his well-supported counterpart in the US. The order of removal also ensures that US production and export of cotton do not go beyond the magnitude and size seen in the period between 1999-2002 substantially influencing market prices and significantly marginalizing small cotton growers who had to bear the brunt of decreased market prices.
The MOU between Brazil and the US likewise advantages the small cotton grower in Brazil because of the promise of enhanced infrastructure, research and other cotton growing activities that can be developed with the help of the US money to be paid to the Brazil Cotton Institute. Moreover, the fact that Brazil triumphed in its quest to stop a powerful and highly industrialized state from violating agricultural agreements could provide an example to other rich and powerful states, such as China and the EU, to desist from subsidizing their own cotton producers. The overall impact is leveling the playing field for the small cotton grower and keeping cotton production within reasonable limits preventing world market price distortions that could heavily weigh again the small cotton grower in Brazil.

CONCLUSION

Unfettered subsidization by one state of its own farmers and producers can lead to world market prices havoc. The harm stems from the effects of the law of supply and demand that can either drive prices up or down once either supply or demand overly exceeds the other. The US upland cotton case illustrated that over-subsidization is detrimental to agricultural producers of other states and creates unfair trade. Not only does the subsidizing state significantly impact world market prices, but it also deprives farmers and growers of other countries of the benefits of stable and sustained product prices. This is because subsidization drives overproduction of goods, especially when the nature of such subsidies is one that is closely linked to pricing. The result is that world market prices are suppressed and the depressed prices are borne by the small agricultural growers in poor countries who have to contend not only with small production, but also depressed prices of their goods.

Works Cited

Baumol, William and Blinder, Alan. Microeconomics: Principles and Policy. Cengage Learning. 2011. Print.
Coppens, Dominic. WTO Disciplines on Subsidies and Countervailing Measures: Balancing Policy Space and Legal Constraints. Cambridge University Press. 2014. Print.
Lakatos, Csilla and Walmsley, Terrie. Dispute Settlement at the WTO: Impacts of a No Deal in the US-Brazil Cotton Dispute. The World Economy, vol. 37, no. 2, 2014, pp. 244-266.
Oduwole, Olajumoke. Realigning International Trade Negotiation Asymmetry: Developing Country Coalition Strategy in the WTO Doha Round Agriculture Negotiations. Stanford University, 2011. Print.
Peterson, Wesley. A Billion Dollars a Day: The Economics and Politics of Agricultural Subsidies. John Wiley & Sons. 2009. Print.
Schnept, Randy. Status of the WTO Brazil-U.S. Cotton Case. Congressional Research Service. 2014. Web. Retrieved 28 December 2014. http://nationalaglawcenter.org/wp- content/uploads/assets/crs/R43336.pdf.
Sumner, Daniel. “Boxed In Conflicts between U.S. Farm Policies and WTO Obligations.” CATO Institute, Trade Policy Analysis, no. 32. 5 Dec 2005. Web. Retrieved 27 December 2014. http://www.cato.org/publications/trade-policy-analysis/boxed-conflicts- between-us-farm-policies-wto-obligations?print
WTO. Dispute Settlement: Dispute DS267, United States — Subsidies on Upland Cotton. 16 October 2014. Web. Retrieved 30 December 2014. http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds267_e.htm