Cotton isnt king anymore–at least not when the U.S. government subsidizes it and the World Trade Organization is asked for an opinion.

Last week, word arrived that the WTO had declared our current system of federal cotton aid to be illegal under the international rules of free trade. The decision wont be formally announced for some weeks, but everybody knows its coming. And its sending shock waves through farming communities.

The important thing is not to panic. In the end, this could even be good for us.

A little background: Brazil brought the case to the WTO because it claimed that Washingtons cash was distorting the global cotton trade. There are presently about 25,000 cotton farmers in the United States; their production accounts for more than 40 percent of the worlds cotton exports. Our government sends them nearly $3 billion per year.

Yet the WTOs decision will reverberate far beyond the so-called Cotton Club. Under the farm bill passed two years ago, tax dollars somewhat directly subsidize agriculture to the tune of $19 billion annually. Given the WTO ruling, countries in the developing world will probably target other commodities and theyre likely to experience similar success. They have nothing to lose because most lack the money to subsidize their own crops.

The 2002 farm bill was an attempt to craft subsidies in ways that would pass muster at the WTO by being non-trade distorting. The cotton ruling is the first clear indication that the authors of the legislation were mistaken in believing their law would survive international scrutiny.

The answer, however, isnt to start bad mouthing the WTO (shooting the messenger) –an organization that helps all consumers and many producers everywhere by reducing tariffs on goods and services. The United States is its indispensable member and also its biggest beneficiary. We have the most to gain from its actions to reduce trade barriers.

Consider this example, provided by Edward Gresser of the Progressive Policy Institute, a New Democrat think tank that supports free trade: In 2000, American cotton farmers earned $46 million from selling cotton to China, he told the Washington Post. Then China joined the WTO. In 2003, [American cotton farmers] earned $733 million from selling cotton to China, and in just the first two months of 2004, they earned $428 million. This is because the Chinese agreed to join the WTO, and made a series of promises to open their markets to the worlds cotton. So [even for] cotton farmers, theres a pretty big payoff in our being a member of this organization.

We must therefore search for ways for farmers to live within the ruling. After it officially comes out and everybody has a chance to digest it–the final decision is said to be 350 pages long–we may discover that although pegging subsidies to yearly price and production is no longer acceptable, other options remain open. One seemingly viable possibility is to make direct farm payments based on either total farm acreage and/or some historical average of production. Another very viable option is farm subsidies based on good environmental practices. The European Union, which is even more vulnerable than we are to these types of WTO rulings, is already moving in this direction by changing their methods of subsidizing. (EU subsidies are about three times as large as American ones.)

Yet theres something more basic going on here: American farmers are going to have to find ways to rely less on government support. The subsidies they receive affect planting decisions and distort the marketplace. Reducing payments doesnt mean that farmers will go out of business–far from it. Yet it does mean that farmers may need to think about changing the mix of crops they grow, especially those who produce low-value goods on high-cost acres or on marginal acres.

The Bush administration has indicated that it will appeal the WTOs cotton decision. Thats the right thing to do, but not for the reasons you might think, because the appeal is almost certain to fail. (As 90% do)

An appeal, however, will buy us some crucial time. Because the process can last a year and a half or longer, it will get us through this years presidential election. Advocates of free trade always have a much easier time with politics right after an election than right before one. Whats more, the delay will drive us deeper into the Doha round of trade talks, carry us a bit closer to the next big farm-bill debate and allow a more informed look at the U.S. budget deficit. That will help us make trade progress in bargaining with other countries and tinkering with how our own government structures its financial ties to farmers. These are the sorts of long-term strategies we need to contemplate, as opposed to knee-jerk reactions during an election year.

If were fortunate, Americans will continue to cotton to the idea that free trade is good for them.