Ten years ago this coming September a WTO dispute resolution panel ruled that the U.S. had not honored its WTO commitments on agricultural export credit programs, cotton subsidies and the planting of other crops on farm program crop acres. Brazil, the winning party, has not received what it considers as adequate compensation. World and U.S. cotton production has changed substantially from the based years of 1999-2002. The U.S. government should continue to seek a negotiated settlement.
Brazil has the right to be compensated. The default remedy of import tariff retaliation on U.S. goods would not have helped Brazilian cotton growers or agricultural exporters and would have added to the cost of critical imports from the U.S. Brazil wanted changes in U.S. policies, which required waiting for the U.S. Congress to change policies in farm program legislation which occurs every four or five years. The hope in 2005 was that changes would be agreed to by the end of 2006 and incorporated in an expected 2007 U.S. farm bill.
In 2010 after WTO arbitrators in 2009 awarded Brazil countermeasures, the U.S. and Brazilian governments agreed on interim compensation pending further policy changes in the 2012 farm. That bill was delayed until early 2014. The outcome in the 2014 farm bill was not deemed adequate by Brazilian cotton growers and the government. The Brazilian government is now expected to request in coming months a new compliance panel at the WTO on whether the U.S. has met its commitments in the 2014 farm bill and if Brazil can apply the countermeasures.
Under the 2010 interim agreement, Brazil did not impose tariffs on goods and countermeasures on intellectual property valued at more than $800 million annually. Officials agreed to meet quarterly on future legislation related to these programs as Congress prepared for new farm policy legislation in 2012. The U.S. also was paying $147.3 million per year to the Brazilian Cotton Institute for cotton research and development. The U.S. government quit making those payments in the fall of 2013 saying they no longer had the authority to do so. The payments were generally unpopular across the political spectrum.
The last fifteen years have shown that cotton acreage in the U.S. is responsive to market forces. High soybean and corn prices reduced cotton acreage and it only recovered in response to higher world cotton prices. Biotechnology has also spread around the world making cotton producers in countries like India and Burkina Faso more competitive than they were before.
Much has changed in cotton production since the burdensome supply years of 1999-2002. For those years, the U.S. harvested an average of 13.2 million acres of cotton per year, 16.6 percent of world harvested acres, produced 17.9 million bales of cotton, 19.5 percent of the world total, exported 9.1 million bales, 32.3 percent of the world total, and had annual domestic utilization of 8.5 million bales, 9.0 percent of world use.
For the 2011, 2012 and 2013 crops, U.S. cotton harvested acreage averaged 8.8 million acres, 11.6 percent of the world total, and U.S. production averaged 15.3 million bales, 14.3 percent of the world total. U.S. domestic use declined to an annual average of only 3.5 million bales with the ending in 2004 of the Multi-Fiber Agreement under the WTO. U.S. exports averaged 11.8 million bales, 26.8 of world trade.
U.S. farm bills themselves have changed as the U.S. Congress been less willing to fund program for farmers. The direct payments made regardless of production and prices and the counter-cyclical price program were ended for all crops in the 2014 farm bill. A new crop insurance program for cotton producers known as STAX has become an issue.
The export credit program, known as the GSM 102 program, has also become more market driven. The new farm bill further reduced the loan length from 36 months to 24 months and gave USDA more flexibility to increase fees to cover costs to make the program more market-oriented. USDA also has the authority to make changes that Brazil agrees to that do not go beyond any applicable international rules on export credits to which the U.S. is a party. The loan length of 24 months is still longer than the six month limit discussed in recent years at the WTO and the 16 months suggested by Brazil.
The WTO dispute resolution process is a backward-looking one based on the conditions when the case was filed, and the U.S. has to deal with the facts in the case as filed. Now is the time for the governments of the U.S. and Brazil and the cotton industries in both countries to come to the table to negotiate a compromise based on the facts in the case with an eye toward the new market realities.
The Brazilian government is in control in the framework discussions and has said it will delay WTO action and seek a negotiated settlement. U.S. Trade Representative Michael Froman has said he will continue to pursue a long-term solution. Doing that in a rapidly change world cotton market will test the ability of the WTO dispute resolution process to be relevant to market conditions.
All of U.S. agriculture has a huge stake in finding a compromise on the cotton case within the WTO policy framework. Now is the time for the U.S. government to negotiate an agreement to remove this case from the nation’s policy agenda.
This case is also a warning for others in U.S. agriculture to take seriously threats of WTO cases. Once a case is lost in the WTO dispute resolution process, the winning party control the agenda and arriving at agreeable changes in policies becomes a time-consuming process.