1. Brazil’s Challenge to the U.S. Cotton Subsidies
The WTO Cotton Dispute
Brazil’s Challenge to the U.S. Cotton Subsidies

2. Subsidies At Issue Marketing Loan Program ($898 Million In 2002).
Counter-Cyclical Payments ($1.309 Billion In 2002).
Direct Payments (Not Green Box Support) ($617 Million In 2002).
Crop Insurance Subsidies ($194 Million In 2002).
Step 2 Subsidies ($415 Million In 2002).
Export Credit Guarantees (Supported $349 Million Worth Of U.S. Cotton Exports In 2002).
Marketing Loan: guarantees 52 cents per pound
Counter-Cyclical Payments: pay up to cents per pound (price-triggered)
Direct Payments: pay 6.67 cents per pound independent of prices
Crop Insurance: subsidized crop insurance premia and providing reinsurance to private insurance companies: steps in when crop fails or prices are low
Step 2: pays the difference between the higher US price and the lower world market price
Export Credit Guarantees: guarantees up to 3-year financing for cotton exports to developing countries where otherwise financing would not be available.

3. Subsidy Payments v Crop Values
97 % % % 85 %
U.S. Subsidies Value
1999 $3.4 billion $3.5 billion
2000 $2.2 billion $4.1 billion
2001 $4.0 billion $3.1 billion
2002 $2.8 billion $3.3 billion
U.S. Subsidies
Total: $12.4 billion
U.S. Crop Value
Total: $14.0 billion
Average Subsidization Rate: 89 percent

4. Green Box Issues: Direct Payments
Direct Payments Do Not Meet The Green Box Criteria:
Payments Are Eliminated If Fruits Or Vegetables Are Grown.
 Payments Based On “Type Of Production.”
2002 Farm Bill Provided For “Updating The Payment Base.”
 Payments Not Based On “Fixed Base Period.”
Thus, direct payments violate Annex 2 paragraphs (a) [fixed base period] and (b) [not based on the type of production undertaken in any year after the base period] of the Agreement on Agriculture and are therefore not properly “green box.”

5. The Peace Clause
Article 13 Of The WTO Agriculture Agreement Exempts Agricultural Subsidies From Actions Under The WTO Subsidies Agreement, Provided That The Level Of Subsidies Does Not Exceed The 1992 Level.
U.S. Subsidies In 1992 Were $2.1 billion.
U.S. Subsidies In Were $3.4, $2.2, $4.0 And $2.8 Billion Respectively.
 Peace Clause Is Inapplicable to the Case.

6. But for the U.S. Cotton Subsidies, Cotton Producers Would Have Lost $872 per Acre Planted to Cotton between
Including U.S. Subsidies, U.S. Producers Made a “Profit” of $106
Kenneth Hood – Former Chairman of the National Cotton Council: “The Delta needs cotton farmers, and they can’t exist without subsidies.” and “Most grain farmers simply don’t need as big a payment as we do to make ends meet.”
Source: USDA

7. Effects of the U.S. Subsidies I
Increased U.S. Cotton Production:
Subsidies Provide Revenue Floor (Marketing Loan and Counter-Cyclical Payments).
Step 2 And Export Credit Guarantees Ensure That U.S. Excess Cotton Is Sold On The World Market.
Crop Insurance Reduces Economic Risks Posed By Crop Failures.
Direct Payments Contribute To Cover The Cost Of Production.
 U.S. Production Increased From 13.3 To 15.5 Million Bales Between 1998 and 2001

8. Effects of the U.S. Subsidies II
Prices go down, production and exports increase
Source: USDA

9. Effects of the U.S. Subsidies III
Increased U.S. Cotton Supplies Led to Lower Prices in the United States and Abroad Due to the Integrated Nature of World Cotton Markets
20-Year Average U.S. Farm Price: 59 cents
20-Year Average A-Index International Prices: 72 cents
Source: USDA

10. Effects of the U.S. Subsidies IIII U.S. World Market Share
1998
2000
2002
International Prices Fell Similar to U.S. Prices
U.S. World Market Share Increased from 17 percent in 1998 to 42 percent in 2002
Despite:
High U.S. Costs of Production
Source: USDA

11. Effects on Brazil / Third Countries
Brazilian Producers Lost Revenue Of $478 Million During Due To Low Cotton Prices.
Reduced Investment of Brazilian And Other Low-Cost Cotton Producers Due To Low Cotton Prices.
Lost Export Opportunities Due To Excessive U.S. Supplies of Cotton.
Increased Poverty In West African Countries Dependent On Cotton Production And Exports.

12. Professor Sumner’s Econometric Analysis
But For The U.S. Subsidies During :
U.S. Production Would Be 28.7% Lower.
U.S. Exports Would Be 41.2% Lower.
World Market Prices Would Be 12.6% or 6.5 Cents Per Pound Higher.
 Analysis Based on FAPRI Model Relied On By The U.S. Congress And USDA.

13. U.S. Cotton Subsidies Violate WTO Commitments
U.S. Subsidies Cause Serious Prejudice To The Interests of Brazil And Other Cotton-Producing WTO Members, Contrary To Articles 5 And 6 Of The SCM Agreement.
U.S. Subsidies Cause The United States To Have More Than An Equitable Share Of World Export Trade In Cotton, In Violation Of GATT Article XVI.

14. Significant Price Suppression
U.S. Subsidies Cause World Market Prices To Be Significantly Suppressed, i.e. To Be Significantly Lower Than They Would Otherwise Be, Contrary To Article 6.3(c) Of The SCM Agreement.
The Price Suppression Affects Brazilian Domestic Prices And Export Prices To The United States And To All Third Country Markets Due To The Integrated Nature Of The World Cotton Market.

15. Increased U.S. World Market Share
The U.S. Subsidies Contributed To An Increase In The U.S. World Market Share For Cotton, Contrary To Article 6.3(d) Of The SCM Agreement.
The U.S. World Market Share In Increased Over Its Previous 3-Year Average This Increase Follows a Consistent Trend.

16. Inequitable U.S. World Market Share
U.S. Cotton Subsidies Contributed To A Large U.S. World Market Share That Is Inequitable Within The Meaning Of GATT Article XVI
U.S. High Cost Of Production Compared To Brazil Or African Countries
Few, If Any, Subsidies In Other Cotton Producing Countries (Except EU and China)

17. Conclusions First (And Likely Only) Challenge Under The Peace Clause.
First Challenge Of Amber Box Agricultural Subsidies Causing Adverse Effects
First Challenge Involving Green Box Provisions.
First Challenge to Export Subsidies Specifically for Agricultural Products.
(Step 2 and Export Credit Guarantee Programs.)