WTO COTTON RULING IMPLICATION

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WTO COTTON RULING IMPLICATION FOR U.S. COTTON
PROGRAMS

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WTO Cotton Ruling

• Direct payments and PFC payments do not qualify
  as green box support.
• Export credit guarantees illegal subsidies
• Cotton Step-2 payment illegal subsidies
• The U.S. subsidies (MLP, CCP and Step-2) had
  serious price suppressing effect during the
  period 1999-2002.

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U.S. Response so far

• Termination of Step-2 program (effective August
  1, 2006)
• Change in the fee structure of the
  GSM-102/GSM-103 credit programs to account for
  market risk
• U.S. WTO proposal for extensive farm program
  reforms.

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U.S. Proposal

• Reforms in all three pillars of the agriculture
  negotiations
• Domestic Supports
• Market Access
• Export Competition
• Contingent on meaningful Commitments by all
  members except the least developed countries

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U.S. Proposal on Domestic Support

• Bound AMS Level (b 25 and higher)
• 83 reduction in the final bound total AMS for
  the European Union and Japan
• 67 billion euros (b 80) to 11.4 billion euros
  (b 13.5)
• 3,973 billion yen (b 33.7) to 675 billion yen
  (b 5.7)
• Bound AMS Level (b 12-b 25)
• 60 reduction in the final bound total Aggregate
  Measurement of Support (AMS) for the United
  States
• 19 billion dollars to 7.6 billion dollars
• Largely includes marketing loan payments and
  counter cyclical payments
• Bound AMS Level (b 0 b 12 )
• 37 reduction in the final bound total AMS for
  the developing and other developed countries

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WTO Ministerial Declaration on Domestic Support

• Three bands for reductions in Final Bound Total
  AMS, with higher linear cuts in higher bands
• Member with the highest level of permitted
  support will be in the top band
• Two members with the second and third highest
  levels of support will be in the middle band
• All other members including developing countries
  will be in the lowest band

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Market Access

• U.S. Proposal
• Substantial reductions in tariffs with deeper
  cuts on higher tariffs as established in the July
  2004 framework.
• Hong Kong Declaration
• Tariff reduction using Swiss formula
• R t0 / (a t0)

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Tariff Reduction using Swiss Formula
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Export Competition

• U.S. Proposal
• Rapid elimination of all export subsidies, no
  later than 2010.
• Elimination of State Trading Export Enterprises.
• Bring export credit program in line with
  commercial terms to prevent export subsidies.
• Hong Kong Declaration
• Elimination of all form of export subsidies by
  2013.
• All form export subsidies for cotton will be
  eliminated by 2006.
• All export credit programs should be
  self-financing.

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Why Analyze U.S. Proposal but not WTO Declaration?

• WTO declaration long on principle, short on
  number (quote from Stephanie Mercier, Senate
  Staff Economist)
• WTO declaration similar to the U.S. proposal with
  greater cuts with higher levels of domestic
  support and market access

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Our Analysis

• Scenario 1
• What it takes to achieve 60 reduction in the
  total U.S. AMS bound level in five years if U.S.
  acts unilaterally?
• Major impacts on price, farm income, production,
  consumption and trade
• Scenario 2
• What it takes to achieve 60 reduction in the
  total U.S. AMS bound level in five years if rest
  of the world liberalizes along with the United
  States?
• Major impacts on price, farm income, production,
  consumption and trade

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What it takes to get 60 AMS Reduction?
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Extent of Reductions in Major Program Payments
Counter Cyclical Payments
Marketing Loan Payments
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Impact on Cotton Net Farm Income
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Cotton Import Tariff Rates and Domestic Subsidies
for the Major Importers and Exporters of Raw
Cotton
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What it takes to get 60 AMS Reduction?
Unilateral vs. Multilateral Reforms
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12
4
8
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Unilateral vs. Multilateral Reforms Impacts on
U.S. Cotton Net Farm Income
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26
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Impacts on U.S. Farm Price Unilateral vs.
Multilateral Reforms
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Concluding Remarks

• Big No-No to unilateral U.S. cuts to achieve 60
  percent AMS reduction
• Cotton net farm income drops by more than 26
• Bad even if other major players join the
  bandwagon and open up their markets
• 18 reduction in cotton net farm income

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Concluding Remarks

• WTO Ruling implication exclusively for cotton
• Step 2 program elimination
• Implications for all program crops
• Change in the fee structure of GSM 102/103 credit
  programs
• U.S. WTO Proposal
• Not so good for cotton farmers Decline in cotton
  net farm income by 18-26