Wall Street Journal Column Sheds Negative Light on U.S. Cotton
June 9, 2010 On May 21, The Wall Street Journal ran an editorial (See below) related to the ongoing dispute between the United States and Brazil regarding the Cotton and Export Credit Guarantee Programs. Gary Adams, vice president of economics and policy analysis for the National Cotton Council, says they are very concerned with the mischaracterizations of certain aspects of the case. Listen to Adams’ recorded response by clicking here.
The Madness of Cotton
The Wall Street Journal
U.S. cotton farmers took in almost $2.3 billion dollars in government subsidies in 2009, and the top 10% of the recipients got 70% of the cash. Now Uncle Sam is getting ready to ask taxpayers to foot the bill for another $147.3 million a year for a new round of cotton payments, this time to Brazilian growers.
We realize that in today’s Washington this is a rounding error. But the reason for the new payments to foreign farmers deserves attention. If it becomes a habit, it is unlikely to end with cotton.
Here’s the problem: The World Trade Organization has ruled that subsidies to American cotton growers under the 2008 farm bill are a violation of U.S. trading commitments. The U.S. lost its final appeal in the case in August 2009 and the WTO gave Brazil the right to retaliate.
Brazil responded by drafting a retaliation list threatening tariffs on more than 100 U.S. exports, including autos, pharmaceuticals, medical equipment, electronics, textiles, wheat, fruits, nuts and cotton. The exports are valued at about $1 billion a year, and the tariffs would go as high as 100%. Brazil is also considering sanctions against U.S. intellectual property, including compulsory licensing in pharmaceuticals, music and software.
The Obama Administration appreciates the damage this retaliation would cause, so in April it sent Deputy U.S. Trade Representative Miriam Sapiro to negotiate. She came back with a promise from Brazil to postpone the sanctions for 60 days while it considers a U.S. offer to — get this — let American taxpayers subsidize Brazilian cotton growers.
That’s right. Rather than reduce the U.S. subsidies to American cotton farmers that are the cause of the trade fight, the Administration is proposing that U.S. taxpayers also compensate Brazilian cotton farmers for the harm done by the U.S. subsidies. Thus the absurd U.S. cotton program would dip into the Commodity Credit Corporation to pay what is a bribe to Brazil so it won’t retaliate.
Talk about taxpayer double jeopardy. As Senator Richard Lugar (R., Ind.) said recently, the commodity credit program was established to assist U.S. agriculture, “not to pay restitution to foreign farmers who won a trade complaint against a U.S. farm subsidy program.”
Mr. Lugar wants the subsidies to U.S. farmers cut by the amount that will have to be sent to Brazil. He adds that a better option would be to take on the trade-distortions of the cotton program. “I am prepared to introduce legislation to achieve these immediate reforms,” he wrote in an April 30 letter to President Obama.
This is probably tilting at political windmills, since Mr. Obama has shown no appetite for trade promotion, much less confronting a cotton lobby supported by such Democrats as Arkansas Senator Blanche Lincoln. But we’re glad to see that at least Mr. Lugar is willing to call out the absurdity of U.S. taxpayers subsidizing foreign farmers to satisfy the greed of a few American cotton growers.
NCC Responds
In a written response, the National Cotton Council said the first victim of sensationalism is the truth. Surely, the editors of The Wall Street Journal (WSJ) are better informed than their May 21 editorial indicates, leaving us to conclude that they knowingly failed to report the full story of a U.S. – Brazil World Trade Organization (WTO) dispute, thus misinforming their readers. With their first sentence, the WSJ does not waste any time in presenting only part of the story. They are quick to point out the high level of government payments in 2009 without clarifying that the payments were elevated because of low prices stemming from the sharp decline in cotton demand due to the global recession. They also fail to note that the WTO found no fault with direct payments and crop insurance, which are included in the total payments cited in the editorial. The WSJ editors further decline to inform the reader that current spending on the price-based provisions involved in the dispute (i.e. the marketing loan and counter-cyclical program) likely will be zero for the 2010 crop.
Readers of the editorial do not even get past the first paragraph before encountering a completely inaccurate statement by the WSJ. In referencing the temporary fund of $147.3 million being established as part of the negotiated solution between the United States and Brazil, the editors falsely indicate that these funds are cotton payments to Brazilian growers. In fact, the agreement between the U.S. and Brazil explicitly forbids that any of the $147.3 million be used for direct payments to Brazilian farmers. The fund is designed to fund capacity building and technical assistance projects with transparency and auditing requirements. Also, the fund only lasts until Congress can address legislative changes to the programs in question.
Upon further review of the WSJ editorial, to assume the editors understood the dispute was, perhaps, giving them too much credit. The editors emphatically state that, “Here’s the problem:..” and then proceed to mischaracterize the crux of the dispute. The WTO did not rule that cotton programs under the current 2008 farm bill violate U.S. trade commitments. No, a WTO panel ruled that selected provisions of the cotton program from the 2002 farm bill along with the export credit guarantee programs for essentially all commodities were either causing significant price suppression or were prohibited subsidies. Amazingly, the editorial does not even mention the export credit programs even though the vast majority of possible trade retaliation is associated with this program …
Omissions by the editors of The Wall Street Journal:
• The Brazil – U.S. WTO case, with respect to cotton, is based on outdated analysis and on previous farm bills.
• The existing ruling failed to adequately consider US efforts to comply
• In 2006, after the first WTO Panel’s ruling, Congress terminated the “step 2” cotton program, a part of the program that was found to be an export subsidy
• Congress also made further adjustments in the 2008 farm bill, reducing target prices slightly and making adjustments in the loan program
• The biggest adjustments, however, have been made by U.S. cotton farmers on their own.
• The U.S. industry has decreased cotton production to the point that the United States is not remotely a threat to any cotton exporting countries.
• Prices are at record levels and all cotton producers should be focused on eliminating market access barriers maintained by countries with centrally planned economies.
• The Brazil case has been effectively resolved by the market and is irrelevant in today’s market.
• Despite this, the cotton industry has committed to Congress and the Administration that in recognition of the importance of maintaining a rules-based trading regime through the WTO, it will continue to work to resolve the dispute.
• The WTO ruling on the U.S. export credit program — which affects all U.S. commodities — is the more difficult aspect of the dispute at this point
• The arbitration ruling with respect to cotton was relatively small
• The arbitration ruling for the export credit guarantee program was formula based, and continues to grow — predicated on our recent use of the export credit guarantee program
• Again, this ruling stands against our export credit guarantee program even though it is based on old law. We changed the program in the 2008 farm law by shortening tenor, making fees more risk-based and terminating one of the credit programs.
• It was necessary for U.S. negotiators in April to put together a proposal that convinced Brazil the United States was committed to a rules based system in order to avoid senseless and troublesome retaliation.
• Until recently Brazil provided no guidance other than declaring the action taken in 2006 and 2008 as insufficient; and
• Initiating action which would result in retaliation on up to $1 billion of US exports. Brazil also took the first steps toward cross retaliation against U.S. Intellectual property rights.
• Remember that more than three-fourths of the retaliation is based on the export credit guarantee program — not the cotton program.
• The temporary agreement between the United States and Brazil is necessary to ensure that trade in goods valued at over $1 billion is not jeopardized and jobs not lost. It is essential to recognize that legislation changes to U.S. farm law normally are made at the expiration of current law which will next occur in 2012. Had Brazil been more forthcoming during the 2008 farm bill debate these matters may have been resolved at that time.
• The existing WTO rulings on the cotton program do not provide the United States with a clear path to compliance. They are vague and out of date.
• Likewise, many aspects of the export credit guarantee ruling is vague and leaves the United States in an uncertain compliance situation.
• The agreement with Brazil places Congress where it should be — in the forefront of establishing U.S. farm policy.
• The agreement with Brazil also includes further promised adjustments to the export credit guarantee program and establishment of a fund which Brazil could use for capacity building programs but not for direct payments to farmers. Interestingly some proposals for use of the funds may actually generate added trade between the U.S. and Brazil.
• The funds are provided from the Commodity Credit Corporation (CCC) which funds many farm, trade, nutrition, conservation and commodity programs. Through the annual appropriations process Congress replenishes the CCC. Congress could decide to require reductions in expenditures in order to offset the funds established in the U.S. -Brazil agreement.
• The establishment of a funding mechanism, to temporarily resolve a WTO dispute, is not without precedent and the funding mechanism will end with enactment of the 2012 farm bill.
It should also be noted that this is not the only long running trade dispute. Others include the U.S.-Mexican trucking dispute involving failure of the U.S. to comply with a provision in NAFTA and a U.S.-EU dispute in which the United States has not complied with a WTO decision related to imposition of countervailing duties on dumping.
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