Cotton Matters: A Rebuttal to J.P. Singh / by Mark Langevin

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Photo by The Times.

By Mark S. Langevin

J.P. Singh, “The Land of Milk and Honey,”[i] is correct to criticize those United States agricultural policies that distort world markets and suppress prices at a high cost to taxpayers and the most productive farmers around the world, including Brazilian cotton growers. He accurately traces the origins of the “cotton dispute” and notes the research of the International Cotton Advisory Committee that found that U.S. cotton producer subsidies were responsible for suppressing world market prices and cotton farmers’ incomes around the world. Farmers need support, but price-suppressing subsidies too often damage the most productive and vulnerable farmers around the world.

Unfortunately, Singh gins up a peculiar argument that distorts the record of the cotton dispute and garbles an examination of the recent bilateral accord between the Brazil and the U.S. that served to resolve this commercial conflict. His argument in the pages of Foreign Affairs (October 23, 2014) tangles up all the facts of the cotton dispute.

Singh does formulate a worthwhile proposition; the cotton dispute “demonstrates that developing countries often find their concessions to be more expensive in the long run than they initially believe them to be.” This supposition strikes a credible note given the standoff between the developed and developing countries participating in the World Trade Organization (WTO) Doha round negotiations.

Nevertheless, the cotton dispute does not illustrate Singh’s claim. The U.S. and Brazil are major exporters of cotton in a global marketplace made possible by the successive bound tariff reductions and other market access exchanges negotiated through the General Agreement on Trade and Tariffs (GATT), the Subsidies and Countervailing Measures, and Agriculture agreements; and enforced through the WTO Dispute Settlement Body (DSB). Yes, U.S. cotton production subsidies have distorted this world market, but Brazil has worked to lessen and eliminate these subsidies and thereby increased opportunities for productive cotton farmers around the world. The international trade system is imperfect and there is reason to rant about the turtle like pace of the WTO dispute settlement system, but Brazil made it to the finish line to win this case on its own terms.

The cotton dispute and its outcome stand in contrast to the position of developing countries whose national economies have been flooded with imports because of trade liberalization, but have yet to effectively harness their own comparative advantages to improve their terms of trade and take advantage of existing export opportunities.[ii] Singh fails to remind the reader that the Cotton-4 countries of Benin, Burkina Faso, Chad, and Mali chose not to join Brazil in the cotton dispute as co-complainants, preferring to advance their interests through direct negotiations with the U.S.[iii] For logical reasons these countries sought short term relief rather than join a longer legal process to squeeze out subsidies. No matter, the cotton dispute hinged on maximizing the export opportunities (to raise the benefits of trade liberalization) of those producers with the greatest comparative advantages. Rather than illustrate Singh’s argument, the case demonstrates the resolve of Brazil to make the most of the multilateral trading system, not shy away from it.

Singh also claims that,

“the U.S.-Brazilian pact echoes an all-too-common conclusion to such disputes: a buy-off by the more powerful player rather than real steps to liberalize trade and reduce protectionism.”

His claim might hold if the bilateral accord was simply resolved through a payment to mollify Brazil, but Singh ignores the historical record.

First, the WTO dispute settlement system contemplates the use of so called “side payments” or monetary settlements to resolve a dispute. WTO member-states agree that this is one alternative among others to rectify a breach of WTO disciplines. This question of monetary settlements is related to the self-enforcement mechanism of the dispute settlement process. Once a decision has been rendered, complainant member-states must seek to self-enforce decisions and this often means the suspension of concessions, known as trade retaliation. However, many developed and developing member-states prefer to negotiate a monetary settlement rather than planning for and adjusting to the economic disruptions brought on by trade retaliation measures. Monetary settlements can be more efficient and certainly more rewarding than trade retaliation, especially in cases where the complainant is a developing nation. Most importantly, these resolutions do not preclude other member-states from lodging cases against the offending member-state. Indeed, Section X of the Brazil-U.S. bilateral accord

“does not imply recognition of the consistency with the covered agreement of the measures discussed in the Cotton dispute (WT/DS 267) and other measures contained in the U.S. Agricultural Act of 2014, nor does it prejudge whether the DSB recommendations and rulings in the Cotton dispute have been implemented.”[iv]

Hence, the mutually agreed resolution recognizes the possibility that the U.S. may not be in compliance of the final 2009 arbitration panel’s decision regarding the cotton dispute—a clear invitation for other cotton producer nations to file disputes if they choose.

Moreover, monetary settlements or “buy-offs,” as inaptly referred to by Singh, serve as greater incentive for national policy makers to comply with WTO disciplines after losing decisions. For example, U.S. Representative Ron Kind,[v] a Democrat from Wisconsin, and Senator Jeff Flake,[vi] a Republican from Arizona, both called into question payments made by the U.S. government to Brazilian growers while advocating for significant reductions in U.S. agricultural subsidies. In addition, such organizations as Americans For Prosperity[vii] and the Environmental Working Group[viii] have expressed concern over these payments within a broader critique of U.S. agricultural policies. Clearly monetary settlements, such as the one that Singh criticizes, can effectively call into question distorting agricultural subsidy programs and strengthen the arguments of domestic reform advocates within the national policymaking process-precisely as the WTO predicates.

An exclusive focus on the monetary settlement also misses a much more important outcome. The U.S. government failed to defend its cotton producer subsidies at the WTO and therefore was compelled to gradually, albeit reluctantly, eliminate or modify them to reduce market distortions. The U.S. has taken real steps to liberalize its agricultural policies,[ix] possibly with the exception of the sugar program, although much more can be done and here both Singh and I agree.

In 2005 the U.S. Department of Agriculture instituted a risk-based fee structure for its export credit guarantee programs so that fees would increasingly offset the programmatic costs of the programs and thereby reduce the effective scope of this subsidy. In 2006 the U.S. government abolished the Step 2 Cotton Program that provided market-distorting incentives for the purchase of U.S. cotton. In 2008 the U.S. Congress approved a Farm bill that eliminated the GSM-103 export credit guarantee, one of largest subsidy programs, as well as the Supplier Credit Guarantee Program (SCGP), all of which constituted highly distorting subsidy programs.

The Agricultural Act of 2014 also reduces the distorting effects of several U.S. agricultural subsidy programs. This legislation eliminates direct and countercyclical payments to U.S. cotton growers, subsidy programs found to be non-compliant with WTO disciplines. Second, Congress reduced the minimum price band for the marketing loan programs. This subsidized financing scheme continues to hold out the potential for suppressing global cotton prices, but lowering the minimum price shrinks the scope of this subsidy and the probability that it will suppress world prices.

Lastly, the recent bilateral agreement offers further liberalization by partially restructuring the GSM-102 export credit guarantee program by reducing the length of the loan guarantees and mandating that the programmatic and risk fees cover the costs of this program’s operating costs. These incremental modifications contribute to the reduction of the market distorting effects of U.S. agricultural policies.

Overall, Brazil’s championing of the cotton dispute has resulted in the gradual, but very significant reduction of the aggregate financial support of U.S. cotton cultivation[x] and the removal of the most harmful subsidy programs. Regrettably, Singh does not acknowledge this evident record and thereby cannot accurately score the contest, failing to tally one Brazilian goal after another. Singh declares, “Brazil is the loser.”

Aside from the score, Singh does not clearly summarize last month’s bilateral accord. The agreement features a peace clause that achieves three important objectives: 1) it does not preclude any other WTO member-state from filing a case against existing U.S. cotton support programs or any other U.S. agricultural policy or program; 2) it clearly states that both parties are committed to continuing bilateral consultations over the U.S. agricultural policies, but that Brazil is free to employ the WTO dispute settlement system to further challenge existing support programs after the expiration of the current Farm bill on September 30, 2018 and 3) the peace clause does not prevent Brazil from filing disputes based on U.S. agricultural producer support programs for corn and soy among other commodities. In other words, the agreement’s peace clause obliges U.S. lawmakers to monitor existing policies, including the newly introduced shallow loss income protection insurance schemes, such as the STAX program for cotton,[xi] to identify distortions and eliminate them to prevent future disputes. Singh simply discounts the peace clause, rather than understanding how it may advance WTO compliance in the future.

Taken together, the peace clause and the monetary settlement, including payments made by the U.S. government to the Brazilian Cotton Institute from 2010 to September of 2013 as well as the $300 million disbursement paid last month, constitute a favorable outcome for Brazilian cotton growers and cotton farmers around the world in measurable ways. This is precisely the type of agreement that the Brazilian Cotton Producers Association, known as ABRAPA, advanced in 2013 through consultations with the National Council Council as well as with both governments.[xii] Also, the Brazilian Cotton Institute, recipient of these funds, is already committed to financing extension projects in the developing world to raise productivity and incomes of family farmers.[xiii]

Rather than recognize the gains made by Brazilian cotton growers through the dispute and its resolution, Singh seems lost in his own grudge to conclude,

“By accepting U.S. compensation, for example, Brazil perpetuated some of the market distortions that had sparked the dispute in the first place.”

He does not explain or substantiate this claim. Instead he complains that Brazil has “foregone its right to retaliate against the United States…” as if retaliation itself represented the end, rather than the means to obtain U.S. compliance!

The Brazilian government has achieved many of the objectives that Brazilian cotton growers sought to achieve by launching the cotton dispute over a decade ago, including significant reform of the U.S. agricultural policies and monetary compensation to partially offset their losses. According to the Gilson Pinesso, President of the Brazilian Cotton Producers Association (ABRAPA),

After months of analysis and meetings, ABRAPA became convinced that this bilateral agreement was the best solution for Brazilian cotton producers… With any agreement or compromise, this agreement does not resolve all of the Brazilian complaints, but it is an historic solution given the years of confrontation and negotiation over this case.”[xiv]

Lastly, Singh ignores the wisdom and achievements of Brazilian cotton producers only to reveal the shortcomings of his own analysis. Rather than contend with the documented historical record of the cotton dispute, he forfeits the argument by claiming that Brazilian President Dilma Rousseff reached a mutually agreed upon solution with the U.S. to bolster her reelection in October of 2014. Singh cites Reuters, but I cannot find a credible Brazilian elections expert or political scientist that can substantiate such a superfluous claim. The agreement simply did not play a role in the first or second round presidential elections in October, nor does Singh offer any evidence to illustrate this claim.

Singh wants to argue against U.S. agricultural subsidies, but he fails to comb his analysis with credible accounts of the historical record. I join J.P. Singh in his concern over policies that distort world markets and undermine the welfare of the most efficient producers and developing countries. Conversely, we cannot achieve free and fair global markets if we rely on losing arguments and distorted analyses. We can learn from the cotton dispute because facts matter and the WTO dispute settlement system, coupled to negotiations, can lead to fewer and fewer market distorting subsidies. In this regard, the cotton dispute and its resolution offer a rich harvest of lessons learned, too many of which were lost in J.P. Singh’s The Land of Milk and Cotton

Mark S. Langevin, Ph.D. is Director of BrazilWorks (www.brazil-works.com), International Advisor to ABRAPA, adjunct Professor of International Affairs at the Elliot School of International Affairs-Brazil Initiative at George Washington University, and adjunct Professor of Global Trade Relations at the School of Policy, Government and International Affairs at George Mason University.

[i] Singh, J.P. “The Land of Milk and Honey.” Foreign Affairs. October 23, 2014 and accessed at: http://www.foreignaffairs.com/articles/142293/j-p-singh/the-land-of-milk-and-cotton.

[ii] For one example of such an argument, see Stiglitz, Joseph E. and Andrew Charlton. “The Right to Trade.” A Report for the Commonwealth Secretariat on Aid for Trade. August 2012.

[iii] Office of the United States Trade Representative (USTR). “United States, “Cotton Four” Countries Celebrate New U.S. Cotton Initiatives, Continued Partnership at 8th WTO Ministerial Conference.” December, 2011 and accessed on November 9, 2014 at: http://www.ustr.gov/about-us/press-office/press-releases/2011/december/united-states-%E2%80%9Ccotton-four%E2%80%9D-countries-celebrate-n

[iv] USTRA. “Memorandum of Understanding Related to the Cotton Dispute (WT/DS267).” Accessed on November 9, 2014 at: http://www.ustr.gov/sites/default/files/20141001201606893.pdf.

[v] See Ron Kind. “Rep. Ron Kind Slams Brazil Cotton Deal Costing Taxpayers $300 Million.” October 1, 2014 and accessed on November 9, 2014 at: http://kind.house.gov/latest-news/rep-ron-kind-slams-brazil-cotton-deal-costing-taxpayers-300-million/.

[vi] Politico. “New skeptics join trade fray — $800M retaliation averted — Dispute on China cotton next?” October 2, 2014 and accessed on November 7, 2014 at: http://www.politico.com/morningtrade/1014/morningtrade15530.html.

[vii] See Christine Harbin Hanson’s “Taxpayer Bribes For Brazil Cotton Farmers?” Americans for Prosperity. Published on April 15, 2014 and accessed on November 7, 2014 at: http://americansforprosperity.org/legislativealerts/taxpayer-bribes-for-brazil-cotton-farmers.

[viii] See Mike Lavendar. “Will Cotton Subsidies Ignite New Trade Dispute?” Environmental Working Group. January 24, 2014 and accessed on November 7, 2014 at: http://www.ewg.org/agmag/2014/01/will-cotton-subsidies-ignite-new-trade-dispute.

[ix] For a full review see Schnepf, Randy. “Status of the WTO Brazil-U.S. Cotton Case.” The Congressional Research Service. October 1, 2014 and accessed on November 7, 2014 at: http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R43336.pdf.

[x] Congressional Budget Office. Letter to Chairman Lucas, January 28, 2014 and accessed on November 7, 2014 at: http://www.cbo.gov/sites/default/files/hr2642LucasLtr_0.pdf.

[xi] See Schnepf (2014:9-10).

[xii] “Letter of Joint Recommendations.” National Cotton Council and ABRAPA. May 17, 2013 and accessed at: http://www.hagstromreport.com/assets/2014/2014_0114_NCC-ABRAPA-Joint-Letter.pdf.

[xiii] “Protocol Of Intentions Between The Ministry Of External Relations Of The Federative Republic Of Brazil And The Brazilian Cotton Institute For Technical Cooperation In The Cotton Industry.” Brazilian Cotton Institute and the Foreign Ministry of the Brazilian Federated Republic. October 10, 2011. Accessed on November 7, 2014 at: http://www.iba-br.com/documents/10180/13687/Protocol+of+Intensions+between+MRE+and+IBA.pdf/40d8221d-978e-4a89-8df7-f2c39d5391c0?version=1.0.

[xiv] ABRAPA. “Brasil e EUA selam o fim do contencioso do algodão na OMC.” October 1, 2014 and translated from Portuguese to English by the author. Accessed on November 7, 2014 at: http://www.abrapa.com.br/noticias/Paginas/Brasil-e-EUA-selam-o-fim-do-contencioso-do-algodao-na-OMC.aspx.