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Feds Ask Cotton Industry to Sidestep WTO with Backdoor Payment

Inside US Trade

USDA FLOATS COMPENSATION IDEA TO END STEP 2 COTTON PROGRAM

Date: September 23, 2005

The U.S. Department of Agriculture has floated the possibility to the U.S. cotton industry for providing compensation to that industry under the Commodity Credit Corporation (CCC) in exchange for eliminating Step 2 cotton payments in response to a World Trade Organization decision. USDA invited representatives of the cotton industry to talk about the proposal last week, according to industry and USDA sources. During those discussions, USDA acknowledged that users of the Step 2 program could face considerable losses if the program were revoked this year, as the Bush Administration proposed to Congress in July.

As a result, USDA suggested compensation could be offered through the CCC to accommodate cotton exporters who had counted on receiving the Step 2 payments to finance sales of U.S. cotton, and who would lose those payments through repeal of Step 2, according to Ed Lloyd, a spokesman for USDA. This would only apply to current Step 2 agreement holders and not those who would hope to secure Step 2 agreements for future sales, industry sources said.

Lloyd said this proposal was meant to follow up on a July 5 letter from Agriculture Secretary Mike Johanns to Vice President Richard Cheney in his role as the president of the U.S. Senate. That letter pointed out that much of the cotton harvest may have been marketed with the expectation that the Step 2 program would be in place (Inside U.S.

Trade, Sept. 2, p. 4).

Lloyd said USDA "certainly hopes" that the cotton compensation would make it easier for Congress to approve legislation repealing Step 2 before the end of the year. Lloyd emphasized that repeal is important from the standpoint of complying with WTO panel decisions and that not doing so could dampen enthusiasm for the Doha round and the Hong Kong ministerial.

However, a congressional aide took a dim view of the talks between the cotton industry and USDA, and said congressional staff had been notified of the compensation idea by industry representatives, not USDA. The aide also said the "impression left on the Hill" was that USDA took a "divide and conquer" strategy toward strong-arming the cotton industry into accepting the compensation in exchange for repealing Step 2 before the end of the year.

This is because National Cotton Council members representating growers, ginners and shippers had separate meetings with USDA officials. The aide said USDA's message was basically that "we want to close out this program by the end of the calendar year, and it would be in your best interest to do this."

The first part of the Step 2 program works by providing one payment to exporters that is equal to the difference between the U.S. price for cotton and the world market price for cotton, which is meant to ensure that U.S. cotton can be sold in foreign markets at a profit. Exporters who had entered into contracts with foreign buyers to sell U.S. cotton, under sales that in some cases would not be final until next year, did so with the expectation of having the Step 2 payment, and thus would want compensation for this.

The second step of the program provides a payment to textile producers who use U.S. instead of foreign cotton in the production of textiles. This payment was found to be a prohibited subsidy by the World Trade Organization (WTO) panel because it was contingent on local content, while the first was found to be a prohibited export subsidy.

These sources said National Cotton Council members would consider the USDA suggestion, and that no final decision has been made. However, one source questioned how compensation would be allocated, and whether this could fairly provide support to offset the payment expected under Step
2.

The NCC's public position is that Step 2 should be kept in place until the current farm bill expires in 2007, but an industry source said cotton producers understand this could be difficult for the administration because of pressure from Brazil. As a fallback position, this source said, some in the cotton industry would be content if the Step 2 program were kept active through the current marketing year, which would end in 2006.

U.S. Agriculture Secretary Mike Johanns on Sept. 21 reiterated that the U.S. goal is to quickly eliminate Step 2, and he said the U.S. should not look for other ways of addressing the issues. He said the approach the U.S. took in July in calling for Step 2's repeal continues to be "the right approach."

The WTO panel gave the U.S. until July 1 to eliminate all subsidies found to be prohibited in the decision. However, Brazil and the U.S. reached a procedural agreement shortly after the Bush Administration submitted legislation to Congress calling for Step 2's repeal. This agreement put off Brazil's retaliation until after a WTO panel rules that the U.S. has not complied with the initial WTO decision by repealing the program (Inside U.S. Trade, July 8, p. 1).

U.S. Trade Representative Rob Portman said on Sept. 21 he would discuss U.S. implementation of the cotton decision with Brazilian Foreign Minister Celso Amorim in Paris on Sept. 22, on the margins of WTO talks that also include EU and Indian officials. Johanns was also set to meet with Amorim in Paris, according to Lloyd.

These talks come after the U.S. missed a second deadline in the cotton case to respond to the panel's findings that various U.S. subsidies had caused serious prejudice to Brazilian producers. Under WTO rules, the U.S. was to either remove those subsidies or their adverse effects by Sept. 21, six months after the WTO decision.

Portman noted the deadline in testimony to the Senate Agriculture Committee on Sept. 21, and said the U.S. had taken "significant steps" to implement the decision by calling for the repeal of Step 2, which he said significantly reduces the serious prejudice to Brazilian producers found by the WTO panel.

He added that U.S. cotton subsidies could be reduced through $3 billion in cuts to U.S. farm programs that are being considered by the House and Senate in budget reconciliation bills, although he acknowledged this process has been postponed because of Hurricane Katrina.

Initially, some observers had seen the budget reconciliation bill as a potential vehicle for a repeal of Step 2, but this week several agriculture sources said they did not believe Senate Agriculture Committee Chairman Saxby Chambliss (R-GA) was in any hurry to repeal Step 2. These sources predicted Chambliss would seek to put off repeal at least until the current marketing year ends on July 31, 2006.

INSIDETRADE-23-38-2