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Take That, Cotton Subsidies!

BusinessWeek Online

Take That, U.S. Farmers!

Mon May 3,

When a World Trade Organization (news - web sites) court ruled on Apr. 26
that subsidies paid to American cotton farmers flout international trade
rules, it did far more than just administer a wrist slap to the Bush
Administration. The U.S. -- and Europe and Japan as well -- put all of their
chips on the WTO backing their position. But they were beaten big time by
the world's struggling nations instead.

How has the U.S. lost? In two ways. First, the setback will probably trigger
a flood of suits in the WTO court from emerging market countries, suits all
modeled on the successful Brazilian challenge to U.S. cotton supports. These
suits will question the legality of $200 billion in annual subsidies that
support the pampered grain, cotton, and dairy farmers of the richest
nations. Washington, Brussels, and Tokyo will fight back, of course. But if
the Brazil decision holds, watch out. "Most developed countries thought they
were immune to this kind of ruling," says former U.S. Trade Representative
Charlene Barshefsky. "But they are going to find this a profound outcome."


The second way the U.S. and the other rich nations lose is in the
maneuvering to dominate the next global round of trade talks. The U.S. and
the European negotiators knew that their counterparts in Brazil, Africa,
India, and elsewhere were desperate to see agricultural subsidies in the
rich nations reduced and more doors opened for their own farm exports. The
Americans and Europeans figured they could dole out crumbs to the developing
nations -- a drop in a subsidy here, an exemption to a quota there -- in
return for greater protections for intellectual property and the completion
of other deals. But the decision on cotton demolishes that tit-for-tat
negotiating strategy. "They were counting on trading these farm subsidies
for other concessions from developing nations, but it turns out they aren't
worth anything," observes John Magnus, a Washington attorney specializing in
global trade.


The Bush Administration, taken by surprise, plans to appeal. In an election
year, that's a no-brainer. "We will be defending U.S. agriculture interests
in every forum we need to," promises Allen F. Johnson, U.S. Trade
Representative for agriculture. But the U.S. has a poor record on winning
such appeals.


The Brazilians know that, and they're rubbing their hands with glee. The
decision on cotton "delegitimizes...domestic subsidies and increases our
bargaining power in (trade) negotiations," says Brazilian Foreign Minister
Celso Amorim. A clearly emboldened Brazil has also filed a case against
Europe on sugar subsidies.


CAPTURING THE MARKET. If Brazil and its allies demolish the legal basis for
subsidies in the rich nations, the shift could be traumatic. Farmers in
industrialized countries receive up to 65% of their income from government
support programs, according to a WTO study. The European Union (news - web
sites) doled out $110 billion to its farmers in 2002, and the U.S. paid
subsidies of $40 billion, according to the Paris-based Organization for
Economic Cooperation & Development. President George W. Bush (news - web
sites) signed a farm bill in 2002 with a record $114 billion in subsidies,
including $3 billion a year for the 25,000 U.S. cotton farmers, who used the
payments to capture 40% of the world market, according to various studies.


Most worrisome to U.S. trade officials: The WTO apparently rejected their
argument that U.S. subsidies should be considered legal as long as they are
intended for such purposes as land conservation, environmental protection,
disaster relief, and so on. Brazil successfully argued that such aid allowed
cotton farmers in the U.S. to cut prices 61% below the cost of production.
As a result, Brazilian cotton growers lost $600 million in sales. "The U.S.
was trying to get off on a technicality, but this ruling says that won't
work," observes Ben Lilliston, an analyst with the Institute for Agriculture
& Trade Policy.


The subsidies that lie at the heart of American and European agriculture
won't disappear overnight. But the rules of the game in this vital area of
global trade finally look set to change.