Document: WT/DS267/R/Add.1 Page E-1 ANNEX E SUBMISSIONS OF PARTIES AND THIRD PARTIES FOR THE RESUMED SESSION OF THE FIRST SUBSTANTIVE MEETING ("FURTHER SUBMISSIONS") Contents Page Annex E-1 Executive Summary of Brazil's Further Submission E-2 Annex E-2 Executive Summary of United States Further Submission E-8
Document codes: WT/DS267/R/Add.1
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX E

SUBMISSIONS OF PARTIES AND THIRD PARTIES FOR THE
RESUMED SESSION OF THE FIRST SUBSTANTIVE MEETING
("FURTHER SUBMISSIONS")

Contents Page
Annex E-1 Executive Summary of Brazil's Further Submission E-2
Annex E-2 Executive Summary of United States Further Submission E-8
Annex E-3 Third Party Further Submission of Argentina E-17
Annex E-4 Third Party Further Submission of Benin and Chad E-28
Annex E-5 Third Party Further Submission of Canada E-55
Annex E-6 Third Party Further Submission of the European Communities E-56
Annex E-7 Third Party Further Submission of New Zealand E-65
Annex E-8 Third Party Further Submission of Paraguay E-78

ANNEX E-1

BRAZIL’S FURTHER SUBMISSION TO THE PANEL
EXECUTIVE SUMMARY

Summary Of The Argument Regarding Brazil’s Further Claims

1. Brazil demonstrates in its Further Subm ission that US subsidies from MY 1999-2007
supporting the production, use and export of US upl and cotton cause or threaten to cause serious
prejudice to the interests of Brazil within the meaning of Article 5(c), 6.3(c) and 6.3(d) of the SCM
Agreement as well as violate GATT Article XVI.

2. The measures challenged by Brazil compri se domestic support subsidies including the
marketing loan programme
1, crop insurance subsidies, market lo ss assistance payments and their
successor counter-cyclical payments, production flex ibility contract payments and their successor
direct payments, cottonseed payments and “other payments”. 2 The measures also include prohibited
export and local content subsidies including Step 2 export and domestic paym ents, and the subsidies
provided by the US GSM 102 export credit guarantee programme. These collective subsidies are
referred to as “the US subsidies”.

3. Table 1 summarizes the amounts of US subsidies in terms of US dollar and as a percentage of
subsidization in terms of the market value of US upland cotton:

1 Brazil uses the phrase “marketing loan progra mme” or “marketing loan payment” to encompass
marketing loan gains, loan deficiency payment (or “LDP’s”) and certificate exchange gains. See US 11 August
Answer to Question 67, para. 133.
2 The United States qualified “other payments” as product-specific support to upland cotton. See US

Programme
1999 2000 2001 2002
Amount of
Payment
Amount of
Payment
Amount of
Payment
Amount of
Payment
Rate of
Subsidization
Rate of
Subsidization
Rate of
Subsidization
Rate of
Subsidization
Marketing Loan
Gains and LDP’s
$1,545 million $573 million $2,541 million $918 million
43.71per cent 14.06 per cent 82.5 per cent 28.23 per cent
Crop Insurance $169.6 million $161.7 million $262.9 million $194.1 million
4.79 per cent 3.97 per cent 8.53 per cent 5.97 per cent
Step 2 $422 million $236 million $196 million $217 million
11.94 per cent 5.79 per cent 6.36 per cent 6.67 per cent
PFC Payments/
Direct
Payments
$547.8 million $541.3 million $453.0 million $485.1 million
15.5 per cent 13.28 per cent 14.7 per cent 14.92 per cent
Market Loss
Assistance/
Counter-Cyclical
Payments
$545.1 million $576.2 million $625.7 million $998.6 million
15.42 per cent 14.14 per cent 20.31 per cent 30.71 per cent
Cottonseed
Payments
$79 million $185 million No payments $50 million
2.23 per cent 4.54 per cent No payments 1.54 per cent
Other Payments $216 million $63 million $68 million $65 million
6.11 per cent 1.54 per cent 2.20 per cent 1.99 per cent
Total Payments $3,524.5 $2,336.2 $4,146.6 $2,927.8
All programmes 97.69 per cent 57.32 per cent 134.6 per cent 90.03 per cent
Value of US
Production $3,534 million $4,073 million $3,080 million $3,252 million
Average Rate of
Subsidization 94.91 per cent

Table 13

4. Brazil’s actionable subsidy claims fall into tw o basic temporal and legal categories: first,
claims of present serious prejudice resulting from subsid ies provided in MY 1999-2002; second,
claims of threat of serious prejudice from subsidies that are required to be paid by USDA to the US
upland cotton industry during MY 2003-2007 under the Farm Security and Rural Investment Act of
2002 (2002 FSRI Act) and the Agricultural Risk Protection Act of 2000 (2000 ARP Act).

5. Because Brazil’s claims involve the adverse eff ects of “subsidies”, Brazil first establishes that
each of the US domestic and export programmes is a “subsidy” within the meaning of Article 1.1 of
the SCM Agreement. As Table 1 above indicates, each provides a “financial contribution” which
confers a “benefit”.

3 The amount of payments reflects the amount presented by Brazil in its 22 August Rebuttal
Submission, para. 173. The value of the US upland cotton production has been taken from Exhibit Bra-4 (“Fact
Sheet: Upland Cotton”, USDA, January 2003, p.5). The value of the US production in MY 2002 has been
calculated by multiplying the amount of US production as reported in Exhibit Bra-4 (“Fact Sheet: Upland
Cotton”, USDA, January 2003, p.4) (16.73 million bales * 480 pounds per ba le) with the average price received
by US farmers of 40.50 cents per pound ( see Exhibit Bra-202 (Agricultural Outlook Tables, USDA,
August 2003, Table 5). Differences between the sum of individual rates of subsidization and the total rate of
subsidization are due to rounding effects.

6. Each of the subsidies is “specific” within the meaning of Article 2.1(a) and/or (c) of the SCM
Agreement. The United States and Brazil agree that the specificity test of Article 2.1 was not
intended to function as a loophole through which narro wly focused subsidies provided to or used by
discrete segments of an economy could escape review. The four direct subsidies – the PFC, direct
payment, market loss assistance, and CCP payments are de jure specific because the 1996 FAIR Act
and the 2002 FSRI Act explicitly limit access of paymen ts to holders of upland cotton base acreage.
The per acre upland cotton base acreage payments of the four programmes are single specific
subsidies because the payments are based on indi vidual cotton-based criteria and are significantly
higher than payments to most other base acres in each program. Alternatively, even if the total
payments to all base acres for each of the four direct subsidies are treated as single subsidies, they are
specific because the payments are excluded from the significant majority of US farmland and the
value of the crops produced with such payments is less than one-quarter the value of total US
commodities.

7. Crop insurance subsidies are specific becau se there are specific policies and groups of
policies available only for upland cotton (or a few other crops) and not for the majority of crops in the
programme. Alternatively, crop insurance is not specific because the 2000 ARP Act denies benefits
to commodities representing more than half of th e value of US agriculture. Further, US crops
represent only 0.8 per cent of total US GDP.

8. Within each of the present serious prejudice and threat of serious prejudice claims, Brazil has
asserted three different claims regarding the application of these actionable subsidies.

9. Present Significant Price Suppression – Article 6.3(c) of the SCM Agreement: The US
subsidies provided during MY 1999-2002 cause present significant price suppression in the world and
Brazilian market, as well as in markets where Brazili an producers export. Braz il first establishes that
Brazilian upland cotton is “like” US upland cott on based on common tariff classification, USDA’s
designation of upland cotton as a separate commodity, and the interchangeability and treatment by the
markets of US and Brazilian cotton as like products.

10. The bulk of Brazil’s price suppression analys is involves establishing the causal link between
the US subsidies and suppressed prices in the US, wo rld, Brazilian, and other markets. Most of this
evidence is also relevant for Brazil’s other presen t and threat of serious prejudice claims. The
enormous size of the MY 1999-2002 US subsidies in terms of amount ($12.9 billion) and percentage
as market value (95 per cent) coupled with the dominating US world market share of 41.6 per cent of
a fungible commodity create a de facto presumption of production, export, and price-suppressing
effects. The effects of the subs idies are also seen in the signi ficant increase of US production,
exports, and world market share in MY 1999-2002 while US, A-Index, and Brazilian prices fell to
record lows and remained suppressed. The causal link is further confirmed by the fact the average
total US upland cotton costs of pr oduction was 77 per cent higher than market prices received by US
farmers in MY 1999-2001, at the same time that US production and exports increased remained at
high levels. Another demonstration of the causal lin k is the 15 per cent increase in the value of the
US dollar between MY 1999-2001 at the same time that US export market share increased 68 per cent
and A-Index prices declined by 21 per cent.

11. The link between US subsidies and suppressed A-Index, Brazilian, and other third country
upland cotton market prices is further confirmed by the fact that the nature, size and global impact of
the US market permits it to drive and suppress world prices. The large size of the US world market
share of 41.6 per cent that is generated and sust ained by the US subsidies suppresses world market
prices. Production and export developments in the US market are widely publicized and impact the
New York Cotton Exchange’s futur es market, which in turn directly influence and impact A-Index
and Brazilian prices.

12. The link between the US subsidies and signi ficant price suppression is also confirmed by
USDA and other economists’ findings of the indi vidual production, expor t and price-suppressing
effects of each of the US subsidies have . USDA and other economists have identified the US
marketing loan payments as having the greatest pr oduction, exports and A-In dex price-suppressing
effects. Crop insurance subsidies, like marketing lo an payments, are directly tied to production, and
have been found to create similar types of eff ects by USDA and other economists, as they eliminate
risk and induce farmers to put marginal land into production. CCP payments (and to a lesser extent
market loss assistance, PFC and direct payments) have production impacts as a result of additional
income and wealth effects that keep land in pr oduction and maintain base acres in production in
anticipation of future base updating like that permitted under the 2002 FSRI Act. Step 2 export
payments directly stimulate US exports and permit US exporters to export high-cost US upland cotton
with the effect of suppressing A-Index prices. The GSM-102 export credit guarantee programme
facilitated the export of more than $1 billion wo rth of US upland cotton between FY 1999 and the
present, thereby increasing US exports and suppressing world prices.

13. A number of econometric studies found that the US subsidies collectively have the effect of
increasing US production, exports and suppressing worl d prices. The ICAC found that world prices
would increase by 11 cents per pound price from the removal of US subsidies in MY 2001 and 6 cents
in MY 2000. The University of Tennessee found an average 11.4 per cent price suppressive effects
from removing US subsidies during MY 2003-2007. The IMF estimated world prices would increase
by 4 per cent based on removing $1 billion of US subsidies in MY 1998. The World Bank/IMF found
a 25-30 per cent increase in world prices from elimination of US upland cotton subsidies in MY 2003-
2007. The Centre for International Economics found an increase of world price by 13.4 per cent by
eliminating US and Chinese subsidies in MY 1998. Professor Daniel Sumner determined that
removing the US subsidies in MY 1999-2002 results in an average increase in the A-Index price of
12.6 per cent.

14. Further, Brazilian prices for domestic Braz ilian sales as well as Brazilian export sales are
suppressed by the effects of the US subsidies. The small size of the Brazilian market and low applied
tariffs mean that Brazilian producers are price take rs, not price makers. Ne gotiations to determine
Brazilian domestic and export prices are heavily infl uenced by New York Co tton Exchange’s futures
prices and A-Index prices. The movements in pri ces between the Brazilian prices and prices in these
international markets are closely tied. Prices in ot her third country markets also show a close linkage
with Brazilian, New York futures, US spot, US A-Index and other prices included in the A-Index
calculation.

15. Finally, the amount of price suppression between MY 1999-2002 as reflected in various
econometric studies of world prices varies from 6 cent s per pound to 11 cents per pound. Professor
Sumner found the A-Index price suppression to be 6.5 cents per pound between MY 1999-2002. This
estimated worldwide price suppression is “signifi cant” because it materially affects producers in
Brazil and throughout the world. Total income lo ss from the price suppression is $3.587 billion and
Brazilian producers lost an estimated $478 million from suppressed prices.

16. Increasing World Market Share in MY 2001 – Article 6.3(d) of the SCM Agreement:
The US subsidies for upland cotton contributed significantly to the production and export of large
quantities of upland cotton in violation of Article 6.3(d) of the SCM Agreement. The three-year
average US world market share in MY 1998-2000 was 22.3 per cent. In MY 2001, the subsidy-
enhanced US world market sh are increased to 38.3 per cent. This MY 2001 increase follows a
consistent trend since the 1996 FAIR Act was enact ed with US world mark et share increasing from
25 per cent to 38.1 per cent. The evidence linking US subsidies and increasing production and
exports in the price suppression analysis is also relevant for the Article 6.3(d) claim. Professor

Sumner finds that but for the US subsidies, US exports betwee n MY 1999-2001 would have declined
on average by 39 per cent.

17. Inequitable World Export Share - 1999-2002: Articles XVI:1 and 3 of GATT 1994: US
subsidies provided from MY 1999-2002 contributed si gnificantly to the United States having more
than an equitable share of world export trade w ithin the meaning of GATT Article XVI:3. The US
share of world exports increased from 17.93 per cen t in MY 1998 to 38.3 per cent in MY 2001 and
increased further to 41.6 per cent in MY 2002. The causal link between the US subsidies and the
increased US export market share is based on the evidence of production and export effects of US
subsidies set out in the price suppression analysis. Professor Sumner concluded that but for the US
subsidies US exports would be 41.2 per cent lowe r and US production would decline by 28.7 per cent
on average between MY 1999-2002. The current US share of world exports of upland cotton is not
“equitable” because producers from countries competing with the United States do not receive any or
at most only small amounts of subsidies and ha ve costs of productions are far lower than the
United States. But for the effects of the US subsidies, these producers, including producers in Brazil,
would have increased their share of the world export trade.

18. Threat of Serious Prejudice: Brazil’s second set of adverse effects claims involves the
demonstration of a threat of serious prejudice under Article 5( c), 6.3(c), and 6.3(d) of the SCM
Agreement and GATT Articles XVI:1 and 3. The reco rd shows that five US subsidies – marketing
loan payments, crop insurance subsidies, Step 2, CCP and direct payments – have no production or
expenditure limitations and either no or at best no practical payment limitations. These unlimited
subsides are required to be paid by USDA and elig ible US producers, users and exporters. These
eligible recipients have an enforceable entitlement to receive the payments – regardless of the effect
of US subsidies on the world upland cotton market. Based on the EC – Sugar Exports GATT panel
decisions and the US – FSC Appellate Body decision, these facts support a finding of a threat of
serious prejudice in the form of significant price suppression, increases in US world market share, and
inequitable share of world export trade.

19. A threat of serious prejudice is confirmed by fact that the level of US subsidies has increased
by up to 10 cents per pound between MY 2001 and 200 2 with the passage of the 2002 FSRI Act.
Having established present price suppression, increased world mark et share and inequitable share of
world export trade, this evidence al so confirms the existence of a threat of serious prejudice for MY
2003-2007. A University of Tennessee study predicts removal of the US subsidies will increase US
prices by 11.4 per cent between 2003-2007. The IMF predicts that removal of US subsidies would
increase world market prices by 25-30 per cent in the short term. Professor Sumner predicts that
removal of US subsidies would increase world A-Index prices by 5.9 cents per pound, decrease US
production by 4.5 million bales, and decrease exports by 4.4 million bales.

20. A threat of serious prejudice also exists because the US costs of production will increase
between MY 2003-2007 with USDA and FAPRI not e xpecting the large cost-market revenue gap to
decline significantly. The most recent FAPRI baseline suggests that marketing loan and CCP
payments will be made throughout MY 2003-2007. Additional evidence of a threat of serious
prejudice exists from USDA and FAPRI baselines (reflecting mandatory payments under the 2002
FSRI Act) that project that US acreage, production, and exports will continue at existing high levels
given the existence of the US subsidies. The in creasing export orientation of US production, as US
domestic textile production declines, also increas es the threat of significant price suppression,
increased world market shares, and inequitable shares of world export trade.

21. The evidence demonstrates that the threat of an increased US world market share in MY 2002
has already materialized, as the US world market share continued to increase in MY 2002 to 41.6 per
cent, well above the MY 1999-2001 three-year average of 29.1 per cent. The threat also exists for
MY 2003 as recent USDA projections of US exports indicate that the likely US share will be 38.8 per

cent in MY 2003 – an increase over the three-year (MY 2000-2002) average of 34.9 per cent. This
evidence further supports the finding of a threat that the US share of world export trade will continue
to be inequitable for MY 2003-2007.

22. Per Se Challenges to 2002 FSRI Act and 2000 ARP Act: Brazil also challenges certain
provisions of the 2002 FSRI Act and the 2000 ARP Act – in as far as they relate to upland cotton – as
per se violations of Articles 5(c), 6.3(c), 6.3(d) of the SCM Agreement and GATT Article XVI:3. In
particular, Brazil challenges the mandatory provisi ons requiring the executi ve branch of the US
Government to make marketing loan, Step 2 domestic and export, crop insurance, direct and counter-
cyclical payments to eligible upland cotton produ cers, users and exporters. There is no statutory
mechanism in any of the challenged statutes or re gulations to limit the guaranteed payments when
these payments cause serious prejudice or a threat of serious prejudice. The absence of any statutory
upland cotton circuit breaker threatens to cause serious prejudice, including price suppression,
increased US export and an inequitable US share of world upland cotton exports.

ANNEX E-2

EXECUTIVE SUMMARY OF THE
FURTHER SUBMISSION OF THE UNITED STATES

1. Brazil Has Failed to Demonstrate that Cr op Insurance Payments Are “Specific”. The
United States reiterates that the subsidy to any agri cultural producer is the premium subsidy paid by
the US Government, which is common to all commoditi es at a chosen coverage level. Thus, Brazil’s
repetition that certain policies are not available to all commodities is in part true but wholly irrelevant:
the particular policies offered to growers of different commod ities are issued by private insurers but
the subsidy by the US Government on the premiums rema ins the same. Crop insurance subsidies are
available to the US agricultural sector as a whole. It is the position of the United States (reflected in
domestic law) that such a widely available subsid y does not satisfy the specificity requirement of
Article 2. Thus, pursuant to Article 1.2 of the Su bsidies Agreement, US crop insurance payments are
not “subject to the provisions of . . . Part III” of the Subsidies Agreement, including Articles 5 and 6
on serious prejudice.

2. Brazil Has Failed to Demonstrate that Cha llenged US Measures Caused the Decline in
World Upland Cotton Prices Because It Simp ly Ignores Key Factors Behind Those Price
Movements. Brazil has failed to make a prima facie case on its claims on the basis of the mere
assertion that large US outlays during marketing years with low prevailing upland cotton prices
necessarily establishes causation. Brazil has failed to explain to the Panel key factors that affected
world cotton markets during the marketing year 1999 - marketing year 2002 period. These factors
and not US subsidies were the causes of the dram atic plunge in cotton prices experienced in recent
years.

3. – Persistent weakness in world demand for cotton due to competing, low-priced
synthetic fibres and weak world economic growth. The production of competing, synthetic fibres
exploded during the 1990’s, putting downward pre ssure on world cotton prices. Asian countries
added more polyester production capacity between 1991 and 2001 than existed in the entire world in
1990. Asian polyester prices remained below wo rld cotton prices from 1990 to 2001. By 2002,
cotton lost the position as the world’s dominant fibre and slipped below polyester’s market share.
Consumer purchases outside the United States a dded over 40 million bales to textile fibre
consumption since 1990 but virtually the entire amount was claimed by polyester. Consumers outside
the United States buy no more cotton today than they did in 1990.

4. In addition to the price pressure from synt hetic production, the world economy grew more
slowly since 1997 than any time for many years. Clothing is a semi-durable good, and when income
growth slows consumers cut back on current purchases, and postpone replacing clothing until incomes
rise more rapidly. Cotton consumption can decline even while income growth remains positive. The
2001-2002 decline in world income occurred just as world cotton production was increasing because
of good weather, severely pressuring world prices.

5. – Burgeoning US textile imports, reflectin g the strong US dollar and declining US
competitiveness in textile and apparel production, have fundamentally shifted the disposition of
US cotton production from dom estic mills to export markets. The United States has supported
world cotton prices through its huge demand for cott on textiles and apparel. Imported textile and
apparel products continue to displace US mill use of cotton fibre. From 1997 to 2002, US mill use of
cotton dropped 32 per cent. For 2002, US cotto n textile and apparel imports rose for the 14
th
consecutive year, while exports remained essentially unc hanged for the fifth straight year. This huge

trade deficit in textiles and clothing has fundamentally changed the pattern of how US-grown cotton is
used. As domestic mill use has fallen drastically , more US cotton has been available for use by
foreign mills, which then comes back to the US in the form of cotton products.

6. – China, the world’s largest cotton producer and consumer, released 14 million bales of
government stocks between 1999 and 2002, equalling as much as 7 per cent of world
consumption in crop year 2000/01. China’s policies were strongly correlated to world cotton price
movements through the late 1990’s and early 2000’s. Through the mid-1990’s the Chinese
Government was concerned with maintaining farm ers’ income and directed the state marketing
organization to maintain cotton procurement prices at high levels, causing stocks to grow rapidly. At
the beginning of the 1999/2000 marketing year, China announced a policy of auctioning cotton from
these stockpiles, with the central government ac cepting the financial loss. China auctioned
11.6 million bales over August 1999 to July 200 2 (3 million bales in 1999/2000, 6.5 million in
2000/01, and 2.1 million in 2001/02). Over the entire marketing year in 2000/01, China’s auctions
equalled 7 per cent of world consumption that year.

7. – Factors Affecting US Cotton Production. Cotton planting decisions are driven by
numerous factors, including the expected price of cotton, prices of competing crops, farm programme
benefits, technological factors and input costs. Cont rary to Brazil’s claims, US cotton producers have
been responsive to world price movements and are no t insulated from the world market. Changes in
production technology can affect both the risk and the expected returns from cotton production. In
recent years, the boll weevil eradication programmes and the introduction and adoption of genetically
modified varieties of cotton have lowered production costs, increased yields, and increased net returns
for US cotton production.
1

8. Since 1994 there have only been 2 years when US harvested acres changed from one year to
the next in a different fashion than growers in th e rest of the world. Those 2 years, 1998 and 1999,
are specific to severe drought in the United States. In 1998, US harvested area fell, largely due to
disastrous conditions across much of Texas; in 1999, weather was more normal and US harvested
acres increased by almost exactly the acres lost in the previous year.

9. In early calendar year 2000, the futures pri ce for cotton had fallen from the previous year’s
level while corn and soybean prices had risen on the year. US and world cotton growers reduced
harvested acreage from the level in 1999 by virtua lly identical proportions. While cotton harvest
futures prices again declined on the year from 2000 to 2001, soybean and corn harvest futures prices
fell by a greater per cent. As a result, US and world cotton growers saw an increase in cotton
harvested acres in 2001. In considering planting in 2002, growers saw soybean and corn harvest
futures prices showing greater percentage increases than cotton. Thus, both US growers and growers
in the rest of the world saw harvested acres of cotton decline from the previous year’s level.

10. Brazil Has Not Established a Prima Facie Case With Respect to US Decoupled Income
Support Measures Because These Measures Have No More than Minimal Effects. With respect
to US green box measures, namely direct pa yments under the 2002 Act and expired production
flexibility contract payments under the 1996 Act, A nnex 2 of the Agriculture Agreement makes clear
that these payments have no, or at most minimal, trade-distorting effects or effects on production.
Under Article 21.1 of the Agriculture Agreement, the Subsidies Agreement applies “subject to” the
Agriculture Agreement. Accordingly, Annex 2 makes it clear that US green box measures do not

1 Studies indicate that the boll weevil eradication program has lowered the costs of producing cotton
and has made cotton a more attractive cropping alternative. US producers have also rapidly expanded plantings
of biotech cotton, rising from 25 per cent of plantings during the 1997 crop year, to an estimated 73 per cent of
plantings in 2003. Studies suggest that biotech cotto n has increased yields and net returns while decreasing
pesticide use.

cause serious prejudice. Income payments that vary in amount with market prices, such as
counter-cyclical payments under the 2002 Act and e xpired market loss assistance payments, are also
decoupled in the sense of not being linked to curre nt production. Because (according to the economic
literature on decoupled payments) the effect on produc tion is negligible, these payments can have no
“effect” for purposes of Subsidies Agreement Article 6.3 nor operate to increase exports under GATT
1994 Article XVI:3.

11. Finally, because no production of upland cotton (or any other crop) is necessary to receive
these payments, it would be erroneous to attribute to “upland cotton” or “upland cotton producers” all
decoupled payments made with respect to upland cotton base acreage. Those acres may be planted to
alternative crops or may be growing no crops at all. Accordingly, there is no basis to include those
payments in an analysis of whether “subsidies prov ided to US producers, users and/or exporters of
upland cotton” have caused serious prejudice.

12. Brazil Has Failed to Demonstrate that Challenged US Measures Have Caused Serious
Prejudice to Brazil’s Interests Within the Meaning of Article 5(c) and 6.3(c). – “Serious
Prejudice . . . May Arise”: The introductory sentence of Article 6.3 establishes that serious
prejudice “may arise” if “one or more” of four specific circumstances is found, indicating that serious
prejudice need not arise even if they are found. As serious prejudice “may” arise if one or more of the
four conditions under Article 6.3 are sa tisfied, Brazil must first show that at least one of those
conditions is met. Second, if Brazil demonstrates on e or more of the criteria in Article 6.3 is met,
Brazil must then demonstrate “serious prejudice.” In this dispute, Brazil has not established that any
prong of Article 6.3 is met.

13. – The “Effect of the Subsidy”: Brazil has not made a prima facie case that “the effect of the
subsidy” was significant price suppression or depression. Brazil’s argument on causation fails
because Brazil has simply not demonstrated the ca usal connection between the US measures and the
price effects. Brazil has not even shown there is a necessary correlation between the measures and the
effects it claims, let alone that there is a genuine and substantial link between the US measures and the
effects claimed. Brazil has failed to separate and distinguish all th e different effects from the various
factors at play during the marketing year 1999 - marketing year 2002 period and has erroneously
attributed to the US measures the effects of these other causes.

14. – “Significant price suppression”. The Agreement does not define “significant”. The
ordinary meaning of significant is “important, not able; consequential,” which suggests that the price
suppression must reach a level at which it is import ant, notable, and consequential in order to be
inconsistent with Article 6.3(c). The United Stat es further notes that the term “significant” modifies
“price suppression or depression”; therefore, it is the effect on prices that must be “significant” and
not the direct effect on producers, as Brazil argues.

15. Under Brazil’s interpretation price suppression w ould be significant at a level of even 1 cent
per pound because this could still “meaningfully aff ect” producers. Brazil’s interpretation, however,
collapses the concept of “significant price suppressi on or depression” with the concept of “serious
prejudice”. It would also greatly expand the effect of Article 6.3(c), which falls under Part III of the
Subsidies Agreement on “Actionable Subsidies” rath er than Part II on “Prohibited Subsidies”, to
encompass any subsidy with any production and therefore price effect. Members agreed, however,
that any theoretical price effect would not suffice to satisfy Article 6.3(c); they accomplished this by
stating that the price suppression or depression had to be “significant” in order to create a situation in
which serious prejudice may arise.

16. Brazil’s theory would also create two sets of subsidy rules: one for widely traded products,
such as most agricultural products, and another for more differentiated products. The more widely
traded a product is, the more any price effect could be deemed to “meaningfully affect” producers.

There is no basis in the text of the Agreement for creating such a distinction. Where Members
intended a particular rule to apply to a particular type of product – such as a “subsidized primary
product or commodity” (Article 6.3(d)) – they said so explicitly.

17. – “In the Same Market”: Article 6.3(c) requires that the “significant price suppression [or]
depression” that is the “effect of the subsidy” occur “in the same market”. The use of the same “in the
same market” phrase as in the price undercutting por tion of this Article suggests that the significant
price suppression or depression must occur when “t he subsidized product” is found “in the same
market” as “a like product of another Member”. That is, “in the same market” is meant to require
identification of a particular market in which price effects are alleged to have occurred so as to allow
a comparison in that market. If a complaining party could merely assert price suppression or
depression in the world market, the word “same” in the phrase “the same market” would be rendered
inutile because the subsidized and non-subsidized produc ts could always be deemed to be in the same
“world market”.

18. – Time Period for Demonstrating Causal Effects: The “appropriate representative period”
for demonstrating present serious prejudice will depend on the nature of the challenged subsidies.
Normally, the most recent period for which data are available will be the appropriate period. In the
case of recurring subsidies such as those under the 1996 Act and the 2002 Ac t, moreover, a past
subsidy no longer exists as of the time a new subs idy payment in respect of current production is
made and can have no “effect” within the meaning of Article 6.3. As a result, the period for which
Brazil must demonstrate present serious prejudice is marketing year 2002. None of the provisions
cited by Brazil, moreover, say that the effect of a s ubsidy 1, 2, or 3 years ago is presently being felt.
Thus, at a minimum, the effect of the subsidy must be demonstrated in each year and for each year in
which Brazil has alleged effects.

19. Brazil Has Failed to Demonstrate that Challenged US Measures Have Caused Serious
Prejudice to Brazil’s Interests Within the Meaning of Article 5(c) and 6.3(d) – "World Market
Share": Contrary to Brazil’s interpretation, Article 6.3(d) does not use the phrase “world market for
exports”; it uses the phrase “world market share . . . in a particular subsidized primary product or
commodity”. This broad term would appear to encompass all consumption of upland cotton,
including consumption by a country of its own co tton production. Context supports reading “world
market share” as distinct from “world export share”. In fact, GATT 1994 Article XVI:3 uses the
phrase “world export trade”, and Brazil interprets Article 6.3(d) and GATT 1994 Article XVI:3 both
as applying to “world export trade”. Had Members intended that “world export trade” be the relevant
concept to apply in Article 6.3(d) , one would have expected use of that phrase. Because Brazil has
misinterpreted “world market share”, and all of Brazil’s evidence goes to a comparison of the “world
export share” of the United States, Brazil has failed to make a prima facie case.

20. – Appropriate Time Period for Showing Present Serious Prejudice: Brazil has limited its
claim under Article 6.3(d) to “the increased US world market share for MY 2001”. Thus, there can be
no finding that subsidies under the 2002 Act or ma rketing year 2002 subsidies presently cause serious
prejudice. As the United States has previously noted, to demonstrate the “effect of the subsidy” it
would normally be appropriate to look to the subsidy provided in the mo st recent year. Brazil has not
explained why it challenges marketing year 2002 subsidies (in addition to 1999-2001) under
Article 6.3(c) but only marketing year 2001 under Ar ticle 6.3(d). Brazil has stated that the 1996 Act
introduced a new subsidy scheme; at a minimum, Br azil should demonstrate that in fact there is a
“consistent trend” over a period when subsidies have been granted (1996-2001).

21. – Causation: “The Effect of the Subsidy”: Brazil has simply not demonstrated the causal
connection between the US measures and the effect s on world market share. As explained above,
Brazil has failed to separate and distinguish other factors that drove prevailing upland cotton prices to
historically low levels.

22. Brazil Has Failed to Demonstrate any Inco nsistency with GATT 1994 Article XVI:3 –
"More than Equitable Share: Brazil argues that in determining what is an "equitable" share, the
Panel must look at what the US share of world export trade would have been in the absence of
subsidies. Brazil cites to no textual basis for its approach, nor could it since the text does not contain
one. There is nothing in Article XVI:3 that says that a Member is banned from using any subsidies,
let alone that a Member is denied the ability to have any share in world markets if the Member
employs subsidies. Any consideration of what is an “equitable” share needs to take into account the
fact that Members are generally permitted to provi de subsidies. However, any subsidy that has a
production effect may increase exports; if so, accord ing to Brazil, the resulting export share would be
“inequitable”. This interpretation would turn Ar ticle XVI:3 into a prohibition on subsidies that
potentially could increase exports. Rather than impos ing a prohibition, Article XVI:3 states only that
Members “should seek to avoid” export subsidies on primary products, with a dditional conditions if
inequitable shares result.

23. In considering the difficulties inherent in applying the "more than equitable world market
share" language, the United States recalls the discussion of the Tokyo Round Subsidies Code panel on
Wheat Flour on the "more than equitable world market sh are" language. The pa nel’s enumeration of
difficulties associated with this con cept are the types of considerations that led to the negotiation of
the Subsidies Agreement. Brazil now would have the Panel believe that these negotiations were
unnecessary, that the disciplines it seeks were all in th e language of Article XVI:3 all along. Brazil’s
approach is in error and should be rejected.

24. – "Any Special Factors": Brazil considers that one “special factor[]” that may be affecting
trade or that may have affected trade is the lo w level or even absence of domestic support in other
supplying countries. Again, Brazil’s proposed rule would suggest that where no other Member were
subsidizing (each because of its own sovereign choi ce not to use resources in that way), a Member
would be prevented from subsidizing in any amount that results in increased exports. However,
Article XVI does not contemplate a prohibition on agri cultural subsidies, even on export subsidies:
under Article XVI:3, Members “should seek to avoid” use of export subsidies on primary products.
Therefore, “any special factors” should not be interp reted in a way that introduces a meaning that the
provision itself avoids.

25. Brazil Has Failed to Demonstrate a Threat of Serious Prejudice: Brazil argues that there
is no explicit standard for threat of serious prej udice in the Subsidies Agreement nor guidance in
WTO reports. The United States considers that the first standard articulated by Brazil is incorrect.
Brazil’s proposed rule would seemingly transfor m Articles 5(c) and 6 fr om actionable subsidy
provisions into prohibited subsidy provisions. Th at is, Brazil’s approach would produce a threat
determination wherever “subsidies by a large exporter have no effec tive production or export
limitations”. There is no such per se threat rule in the Subsidies Agreement, however; a finding of
serious prejudice requires a fact-intensive demonstration.
2

2 The United States also considers that this proposed standard has not been met by Brazil. First, as
explained above, Brazil has not established a prima facie case of present serious pr ejudice, and therefore one
cannot presume that there is a threat such prejudice will continue. Second, the Appellate Body report in United
States – FSC cited by Brazil involved export subsidies under the Agriculture Agreement and a completely
separate standard. Under the serious prejudice provision of the Subsidies Agreement, the question is the much
more complicated issue of what is the clearly forese en and imminent effect of measures on a Member’s
interests, which may depend on future market conditions, world prices, and other factor s. Third, Brazil has not
demonstrated that the challenged measur es are mandatory in the sense that th ey must be given if an application
is made. Even though the Department of Agriculture has the obligation to make such payments available, the
obligation only attaches when certain market conditions pr evail. Thus, to show that the threat of serious
prejudice is (in Brazil’s words) “real, clear, and imminent,” Brazil would have to show predicted prices over the
future period complained of (marketing years 2003-07) and the likelihood of that occurring.

26. The United States believes the second standard proposed by Brazil is correct. To demonstrate
a threat of serious prejudice a complaining party must show a clearly foreseen and imminent
likelihood of future serious prejudice. The use of the elements of serious prejudice set out in
Article 6.3 ensures that a complaining party come forward with sufficient credible evidence.
3

27. – Threat of Serious Prejudice Via Price Suppression: In addition to the reasons just given,
the United States notes that price developments over the past several months and expected price
movements do not support a conclusion of a clearly foreseen and imminent likelihood of future
serious prejudice. Brazil claims that “[b]ase[d] on MY 2002 prices, current prices in August 2003 and
price levels projected by FAPRI’s baseline, it is likely that marketing loan and CCP payments will be
made during MY2003-2007”. However, current market and futures prices (not reflected in Brazil’s
submission) already indicate that the baseline projection of low prices is wrong.
4 Thus, current prices
and futures prices do not suggest any clearly foreseen and imminent likelihood of future serious
prejudice.

28. Threat of Serious Prejudice Via Price Suppression: Brazil again reads “world market
share” in Article 6.3(d) as the equivalent of “world export share”. Thus, Brazil ’s threat analysis is
wrong for the same reason as its serious prejudi ce analysis, and Brazil has not established a prima
facie case of threat of serious prejudice under Article 6.3(d).

29. GATT 1994 Articles XVI:1 and XVI:3. Brazil asserts that the 2002 Act and 2000
Agricultural Risk Protection Act threaten a high and inequitable share of world exports between
MY2003-07. Brazil nowhere cites the text of GATT 1994 Article XVI:3 (or of the Subsidies
Agreement) that would support the notion that there is a valid cause of action for “threat” of a “more
than equitable share of world export trade”. In the absence of any text relating to Article XVI:3,
Brazil’s claim of a “threat” of a “more than equitable share” must be rejected.

30. Brazil Has Failed to Demonstrate that Challenged US Measures Are Per Se Inconsistent
with US WTO Obligations. Brazil argues that the marketing loan, counter-cyclical, direct, and step
2 payments as well as the crop insurance subsidies are per se inconsistent with US WTO obligations
because they threaten to cause serious prejudice at pr ice levels that require the payment of marketing
loan and CCP payments (that is, below 52 cents per pound). For all the reasons set out with respect to
Brazil’s present serious prejudice claims and its threat of serious prejudice claims, Brazil’s argument
is in error.

31. Brazil also argues that even at high price levels where only direct payments and crop
insurance payments would be made, there is necessarily a threat of serious prejudice because these
payments necessarily will keep marginal land in production because producers face no down-side
revenue risk. Brazil has presented no evidence on th e extent of any alleged effect of these two
subsidies in keeping marginal production on-line at a time of high prices (as the market currently
expects). Second, that some marginal lands may be kept in production cannot alone suffice to

3 A similar concern is addressed for purposes of threat of material injury in countervailing duty
investigations by Subsidies Agreement Article 15.7; under this article, “[t]he change in circumstances which
would create a situation in which the subsidy would cause injury must be clearly foreseen and imminent.” We
note the relationship between threat of serious prejudice and threat of material injury, both of which make up
part of adverse effects under Article 5.
4 Instead of continued low prices, the A-Index average for September 2003 has risen to 64.06 cents per
pound. New York Cotton Exchange futures prices demonstr ate that market participants expect cotton prices to
climb even further through the 2003 marketing year, stre ngthening beyond their 20-year average of 67.86 cents
per pound (1983-2002) within the current 2003 marketing year. In fact, if cotton prices reach the levels (over 70
cents per pound) indicated by the future s market, prices would be very close to what Brazil calculates as the
A-index average (74 cents per pound) for the period before Brazil alleges serious prejudice.

demonstrate a per se threat of serious prejudice. Otherwise, any subsidy with any production effect
would be found to pose a threat, transforming actiona ble subsidies into prohibited subsidies. Thus,
Brazil has not demonstrated that these subsidies per se present a real, clear, and imminent threat of
serious prejudice.

32. Export Credit Guarantees – The Negotiatin g History of Article 10.2 Reveals that the
Negotiators Explicitly Deferred the Application of All Export Subsidy Disciplines on Export
Credit Guarantees: The negotiating history of Article 10.2 of the Agreement on Agriculture reveals
the explicit deferral by the drafters of the app lication of export subsidy disciplines on export credit
guarantees. In particular, the plain difference between the language of the Draft Final Act and that of
Article 10.2 shows that the negotiators specifically opted not to impose the disciplines that Brazil now
seeks to impose through litigation. The earlier version was an unambiguous prohibition, unless
permitted under internationally agreed disciplines. The latter – and current – version imposes no such
prohibition. It only requires Members to work toward the development of yet-to-be-agreed
disciplines, and only upon agreement on such disciplines are export credit guarantee programmes
required to adhere to them.

33. Brazil’s interpretation of Ar ticle 10.2 would require export credit guarantees in agriculture to
be subject to more disciplines than any other pr actice addressed in the Agreement on Agriculture.
Under Brazil’s view, not only would export credit guarantees constitute e xport subsidies and be
subject to all of the export subsidy disciplines, but Members would also be specifically obligated to
work toward and then apply additional disciplines. Brazil’s argument would require an interpretation
that the negotiators viewed export credits, cr edit guarantees, and insurance programmes as more
malign than the recognized export subsidies themse lves. This implausible conclusion is nowhere
manifest in the text of the negotiating history.

34. To the contrary, the text indicates that export credits, credit guarantees, and insurance
programmes were not considered export subsidies, because they were explicitly excluded from
Article 9.1 of the Agreement on Agriculture, d espite their inclusion in negotiating documents
culminating in the current text. Brazil argues that the same is true of “[e]xport performance-related
taxation concessions or incentives other than the remi ssion of indirect taxes”, and yet the Appellate
Body has ruled the FSC and ETI measures are subj ect to the export subsidy disciplines of the
Agreement on Agriculture. With respect to t hose measures, however, no provision like Article 10.2
exists. Export credits, credit guarantees, and insu rance programmes were not only removed from the
illustrative list evident in Article 9.1 but received the explicit commitment to negotiate disciplines set
forth in Article 10.2.

35. – The Application of Government-Wide Accounting Rules under the Federal Credit
Reform Act Indicates that the Export Credit Guarantee Programmes are Covering Long-Term
Operating Costs and Losses: The United States has demonstrated that over time, as indicated by the
government-wide accounting rules mandated under the Credit Reform Act, with respect to those years
for which nearly complete experiential data is available, programme revenues exceed operating costs
and losses. In those years for which the accounting books are nearest to closing (1994 and 1995), the
operation of the programme shows a profit. Simila rly, current data for 1992, 1993, 1996, and 1999
also indicate a profit. All of this data is on a cohort-specific basis, a methodology with which Brazil
agrees.
5

 5 Brazil misapplies the cohort-specific accounting methodology, however, to erroneously argue that
“when [the] total lifetime reestimates for all cohorts of guarantees disbursed sin ce 1992 are netted against the
total original subsidy estimates adopted each budget year during the period 1992-2002, the resulting loss is
nearly $1.75 billion”. To arrive at this fanciful figure Brazil begins not with the estimates based on the “actual”
level of guarantees issued, but rather with the original subsidy estimate in the budget year, well before virtually
any activity in the programmes has occurred in that fiscal year. Th e “actual” figure is simply a reflection of the

36. The United States has repeatedly noted that CCC has complete discretion at any time not to
issue guarantees with respect to any individual application for an export credit guarantee or to suspend
the issuance of export credit guarantees under any partic ular allocation. In addition, the authorizing
statute prohibits CCC from making credit guarantees available in connection with sales of agricultural
commodities to any country that the Secretary of Agriculture determines cannot adequately service
the debt associated with such sale. Third, av ailability of export credit guarantees is governed by
allocations in effect at any one time for specifi c commodities and specific destinations. Fourth, the
ability of CCC to issue guarantees is constrained by the apportionment process of the President’s
Office of Management and Budget.

37. – Forfaiting is Analogous to the CCC Export Credit Guarantee Programmes: Brazil’s
argument that forfaiting transactions and CCC export credit guarantee transactions are dissimilar
illustrates the comparability of the financing availa ble in these transactions. As Brazil points out, in
both cases “the exporter wants to get paid immediately on a cash basis, and the importer wants credit
that it can repay on a deferred basis”. From th e importer’s perspective, the export credit guarantee
transactions are less favourable than forfaiting, because a lthough the importer’s bank can repay its
obligation over time, the CCC has no control over th e terms of the arrangement between the importer
and its bank, which may not extend the deferred paym ent terms to the importer. In forfaiting, the
importer “can repay on a deferred basis”. In bot h cases, the transaction (in Brazil’s words) “enables
the exporter to convert a credit sale into a cash sal e.” Brazil recognizes that as the complaining party
it carries the burden of demonstrating that a “ben efit” is conferred with respect to the GSM-102
programme. Brazil has failed to carry this burden.

38. The Step 2 Programme Does Not Violate Article 3.1(b) of the Subsidies Agreement or
Article III:4 of GATT 1994: Brazil has rotundly stated: “There are no circumstances in which a
‘local content subsidy’ would comply with Article 3.1(b)”. In effect, Brazil’s argument would delete
the application of the introductory clause of Article 3 to Article 3.1(b) entirely. But the phrase
“except as provided in the Agreement on Agriculture” by its terms applies to both export subsidies
under Article 3.1(a) and local content subsidies under Article 3.1(b).

39. Brazil would require the Step 2 programme to permit payments for the use of all cotton,
whether domestic or imported, but only payments fo r domestic cotton would be included in the AMS.
Such a programme would no longer be in favour of domestic producers. The Step 2 programme
provides a benefit to producers because it serves to maintain the price competitiveness of US cotton
vis-a-vis foreign cotton through a payment to captu re some differential between prevailing foreign
and domestic cotton prices. Brazil’s hypothetical programme would cause the benefit to US producers
to evaporate. Rather than a subsidy “in favour of agricultural producers”, the programme would
become a simple input subsidy in favour of te xtile manufacturers outside the coverage of the
Agreement on Agriculture altogether. Brazil’s interpretation would render Paragraph 3 of Annex 7 of
the Agreement on Agriculture inutile.

actual level of guarantees issued in the particular fiscal year. The original subsidy estimate, in contrast, begins
with what is an historically overly optimistic projection of actual use of the programme and then is required to
use the government-wide estimation rules without regard to the actual experience specific to the CCC export
credit guarantee programmes.
 Actual guarantee issuance can first be reflected only in the budget two fiscal years after the
original subsidy estimate. Once the actual use of the program is determined all subsequent reestimates are based
on that figure, not on the original subs idy estimate. Other than with respect to interest (because of independent
market forces), a downward reestimate never occurs based on the original subsidy estimate. It only occurs
subsequent to establishment of the actual program use. Consequently, it is wholly inappropriate to calculate net
reestimates based on the original subsidy estimate for a pa rticular cohort, as Brazil has done. For these reasons,
the United States’ calculation indica ting increasing profitability within the program is accurate, and the
Brazilian calculation is not.

40. Brazil argues that since the Peace Clause pr ovisions for domestic subsidies do not reference
Article 3, the Agreement on Agriculture envisioned th at local content subsidies would be prohibited.
Brazil’s conclusion does not necessarily follow from the structure of the text. Indeed, a contrary
conclusion is more appropriate. Article 13(b) does not refer to Subsidies Agreement Article 3
because the substantive obligation of Article 3.1(b) does not apply in the case of domestic content
subsidies in favour of agricultural producers. Article 13(b) applies to “domestic support measures that
conform fully to the provisions of Article 6 of this Agreement”. The character of the domestic
subsidy is not relevant to the disciplines. Th e Agriculture Agreement never defines “domestic
support”, which is permitted in any form so long as the Member adheres to its reduction
commitments.

4. Given the little time availabl e between the receipt on 30 September of the responding party
submission of the United States and the date fixed for this third-party submission, Argentina will
comment on the US submission at the meeting of the Panel with the parties and third parties
scheduled on 8 October next.
II. IMPACT OF THE US SUBSIDIES ON THE WORLD COTTON MARKET
SITUATION

5. In the first line of the Introduction to its Furt her Submission of 9 September, Brazil points out
that this is a case involving basic economic principles of supply and demand. Indeed, according to the
basic principles of a market economy, in an open ma rket prices would follow the costs of the more
efficient producers. Thus, higher-cost (i.e. less effi cient) producers are gradually compelled to reduce
production. In the world cotton market, however, these principles are turned on their head: many
highly efficient global producers have been cutting production, while the less efficient US producers
are insulated from changes in market prices. Worse still, there is an inverse relationship between the
world price of cotton and US production.
6. In the words of US Senator Fred Thompson,
"These policies defy logic and they defy the mo st basic laws of economics. The result
is that farmers know that they are guaranteed to receive a certain price regardless of
market conditions, so they ignore ma rket signals and overproduce. The
overproduction further depresses commodity prices, leading to the need for ever
increasing government subsidies".
3
7. Argentina already emphasized this point in the co nsultations held in December of last year
when it addressed the following questions, inter alia, to the United States:
Could the US explain the reasons behind th e fact that in 2001 -fifth year of falling
prices- US cotton producers did obtain a record harvest of 20.3 million tons -an
increase of 42 per cent compared to 1998- and that the cotton planted area did
increase by 6 per cent during the same period?
Why does the USDA estimate a 10 per cent drop in the world production for 2002 -
reflecting the impact of world prices in in vestment-, and at the same time estimates
for this year another record harvest in the U.S. -the fourth biggest ever recorded-?
Could the US please explain the reasons for the increase in the volume of US exports
from 946,000 tons in 1998 to 1.8 million tons in 2001, while there is a drop in the
international prices?
According to international standards, the US is not a low-cost producer
4.
Additionally, US productivity levels are lower than those of other exporting
countries5. However, while international prices fell about 54 per cent since the mid-
1990s, the US did expand its cotton area and did increase the production: Could the

3 Exhibit Bra-200 (Congressional Record 107th Congress, Senate) S3990; Brazil's Further Submission,
9 September 2003, Section 4.9.
4 The USDA estimates the averag e production cost in the USA at about US$0.73 per pound.
Nevertheless, one third of its production has higher production costs. On the other hand, the average production
cost in Burkina Faso, for instance, is US$0.21 per pound (Data from International Cotton Advisory Committee,
"Survey of the Cost of Production of Raw Cotton", 2001).
5 About 20 per cent lower than in Brazil or China, for instance.

US please explain the lack of correlation between world price for cotton and US
production?
8. At the time, the United States' only response to Argentina's questions was that production was
affected by a multiplicity of factors, including th e development of fibres, biotechnology, demand,
quality, technical progress, the price of inputs, and so forth, without in any way explaining how it
could achieve such expansion amidst such a spec tacular fall in international cotton prices and high
domestic production costs.
9. In this respect, Argentina has already extens ively discussed the impact of the decline in
international cotton prices on its own cotton economy. As already mentioned, since 1997/98
slumping international prices and increased US gove rnment support have cons istently driven cotton
producer prices down, which in turn has enta iled ongoing reductions in cultivated acreage and
production.
6
10. As Argentina stated at the 61 st Plenary Meeting of the International Cotton Advisory
Committee7 (ICAC), planted and harvested acreage in MY 2001/02 plummeted to its lowest level
since MY 1933/34 – that is, the lowest in the past 68 years – as a result of the continuing fall in
international prices.
11. Argentina believes that without the subsidies gr anted by the United States to its cotton sector,
U.S. cultivated acreage and production would diminish , as would US exports, and that there would be
an ensuing rise in international prices.
12. Argentina further believes that if the Unite d States – being one of the world's leading
suppliers – had not increased its world market share as a result of the subsidies, the international price
of cotton would have been higher, and hence thir d-country producers, including in Argentina, would
not have been so adversely affected by artificially depressed prices.
13. The following table shows the steady increase in US cotton exports since 1995, whereas
Argentina's cotton exports have been shrinking in a general context of declining world cotton prices,
as discussed in paragraphs 23 to 25 below.

6 Since 1997/98, cultivated acreage has in fact shrunk by 76 per cent, with 174,000 hectares planted to
cotton, and production by 63 per cent, with an estimated 73,000 tons of fibre produced. Argentina: Economic
Injury to the Cotton Sector as a Result of Low Prices , Working Group on Government Measures of the
International Cotton Advisory Committee, 2002.
7 Held in Cairo, Egypt, from 20 to 25 October 2002.

Marketing Year US Exports
(in 1,000 metric tons)
Argentine Exports
(in 1,000 metric tons)
1995/96 1,671 274
1996/97 1,495 269
1997/98 1,633 202
1998/99 946 213
1999/00 1,481 70
2000/01 1,467 97
2001/02 2,395 51
2002/03* 2,351 6
 * Estimate.
Source: ICAC and Instituto Nacional de Estadística y Censos (INDEC) (National Institute
of Statistics and Censuses).

III. INCONSISTENCY WITH ARTICLES 5(C) AND 6.3(C) AND (D) OF THE SCM
AGREEMENT

III.1 ARTICLE 5(C) OF THE SCM AGREEMENT

14. Argentina contends that the United States has fa iled to meet its obligations under Article 5(c)
of the SCM Agreement, which stipulates that "[ n]o Member should cause, through the use of any
subsidy referred to in paragraphs 1 and 2 of Articl e 1, adverse effects to the interests of other
Members, i.e.: ... serious prejudice to the interests of another Member...".
15. In fact Argentina contends that through the granting of subsidies – understood in the sense of
paragraphs 1 and 2 of Artic le 1 of the SCM Agreement 8 – the United States has caused and is
threatening to cause serious prejudice to the interests of other Members, including Argentina.
III.2 ARTICLE 6.3(C) OF THE SCM AGREEMENT

16. Article 6.3(c) establishes that "[s]erious prej udice in the sense of paragraph (c) of Article 5
may arise in any case where... the effect of the s ubsidy is a significant... price suppression, price
depression...".
17. Thus, the existence and threat of serious prejudice to the interests of other Members –
including Argentina – is based on the fact that, as established in Article 6.3(c) of the SCM Agreement,
the effect of the subsidies provided by the United St ates to its cotton sector is and will be significant
suppression and depression of international cotton prices.
18. Argentina fully concurs with Brazil that the sh eer magnitude and percentage of U.S. cotton
subsidization suggests a de facto presumption that the cotton subsidies are the decisive factor for the
high levels of US production and exports as well as the low international cotton prices. 9 Argentina
emphasizes that such was precisely the presumption im plicit in its questions to the United States
during the consultations. (See paragraphs 7 and 8 above.)

8 As Brazil demonstrates in Section 3.2 of its Further Submission of 9 September 2003.
9 On the basis of information in the USDA's Fact Sheet: Upland Cotton , January 2003, Exhibit Bra-4,
Brazil points out that the total amount of US cotton subsidies was nearly US$13 billion, with an average
subsidization rate of 95 per cent. Brazil's Further Submission, 9 September 2003, Section 3.3.4.1.

19. Argentina also agrees that there is a strong temporal link between the increase in the US
subsidies over the MY 1999-2002 period and th e significant suppression and depression of
international cotton prices during that period.10
20. Argentina believes that but for the US subsidi es international cotton prices would have been
higher in MY 1999-2002. By stimulating US cotton production 11 and exports, the subsidies drove
international prices down through excess, low-priced US supply – not in fact generated by efficient
low-cost production but precisely thanks to the distorting effect of the subsidies.
21. It should be noted in this respect that Argentina (like or perhaps to an even greater extent than
Brazil) is a "price-taker" in the world cotton market , which is heavily influenced by the enormous US
subsidies that generate a growing world supply.
22. It should also be emphasized that the price movements of US, Cotlook "A" Index and third
country (e.g. Brazilian and Argentine) market pric es are directly interconnected. US – as indeed
Brazilian – cotton forms part of Cotlook's "A" Index "basket". Likewise, US – as indeed Brazilian
and Argentine – cotton forms part of Cotlook's "B" Index "basket".
12 Moreover, US, Brazilian and
Argentine cotton are varieties of the same species, namely Gossypium hirsutum.
23. As in the Brazilian market, domestic price quotes for cotton have suffered a significant
downturn.
24. The table below shows the direct relationship between the decline in the "A" Index world
price of cotton and the drop in the domes tic price quotes for cotton issued by the Cámara Algodonera
Argentina (CAA) for the MY 1995/96-2001/02 period (in US cents/lb):

Marketing
Year
"A" Index
World Price*
CAA Price
Quote**
1995/96 0.86 0.72
1996/97 0.79 0.69
1997/98 0.72 0.65
1998/99 0.59 0.55
1999/00 0.53 0.54
2000/01 0.57 0.49
2001/02 0.42 0.37
 * CIF Northern European ports
 * * FREE MILL, grade C 1/2

25. The following chart clearly shows the trends in the "A" Index world price of cotton and the
domestic price quotes for cotton in recent years:

10 Brazil's Further Submission, 9 September 2003, Section 3.3.4.2.
11 Argentina agrees with Brazil (Sec tion 3.3.4.7.7) that without the ad ditional income provided by the
subsidies granted by the US to its cotton farmers, acreage devoted to cotton would have been, and would be,
much smaller, since US cotton production costs are among the highest in the world. (See Third-Party
12 In addition, the average values of national stan dards for the technical characteristics of Argentine
cotton fibre show that the length, strength and micronaire value of the fibre are considered in the median range
at international level.

26. The similarity in the trends in world prices and domestic price quotes for cotton further
supports Brazil's point
13 that the US subsidies have a suppressing and depressing effect on
international cotton prices. In other words, in the absence of US subsidies that generate excess global
supply, international cotton prices would have be en higher, as would the domestic price quotes for
cotton in Argentina, which are entirely influenced by the former.
27. To an even greater extent th an Brazil because of the smaller scale of its cotton economy,
Argentina is basically a "price-taker" in the in ternational cotton market, unlike the United States,
which, given the size and global impact of the US cotton market and its 41.6 per cent world market
share, is the international market "price-setter" par excellence.
28. In concrete terms, the amount of the US cotton subsidies and the scale of US production and
exports are decisive when it comes to determining th e extent to which the subsidies impact the fixing
of both international and third market prices.
29. As economic theory would suggest and Brazil points out, increased supplies of US cotton in
the world market tend to lower international prices since demand remains relatively inelastic.14
30. The chart below illustrates the relationship betw een US cotton exports and the international
price of cotton:

13 Brazil's Further Submission, 9 September 2003, Section 3.3.4.2.
14 Brazil's Further Submission, 9 September 2003, Section 3.3.4.6; Exhibit Bra-I, para.22.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02
"A" Index world price
CAA price quote

COTTON
Relationship between U.S. exports and the
decline in the international price
0
500
1000
1500
2000
2500
95/96 96/97 97/98 98/99 99/00 00/01 01/02
Tons
(thousands)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
US cents
U.S. exports World price

31. According to a study carried out by the Br azilian National Cotton Exporters' Association
(ANEA),15 the impact of the US subsidies is one of the reasons why cotton production in Argentina
has dropped by more than 60 per cent.
32. The study reinforces Brazil's view that an incr ease in the world price of cotton would enable
least-developed and developing countries such as Arge ntina, Brazil, Benin, Burkina Faso and Chad,
inter alia, to recover the historically competitive position they enjoyed in the international market.
33. As Argentina indicated previously, the presen t collapse of the Argentine cotton sector is
reflected in the extremely high level of indebted ness of producers, estimated at US$600 million and
equivalent to twice the size of agricultural GDP of Chaco Province, the country's largest cotton
producing region, which accounts for between 60 and 65 per cent of domestic cotton production.16
34. As regards the effects of the US subsidies on the international price of cotton, Argentina
considers that the number and quality of the empiri cal and econometric analyses presented by Brazil,
which were carried out by both international or ganizations and various prestigious US economic
research institutions such as the USDA, provide irrefutable evidence of the collective and individual
effects of each subsidy programme on the price of cotton.

15 Características del Mercado Mundial de Algodón (Features of the World Cotton Market), ANEA,
15 February 2002.
16 Third-Party Submission by Argentina, 15 July 2003, para. 28.

35. Argentina agrees with the conclusions reached by various studies presented by Brazil in its
Further Submission
17 and repeats that an increa se in the world price of cotton would enable countries
such as Brazil and Argentina to recover their competitive position in the world cotton market.
36. Over and above any endorsement that may be gi ven to the conclusions of any one of those
studies (and each study's estimate of the price effect of the subsidies), Argentina emphasizes Brazil's
point18 that the suppressing and depressing effect on intern ational cotton prices is significant, even if
international prices were to decrease by only 1 cent per pound, for even such a level of decline implies
highly prejudicial consequences for the cotton economies of many countries, including Argentina.
III.3 ARTICLE 6.3(D) OF THE SCM AGREEMENT

37. The existence and threat of serious prejudice to the interests of other Members, including
Argentina, is also based on the following provision of the SCM Agreement:
Article 6.3 "Serious prejudice in the sense of paragraph (c) of Article 5 may
arise in any case where one or several of the following apply:

(d) the effect of the subsidy is an in crease in the world market share of the
subsidizing Member in a particular subsid ized primary product or commodity as
compared to the average share it had duri ng the previous period of three years and
this increase follows a consistent tre nd over a period when subsidies have been
granted."
38. As regards the serious prejudice claim, Argentina proposes on the one hand to refer to the
U.S. levels of domestic support for cotton, as detaile d at paragraph 64 of Argentina's first Third-Party
Submission of 15 July 2003. Thus, the US budgeta ry outlays for support for the cotton sector in
marketing years 1999 to 2002 were US$3.445 million, 2.311 million, 4.093 million and 3.113 million
respectively, according to data supplied by the USDA.19
39. Such being the US levels of domestic support for cotton, Argentina will now give the US
level of cotton exports over that same period, in orde r to demonstrate that the effect of the subsidies
has been to increase the US world export market share for cotton.
40. The US level of cotton exports in recent years – according to data drawn from a USDA report
other than the documents on which Brazil based its Article 6.3(d) claim20 – is as follows:

17 Brazil's Further Submission, 9 September 2003, Section 3.3.4.8.1.
18 Brazil's Further Submission, 9 September 2003, Section 3.3.5.
19 See Exhibits Bra-6, Bra-76, Bra-4, Bra-57, Bra-55, Bra-47, and footnotes 301 and 321. The
budgetary outlays for US cotton export credits and credit guarantees have not been taken into account.
20 Cotton: World Markets and Trade , USDA, March 2003, Table 1 (http://www.fas.usda.gov/export-
sales/esrd1.html).

COTTON EXPORTS
(in 1,000 metric tons)

 1998/99 1999/00 2000/01 2001/02
(Estimate)
WORLD TOTAL 5,153 5,950 5,789 6,323
US TOTAL 936 1,470 1,467 2,395
US WORLD SHARE
(percentage)

 18.16

 24.70

 25.34

 37.87

41. In chart form, the US share of world cotton exports is as follows:

WORLD AND US COTTON EXPORTS
(in 1,000 metric tons)

42. Argentina thus contends that there has been an increase in the world market share of the
United States as compared to the av erage share it had during the previous period of three years and
that this increase has followed a consistent trend ove r a period when the subsidies have been granted,
since the average world market share of the United States was 22.73 per cent between 1998/99 and
2000/01 and 37.87 per cent in MY 2001/02, recording a more than 15 percentage point increase
over the average share during the immediately preceding three-year period.
43. In conclusion, Argentina asserts that, in the absence of subsidies, US cotton production would
naturally have been lower than that actually record ed and consequently the volume of US exports and
ultimately the impact of the US world market share would also have been smaller.
III.4 THREAT OF SERIOUS PREJ UDICE: ARTICLE 6.3(C) AND (D)

44. Having established the existing serious prej udice caused by the US cotton subsidies,
Argentina agrees with Brazil that the threat of ser ious prejudice is clearly foreseeable and imminent
because of the effects of the even larger s ubsidies provided under US legislation for the
MY 2003 2007 period.
5153 5950 5789 6323
936 1470 1467 2395
1998/99 1999/00 2000/01 2001/02 (Estimate)
WORLD TOTAL US TOTAL

45. As discussed in detail by Brazil,
21 the marketing loan payments, crop insurance subsidies,
CCP, direct payments and Step 2 Payments programmes are mandatory in terms of the US budget for
the MY 2003-2007 period, with no limitations on the volume of production and exports or on
budgetary expenditure for cotton.
46. By way of example that confirms the above, a nd subsequently to Brazil's Further Submission,
the USDA announced on 17 September 2003 that it w ould begin issuing counter-cyclical payments
for final 2002-crop cotton. 22 The counter-cyclical payment rate for cotton is U$S303.09/ton. This is
the amount by which the target price (U$S1,596.1/ton 23) exceeds the effective price (the national
average market price producers received or the loan rate – whichever is higher).
 As can be seen from the table below, these payments represent a major portion of the price.

 Current price
(US$/t)
Counter-cyclical
payment rate
(US$/t)
Percentage (counter-
cyclical payments)
Cotton 1,235 303.09 24.54%

47. Counter-cyclical payments for 2002-crop cotton ar e at their maximum levels because of this
season's low market prices. In other words, the r eason why counter-cyclical payments are so high is
because this MY's prices are very low. The fact that the target price is maintained regardless of
market price fluctuations confirms Argentina's point that US producers are insulated from such
changes in market prices (see paragraph 5 above).
48. Argentina contends that this guaranteed flow of subsidies will undoubtedly lead to a higher
level of US cotton production a nd exports. This will inevitably result in price suppression and
depression as well as an increasing and inequitable US world market share for cotton, thus creating a
source of permanent uncertainty that confirms th e threat of serious prejudice generated by the
subsidies.
49. Moreover, Argentina also agrees with Brazil 24 that the link between the US cotton subsidies
and the threat of significant price suppression and depression and of an increase in the US world
market share for cotton stems from th e fact that that the future s ubsidies will be as necessary as the
current ones for U.S. producers to bridge the gap between market prices and their total production
costs. This will enable U.S. producers to contin ue competing with more efficient third-country
producers, especially considering that the USDA forecasts an increase in total production costs.25
II. CONCLUSION
50. In view of the foregoing, Argentina considers th at the subsidies granted by the United States
to the US cotton sector over the MY 1999-2002 period have caused and still cause serious prejudice to
the interests of other Members, including Argentina, in that:

21 Brazil's Further Submission, 9 September 2003, Section 4.2.
22 USDA Release: USDA ISSUES FINAL 2002-CROP UPLAND COTTON, RICE AND PEANUT
COUNTER-CYCLICAL PAYMENTS.
23 Monitoring and Evaluation 2003, OECD.
24 Brazil's Further Submission, 9 September 2003, Section 4.5.
25 See Exhibits Bra-7 (ERS Data: Commodity Costs and Returns); Bra-257 ( Cost of Farm Production
Up in 2003 , USDA, 6 May 2003) and Bra-82 ( USDA Agricultural Baseline Projections until 2012 , USDA,
February 2003, p.48).

 - They have a significant suppressing or depressing effect on international cotton
prices, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement; and

 - they have the effect of increasing the U. S. world market share for cotton, within the
meaning of Articles 5(c) and 6.3(d) of the SCM Agreement.

51. Furthermore, Argentina considers that the subsidies provided under US legislation for the MY
2003-2007 period threaten to cause serious prejudice to the interests of other Members, including
Argentina, insofar as:
 - they will have a significant suppressing or depressing effect on international cotton
prices, within the meaning of Article 5(c), its footnote 13, and Article 6.3(c) of the
SCM Agreement; and

 - they will have the effect of increasing th e US world market share for cotton, within
the meaning of Article 5(c), its footnote 13 and Article 6.3(d) of the SCM Agreement.

52. Argentina accordingly requests the Panel to find that the aforementioned subsidies granted by
the United States to the US cotton sector are inconsistent with Articles 5(c) and 6.3(c) and (d) of the
SCM Agreement.

I. INTRODUCTION

1. This dispute marks the first time that e ither Benin or Chad – two least-developed, sub-
Saharan African countries – have participated in a WTO dispute. Benin and Chad have taken this
unprecedented step in response to the serious threat posed to their economic and social stability by
massive, WTO-inconsistent US subsidies on upland cotton.

2. As indicated below, subsidies provided by the United States to its relatively small and
prosperous group of cotton farmers exceed the gross national income of Benin, Chad, and every other
country in the West African region.

3. Cotton plays a critical role in the economic de velopment of West Africa. The cotton farmers
of the region are highly vulnerable to changes in the world price of cotton. These small, subsistence
farmers have no ability to influence the internationa l cotton market – they are “price takers”, not
“price makers”.

4. When US subsidies cause or contribute to a dramatic fall in world prices, the consequences
for Africa are severe: hundreds of thousands of people are pushed from basic subsistence living to
stark poverty.

II. SERIOUS PREJUDICE UNDER THE SCM AGREEMENT

5. US subsidies have caused, and are causing, adve rse effects to the interests of Benin and Chad
within the meaning of Article 5(c) and 6.3 of the SCM Agreement. The United States has caused, and
is causing, serious prejudice to the interests of Benin and Chad through the use of WTO-inconsistent
subsidies on upland cotton. The serious prejudice to the interests of Benin and Chad arises because
the effect of the US subsidies has been the si gnificant price suppression and/or price depression for
cotton in the same market, within the meaning of Article 6.3(c).
1

6. Benin and Chad agree with Brazil that for th e purposes of Article 6.3(c), the term “market”
could encompass an individual country, a region, or the world market for cotton.
2 In addition, in the
view of Benin and Chad, the Further Submission of Brazil has clearly established the causal link
between US subsidies and suppressed prices in the world market.

7. Therefore, for the purposes of this Third Party submission, Benin and Chad accept that the
causal link has been established by Brazil, and w ill focus instead on the impact of such suppressed
prices on the economies and cotton sectors of Benin and Chad.

III. THE COTTON SECTOR IN BENIN

8. Benin’s Third Party Submission of 15 July 2003, provided the basic facts about its cotton
sector. While Benin does not wish to repeat all of this information, it would recall that:

 - cotton is the most important cash crop in the national economy, accounting for about
90 per cent of agricultural exports;

1 As a threshold matter, upland cotton from Benin and Chad is clearly “like” US upland cotton within
the meaning of Article 6.3. Benin and Chad agree with the analysis set out by Brazil in Part 3.3.2 of its Further
Submission. Applying the tests set out in previous GATT and WTO cases, the Panel should have little difficulty
in concluding that these are “like products”.
2 Further Submission of Brazil, paragraph 98.

 - cotton has provided 75 per cent of the country’s export earnings over the past four
years;

 - cotton generates a quarter of the country’s revenues;

 - a third of all households depend on the cultivation of cotton, and a fifth of wage-
earning workers are employed in the cotton sector; and

 - overall, about a million people in Benin – out of a population of six million – are
dependent on cotton, or cotton-related activities.

IV. THE COTTON SECTOR IN CHAD

9. Since Chad did not file an earlier submission, it takes this opportunity to provide the Panel
with brief essential information about the national economy of Chad, and the cotton sector.

10. Chad, like Benin, is one of the poorest countries in the world. Of the 175 countries listed in
the 2003 United Nations Human Development Index, Chad is ranked 165
th.3 It is estimated that 80 per
cent of the population of Chad lives on less than US $1 per day. Average life expectancy is 48 years.
Nearly a third of all children in Chad under the age of five suffer from chronic malnutrition.4

11. The cotton-producing region of Chad is located in the southern part of the country, in an area
covering about 127,000 square kilometres. Cott on is generally grown on small farms, usually no
more than one or two hectares. Farmers have to rely on rain for irrigation and animals for traction
when working the cotton fields during the sowing season.

12. Cotton production in Chad affects approximate ly 1.5 million people, out of a total population
of about 8.1 million.
5 Cotton exports account for 5.1 per cent of GDP in Chad, and represents 25 per
cent of all exports. 6 Cotton is therefore one of Chad’s main sources of income, and sustains the
livelihood of a large portion of its population.

13. A recent World Bank report on the co tton sector in Chad stated that:

“Revenue from cotton constitutes the only source of community development for
villages in the cotton-producing area to m eet their needs and improve their quality of
life [original emphasis]....[C]otton payments ar e received in two ways: as individual
lump sums and as rebates/ balances (restourne), depending on the realized level of
prices internationally [emphasis added]. Rebates co nstitute the only source farmers
have to invest in village-level public goods such as schools, hea lth centres, credit

3 Human Development Report 2003 , United Nations Development Programme,
http://undp.org/hdr2003.
4 Chad at a Glance, World Bank Group, 20 August 2003.
5 According to the World Bank, there are roughl y 400,000 farm households in the cotton-producing
areas of Chad, of which about 60 per cent grow cotton. An average farm household has 5 to 6 people. World
Bank, Chad Cotton Sector Reform: A Case Study on Poverty and Social Impact Analysis . Document available
at http://poverty.worldbank.org/files/13138_chadcottonreform.pdf
6 P. Fortucci, The Contributions of Cotton to Economy and Food Security in Developing Countries .
Food and Agriculture Organization of the United Nations. July 2002.

institutions, storage facilities, clean water pumps and wells, radiers to limit village
isolation during rainy season, and so forth.”7
14. Rather more succinctly, the World Bank ob served that: “Cotton was introduced in Chad
during the colonial period and has dominated the economy since then.”8

V. US COTTON SUBSIDIES – SERIOUS PREJUDICE TO BENIN AND CHAD

15. Brazil’s Further Submission of 9 September 2003 provides compelling evidence of the
serious prejudice Brazil has sustained as a result of massive, WTO-inconsistent cotton subsidies. Yet
the serious prejudice to the countries of West Africa, including Benin and Chad, has been far worse.
9

16. The subsidies paid by the United States to its relatively prosperous 25,000 cotton farmers
dwarf the economies of West Africa. As indicated in Benin’s Third Party submission of 15 July US
cotton subsidies exceed the gross national income of Benin (population 6 million), as well as Chad
(population 8 million).

17. US cotton subsidies also exceed the gross nati onal income of Burkina Faso (11 million), Mali
(11 million), Togo (5 million) and the Central Af rican Republic (4 million). As the respected
international NGO Oxfam noted, “no region is more seriously affected by unfair competition in world
cotton markets than sub-Saharan Africa”.10

18. The Oxfam report notes that:

“Central and West African countries have su ffered far graver injury than any other
developing region….The crop…occupies a pi votal position in the macro-economy of
many countries….[Cotton] exports are a vita l source of foreign exchange, financing
essential imports such as food, fuel, and ne w technologies. They also underpin
government revenues, providing the funds needed to invest in health and education….
High levels of poverty and limited governme nt provision of basic services make
Central and West Africa acutely vulnerable to adverse trends in world prices. Falling
world prices mean that farmers have less to spend on health, education, and
investment. Wages for agricultural labour also decline, as does the government’s
capacity to provide basic social services.
Prospects for economic growth – a key requi rement for poverty reduction – have also
been damaged.”
11
19. The Oxfam report – using data from the Inte rnational Cotton Advisory Committee - estimates
that in 2001 alone, sub-Saharan exporters lost $302 million as a direct consequence of US cotton
subsidies. It notes that Benin’s actual cott on export earnings in 2001/02 were $124 million.

 7 World Bank Report on Poverty and Social Impact Analysis – Chad Cotton Sector Reform – Ex-Ante
Qualitative Analysis – First Phase. Document available at http://poverty.worldbank.org/files.
8 Id.
 9 Benin and Chad also welcome, and endorse, the arguments set out in Part 7 of Brazil’s Further
Submission, “Serious Prejudice to the Interests of Africa n Countries by Reason of the US Subsidies on Upland
Cotton.”
10 Cultivating Poverty: The Impact of US Cotton Subsidies on Africa . Oxfam Briefing Paper 30. 27
September 2002. Brazil has filed the full Oxfam report as exhibit Bra-15.
11 Id., pages 8-9.

However, had US subsidies been withdrawn, Benin’s export earnings are estimated to have been $157
million. Therefore, the value lost to Benin as a result of US subsidies was $33 million.
12

20. Chad’s cotton export earnings in 2001/02 we re $63 million, although in the absence of US
subsidies, Chad would have earned $79 million, thus reflecting a loss of $16 million.
13

21. For the period from 1999/2000 to 2001/2002, Oxfam estimates a total cumulative loss of
export earnings of $61 million for Benin and $28 million for Chad.
14 As Oxfam rightly emphasizes,
“the small size of several West African economie s and their high levels of dependence on cotton
inevitably magnify the adverse effects of US s ubsidies. For several countries, US policy has
generated what can only be described as a major economic shock”.15

22. Indeed, for the subsistence cotton farmers of Benin and Chad, already highly vulnerable to
fluctuations in the world price of cotton, the pr ice suppression caused by US subsidies can and does
have a highly destabilizing effect. According to th e empirical data analyzed by two US economists,
Nicholas Minot of the International Food Policy R esearch Institute and Lisa Daniels of Washington
College:

“A 40 per cent reduction in farm-level pr ices of cotton is likely to result in a
reduction in rural per capita income of 7 per cent in the short-run and 5-6 per cent in
the long-run. Furthermore, poverty rises 8 percentage points in the short-run,
equivalent to an increase of 334 thousand in the number of individuals in families
below the poverty line . In the long run, as households adjust to the new prices, the
poverty rate settles down somewhat, remain ing 6-7 percentage points higher than
originally….
Overall, the results in this paper challe nge the stereotype of the rural poor in
developing countries as consisting of s ubsistence farmers that are relatively
unconnected to, and thus unaffected, by swings in world commodity markets. At
least in the case of Benin, to the extent that fluctuations in world cotton prices are
transmitted to farmers, they will have a significant effect on rural incomes and
poverty.”
16 [emphasis added]
23. Thus, as the Minot/Daniels paper indicates, a drop in world cotton prices of 40 per cent
pushes an additional 334,000 people below the poverty line in Benin. Moreover, the Minot/Daniels
study adopted a relative poverty line, equivalent to US$123 per person per year, far below the US$1
per day used by the World Bank. 17

24. The Minot/Daniels paper describes what this means in human terms. The detailed household
surveys carried out in Benin describe the living conditions for cotton farmers:

 85 per cent of the cotton farmers in Benin have houses with mud or mud-brick walls.

 62 per cent live in houses with a dirt floor.

12 Id., page 17-18.
13 Id., page 17-18.
14 Id., page 32.
15 Id., pages 17 and 32.
16 Nicholas Minot and Lisa Daniels, Effect of Falling Cotton Prices on Rural Poverty in Benin. Exhibit
BEN-CHA 1, paragraphs 36 and 38.
17 Id., paragraph 13.

 72 per cent have corrugated metal roofs and 28 per cent have straw roofs.

 53 per cent of the cotton farmer households get drinking water from a public well,
while another 18 per cent use water from a river or lake.

 Less than 2 per cent have electric lights, and 98 per cent use oil or kerosene lamps.

 On average, the nearest source of potable water is 430 m away, and the nearest paved
road is 36 km away.

 About 34 per cent of the cotton farmers do not own a chair, 38 per cent do not own a
table, and 34 per cent do not own a bed.18

25. Needless to say, farmers living in such conditio ns are “price takers”, not “price makers” in the
global cotton market.

26. While comparable household surveys have not been conducted in Chad, conditions in Chad
are, if anything, worse than in Benin. Moreover, as in Benin, the cotton farmers of Chad are highly
vulnerable to changes in the international price of cotton.

27. Yet despite this situation of poverty, cotton farmers in both Benin and Chad are, and remain,
efficient producers. As noted in Benin’s submissi on of 15 July the cost of producing cotton in West
Africa is 50 per cent lower than comparable costs in the United States. Indeed, a recent World Bank
Policy Research Working Paper found that West Af rican countries were among the world’s lowest
cost producers of cotton.
19

28. Moreover, as Benin noted in its Submission of 15 July the IMF reported that Benin’s reform
process in the cotton sector is among the most advanced in the region. However, to re-iterate a key
point of Benin’s earlier submission, these economic e fficiencies have been vitiated by the plunge in
world cotton prices caused in no small part by US subsidies.

29. Similarly, since 1999, Chad has undertaken major reforms in its cotton production system.
The aim of these reforms has been to improve prod uction and productivity with a view to generating
supplementary income, which could then be used to reduce widespread poverty in cotton-growing
areas, and indeed in the country as a whole. Th e method for achieving this goal is a progressive
liberalization of the cotton industry, similar to methods employed in other African cotton-producing
countries.

30. However, as in Benin, the reforms in Chad are being seriously undermined by huge US
subsidies. As stated by the World Bank:

This analysis
20 appears to be all the more urgent today, given the current situation on
the international market and the low pr ice of cotton deriving from the recently-
introduced US subsidies. These can have the effect of thwarting the reform and of
having a considerable social and poverty impact. Unless the international situation

18 Id., paragraph 23.
19 Cotton Sector Strategies in West and Central Africa . World Bank Policy Research Paper 2867, July
2002, page 9. Brazil has filed this Working Paper as exhibit Bra-265.
20 The report’s analysis was: “the findings … su ggest that privatisation and liberalization will not
automatically lead to price competition nor will they automatically solve some of the structural problems that
plague the current cotton system in Chad”.

changes and the US subsidies are removed, any liberalization and privatization of the
cotton sector is unlikely to be successful. [original emphasis].
21
31. The World Bank Policy Paper adds that:

“…subsidies to cotton farmers in ma jor cotton producing countries increase
artificially the supply in international markets and depress export prices for WCA
[West and Central Africa] countries. Downward pressures on export prices have been
exacerbated by generous (and in the case of the United States, rapidly increasing)
subsidies for cotton production in the United States, China and the European
Union.”
22
32. The Policy Paper ultimately concluded that:

“Removal of these subsidies would benefit WCA countries, and allow them to better
exploit their comparative advantage in cotton production for growth and poverty
reduction.”
23
VI. CONCLUSION

33. On 10 June 2003, the President of Burkina F aso, H.E. Blaise Compao ré, presented the joint
proposal on cotton to the Trade Negotiations Committ ee on behalf of Benin, Burkina Faso, Chad and
Mali.24 In presenting the proposal, President Compaoré remarked that:

“More than ten millions of people in West and Central Africa directly depend on
cotton production, and several other millions of people are indirectly affected by the
distortion of world market prices due to production and export subsidies to this
agricultural product….
While cotton accounts for only a small portion of economic activity in industrialized
countries, in all our States, it represents a determining and critical factor for poverty
reduction policies as well as for political and so cial stability. Through induced effects
on infrastructure development, education a nd basic health services, cotton production
acts as an essential link within our countries’ development strategies….
Arguments in favour of sector-based modalities for cotton are straightforward: our
countries are not asking for charity, neither are we requesting preferential treatment
or additional aid. We solely demand that, in conformity with WTO basic principles,
the free market rule be applied. Our producers are ready to face competition on the
world cotton market – under the condition that it is not distorted by subsidies. ”
25
[emphasis added]
34. Similar remarks were made following the Canc un Ministerial by Dr. Kipkorir Aly Azad Rana,
a Deputy Director-General of the WTO. Speaking to the Second East African Business Summit in
Kenya (18-21 September 2003), he stated that:

21 World Bank Report on Poverty and Social Impact Analysis – Chad Cotton Sector Reform – Ex-Ante
Qualitative Analysis – First Phase. Op cit., page 35.
22 Cotton Sector Strategies in West and Central Africa . World Bank Policy Research Paper 2867,
July 2002.
23 Id.
24 Poverty Reduction: Sectoral Initiative in Favour of Cotton. WT/MIN(03)/W/2.
25 WTO News: Address by President Blaise Co mpaoré to the Trade Negotiations Committee,
10 June 2003. www.wto.org.

"A strong call for action in addressing subsidy issues in cotton was made earlier this
year by Benin, Burkina Faso, Mali and Chad….West African negotiators put the
spotlight, before and at Cancún, on cotton s ubsidies leading to overproduction by less
efficient farmers in rich countries a nd depressing global market prices….The
countries who brought this issue to the ta ble do not have a broad range of export
possibilities to choose from, but in cotton, they produce high quality merchandise at
competitive prices. In recognition of th e benefits of export-led growth for
development, they have turned, at the highest level, to the WTO. They do not ask for
aid, which is the World Bank's remit, nor do they make political appeals that belong
to the United Nations. They have just asked that WTO rules and disciplines apply also
in sectors of interest to the poor - that a fair and market-oriented system be
established in agriculture and that rich countries' wasteful export and production
subsidies be abolished and cease to undermine their comparative advantage .”
 26
[emphasis added]
35. Both President Compaoré and Deputy Dir ector General Rana were speaking about WTO
negotiations, not dispute settlement. Yet their messa ges are equally valid for the purposes of this
Panel proceeding. In this dispute, Benin and Chad are not seeking charity or preferential treatment.
Similarly, Benin and Chad do not wish to make political appeals.

36. In the context of this proceeding, Benin a nd Chad ask the Panel simply to find that the
United States must adhere to the WTO rules a nd disciplines on subsidies that it accepted at the
conclusion of the Uruguay Round. This includes the clear prohibition in Part III of the SCM
Agreement against causing serious prejudice to the interests of other Members. US subsidies on
upland cotton have demonstrably caused serious pr ejudice to the interests of Benin and Chad by
suppressing world prices for upland cotton. The results have been devastating for West Africa.

37. Benin and Chad therefore respectfully request the Panel to grant the relief requested by Brazil
in Part 9 of its Further Submission.

 26 WTO News: Address by Dr. Kipkorir Aly Azad Rana , Deputy Director-General to the Second East
African Business Summit, “The Multilateral Trading Syst em: Why East Africa Must Remain Engaged.” 18-
21 September 2003. www.wto.org.

Exhibit Ben-Cha 1

Nicholas Minot
Research Fellow
Markets, Trade, and Institutions Division
International Food Policy Research Institute
2033 K St. NW
Washington, D.C. 20006 USA

Lisa Daniels
Associate Professor
Department of Economics
Washington College
Chestertown, MD 21620 USA

26 September 2003

 Contact information: The authors may be contacted by mail using the first address listed
above, by phone at +1 202 862-8199, or by email at n.minot@cgiar.org.
 Acknowledgements: This original version of this paper was prepared for The World Bank.
The field research was funded by the German Bundesministerium für Wirtshaftliche Zusammenarbeit
(BMZ). The authors also wish to acknowledge useful comments and assistance from Ousmane
Badiane at the World Bank, Karen Macours and others at the Northeast Universities Development
Consortium conference at Williams College in October 2002, and an anonymous reviewer at IFPRI.

Effect of falling cotton prices on rural poverty in Benin

Summary

 This paper combines farm survey data from Benin with assumptions about the decline in
farm-level prices to estimate the direct and indirect effects of cotton price reductions on rural income
and poverty in Benin. The results indicate that there is a strong link between cotton prices and rural
welfare in Benin. A 40 per cent reduction in farm-l evel prices of cotton results in an increase in rural
poverty of 8 percentage points in the short-run and 6- 7 percentage points in the long run. The short-
run impact is equivalent to an increase of 334 thou sand in the number of individuals in families below
the poverty line.

 The results in this paper challenge the stereoty pe of the rural poor in developing countries as
consisting of subsistence farmers that are relatively unconnected to, and thus unaffected, by swings in
world commodity markets. At least in the case of Benin, to the exte nt that fluctuations in world
cotton prices are transmitted to farmers, they will have a significant effect on rural incomes and
poverty.

Introduction

1. From January 2001 to May 2002, world cotton prices fell almost 40 per cent, from 64 cents
per pound to 39 cents/pound
1. Since then, prices have rebounded to about 60 cents/pound, but cotton
prices still show a long-term downward trend fro m the mid-1990s when cotton prices were over
80 cents/pound (see Figure 1). One reason for the lo ng-term decline is that world demand for cotton
has been stagnant at 20 million tons since the mid- 1990s, in part due to competition with synthetic
fibers. Short-term fluctuations in cotton prices are of ten driven by shifts in the net trade of China, the
largest cotton producer and consumer in the world.

2. In addition to these two effects, cotton prices are pushed below what they otherwise would be
by government support to cotton growers. Th e International Cotton Advisory Committee (ICAC)
estimates that world-wide direct assistance to cotton growers was US$ 4.9 billion in 2001/02. Of this
amount, the United States accounted for US$ 2.3 billion, equivalent to 24 cents per pound of cotton
produced. Other sources, using a broader definiti on of assistance, estimate that the government
provides US$ 3.9 billion to the cotton sector (Oxf am, 2002). Until 2002, US cotton policy consisted
of various programs
2, including two (the marketing loan program and loan deficiency payments) that
ensure that farmers receive at least 52 cents/pound. This has the effect of insulating US farmers from
the falling world prices. In 2001, in spite of lo w world prices, the US posted record cotton production
and near-record export volumes. Furthermore, US subsidies to cotton have increased since these
studies were carried out. The 2002 Farm Bill introdu ced target prices for the major commodities and
programs that effectively pay farmers most of th e difference between market prices and the target
price. For upland cotton, the target price is 72 cen ts/pound. In addition, by allowing farmers to
update their “base acreage”, the new policy provides incentives for farmers to expand production3.

3. Several recent studies have attempted to assess the impact of subsidies on world prices. The
Centre for International Economics in Canberra uses a five-region world model of fibre, textile, and
garment markets in 2000-01 to simulate the im pact of US and European subsidies on cotton
production and export. They find that removing US and European subsidies to cotton growers would
raise the world cotton price by 6 cents/pound or 11 per cent. Another study, carried out by ICAC,
estimates that removing US production subsidies would have increased the world price by
11 cents/pound in 2001/02 (ICAC, 2002). And most recently, Sumner (2003) estimates that, in the

1 These prices are based on the A-Index cotton price, calculated as the average of the five lowest prices
for US cotton in Northern European markets based on a grade of middling 1-3/32 inch fibre length.
2 The 1996 Farm Bill introduced production flex ibility contract (PFC) payments, which were related
to historical (not current) production and would decline over time as part of an effort to phase out farm
subsidies. PFC payments to cotton farmers fell steadily from US$ 700 million in 1996 to US$ 474 million in
2002. Loan deficiency payments and marketing loan gains are, on the other hand, tied to current output and
market prices. Low commodity prices over the last 3-4 years have sharply increased the cost of these programs.
Payments to cotton growers were negligible in 1997, but rose to US$ 1.5 billion in 1999 and almost US$ 2.5
billion in 2002. In addition, Congress has authorized ad hoc market loss assistance (MLA) payments almost
annually. MLA payments to cotton farmers were US $ 600 million in 1999 and US$ 650 million in 2002.
Cotton exporters and US mills also receive roughly US$ 200 million per year in “Step 2” payments, designed to
keep US cotton exports competitive (USDA, 2002b and Oxfam, 2002).
3 The 2002 Farm Bill introduces two new commodity programs: direct fixed payments and counter-
cyclical payments. In the case of upland cotton, the fixed direct payment is set at 6.7 cents/pound and is paid on
the basis of 85 per cent of the “bas e acreage”. The counter-cyclical payments involve payments of up to
13 cents/pound on 85 per cent of the base acreage depending on the gap between the market price (or the loan
rate, whichever is higher) and the target price. These programs replace the production flexibility contract
system and (supposedly) eliminate th e need for the market loss assistance. The marketing loan and loan
deficiency payments continue under the new Farm Bill with the same loan rate: 52 cents/pound for upland
cotton. In addition, farmers are allowed to update thei r base acreage, providing them incentive to maintain or
increase acreage in the event future opportunities to update acreage (USDA, 2002c).

absence of US subsidies, the world cotton price would have been 12.6 percent higher over 1999-2002.
This estimate is probably the most authoritative because it takes into account the 2002 Farm Bill, it
incorporates a detailed treatment of various US subsidy programs, and it uses a standard modelling
framework and parameter estimates.

4. The World Bank estimates that removi ng US cotton subsidies would generate
US$250 million per year in additional revenues for West African cotton farmers (Badiane et al, 2002).
An Oxfam report calculates the losses to three West African nations at 1-2 per cent of gross domestic
product. It points out that, in Mali and Benin, lo sses in export revenue associated with US cotton
subsidies are greater than US development assistance to those countries (Oxfam, 2002).

5. The adverse impact of lower cotton prices on export revenue and GDP in cotton exporting
nations is clear, but does this translate into hi gher incidence of rural poverty? If cotton is grown
mainly by larger farmers with relatively high incom es, then the effect of changes in cotton prices on
rural poverty may be modest. Even if cotton is gr own primarily by small farmers, the magnitude of
the effect on rural poverty will be small if few farm ers grow cotton or if it accounts for a small share
of rural income. Assessing the direct impact of changes in cotton prices on rural poverty requires
detailed household-survey data on incomes and expenditures.

6. This paper examines the impact of changes in cotton prices on rural poverty in Benin. In
particular, it has two objectives:

 to describe the living conditions and level of poverty for cotton growers and other farmers in
Benin; and

 to estimate the short- and long-run impact of lower cotton prices on the income of cotton
growers and on the incidence of poverty in rural Benin.

Background

7. The Republic of Benin is a small West African nation of about 6.0 million inhabitants, 59 per
cent of whom live in rural areas. Its rural economy is based on maize, sorghum, millet, yams, cotton,
and livestock production. The per capita gross national product is US$ 380, placing Benin among the
poorest 20 per cent of countries. The per capita inco me of Benin is lower than the average for sub-
Saharan Africa (World Bank, 2000).

8. In 1989, Benin entered a period of economic a nd political reform. Elections were held in
which the military government was voted out of offi ce, and Benin entered into the first of several
structural adjustment programs with the Interna tional Monetary Fund and the World Bank. In the
agricultural sector, state farms and cooperatives were disbanded, food crop prices and marketing were
liberalized, and many state-owned enterprises, in cluding agro-processing enterprises, were privatized
or closed (République du Benin, 1997). In Ja nuary 1994, the CFA franc (FCFA) was devalued by
50 per cent, effectively doubling the price of imports and the returns to exports. Although this
imposed hardship on manufacturing firms and cons umers that had become accustomed to cheap
imports, it stimulated the local production of cotton, rice, and other tradable goods.

9. Although the cotton sector benefited from the 1994 devaluation, structural reform in cotton
marketing was limited. The cotton sector in Be nin remained under the control of the state-owned
Societé Nationale pour la Promotion Agricole (SONAPRA). In the past two years, Benin has begun
to implement reforms to reduce the role of SONAP RA and introduce competition in the distribution
of inputs and the marketing of cotton. The fall in world cotton prices has led to political pressure for
the government to support the domestic price or even to re-assume control of the sector to protect

farmer interests. According to ICAC (2002), th e government provides modest support for the cotton
price, equivalent to 5 cents/pound. Currently, co tton represents 90 percent of agricultural exports and
60-70 per cent of its total exports (excluding re-exports
4).

10. The economic reforms carried out in the 1990s and the growth in cotton production during
this period resulted in concrete benefits for rural households. The 1994-95 Enquête sur les Conditions
de Vie en Milieu Rural (Survey on Living Conditions in Rural Areas) estimated the poverty rate at
33 per cent (UNDP-MDR, 1996: 13). Adopting a similar definition of expenditure and the same
poverty line (adjusted for inflation), the poverty rate in the 1998 survey had fallen to 21 per cent.
Qualitative questions in the latter survey appear to support the view that rural conditions improved in
the 1990s. According to the IFPRI-LARES survey, 52 percent of the households reported that they
were better off at the time of the survey (1998) than in 1992 and only 28 per cent reported being
worse off . Furthermore, those reporting improve ment tended to attribute these gains to economic
factors such as crop prices and off-farm income opportunities, while those reporting worsening
conditions tended to cite health and weather factors. Cotton farmers, those in the north of the country,
and poor households were more likely to report improved conditions than others. (IFPRI, 2001)

11. These results suggest that there is a strong link between market-oriented policies and cotton
expansion on the one hand and the living conditions of farmers in Benin on the other hand. The
analysis presented in this paper will further examin e this link, focusing on the impact of changes in
cotton prices on rural income and poverty.

Methods

12. The data used in this paper come from the Enquête des Petits Agriculteurs (EPP) or Small
Farmer Survey, carried out in 1998 by the Intern ational Food Policy Resear ch Institute (IFPRI) and
the Laboratoire d’Analyse Régionale et d’Expertise Sociale (LARES). The survey used a 24-page
questionnaire, divided into 16 sections
5. The households were selected using a two-stage stratified
random sample procedure based on the 1997 Pre-Ce nsus of Agriculture. In each of the six
departments6, villages were randomly selected, with the number of villages proportional to the volume
of agricultural production, subject to a minimum of 10 villages per department. In total, one hundred
villages were selected. In each village, nine hou seholds were randomly selected using household lists
prepared for the pre-Census of Agriculture. Th e survey was carried out from August to November
1998. In a few villages, the number of interviewed households was eight or ten, resulting in a final
sample size of 899 agricultural households. Sampli ng weights are used in calculating the results
presented here (see IFPRI, 2001 for more detail).

13. In this study, we adopt a relative poverty line, set at the 40
th percentile of per capita
consumption expenditure. Per capita expenditure is calculated as cash expenditure on consumption
goods, the imputed value of home-produced food, a nd the rental equivalent of owner-occupied
housing. The resulting poverty line is equivalent to US$ 123 per person per year. It is worth noting
that this poverty line is far below the US$ 1 per day frequently used by the World Bank.

4 Re-exports of manufactured goods to Nigeria and other countries accounts for a large share of total
exports.
5 The 16 sections are household characteristics, hous ing characteristics, land, agricultural production,
labour use, input use, changes regarding input use, credit, crop marketing, storage, sources of information, food
and non-food consumption, allocation of time, asset ownership, sources of income, and perceptions of farmers.
6 Since this study was carried out, an administrativ e reorganization has resulted in an increase in the
number of departments from 6 to 12. The analysis in this report retains the old definitions of departments
because this was the basis for the sampling design of the survey.

14. We simulate the impact of various percenta ge reductions in cotton prices on the incomes of
rural households. In the short run (before the hous ehold responds to lower prices), the change in
income of each household is simply the change in the value of cotton production, assuming the farmer
grows the same amount of cotton. This can be calculated as follows:

iccii0i1 H/)PQ(yy  (1)

where y 1i is per capita income 7 of household i after the shock, y 0i is per capita income before the
shock, Qc is the quantity of cotton produced by household i, ∆Pc is the change in the price of cotton,
and Hi is the number of members in household i.

15. In the long run, lower cotton prices will l ead farmers to substitute away from cotton and
reduce input use, so the long-run direct impact is smaller than the short-run direct impact of the
change in cotton prices. In this analysis, we u se the concept of producer surplus to measure the
welfare impact of the change in cotton price. This is calculated using the following equation:

i
c
ci
c
2
ciccii0i1 H/P
Q)P(2
1H/)PQ(yy 




  (2)
where εc is the general equilibrium supply elasticity of cotton and Pc is the price of cotton8.

16. In the absence of estimated elasticities of supply for cotton in Benin, we use a range of
plausible elasticities to calculate the range of plausible welfare impacts9. The elasticities used are 0.5,
1.0, and 1.5. As in the analysis of the short-run effect, we simulate the impact of these changes on the
income of each household in the sample (micro-sim ulation) in order to estimate the impact on
different types of households in terms of income and poverty.

17. The simulations are run with farm-level reductions in cotton price ( ΔPc) of 10%, 20%, 30%,
and 40%. The other variables (y oi and Q ci ) are all defined at the household level, allowing the
changes in per capita income to be calculated for each household in the sample. This “micro-
simulation” approach allows us to estimate the ch ange in income for any sub-group in rural areas,
defined by income, farm-size, or other variables.

18. The impact of price changes on poverty is measured using the Foster-Greer-Thorbecke
measures of poverty 10, the most widely used of which are known as P 0, P 1, and P 2. P 0 is just the

7 As mentioned above, we use per capita expenditure as a proxy for per capita income
8 This expression is more accurate for small changes in price than large ones. These are third-order
effects in that they would be captured by the third term in a Taylor-series expansion. It will be shown later that
the results are not very sensitive even to second-order effects (alternative assumptions about supply elasticities).
9 Two studies have estimated the supply elasticity of cotton in Tanzania. Dercon (1993) estimated an
elasticity of 0.63, while Delgado and Minot (2000), using more recent data, obtained an estimate of 1.0.
 10 The Foster-Greer-Thorbecke measures of poverty are calculated as


 





i
iy
N
1P

where Pa is the poverty measure, N is the number of households, μ is the poverty line, and y i is the income or
expenditure of poor household i (the summation occurs only over poor households). When α=0, the poverty
measure, P 0, is the incidence of poverty, that is, the proportion of households whose income is below the
poverty line. When α=1, the poverty measure, P 1, is the poverty-gap measure. The poverty gap is equal to the
incidence of poverty multiplied by the average gap between the poverty line an d the income of a poor
household, expressed as a percentage of the poverty line. Thus, it takes into account the depth of poverty as

proportion of the population below the poverty line. P
1, sometimes called the poverty gap measure,
takes into account how far below the poverty line the poor are, on average. And P2, sometimes called
the poverty gap squared, takes into account the degree of inequality among poor households, giving
greater weight to extreme poverty.

Characteristics of Cotton Farmers in Benin
19. Before estimating the impact of changing cott on prices on rural households, it is useful to
describe the role of cotton in the rural economy and the characteristics of cott on growers. According
to the IFPRI-LARES Small Farmer Survey, cotton is grown by roughly one third of the farm
households. Cotton accounts for about 18 per cent of the area planted by farm households and 22 per
cent of the gross value of crop production. In valu e terms, cotton is the second most important crop,
after maize. Among cotton farmers, the average area planted with cotton is 2.3 hectares, producing
2.7 tons of seed cotton
11. The value of this output is US$ 901 per cotton farm12.

20. Another measure of the importance of cotton in the rural economy is its contribution to cash
income. Farmers in Benin are quite market oriented, selling over half the output of cowpeas,
groundnuts, manioc, and sweet potatoes, and selli ng almost half of the output of the “staple”
foodcrop, maize. Nonetheless, cotton accounts for a bout one-third of the value of crop sales carried
out by farm households in Benin (IFPRI, 2002).

21. Who are the cotton growers in Benin and how do they differ from other farmers? As
mentioned earlier, cotton production is concentrated in the north and center of Benin. About two-
thirds of the farmers in the large northern depart ment of Borgou grow cotton, as do 37 per cent of
those in nearby Atacora and 64 per cent of those in the central department of Zou. By contrast, in the
three departments in the south (Atlantique, Mono, and Ouémé), the percentage ranges from zero to
25 per cent. If we divide the farm households in to quintiles, the proportion of farmers growing cotton
does not seem to vary consistently across quintiles. If anything, the proportion of cotton growers is
lower (28 per cent) in the richest quintile (see Table 1).

22. Cotton growers tend to have farms that ar e, on average, twice as large as those of non-
growers (5.3 hectares compared to 2.3 hectares). Nonetheless, cotton growers are similar to other
farmers in terms of various measures of well-being. The incidence of poverty rate is slightly lower
among cotton farmers (37 per cent) than among ot her farmers (42 percent), but the per capita
expenditure of cotton growers is about 8 per cent lower than that of others, and the budget share
allocated to food is almost identical to that of non- growers (see Table 2). The reason that the larger
farms do not translate into a higher standard of livi ng is that cotton growers are concentrated in the
more arid north, where the agricultural potential is lower and where there are fewer opportunities for
non-farm employment.

23. To give a more concrete idea of the living sta ndards of cotton growers, it is useful to describe
some indicators of living conditions, according to the farm surveys:

well as the percentage of the households that are poor. If α=2, then the poverty measure, P 2, takes into account
the degree of inequality among poor households, as well as the depth of poverty and the number of poor
households. P 2, sometimes called the poverty-gap squared, will be referred to as a measure of the severity of
poverty (see Foster, Greer, and Thorbecke, 1984).
11 It is worth noting that the average yield is calcula ted at the household level and aggregated, so it is
not necessarily equal to the average quantity divided by the average area. A similar qualification applies to
production, price, and value of output.
12 When the Small Farmer Survey was carried out, the exchange rate was around 630 FCFA/US$, so
that the value of cotton production was US$ 901 per cotton farm.

 85% of the cotton farmers in Benin have houses with mud or mud-brick walls,
 62% live in houses with a dirt floor,
 72% have corrugated metal roofs and 28% have straw roofs,
 53% of the cotton farmer households get dri nking water from a public well, while another
18% use water from a river or lake,
 Less than 2 percent have electric lights,
 On average, the nearest source of potable wate r is 430 m away, and the nearest paved road is
36 km away,
 About 34% of the cotton farmers do not own a chair, 38% do not own a table, and 34% do not
own a bed.

These figures are fairly typical of farmers in Benin. Thus, it is not that cotton farmers are poorer than
average, but rather that almost all farmers in Benin, including cotton farmers, are quite poor.

Effect of lower cotton prices
24. In this section, we use the data from the IFPRI-LARES Small Farmer Survey to estimate the
impact of lower cotton prices in Benin. First, we examine the impact of lower prices on the income
and poverty of cotton farmers in the short-run, befo re they have an opportunity to respond to the
lower prices. Next, we estimate the impact on cotton farmers in the longer run, after they have
responded to the shock of reduced prices.

Short-term direct effects of lower cotton prices

25. As described earlier, we estimate the short-te rm change in income associated with lower
cotton prices using household-leve l information on per capita expenditures and the volume of cotton
production, combined with different assumptions a bout the reduction in cotton price. A 40 per cent
reduction in the farm-gate price of cotton reduces the income of cotton growers 21 per cent. Taking
into account the incomes of non-growers, which do not change in this simulation, the average income
falls 7 per cent. Smaller reductions in the cotton price cause roughly proportionate changes in income
(see Table 3).

26. With a 40 per cent fall in the cotton price, the average incidence of poverty, including both
cotton growers and other farmers rises 8 percentage points, from 40 per cent to 48 per cent (see Table
3). In absolute terms, this implies that about 334 thousand people would fall below the poverty line as
a result of a 40 per cent reduction in cotton prices.
13 A 40 per cent decrease in the price of cotton
results in a 40% increase in the poverty gap for a ll farm households in Benin, while the poverty gap
squared (P2) or severity of poverty increases 61 per cent.

27. This analysis can be broken down by depart ment to evaluate regional differences in the
impact of falling cotton prices 14 (see Table 3). In Atlantique and Ouémé, the reduction in cotton
prices has negligible effects on income and povert y because there are virtually no cotton farmers in
these departments. On the other hand, the impact on the departments of Borgou and Zou are large. In
Zou, a 40 per cent reduction in cotton prices results a 15 percent fall in per capita income and a
17 percentage point increase in the incidence of pove rty. In Borgou, the same decrease in cotton

13 This estimate is obtained by multiplying the percentage point increase in poverty (.08), the number of
farm households in Benin based on the sum of the sampling weights (474,964), and the average household size
of farms in Benin according to the survey (8.8).
14 As mentioned earlier, since the survey was carri ed out, the number of departments has increased
from 6 to 12. The sample size of the survey is too small to allow disaggregation of results by the newly defined
departments.

prices causes an 18 per cent reduction in per capita income and a 18 percentage point increase in the
incidence of poverty. In fact, the department of Borgou moves from having an “average” poverty rate
(greater than in two departments and less than in two others) to having the highest incidence of
poverty, 62 per cent. Similarly, the poverty-gap (P
1) in Borgou increases by a factor of three and the
severity of poverty (P2) doubles as a result of the 40 percent reduction in cotton prices.

28. Finally, we look at the effect of falling cotton prices on the cumulative distribution of income
per capita (see Figure 2). Among other things, it gi ves us information about the sensitivity of the
results to alternative poverty lines, an important c onsideration given that our poverty lines is relative
(set at the 40
th percentile in the base distribution). The point where the cumulative distribution cross
the poverty line is the poverty rate (note that the base distribution cross the poverty line at the
40th percentile). It is clear from the graph that similar results would have been obtained for higher and
lower poverty lines.

Long-term direct effect of lower cotton prices

29. Because of uncertainty regarding the supply el asticity of cotton, we carry out this analysis
using three elasticities: 0.5, 1.0, and 1.5. In order to simplify the discussion, we present only the
impact of a 40 percent reduction in cotton prices. These results are presented with the base levels and
with the short-run impact. Since the assumption behind the short-run impact is that the supply
elasticity is zero (ε=0)., they are labelled as such.

30. As described earlier, the short-run impact of the lower cotton price is to reduce average per
capita income by 7 per cent. If the general equilibri um supply elasticity of cotton is 0.5, the average
income after the price reduction falls 6 percent from the base. At the other extreme, if the supply
elasticity is 1.5, then the average income falls 5 per cent from the base (see Table 4 ).

31. In the long run, a reduction of 40 percent in the price of cotton is associated with a 6-
7 percentage point increase in the overall rural poverty rate, depending on the assumption regarding
the supply elasticity. The poverty gap measure (P
1) rises from 0.10 to 0.12 - 0.13, again depending on
the elasticity assumption. And the poverty gap squared (P 2) increases from 0.036 to 0.047 - 0.058
(see Table 4). As expected, the long-run impact of the 40 per cent reduction in cotton prices is
somewhat less adverse than the short-run impact. It is notable, however, that the results are not very
sensitive to the elasticity assumption.

32. The long-run effects on each department are give n in Table 4. For example, in Borgou, per
capita income falls 18 percent in the short-run, but rebounds 4 percentage points if the supply
elasticity is 1.0 and 7 percentage points if the elasticit y is 1.5. Similarly, the per capita income in Zou
falls 15 per cent in the short-run, but rebounds 3 per centage points in the long-run if the elasticity is
1.0.

33. The poverty rates in each depa rtment follow the same pattern in reverse. In the short-run,
they rise as a result of the 40 percent fall in cotton pr ices, but in the long-run they fall back down part
of the way. In Borgou, the poverty rate rises from 44 per cent to 62 per cent in the short run, falling
back to 58-60 per cent in the long run, depending on which elasticity assumption is used. Similarly,
the incidence of poverty in Zou increases from 33 per cen t to 50 per cent in the short run, then falls to
47-49 per cent in the long run. As described above, there is little or no change in poverty in the three
southern departments (Atlantique, Mono, and Ouémé) because there are very few cotton growers in
these departments.

34. In Figure 3, we show the cumulative distributi on of income in the base scenario, with a 40 per
cent reduction in cotton prices in the short run ( ε=0), and with a 40 per cent reduction in cotton prices
in the long run (ε=1.5). Although the long-run supply elasticity used in this figure is at the upper end

of what we believe is plausible, the difference be tween the short-run and long- run results is not very
large. In other words, the long-term results ar e not very sensitive to the assumption regarding the
supply elasticity of cotton. Even with a relatively elastic supply ( ε=1.5), the response of farmers only
offsets about one-third of the initial negative short-run impact.

Conclusions

35. This paper analyzes the impact of changes in world cotton prices on farmers in Benin. Both
quantitative measures of per capita expenditure fro m household surveys and qualitative responses to a
nationally representative survey suggest that rural living conditions improved over the 1990s.
Furthermore, farmers tend to attribute this improve ment in rural living conditions to economic factors
such as crop prices, availability of food, and access to non-farm employment. Although the causal
link is difficult to establish with certainty, it appears the economic reforms of the 1990s (including the
1994 devaluation) and the growth of cotton production during this pe riod contributed to a noticeable
improvement in rural standards of living.

36. The link between cotton markets and rural living conditions can, however, work against
farmers as well. The analysis in this paper is motivated by the 39 percent decline in the world price of
cotton between January 2001 and May 2002. We combine farm survey data from 1998 with
assumptions about the decline in farm-level prices to estimate the short- and long-term direct effects
of cotton price reductions on rural income and various measures of poverty. We also use the survey
data to study two types of indirect effects: the impact of lower cotton production on the demand for
agricultural labour by cotton growers and the impa ct of lower cotton prices on other households
through the multiplier effect.

37. The results indicate that there is a strong link between cotton prices and rural welfare in
Benin. A 40 per cent reduction in farm-level prices of cotton is likely to result in a reduction in rural
per capita income of 7 per cent in the short-run and 5-6 per cent in the long-run. Furthermore, poverty
rises 8 percentage points in the short-run, equivalent to an increase of 334 thousand in the number of
individuals in families below the poverty line. In the long run, as households adjust to the new prices,
the poverty rate settles down somewhat, remaining 6-7 percentage points higher than originally.

38. Furthermore, these estimates may well underestim ate the actual effect of lower cotton prices
on rural poverty in Benin. First, in an econom y with unemployed resources and excess capacity, an
external shock affecting income (s uch as a change in cotton prices) has a multiplier effect. Changes
in cotton farmer income result in changes in demand for goods and services produced by their non-
cotton-growing neighbours, whic h in turn influences the demand for goods and services these
neighbours consume. Estimates for four countries in sub-Saharan Africa suggest that the multiplier is
in the range of 1.7 to 2.2, meaning that the tota l effect on income (positive or negative) is 1.7 to
2.2 times greater than the direct impact. Second, we assume that farm prices change by the same
proportion as world prices. In competitive market s with a fixed marketing margin, the percentage
change in farm prices will be greater than the percentage change in world prices
15. Third, our
estimates do not take into account other indirect eff ects associated with declining cotton production.
An earlier analysis of the Small Farmer Survey data from Benin indicated that cotton farmers are
three times more likely to apply fertilizer to th eir maize crops compared to non-cotton farmers (see
Minot et al, 2001). This is because growing cott on gives farmers access to fertilizer on credit, some
of which they “divert” to their maize fields. The implication is that lower cotton prices will indirectly
reduce the yields of food crops.

15 Until recently, the effect of changes in world prices on farm-level prices in Benin was muted by
government regulation of the market which stablized prices. Under market reforms being carried out in Benin
and elsehwere in West Africa, markets are becoming more competitive and changes in farm prices will closely
match changes in world prices.

39. Overall, the results in this paper challenge the stereotype of the rural poor in developing
countries as consisting of subsistence farmers that are relatively unconnected to, and thus unaffected,
by swings in world commodity markets. At least in the case of Benin, to the extent that fluctuations
in world cotton prices are transmitted to farmers, th ey will have a significant effect on rural incomes
and poverty. The broader implication is that policies that subsidize cotton production in the
United States and elsewhere, dampening world prices, have an adverse impact on rural poverty in
Benin and (by extension) other poor cotton-exporting countries.

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 Table 1. Proportion of farm households
 growing maize and cotton
 Maize Cotton
Department
 Atacora 76 37
 Atlantique 100 0
 Borgou 96 68
 Mono 83 25
 Ouémé 91 4
 Zou 95 64
Quintile
 Poorest 91 35
 2
nd 93 30
 3rd 90 44
 4th 88 38
 Richest 90 28
Benin 89 34
Source: IFPRI-LARES Small Farmer Survey.

Table 2. Characteristics of cotton growers and other farmers
 Cotton Other
 growers farmers Total
Household size 10.1 8.1 8.8
Dependency ratio 49 48 48
Sown area (ha) 6.5 3.2 4.4
Farm size (ha) 5.3 2.3 3.3
Expenditure (FCFA/person/year) 99,437 108,315 105,203
Food share 57 56 57
Home production share 35 24 28
Percent growing cotton 100 0 35
Cotton area (ha) 2.3 0 0.8
Cotton output (kg) 2,559 0 897
Cotton yield (kg/ha) 1,084 1,084
Cotton sales (FCFA) 505,584 0 177,217
Poverty measures
 P
0 0.37 0.42 0.40
 P1 0.095 0.103 0.100
 P2 0.033 0.037 0.036
Source: IFPRI-LARES Small Farmer Survey.

Table 3. Short-run direct impact of reductions in cotton prices by department
 Atacora Atlantique Borgou Mono Ouémé Zou Total
Per capita expenditure
 Base 84,672 139,290 94,803 88,034 116,479 110,108 105,203
 10% reduction 83,559 139,290 90,455 87,547 116,414 106,115 103,388
 20% reduction 82,446 139,290 86,106 87,060 116,349 102,123 101,574
 30% reduction 81,333 139,290 81,758 86,573 116,284 98,130 99,759
 40% reduction 80,219 139,290 77,409 86,086 116,219 94,137 97,944
Incidence of poverty (P0)
 Base 0.54 0.14 0.44 0.50 0.44 0.33 0.40
 10% reduction 0.55 0.14 0.46 0.50 0.44 0.37 0.42
 20% reduction 0.56 0.14 0.53 0.50 0.44 0.43 0.44
 30% reduction 0.56 0.14 0.58 0.52 0.44 0.47 0.46
 40% reduction 0.57 0.14 0.62 0.53 0.44 0.50 0.48
Poverty gap (P1)
 Base 0.161 0.034 0.098 0.131 0.110 0.071 0.100
 10% reduction 0.166 0.034 0.114 0.134 0.110 0.081 0.106
 20% reduction 0.172 0.034 0.137 0.137 0.111 0.097 0.115
 30% reduction 0.178 0.034 0.167 0.140 0.111 0.118 0.126
 40% reduction 0.185 0.034 0.202 0.143 0.111 0.144 0.138
Severity of poverty (P2)
 Base 0.065 0.012 0.031 0.046 0.042 0.022 0.036
 10% reduction 0.068 0.012 0.039 0.048 0.042 0.025 0.038
 20% reduction 0.070 0.012 0.052 0.050 0.042 0.031 0.042
 30% reduction 0.074 0.012 0.071 0.052 0.042 0.041 0.049
 40% reduction 0.078 0.012 0.100 0.055 0.042 0.057 0.058
Source: IFPRI-LARES Small Farmer Survey.

Table 4. Long-run direct impact of a 40% reduction in cotton price by department
 Atacora Atlantique Borgou Mono Ouémé Zou Total
Per capita expenditure
 Base 84,672 139,290 94,803 88,034 116,479 110,108 105,203
 ε = 0 80,219 139,290 77,409 86,086 116,219 94,137 97,944
 ε = 0.5 80,665 139,290 79,149 86,280 116,245 95,734 98,670
 ε = 1.0 81,110 139.290 80,888 86,475 116,271 97,331 99,396
 ε = 1.5 81,555 139,290 82,627 86,670 116,297 98,928 100,122
Incidence of poverty (P0)
 Base 0.54 0.14 0.44 0.50 0.44 0.33 0.40
 ε = 0 0.57 0.14 0.62 0.53 0.44 0.50 0.48
 ε = 0.5 0.57 0.14 0.60 0.53 0.44 0.49 0.47
 ε = 1.0 0.57 0.14 0.59 0.52 0.44 0.48 0.47
 ε = 1.5 0.56 0.14 0.58 0.52 0.44 0.47 0.46
Poverty gap (P1)
 Base 0.161 0.034 0.098 0.131 0.110 0.071 0.100
 ε = 0 0.185 0.034 0.202 0.143 0.111 0.144 0.138
 ε = 0.5 0.182 0.034 0.188 0.142 0.111 0.133 0.133
 ε = 1.0 0.179 0.034 0.174 0.140 0.111 0.123 0.128
 ε = 1.5 0.177 0.034 0.161 0.139 0.111 0.113 0.123
Severity of poverty (P2)
 Base 0.065 0.012 0.031 0.046 0.042 0.022 0.036
 ε = 0 0.078 0.012 0.100 0.055 0.042 0.057 0.058
 ε = 0.5 0.077 0.012 0.088 0.054 0.042 0.050 0.054
 ε = 1.0 0.075 0.012 0.076 0.053 0.042 0.044 0.050
 ε = 1.5 0.073 0.012 0.067 0.052 0.042 0.039 0.047
Source: IFPRI-LARES Small Farmer Survey.

 Figure 1. Cotton prices in Northern Europe (A-Index)

-
20
40
60
80
100
120
140
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
A-index cotton price (US cents/pound)
Source: USDA, 2002; USDA, 2001.
 Note: The A-Index is the average of the five lowest prices of cotton in Northern European markets for
middling 1 3/32 inch fiber length. For June and July 1995, there was no A-Index quotation; the dotted line
represents a simple linear interpolation.

 Figure 2. Short-run impact of lower cotton prices on the cumulative distribution
of income
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000
Income per capita
Cumulative proportion of households
Base
20% reduction
40% reduction
Poverty line
Poverty line

 Figure 3. Long-run impact of a 40% reduction in cotton prices on the
cumulative distribution of income
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000
Income per capita (FCFA)
Cumulative proportion of households
Short run (e=0)
Long run (e=1.5)
Base
Poverty line