RS21712 -- The African Cotton Initiative and WTO Agriculture Negotiations January 16, 2004 Four cotton producing African countries -- Benin, Burkina Faso, Chad, and Mali -- have proposed in WTO agriculture negotiationsthe complete elimination of trade-distorting domestic support and export subsidies for cotton. (1) The four countries propose an end tocotton export subsidies over three years, followed by the elimination of production-related domestic support overfour years, in eachcase from January 1, 2005. In addition, the proposal calls for WTO members to establish a transitional financialcompensationmechanism in favor of cotton-exporting developing countries affected by the subsidies. Data from the InternationalCotton AdvisoryCommittee (ICAC) would be used to calculate developing country revenue losses. (2) Although not specifically mentioned in the Doharound negotiating mandate, cotton subsidies have been identified as a key issue to resolve before DDA negotiationscan besuccessfully concluded. (3) Cotton production is an important economic activity in WCA countries. (4) According to data from the United Nations Food andAgriculture Organization (FAO), cotton production accounts for 5% to 10% of the gross domestic product (GDP)in Benin, BurkinaFaso, Chad, and Mali. (5) Cotton accounts for around30% of total export earnings of WCA counties and more than 60% of earningsfrom agricultural exports. The World Bank reports that over 2 million farmers in the region produce cotton. (6) Cotton production in the United States does not occupy a similarly dominant role in the total U.S. economy, but it does occupy animportant place in the U.S. agricultural economy. (7) Cotton production accounts for just over three-hundredths of a percent (0.034%)of U.S. GDP (2002). Cotton exports account for 1.4 % of total merchandise exports and 4% of agricultural exports. Cottonproduction employs 173,447 people on 31,433 farms. An additional 200,000 jobs are provided by cotton ginning,marketing andtransportation, and in cottonseed oil mills and textile mills. Total revenue generated by the entire sector of $40.1billion represents3.8 % of GDP. (8) The United States is the second largest producer of cotton, but is the world's largest exporter. Marketing year 2003 exports areestimated at 2.9 million metric tons and account for 41% of world cotton exports. The WCA region is the thirdlargest producer,accounting for 5% of world cotton production and the second largest exporter, accounting for 12% of world cottonexports. Uzbekistan is the third largest exporter with about 10% of world exports. China, the world's largest cottonproducer, is also theworld's largest importer of raw cotton. (9) WCA countries are low cost producers of cotton. (10) For example, in 2001, the average cost of production in Benin, one of the foursponsors of the cotton initiative, was 31 cents per pound. In the United States, the national average cost ofproduction was 68 centsper pound in 2001. The economic rationale for the African cotton initiative is based in part on an analysis conducted by ICAC which estimates thatcotton producers in developing countries (not just Africa) face annual losses of about $9.5 billion as a result ofsubsidies that othercountries provide their cotton farmers. (11) Lossesof this magnitude, according to ICAC, are the result of the excess productionstimulated by subsidies that depress world cotton prices. The ICAC study notes that world prices for cotton at 42cents per pound (in2000/2001) were at their lowest level in 30 years. Low cotton prices, according to ICAC, particularly affectrevenues earned by someof the poorest African countries; while producers in subsidizing countries are shielded from price declines bysubsidies. ICAC points out that the United States provides the largest amount of subsidies to its cotton producers, which it estimated at $2.3billion in 2001/2002. Other countries' subsidies in 2001/02 included China ($1.2 billion), European Union (EU)countries Greeceand Spain ($716 million), Turkey ($59 million), Brazil ($50 million), and Egypt ($29 million). ICAC simulatedthe reduction incotton production if U.S. subsidies were eliminated. According to the simulation, without subsidies, U.S. cottonproduction in1999/2000 would have been 900,000 tons lower than actual production in that year, 700,000 tons less than actualproduction in2000/2001, and 1.4 million tons less than actual in 2001/2002. The simulated removal of subsidies resulting in lower production, leads to higher prices in the short term. The simulated decline inU.S. production results in average international prices per pound of cotton 6 cents higher than realized in 1999/00,12 cents higherthan in 2000/01 and 22 cents higher than in 2001/02. Higher prices would reduce the demand for cotton. Thus theinitial priceincreases would be lowered by 1, 2, and 6 cents per pound respectively in the three marketing years simulated. Initial price increasesalso would be offset by shifting world production to non-subsidizing countries in the medium and long terms. Overall, however, theICAC study says that the removal of cotton subsidies would have had a net positive effect on the world price ofcotton by 3 cents in1999/2000, 6 cents in 2000/01, and 11 cents in 2001/02. U.S. and other country subsidies are not the only factor depressing world cotton prices. ICAC says that weakconsumer demandresulting from the recent economic slowdown and continuing competition from synthetic fibers are preventing worldcottonconsumption from more rapid growth. In addition, says ICAC, improved technology, the strong U.S. dollar, andthe expansion ofcotton production into new areas contributed to the increase in world cotton supply in 2001. A recent World Bank report used results from the ICAC study to illustrate the effect of U.S. and other countries' subsidies on cottonproducers in the WCA region. (12) According tothe World Bank Report, ICAC's estimate of a 11 cent per pound increase in the netaverage world price for cotton (in 2001/2002) would translate into revenue gains of $250 million a year for WCAfarmers. Oxfam, aBritish non-governmental organization, also contributed to the debate over the impact of cotton subsidies, withpublication of a reportthat estimated revenue losses to African farmers from U.S. cotton subsidies. (13) Both the World Bank and Oxfam have played a majorrole in mobilizing public opinion in support of the African cotton initiative. The U.S. responded to the cotton initiative by proposing that cotton be included in a comprehensive negotiated agreement to cutsubsidies and tariffs on all farm products and eliminate tariffs and non-tariff barriers on manufactured goods,including textiles. (14) The U.S. Trade Representative (USTR) maintains that the problems affecting cotton extend beyond the issue ofsubsidies and includefactors such as competition by synthetic fibers, the slowdown in world economic growth, and higher yields due tofavorable weatherconditions. USTR cites many barriers that limit market opportunities and distort trade of cotton: trade distortingdomestic supportapplied by the United States, the European Union, China and some developing countries; high average allowedtariffs for cotton andtextiles and clothing; non-tariff barriers such as non-transparent customs procedures, difficult and costly markingand labelingrequirements, and burdensome testing methods; and industrial policies related to man-made fibers that distort themarket and displacesales of cotton and cotton products. As an alternative to the African sectoral approach, the United States proposeda comprehensiveinitiative that would address four areas: subsidies for cotton and man-made fibers; tariffs on fiber, textiles, andclothing; non-tariffbarriers; and other barriers such as state monopolies, special tax advantages, and export requirements. The National Cotton Council of America (NCC), an organization that represents producers, ginners, warehousers, merchants,crushers, cooperatives and textile manufacturers, allied itself with the USTR proposal to link WTO negotiations oncotton with textiletrade negotiations. (15) A bipartisan group of U.S.Senators from cotton-producing states expressed their opposition to the Africancotton initiative in a letter to the U.S. Trade Representative. (16) The Senators stated that "the current round of multilateral tradenegotiations offers an opportunity to increase market access and further discipline trade distorting domestic supportand exportsubsidies....A sectoral initiative focusing specifically on the U.S. cotton program is counterproductive to U.S.cotton's interest anddistracts from multilateral reform of agricultural trade." Adoption of a stand-alone sectoral initiative, as proposed by the African countries, could mean that cotton producers would, after fouryears, no longer be receiving payments under 2002 farm bill programs that are linked to production, namelymarketing loan assistanceand loan deficiency payments. (17) Cotton producersalso could become ineligible to receive payments under the 2002 farm bill's newcounter-cyclical payments (CCP) program. CCP payments are linked to the level of commodity prices. Directpayments, alsoauthorized by the 2002 farm bill, would not be affected if the initiative were adopted because they are not productionrelated. InFY2002, cotton producers received $721 million in loan deficiency payments. CCP payments were included in the2002 farm bill;estimated CCP payments for cotton in FY2003 total $1.247 billion. (18) Direct payments in FY2003 are estimated to be $428 million. Credit guarantees for cotton exports, an estimated $234 million in FY2002, also could be affected under astand-alone initiative asproposed by the Africans. (19) Adoption of the U.S. proposal to reduce cotton subsidies as part of a comprehensive approach to reducing trade-distorting domesticsupport, also could have substantial, if less drastic, consequences for cotton. The most recent U.S. proposal forWTO agriculturenegotiations is contained in a letter from the U.S. Trade Representative to WTO members. (20) In the letter, the USTR affirms that it isthe "objective of the United States to achieve substantial cuts in trade-distorting domestic support for agriculturalproducts, includingcotton; the elimination of export subsidies for cotton and all other agricultural products; and substantialimprovements in marketaccess for cotton, cotton products, and other agricultural goods." Under this latest formulation of the U.S. proposal,trade-distortingprograms like marketing loan gains/loan deficiency payments would be reduced but not eliminated. The U.S.proposal, whichrecognizes a subsidy element in export credit programs, also could result in changes in U.S. export credit guaranteesfor cotton andother products. While elimination or reduction of U.S. cotton subsidies could benefit farmers in African and other low-cost producers of cotton (e.g.,Australia), the economic effects in the United States could be both positive and negative. U.S. consumers couldbenefit from lowerprices for products made from cotton. (U.S. tariffs and quotas on textiles would also have to be liberalized for U.S.consumers toreceive much benefit from cotton subsidy reduction or elimination.) Taxpayers could benefit from not having topay for support ofcotton producers. However, cotton producers, industries that supply inputs to cotton production, and ruralcommunities could beadversely affected. Workers in ginning, transportation and marketing, warehousing, and cotton seed crushing couldall be adverselyaffected. Those affected could be expected to oppose the elimination of subsidies and/or demand adjustmentassistance tocompensate for adverse impacts of subsidy elimination. The African cotton initiative remains on the WTO negotiating agenda and is an issue that appears to be blocking the completion of theDoha round. The four African sponsors of the proposal, other African countries, and other developing countriescontinue to insist ona separate, sectoral approach to the cotton subsidy issue. The United States, on the other hand, continues to insiston including cottonsubsidies in a broader negotiating approach. U.S. cotton subsidies also are being challenged in WTO disputesettlement where Brazilis arguing that the United States has exceeded its subsidy reduction commitments for cotton. (21) If Brazil wins this dispute, the UnitedStates either would be obliged to alter its cotton subsidy programs or accept the imposition of retaliatory tariffs byBrazil on some ofits products. In 2004, interested Members of Congress will be closely monitoring the WTO agriculture negotiations,the Africancotton initiative, and the WTO cotton dispute.

Summary:
In World Trade Organization (WTO) Negotiations on agriculture, a group of Africancountries have proposed that all subsidies for cotton be eliminated by the end of four years. The proposal alsoadvocatescompensating African cotton producing countries for revenues estimated to be lost due to cotton subsidies. TheUnited States, whichprovides substantial production-related subsidies to cotton producers, agrees that cotton subsidies distort trade, butmaintains that theissue should be negotiated in a comprehensive manner. Disagreement over the African cotton initiative has blockedprogress on anagreement on agriculture in the current round of multilateral trade negotiations known as the Doha DevelopmentAgenda (DDA). How to tackle the question of cotton subsidies -- either as a stand-alone initiative or as part of a broader agreementto reducetrade-distorting farm subsidies -- will be on the agenda as DDA negotiations continue in 2004. If the initiative wereagreed to asproposed, U.S. cotton producers would no longer be receiving 2002 farm bill marketing loan, loan deficiency, orcounter-cyclicalpayments after four years. Under a U.S. alternative proposal for reduction in trade distorting subsidies, cottonproducers could stillreceive payments under those programs but in reduced amounts. This report will be updated.