Download BRAZIL, BENIN, AND THE COTTON TRADE

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BRAZIL, BENIN, AND THE COTTON TRADE
WHO PLACED THE WINNING BET IN THE WTO?
A.
THE COTTON MARKET
1.
Many experts believe that the cotton market is the most distorted in what is already an
extremely distorted trade in agricultural products. These distortions are due to the high level of
subsidies granted by the developed countries and certain developing countries to cotton production.
Between 1998 and 2002, overall support for cotton production ranged from US$3.8 billion to
5.8 billion, granted chiefly by the United States, China, Greece, Spain, Turkey, Brazil, Mexico and
Egypt. Between December 2000 and May 2002, the international price of cotton fell by 40 per cent,
pushing the world market value for cotton down from 35 billion to 20 billion dollars in the space of
only 18 months. During that period, the price of cotton hit a low of 29 cents per pound, as against
74 cents per pound in 1995. Adjusting for inflation, this was the lowest price since the Great
Depression of the 1930s.
2.
More than two-thirds of the world volume of cotton is produced in the developing countries.
The countries with the lowest production costs are Brazil, China and Pakistan, followed by Australia,
Turkey and the countries of West Africa. The countries with the highest production costs are Israel,
Syria and the United States. And yet, the United States is the second largest producer after China, and
by far the leading exporter. The United States is only able to sustain these high production and export
volumes thanks to the high level of production support granted by the US Government to its
producers. Moreover, the fall in world cotton prices led to a surge in US price support programmes,
and the support granted to US cotton producers jumped from US$1.16 billion in 1997 to US$2.24
billion in 2004, reaching a peak of US$3.9 billion during that year. These payments exceed the
US$1.4 billion in subsidies granted by the United States in 1992.
3.
All of these subsidies concentrated on a single product clearly have a considerable impact on
cotton production and prices. A number of econometric models have tried to estimate this impact,
and although their results vary considerably, by and large they suggest that in the absence of the
subsidies, cotton prices would have been higher. In 2003, a study by the International Cotton
Advisory Committee concluded that during the 2000-2001 season, average cotton prices would have
been 30 per cent higher than what they actually were. Also in 2003 Sumner, using data from the Food
and Agricultural Policy Research Institute (FAPRI), estimated that without the US subsidies, the price
of cotton during the period 1999-2002 would have been close to 13 per cent higher.
B.
BRAZIL ATTACKS THE UNITED STATES THROUGH THE DISPUTE SETTLEMENT MECHANISM
4.
At the end of the 1990s, following the Asian financial crisis, the prices of many commodities
went into a slump. A number of countries had to adopt support measures for their producers, and the
United States adopted its so-called "2002 Farm Bill". Among other things, this Bill provided for the
payment of emergency subsidies triggered when prices fell below certain levels, the so-called
"countercyclical payments". As a result of these subsidies, which are above the WTO bound levels,
Brazil's soya bean exports were adversely affected. However, just as Brazil was about to bring the
case before the WTO, soya bean prices began to rise, with the result that the amount of subsidies paid
to US producers fell. Consequently, Brazil focused its attention on another product, cotton, even
though it was less important to its exports than soya beans.
5.
In September 2002, Brazil requested consultations with the United States concerning the
subsidies granted to its cotton producers. On 18 March 2003, the DSB established a panel to examine
this issue. Brazil's claims can be summarized as follows:
-2-
C.

From 1999 to 2002, US domestic subsidies to its cotton producers exceeded the WTO
bound levels, i.e. the 1992 levels.

US export subsidies for cotton in the form of export credits and payments to cotton
users (Step 2 payments) violate the provisions of the WTO Agreement on
Agriculture.

Direct payments to cotton producers do not qualify as green box subsidies because
they are contingent on not planting fruit and vegetables, and are therefore related to
the type of production.

The US cotton production subsidies cause "serious prejudice" to Brazilian production
and are hence actionable under Article 6 of the Agreement on Subsidies and
Countervailing Measures. The serious prejudice is due to the fact that the subsidies
caused a 41 per cent increase in US cotton exports. The cotton subsidies granted by
the United States also depressed world cotton prices by some 12.6 per cent.
BENIN PREFERRED TO FOLLOW THE PATH OF NEGOTIATIONS
6.
The Doha Development Agenda was launched in Doha, Qatar, in November 2001. Its main
objective is to promote trade in the developing countries. In order to achieve that objective, Members
recognized the importance of reforming trade in agriculture by reducing tariffs on agricultural
products, reducing trade-distorting subsidies and eliminating export subsidies.
7.
Benin is a least developed country (LDC) situated in Western Africa. Together with
Burkina Faso, Chad and Mali (known collectively as the C-4 or Cotton-4), it constitutes one of the
leading cotton producers of sub-Saharan Africa. While Brazil certainly has an export interest in
cotton, for Benin and the other countries of the C-4, cotton exports are vital and form an important
component of their development plans and their poverty reduction strategies. During the period
2001-2003, cotton, in Benin, accounted for US$126 million in exports, i.e. 27.7 per cent of its goods
exports and some 4.5 per cent of its GDP.
8.
Reacting to the complaint brought by Brazil at the WTO, Benin, together with the other
C-4 countries, decided to launch the so-called "cotton initiative" in spring 2003. The initiative was
originally submitted simultaneously to the WTO General Council and the negotiations on agriculture.
The C-4 proposal described the damage to their cotton exports caused by the developed countries'
subsidies, estimating total annual loss of income at US$250 million. It called for a total elimination of
production support and export subsidies for cotton within a period of three years, and for the
establishment of a mechanism to compensate for the losses suffered by the C-4 while the subsidies
were still in place.
9.
The cotton initiative was the result of a deliberate decision by the C-4 to pursue a negotiating
strategy alongside Brazil's litigation strategy. They took this decision because they thought that to
participate as co-complainants in the dispute brought by Brazil against the United States would call
for considerable financial and human resources that would impose a very heavy burden on their
already stretched capacity. Besides, the C-4 countries thought that in any case, a WTO dispute would
take three to five years to reach the stage of requiring compliance with the recommendations of the
DSB, and that even if they were to win the dispute, given the size of their economies it would be very
difficult for them to take effective retaliation measures against the United States. Consequently, only
two of the C-4 countries (Benin and Chad) participated – as third parties – in the dispute brought by
Brazil. However, they all decided to open up parallel negotiations in the framework of the Doha
negotiations to tackle the cotton issue. This negotiating strategy would enable the C-4 countries to
achieve a broader and more lasting solution to the problem of the subsidies that were distorting the
cotton market, as opposed to a more limited solution through litigation, which would only have settled
the problem as regards the United States.
-310.
In order to prepare the ground for the negotiations and to explain the problems facing the
African cotton growers, the C-4 turned for help to two NGOs, Oxfam and IDEAS Centre, which
launched a media campaign in Europe and the United States so that the citizens of those countries
would put pressure on their governments to accept the initiative. The President of Burkina Faso then
made a speech before the General Council in July 2003, earning the sympathy of many developed and
developing countries, and ensured that the cotton initiative was included in the agenda for the
Cancun Ministerial Conference. Unfortunately, and partly because of the problems involved in
agreeing on the cotton issue, the Cancun Ministerial Conference was a failure and no ministerial
declaration was adopted. The initiative was left pending.
11.
On 1 August 2004, the negotiations got back on track and the so-called "July Package" was
adopted. In that decision, Members recognized the importance of cotton for the development of a
number of developing countries and LDCs, and provided a mandate to take urgent action to correct
the distortions in that market. The cotton initiative as adopted in the July Package comprises two
parallel aspects: development and trade. Under the development aspect, the Director-General is
entrusted with the task of consulting the relevant international organizations to direct existing aid
programmes towards the diversification of the economies in which cotton is an important part of
GDP. Under the trade aspect, Members undertake to address the cotton issue ambitiously,
expeditiously, and specifically, within the agriculture negotiations.
12.
In order to obtain a mandate for the cotton initiative in the July Package, the C-4 countries
had to make two concessions: firstly, there is no reference to compensation, as this was replaced by
the development aspect of the initiative; and secondly, the initiative is not a "stand-alone issue", it is
part of the agriculture negotiations and as such forms part of the single undertaking of the
Doha Round.
D.
THE REPORTS OF THE PANEL AND THE APPELLATE BODY
13.
The Report of the Panel was circulated to Members on 8 September 2004. In short, the Panel
found that:

Two of the direct payments to US cotton producers were not "green box" subsidies
because the payments under those programmes were linked to production and were
not "decoupled support"; consequently they were not covered by Article 13 of the
Agreement on Agriculture and were actionable.

The domestic support programmes were not covered by Article 13 of the Agreement
on Agriculture (the "peace clause"), since during the period from 1999 to 2002 they
exceeded the 1992 levels.

Export financing and user marketing programmes (Step 2) were prohibited export
subsidies. Moreover, user marketing payments (Step 2) were also import substitution
subsidies, and hence prohibited.

Cotton support programmes that were contingent on prices – payments under the
marketing loan programme, user marketing payments (Step 2), market loss assistance
payments and counter-cyclical payments – caused significant price suppression
within the meaning of Article 6.3(c) of the SCM Agreement.

Brazil did not establish the existence of serious prejudice under Article 6.3(d) of the
SCM Agreement, since it based its arguments on an erroneous interpretation of the
term "world market share".
-414.
Both the United States and Brazil appealed certain findings of the Panel. In its report of
3 March 2005, the Appellate Body upheld all of the appealed findings of the Panel, although in some
cases its reasoning was different.
E.
(NON-) COMPLIANCE WITH THE RECOMMENDATIONS OF THE DSB
15.
The DSB gave the United States until 1 July 2005 to implement its recommendations on
prohibited subsidies, and until 21 September 2005 for the actionable subsidies. Once these periods
had elapsed, Brazil considered that the United States had failed to comply with the recommendations
and asked the DSB for retaliatory measures that could amount to a total of US$4 billion. In its
request, Brazil pointed out that it was neither practicable nor effective for it to suspend concessions
and other obligations on imports of US goods. Consequently, it announced its intention to take
cross-retaliation measures, suspending its obligations in the TRIPS and Services areas. The
United States challenged Brazil's request, and the DSB established two arbitration procedures under
Article 22.6 of the Dispute Settlement Understanding (DSU). On 21 November 2005, both parties
requested the suspension of the procedures. This suspension had been agreed upon with the
United States in order to allow time for the establishment of a compliance panel under Article 21.5 of
the DSU.
16.
The Article 21.5 Panel was established in September 2006, and circulated its report in
December 2007. The Panel's report was appealed, and finally, the Appellate Body circulated its
report on 2 June 2008. It upheld the findings of the Panel to the effect that the United States had not
complied with the DSB's recommendations, since the payments under the marketing loan programme
and the counter-cyclical payments continued to cause serious prejudice to Brazil in the form of
significant price suppression. It further upheld the finding that the United States had also failed to
comply with the DSB's recommendations on prohibited subsidies, since the GSM102 export financing
programme was contrary to the provisions of the Agreement on Agriculture and the SCM Agreement.
17.
Now that the compliance procedure under Article 21.5 of the DSU has been completed, Brazil
has reactivated the retaliation procedure by asking that the arbitration procedures under Article 22.6 of
the DSU be resumed. Nevertheless, Brazil has also stated that if an agreement on cotton were reached
in the framework of the negotiations, retaliatory measures would no longer be necessary.
F.
AND WHAT HAS BENIN ACHIEVED IN THE NEGOTIATIONS?
18.
At the Hong Kong Ministerial Conference, the C-4 countries obtained a specific mandate
which provides that:

The developed countries will eliminate all export subsidies on cotton in 2006.

On market access, the developed countries will give duty- and quota-free access for
cotton exports from the LDCs from the commencement of the implementation period.

Reduction in the support for cotton will be more ambitious and implemented more
rapidly than for other products.
19.
The mini-ministerial meeting held in July of this year to establish modalities in agriculture
and NAMA was a failure. In his statement before the Trade Negotiations Committee, the Chairman
and WTO Director-General, Pascal Lamy, explained that out of a "to-do list" of 20 topics, 18 had seen
positions converge, but gaps could not narrow on the 19th, the special safeguard mechanism for
developing countries, and hence, topic No. 20, cotton, had not been discussed.
20.
In spite of the collapse of the mini-ministerial meeting and the inevitable delay in the
negotiations, all Members are aware that there can be no positive outcome to the Doha Round if the
cotton issue raised by the C-4 countries is not resolved. The latest version of the draft modalities on
-5agriculture essentially reflects the proposals made by the C-4 in the three pillars of the agricultural
negotiations, as well as the mandate provided in Hong Kong. However, the reduction formulas and
other implementation details currently forming part of the draft clearly have not been agreed upon,
and could be modified.
21.
As regards the development aspects of the cotton initiative, the WTO set up a Consultative
Framework Mechanism which meets regularly to evaluate the progress made in the area of
development assistance for cotton. The Hong Kong Ministerial Conference took note of the efforts
made in three areas: first, the consultations with donors in order to improve the coherence and
coordination of the assistance provided to the cotton sector and to try to establish a mechanism to
address the income losses until the end of the subsidies; second, increasing the assistance specifically
targeting cotton, and promoting South-South cooperation, including technology transfer; and third,
stepping up domestic reform efforts by the African cotton producers with a view to increasing
productivity and efficiency. The Director-General regularly informs the General Council of the
progress made in these three areas. However, nothing concrete has been achieved thus far, and the
increase in development assistance for the cotton sector has been minimal.
G.
TO BE CONTINUED...
22.
Neither the litigation process chosen by Brazil, nor the negotiating process chosen by Benin
have achieved their goals. While it is true that both countries have scored important victories, they
have not yet achieved full satisfaction. Future developments are uncertain in both cases. The
United States appears to be moving at a snail's pace when it comes to complying the
recommendations of the DSB, and there is no certainty that the pressure that Brazil is able to exercise
with retaliatory measures – even in the TRIPS and services areas – will be sufficient to persuade the
United States to take the politically costly step of reforming its system of support for agriculture. On
the other hand, the negotiations are bogged down and there is no saying when or if they will reach a
positive conclusion, even if the Director-General has made it clear that "without cotton there is no
Round".
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