The Hindu Business Line : WTO cotton ruling may impact global market

A PRELIMINARY ruling of the World Trade Organisation (WTO) on US subsidies for cotton has started to create ripples in the international arena. The landmark decision has the potential to impact the global cotton market as well as producers and users of the natural fibre worldwide.

The decision yet to be released follows the complaint filed by Brazil, which among the world's top five cotton producing countries, that huge subsidies granted by the US resulted in massive increases in cotton output, lowered world prices and thereby adversely affected producers in developing countries.

The US is the world's largest cotton exporter accounting for close to 40 per cent of global trade of around 6-7 million tonnes (mt), and is the world's second largest producer after China, accounting for a fifth of global production of about 20 mt.

From 3.03 mt in 1998-99, cotton output in the country increased to a record 4.42 mt by 2001-02. During the same period, US cotton exports increased from less than one mt to a new high of 3.0 mt.

While world average yield of cotton is 600 kg per hectare, the US harvests 700-800 kg/ha and a considerable part of the acreage in the country is planted to genetically-modified cotton. The US cotton sector comprises only 25,000 farmers, mostly in the Mississippi Delta, western Texas and California. Despite the small size, producers have been paid billions of dollars in the form subsidies.

According to one estimate, in a peak production year like 2001-02, subsidy amounted to as much as $ 3.7 billion. As a sizeable part of the US cotton production is for servicing export markets, in addition to direct farm subsidies, the US Government operates export credit and credit guarantee schemes in order to promote exports.

These schemes are also said to be market distorting. Aggressive marketing strategies adopted by the country have placed it in a dominant position in the world market.

Objection to subsidized production and export of cotton by developed countries has been building up in recent years. During 2001 and 2002, and much of last year, world cotton prices had plummeted to low levels not seen in the previous three decades. Poor African countries were the worst hit. It was only in the latter half of 2003 that the prices stated to improve because of emergence of demand from China. .

Given the importance of cotton to American agriculture, the WTO ruling could potentially hurt cotton production as also exports from the US. At the same time, a firmer world market that will result from lower US production and export will help poor nations, especially those in Africa, realize more remunerative prices for the produce.

However, not many are willing to bet on a major change in the situation. The US will most likely appeal against the decision and the case can drag for several months, if not years, according to a senior functionary overseeing the global cotton sector.

Farm subsidy and technology are two drivers of agricultural growth in developed economies. The US and the European Union both are extremely reluctant to pare down their support programs. Interestingly and ironically, the case against the US brought by Brazil is to a large extent based on the work of a distinguished American agricultural economist, Daniel Sumner, a professor at the University of California at Davis and an undersecretary in the Department of Agriculture in the first Bush administration.

Prof Sumner's findings suggest that US farm subsidies not only boosted US cotton exports but also depressed the price of cotton around the world. In its appeal, the US is expected to challenge the methodology and findings of the study, experts said.

What is significant for the developing nations is that a beginning has been made to drag the farm subsidy issue to the WTO for dispute settlement. This landmark case can trigger many more of such complaints. Whether all these will have any meaningful impact on developed countries that are known to grant heavy subsidies that admittedly distort global farm goods market and depress prices to the detriment of developing nation producers remains to be seen.