This is designed to be a brief report covering a wide range of trade policy issues.

Overview

The WTO Panel Report has not been translated as of the date of this paper. Once translation is complete, the United States will appeal the decision that apparently went against the U.S. cotton program. The appeal will take 90 days from its initiation. Should the U.S. lose all or parts of the appeal, it will have a reasonable time to comply with the ruling.

The Doha Round of Trade Negotiations is attempting to revise the Uruguay Round Agricultural Agreement to provide for the elimination of export subsidies, reductions in trade-distorting domestic agricultural support, and improved market access for agricultural exports. Negotiators reached agreement on a "framework" text designed to guide the remainder of the negotiations. That text is vague, but has been widely supported by U.S. agricultural interests. The framework appears to enhance the ability of the U.S. to comply with a new agreement without undue detrimental changes in U.S. farm programs. However, the framework text contains four separate references to cotton that could be interpreted as placing a higher burden on cotton in this negotiation.

The Administration continues to negotiate a myriad of free trade agreements. The following table provides a quick status update on those agreements.

With significant export purchases and expanded tariff rate quotas, China's implementation of the cotton fiber TRQ has not been on the policy front-burner in recent months. However, there are concerns across agriculture with new phytosanitary rules issued by China. Within the cotton sector, falling international prices have led to increased concerns regarding defaults on existing contracts. China's 2004 cotton crop is expected to exceed 30 million bales.

Worldwide textile quotas are due to expire on January 1, 2005. An increasing number of textile exporting countries have begun to realize they stand to lose worldwide market share for their textile production to China once quotas are lifted. The National Council of Textile Organizations has been heavily involved in a coalition that has significantly raised the awareness of international organizations to the structural changes likely to occur after textile quotas are removed.

The U.S. - Brazil WTO Dispute

In November 2002, the Brazilian government requested consultations with the United States concerning virtually all aspects of the United States cotton program. In February 2003, Brazil requested the establishment of a Panel to hear the dispute.[1] The three-member Panel was formed (consisting of representatives from Poland, Chile and Australia) and held three meetings. Final papers were transmitted in February 2004. The U.S. submissions alone are almost 1,000 pages, not counting numerous attached documents.

The Panel reached its decision in June, but that report remains confidential until the translation is complete. Once the report is made public, the U.S. has 60 days to appeal the decision. The appeal process itself will take no more than 90 days, with a final decision expected late this year or early in 2005.

As the report is not yet public, this discussion will rely on the submissions of the parties (which are public) and press reports concerning the Panel’s decision.

The Basis for the Brazil Complaint

Brazil alleges that U.S. programs that subsidize cotton production are actionable under the Agreement on Subsidies and Countervailing Measures[2] (the “SCM” agreement). Brazil further alleges that exemptions for the U.S. cotton program contained in the “peace clause” of the Agricultural Agreement do not apply. Specific allegations are:

1. The U.S. step 2 program and export credit guarantee programs for cotton are “prohibited” subsidies under Article 3.2 of the SCM Agreement; and
   
   
2. Other U.S. agricultural subsidy programs applicable to cotton cause “serious prejudice” to the interests of Brazil, in violation of Article 5 © of the SCM Agreement.

There are two applicable World Trade Organization Agreements.

In the Uruguay Round Agricultural Agreement, (the “URAA”), WTO members agreed to discipline agricultural subsidies[3]. The Agricultural Agreement contains disciplines on domestic support, export subsidies and market access.

The Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”) provides that domestic support programs, like the marketing loan program, are deemed to be actionable and can be challenged in the SCM Agreement if they cause “serious prejudice” to the interests of another member.

Export subsidies are deemed to be prohibited, and there is no need for the complaining party to establish any injury.

However, Article 13 of the URAA, referred to as the “Peace Clause,” exempts the following agricultural programs from action under the SCM Agreement:

• “Green box” programs (such payments de-coupled from price and production);
  
  
• Export subsidies that conform to the URAA and are only provided in accordance with a country’s schedule of commitments; and
  
  
• Other agricultural subsidies (blue and amber box), provided they conform to the URAA commitments and the level of support for a specific commodity does not exceed that decided for the 1992 marketing year.

These exemptions expired for all countries on January 1, 2004. Nevertheless, Brazil had to overcome a Peace Clause defense in this case, as the Peace Clause was in effect when Brazil brought the dispute.  

Arguments of the Parties

In order to win on its allegations concerning “actionable” subsidies, Brazil had to address the following questions:

• Is the program a subsidy?

If so, then...

• Is the program protected by the Peace Clause?

If a Peace Clause defense fails...

• Does the subsidy program cause serious prejudice to Brazil?

In attempting to prove serious prejudice, Brazil argued that the U.S. program—

• had caused “significant price ... suppression in the same market”; and
• had the effect of increasing the world market share of the U.S. for upland cotton.

The outcome with respect to the Peace Clause depends on what approach is taken by the dispute settlement panel in determining levels of support. Overall statutory support levels for cotton, expressed in terms of price or income support, are lower than that in place for the 1992 crop. Both loan rates and target prices are below 1992 levels. Brazil has argued that expenditure levels for the cotton program in recent years exceed expenditures applicable to the 1992 crop of cotton. The definition of green box programs is important in the context of a Peace Clause defense.[4]

Brazil made two primary arguments to uphold its assertion that U.S. green box programs (PFC payments and direct payments) were not properly classified as green box. Brazil argued that base and yield updating violated the URAA requirement that payments be based on a fixed area and yield. Brazil also argued that restrictions on planting fruits and vegetables on farms that receive PFC or direct payments was inconsistent with URAA provisions stating that the payments must not be “related” in any manner to production.

Brazil alleged that the Step 2 program is a prohibited subsidy, that it is not protected by the URAA, and that it is a per se violation of Article 3 of the SCM Agreement. Brazil also alleged that the export credit guarantee program was a prohibited subsidy with respect to all covered commodities.

In order to win on its allegations concerning “prohibited” subsidies, Brazil had to address the following questions:

• Is the program an export subsidy or a domestic preference subsidy?

If so, then...

• Is it operated in conformity with the URAA?

If the subsidy is not operated in conformity with the URAA, then the inquiry ends. Brazil did not have to prove injury.

The Council contends that Step 2 is included in the U.S. schedule as part of U.S. domestic programs, and, as such, is properly defined as a domestic support measure.

The export credit guarantee program was not listed in any schedule in the URAA because the United States believed it was exempt in accordance with Article 10:2 of the URAA – which basically obligated the countries to work toward an agreement governing export credits. That agreement has not been reached.  

If the press reports are accurate, the Panel ruled against the United States on almost all of the substantive issues:

• U.S. violated the “Peace Clause”;
  
  
• direct payments to not qualify as green box;
  
  
• step 2 and GSM programs are prohibited subsidies; and
  
  
• the U.S. cotton program has caused serious prejudice to Brazil’s industry.

There is very little precedent available that helps define what is meant by “serious prejudice.” The U.S. brought forward strong economic arguments showing that the U.S. cotton program has not injured Brazil’s interests. Brazil, of course, argued the opposite.

Brazil argued that the nature of U.S. cotton payments, whether decoupled from planting or specifically linked to production, is irrelevant. Brazil claimed that the PFC payments and the marketing loss assistance payments under the FAIR Act and the direct and counter-cyclical payments in the new farm law still cause growers to produce additional acres of cotton, and therefore, Brazil alleges, the payments really aren’t “decoupled.” Brazil argued that marketing loan gains cause low prices rather than low prices causing increased marketing loan gains. Brazil also claimed that the U.S. holds a disproportionate share of the world market in cotton fiber and that our subsidies must remain high because the U.S. is a high-cost cotton producer.

The Brazilians retained the services of a U.S. law firm (Sidley & Austin) and hired Professor Dan Sumner to handle economic analysis. Dr. Sumner is on the faculty at University of California-Davis and is a former Assistant Secretary of Economics at USDA (1990-93). Dr. Sumner was made an official delegate to the Brazilian team and routinely addressed the panel during its sessions, attacking U.S. economic positions. Needless to say, the U.S. is extremely upset that someone with his past experience, inside information and access to confidential U.S. government information would be actively trying to dismantle US farm programs. Dr. Sumner and Brazil also managed, through contacts at Iowa State University, to use the FAPRI analytical model in their arguments, but made significant changes to the FAPRI system to produce results that would support their allegations concerning impacts of decoupled payments.

Reports were cited to the Panel showing world price impacts from the U.S. cotton program that ranged from 2% to 26%. The high numbers were from Dr. Sumner and from an ICAC analysis and studies based off of the ICAC analysis.  

Brazil quoted NCC testimony whenever possible; it used NCC estimates of the value to the industry of the export credit guarantee program; it made inappropriate comparisons using cost-of-production figures from USDA; and clearly had an impact on the Panel through submissions that compared the value of the U.S. cotton crop in 2001 and 2002 with total expenditures under the cotton program.

Cotton’s Rebuttal

One of Brazil’s main arguments has been used over and over again. It is reflected in the following chart:
 

The chart shows rising , while also showing the dramatic price decline that occurred from 1998 to 1999 and from 2000 to 2001.

Council Economist Gary Adams has raised several problems with this argument. He noted that 1998 and 2001 are misleading years for comparison, representing an extremely small crop and a record large crop, respectively. He has commented that production is not the primary economic decision, but rather the Panel should focus on acreage. The chart ignores the impact of alternative crop prices, which were weak in 2000; it ignores that U.S. acreage response was similar to acreage response around the world; and it fails to explain the real reason behind increasing U.S. exports of cotton fiber.

By showing an increase in exports, Brazil was attempting to prove that the U.S. had increased its world market share of cotton - but it has not. The world market share of cotton production attributable to the United States for the last 33 years has been relatively stable at roughly 20%. In fact, U.S. world market share was down in 2002 - contrary to what Brazil seems to have argued.

What about price suppression? World market prices for cotton have been on the decline since 1995 when U.S. prices exceeded 90 cents a pound. Yet, throughout this period, the price of U.S. cotton on world markets has consistently exceeded the A index and consistently exceeded Brazil’s prices.

Several Texas Tech agricultural economists recently completed a study detailing the impacts of U.S. cotton programs on the world market. The Texas Tech study estimated price impacts ranging from less than ½ of a percent to just over 2 percent. That’s about a quarter of a cent to 1.2 cents per pound.  Similar impacts have been found by two separate studies conducted by FAO and IMF. It does not seem possible that these insignificant price impacts could be said to cause any country serious prejudice.

In fact, Brazil is expected to increase cotton production in 2004 by 70% over its 2001 production. China, the largest cotton producer in the world, is expected to increase its cotton production in 2004 by 23% over 2001. Combined, Brazil and China are estimated to have increased cotton production in 2004 by 8.1 million bales over their 2001 production - an increase that is twice the size of the 4 million bale annual cotton crop in West Africa. And while excellent weather across the cotton belt has caused U.S. crop estimates to swell, we still anticipate producing less than in 2001.

Cotton imports by China show a far greater correlation to world cotton prices than any aspect of the U.S. cotton program.

Despite these economic arguments which seem compelling, it has been difficult for the U.S. to deal with the negative perception generated by decreasing world prices and increased program expenditures. Although the actual numbers are high, virtually every reporter working on this story has found a way to exaggerate them.

The Council assisted in the development of arguments and critiques, with particular attention to the economic analysis prepared by Dr. Sumner. We worked closely with staff of the office of the US Trade Representative, as well as with USDA staff and have been pleased with the level of cooperation. USTR and USDA have worked to develop aggressive arguments throughout this process.  The papers submitted by USTR to the WTO panel can be seen on the USTR website (www.ustr.gov). These papers include statements regarding the U.S. view of the case, the operation of U.S. policy and rebuttals to claims made by the Brazilians and their hired economists.

The United States presented sound economic and legal arguments aimed at all aspects of Brazil’s claims. The U.S. arguments were consistent with long-standing U.S. interpretations of the WTO agreement, including the position that the export credit guarantee program was exempt under article 10:2 of the URAA and that the step 2 program was correctly classified as a domestic agricultural program.

Should the apparent panel decision withstand the appeal process, this decision will have ramifications outside of U.S. cotton policy. The export credit guarantee allegations extend to all commodities eligible for that program - although some commodities have export subsidy schedules. U.S. trade negotiators may have to deal with the fact that the URAA was not interpreted as anticipated by the United States. They may have a more difficult time convincing U.S. agriculture about the meaning of any ambiguous language in new trade agreements.

The cotton industry has received strong statements of support by many members of Congress and the Administration. As Chairman Anderson and Ambassador Zoellick have stated, the dispute is in the first stages of a marathon - a race that involves both this dispute settlement action and the ongoing Doha negotiations. The Council will do its part, working with Congress and the Administration, to maintain an effective U.S. cotton program that complies with WTO rules.

Enforcement

Should any part of the panel’s ruling not be overturned on appeal, the question will become what must the U.S. do in response to this decision. First, the WTO has no true enforcement power. Each member is expected to essentially function as its own policeman and is expected to make the appropriate changes in policy.

Structurally, once the appellate report is adopted, the losing party will notify its intentions concerning implementation. Countries have a reasonable time in which to change their policies. If the U.S. does not change its program, and the parties cannot agree to compensation, Brazil would seek authorization from the WTO to impose trade sanctions against U.S. products. It is likely that any decision would target the prohibited subsidies for the quickest modifications.

Lessons

Seemingly innocuous statements by the Council and its membership have been used against the U.S. in this fight. It is as if the National Cotton Council suddenly became the spokesperson for the U.S. government as far as Brazil is concerned.

Second, the cotton industry must continually come to grips with the economic situation confronting the industry - both domestically and worldwide.

Third, the structure of U.S. programs legally could have made a big difference. Starting with the 1996 Act, a significant decoupled component was added to U.S. farm policy. Yet, all decoupled payments are still shown in the U.S. budget by commodity. The U.S. tracks how much direct payments are attributable to cotton history, rice history, wheat history and so on. This simple tracking undermines arguments that the program is truly decoupled.

It is clear that the rest of the world will not meekly follow U.S. and EU interpretations of WTO agreements. It is critical that negotiating text be carefully parsed and well-understood.

WTO Framework Agreement

In late July the Doha Round of WTO negotiations was resuscitated as participating countries reached agreement on a Framework document designed to provide the parameters that will govern the remainder of the negotiations. U.S. negotiators are pleased with the document and believe it can lead to a successful completion of the Doha negotiations.

The current negotiations are essentially picking up where the Uruguay Round left off. The goal of the United States has been to achieve progress in each of the three “pillars” of the negotiation - export subsidies, market access and domestic agricultural support. The Framework document does not contain a lot of specific commitments, but does provide a basis for the negotiations to continue. Despite the absence of numbers, the Framework does signal that several significant decisions have been made.

The Framework calls for the elimination of export subsidies; it calls for reductions in domestic support; and it contains several references to cotton intended to single cotton out for special treatment. Significantly, the Framework also calls for a redefinition of the blue box category of agricultural support, reflecting a U.S. effort to ensure the counter-cyclical program fits in that category.

Domestic Support

The Uruguay Round established three central categories of agricultural support:

• A green box category, which represents decoupled, non-trade-distorting support;
  
  
• A blue box category, which was not limited in the Uruguay round and was to contain programs such as the old acreage limitation programs; and
  
  
• An amber box category which represents programs that are linked to production and are subject to disciplines.
  
  
• There is also a de minimis category which is essentially a threshold. If support does not reach the threshold amount, it is not counted. If it exceeds the threshold amount, all of that support is counted toward the amber box commitments. De minimis may be product-specific or non-product-specific.

Since the negotiation of those categories, the EU reworked some of its programs to take advantage of the blue box and the green box. The United States, meanwhile, went away from blue box programs and is using green, amber and the de minimis category.

The Framework would essentially move the U.S. counter cyclical program from the amber category to a revised blue box category. It also calls for a reduction in the cap on amber box spending and would place a ceiling on the blue box category for the first time. The Framework also establishes a new, kind of overall calculation referred to as Overall Trade Distorting Support. This larger number is slated for an immediate 20% reduction and some further reduction, which is to be negotiated.

The Framework calls for product specific caps within the overall amber box category - which is new - and states that rules applicable to the green box will be clarified. The U.S. wants to ensure that direct payments fall into the green box category. Under the current farm bill, the U.S. spends $5.3 billion on direct payments. There is no mention of caps on Green Box support in the Framework.

Significantly, the Framework anticipates that those countries that subsidize the most will make the largest cuts. Just as significantly, developing countries will receive special and differential treatment, blunting the impact of much of these proposed disciplines.

Without question this revised blue box is the centerpiece of the domestic part of the Framework.

Export Subsidies

Turning to export subsidies, the Framework anticipates that export subsidies in agriculture will be eliminated by a date certain. Likewise, the export subsidy component of export credit guarantees is to be phased out. The document also states that ultimately export credit guarantee terms may not be longer than 180 days. The document anticipates that the final agreement will impose disciplines on state trading enterprises as well.

Market Access

Market access provisions in the Framework are definitely a work in progress. There are several significant guideposts:

• Tariff reductions are to be made through a tiered formula, from bound rates. Higher tariffs will receive deeper cuts.
  
  
• Substantial overall tariff reductions will be achieved as a final result.
  
  
• Each member will make a contribution.
  
  
• LDCs are exempted.
  
  
• Developing countries will receive special and differential treatment. (longer periods; smaller cuts)
  
  
• There will be flexibility for “sensitive products” and developing countries will be able to designate a list of “special products” which will receive “more flexible” treatment.
  
  
• “Substantial improvements in market access will be achieved for all products.”

The following two standards are key to the market access component of this negotiation and their meaning is anything but clear.  

1. Substantial overall tariff reductions will be achieved as a final result; and
   
   
2. Substantial improvements in market access will be achieved for all products.

For example, reducing a bound tariff rate of 50% by 50% results in a 25% ad valorem tariff. If the country was already applying a 15% ad valorem tariff, it does not have to make any reduction in its applicable tariff level. It is a matter of interpretation whether the negotiation 1) resulted in a substantial overall tariff reduction; or 2) if that reduction in the bound tariff rate in any way can be said to be equivalent to an improvement in market access.

The Framework negotiations almost derailed because of disagreements over the treatment of sensitive products for developed countries. In the end, the document makes it clear there will be sensitive products for all members and special products just for developing countries, but does not provide much in the way of concrete guides.

Remember that cotton fiber imports into the United States are covered by a tariff rate quota. For the United States, cotton is currently defined as a “sensitive” product.

Finally, I will note that “recently acceded” members of the WTO have been seeking some sort of special treatment as well. Recently acceded here refers to China. The Framework again indicates that consideration will be given to the concerns of recently acceded members, but contains no specifics.

Cotton Specific Issues

The WTO General Council Framework contains 4 separate references to cotton and raises concerns that cotton may receive unequal and inappropriate treatment. These references are a direct result of proposals tabled by several African cotton-producing countries to eliminate all subsidies for cotton production. This effort has been enhanced by the efforts of several international non-profit organizations - primarily OXFAM International. Some of the language improved between the original draft and the final version, but the discrete references remain very troubling.

Cotton is singled out in paragraph 1.b. of the introductory General Council statement and in paragraphs 4, 5, and 46 of the agricultural annex. While cotton is singled out in the introductory statement, it does appear that cotton discussions will be moved out of the General Council and into the agricultural negotiations. However, the price for this move is concrete language committing to a sectoral initiative on cotton, with a special subcommittee to meet periodically.

The agricultural text states that cotton will be addressed “ambitiously, expeditiously, and specifically” within the agriculture negotiations. In contrast, the overall agricultural reform is to be carried out in a “balanced and equitable manner.” The Framework goes on to state that the provisions of the agricultural framework, as well as the sectoral initiative, “provide a basis for this approach.” Work in the special subcommittee is to encompass all three pillars.

The cotton-specific text of the Framework Agreement leaves no doubt that cotton will receive special attention within the overall agricultural negotiations. However, the text does not commit the U.S. to any specific action with respect to the current cotton program, nor does it require that the cotton program be subjected to cuts that are disproportionate to those for other commodities. Absence of a requirement for disproportionate cuts in the U.S. cotton program notwithstanding, there will be expectations and intense pressure for such cuts.

There is no doubt there will be a special subcommittee that will be meeting to discuss cotton specific issues. The industry must consider how to ensure that all relevant issues are considered and properly weighed in those meetings.

Discussions with African Countries

The Council has worked directly with several African countries (primarily Burkina Faso, Mali, Chad and Benin) through the Department of Agriculture and the Agency for International Development. The Council has participated in informational exchanges and educational programs focusing on technological enhancements that could be available for cotton producers in these countries. As this process continues, a controversy may develop with respect to the provisions of the so-called Bumpers Amendment which limits support the U.S. government can provide to countries that are growing “surplus” commodities.

The Council has discussed this issue with the Administration and has indicated it is willing to work with USDA concerning this issue. However, the initial flexibility being demonstrated by the Council may be short-lived should there be no signs of flexibility by these countries in the WTO process.

Closing Thoughts on Doha Negotiations

The final issue I would like to discuss goes back to an earlier point about the relationship between the Uruguay Round Agricultural Agreement and the Subsidies Code. The Peace Clause expired in January 2004, therefore, any country may bring a Subsidies Code case against any aspect of U.S. agricultural subsidy programs. This will be the arrangement until a new agreement is reached that impacts the ability to bring a Subsidies Code case against agricultural programs.

While several overall aspects of the Framework document appear to be positive for the bulk of U.S. agriculture that participates in subsidy programs, the new agreement will not achieve protection for those programs unless some sort of hurdle is constructed. That hurdle should provide that programs that comply with the Agricultural Agreement are presumed not to cause serious prejudice under the Subsidies Code. Such a provision should not be time limited and it should not be tied to current levels of support. As the Brazil case clearly demonstrates, as support programs change over time, it becomes very difficult to compare accurately current levels of support with past levels of support. The current Framework will apparently go farther than the URAA in establishing ceilings and commodity specific restraints on agricultural subsidization. In such an environment, a provision establishing a presumption in favor of programs that are in compliance with the agricultural agreement would seem to be appropriate.

Istanbul Declaration/Global Alliance for Fair Textile Trade

An initiative that began with a March 2004 Istanbul meeting of officials from ATMI, AMTAC and the Istanbul Textile and Apparel Exporters Association (ITKIB) has, in the ensuing months, resulted in the formation of the Global Alliance for Fair Textile Trade (GAFTT). GAFTT, now comprised of some 98 organizations from 51 countries, is calling for a special meeting of the WTO to consider the impact of textile quota phase-out scheduled for January 1, 2005. NCC is among the 98 participating organizations.

The 98 organizations have supported action by their respective governments to push for such a special WTO meeting. A formal request for the meeting was filed by Mauritius, and the request has subsequently been supported by a number of other countries, including Bangladesh, Dominican Republic, Lesotho, Mexico, Nepal, Sri Lanka and Turkey. Several countries have objected to the meeting, including China, India, Pakistan, Brazil, Indonesia and Hong Kong.

While Director General Supachi, citing absence of consensus, denied the request for a special WTO meeting, he noted that the scheduled quota phase-out had become a major issue that needed to be addressed. He suggested the matter be put on the agenda of Council on Trade in Goods when it convenes on October 1.

GAFTT will likely schedule a summit in Geneva, immediately preceding the meeting of the Council on Trade in goods.

Status of Regional/Bilateral Trade Agreements

Chile & Singapore Agreements

President Bush signed the Chile and Singapore agreements last September to became effective January 1, 2004. NCC and the national textile organizations opposed these agreements because they included TPLs with little or no compensating benefits for the U.S. fiber and textile industries. The Singapore agreement includes provisions for 25 million SMEs of 3^rd country fabrics and yarns and the Chile agreement, 2 million SMEs.

AGOA III

Congress hurriedly completed action to extend AGOA legislation from its planned 2008 expiration date to 2015, and President Bush signed implementing legislation on July 13, 2004. Other key provisions:

• Extend authority for the use of 3^rd country fabrics from September 2004 to September 2007,
  
  
• Amends rule-of-origin provisions to allow non-AGOA-produced collars and cuffs for apparel import categories,
  
  
• Expands “folklore” AGOA provision to allow ethnic fabrics that are made on machines to qualify for AGOA duty-free treatment,
  
  
• Includes provisions for the development of sustainable infrastructure, and
  
  
• Provision of technical assistance, including assignment of 20 people to sub-Saharan Africa to assist and advise them on sanitary and phyto-sanitary standards to meet requirements for the U.S. market.

While AGOA III extends liberal TPL provisions, it was not overtly opposed by NCC or the major textile organizations.

Australia Agreement

President Bush signed the Australia agreement on August 3. It was enacted by Congress (80-16-4 Senate; 314-109-1 House). While several U.S. agricultural organizations had misgivings about the Australia FTA, it was not opposed by NCTO and other national textile organizations or the NCC. News media on 8/13/04 reported that Australia made certain amendments in the agreement to protect subsidized medicine within Australia. Making these changes after Congressional approval in the U.S. raises a question as to whether the agreement, as amended, will be seen as appreciably altering the agreement approved by the U.S. Congress, making it subject to further review and approval.

Bahrain

Negotiations have ended and the President has announced plans to sign a free trade agreement with Bahrain. The agreement awaits Congressional action.

This agreement is supported by most sectors of the U.S. agricultural community but is opposed by NCC and the major textile organizations because of its provisions for 3^rd country participation. For a period of 10 years, Bahrain can export up to 65 million SMEs of textile products to the U.S. sourced from anywhere.

Morocco

The US/Morocco agreement was signed by President Bush in June and was enacted by Congress (85-13-2 Senate; 323-99 House). The agreement provides for a temporary transitional TPL for the first 10 years allowing non-originating yarns or fabric to be traded at the preferential tariff rate. The TPL is set at 30 million SMEs for the first four years of the Agreement, and then declines by 14 percent per year over the remaining six years it is in effect. Yarns and fibers present in less than 7 percent by weight of a textile article are disregarded as de minimis, except in the case of elastomeric yarn. The Agreement also contains a provision which permits the use of Sub-Saharan African cotton in the production of certain yarns and fabrics, without disqualifying those goods from preferential treatment, up to an annual level of 1 million kilograms.

The Agreement includes a special textile safeguard mechanism that permits a Party to re-instate duties for a limited period of time if imports from the other Party cause serious damage, or actual threat thereof, to domestic production. The special textile safeguard mechanism is available until ten years after tariffs have been eliminated.

This agreement was supported by most of the U.S. agricultural community but was opposed by the U.S. textile industry. NCC has also communicated its concern about the large TPL to members of Congress.

Southern African Custom Union (SACU)

The United States and the five member countries of the Southern African Customs Union (SACU) -- Botswana, Lesotho, Namibia, South Africa and Swaziland- launched negotiations toward a free trade agreement on June 2, 2003. It will be the first U.S. FTA in sub-Saharan Africa and the first time the SACU nations have jointly negotiated such an agreement.

The 6^th round took place during the week of June 21, 2004. Despite almost a year of negotiations, progress has been slow on almost all negotiating areas, including agricultural market access. One of the major differences between the U.S. and SACU positions is that SACU wants many products excluded from tariff liberalization or only partially liberalized, while the U.S. wants a comprehensive free trade agreement. While most U.S. imports from SACU receive duty-free treatment because of AGOA and other preference programs, tariffs on U.S. exports to SACU are sometimes high, especially on meat, poultry, horticultural and processed food products.

Central American Free Trade Agreement & Dominican Republic Free Trade Agreement (CAFTA/DR)

Both the CAFTA and DR negotiations have been concluded and the Administration has indicated it has plans to ask for Congressional approval of a “docked” CAFTA/DR, probably sometime after the November elections.

NCC has a board resolution opposing the current CAFTA but expressing support for a “good CAFTA.” NCC opposition to the current CAFTA is prompted by the amount of 3^rd country participation it allows in the textile arena (200 million SMEs). The board resolution (with additional language for board minutes in italics) follows:

The National Cotton Council has consistently stated its strong belief that a good CAFTA agreement is essential to preserving a viable US cotton and textile industry. To this end, the Council has urged the Administration to negotiate a CAFTA with provisions that preserve benefits for signatory countries and deny unnecessary benefits to 3^rd countries.

The Council’s Board of Directors reaffirms its conviction that a good CAFTA is essential to the economic viability of the US cotton and textile industries and pledges its support for passage of an agreement that fosters benefits for signatory countries. Inasmuch as the CAFTA agreement in its current form does not meet this fundamental objective, the Council (a) opposes passage of the current CAFTA agreement and (b) urges Congress to defer consideration of CAFTA until such time as the textile provisions are thoroughly reviewed and significantly improved.

Language in Minutes

The Board agrees that the Council’s position with respect to CAFTA will be reviewed in light of any offers for change in CAFTA provisions or commitments to address the severe market disruption caused by China.

In the months following the 2004 Annual Meeting, NCC has been unsuccessful in generating textile industry support for compromises on CAFTA that could be proposed to the Administration and/or agreement on what commitments to address China issues would constitute an acceptable trade for industry agreement to withdraw its opposition to the current CAFTA.

Free Trade Area of the Americas (FTAA)

Progress on an FTAA has been slow. Vice Ministers met during the first week of February to develop the so called “common set” of obligations, but work was not completed and no resumption of the meeting has been scheduled. The U.S. and 13 other countries, including all our current and prospective bilateral FTA partners, made a unified proposal at the February meeting that would provide for basic commitments in all areas of the negotiation. Mercosur and Caricom continue to seek additional commitments on export credits and food aid and SPS, as well as a “neutralization mechanism” to offset the effects of domestic support.

In order to break this impasse, the co-chairs have been asked to make a proposal on next steps. Two sets of informal discussions were held in Buenos Aires in April, but there was no progress. The co-chairs met twice in May to try to hammer out a compromise, but so far no agreement has been reached.

At the November 2003 meeting of Trade Ministers from the 34 Western Hemisphere countries there was agreement (called a mandate) that market access negotiations would be concluded by September 30, 2004. The entire FTAA negotiations are scheduled to be completed by January 2005. Given the suspension of discussions on common elements, this deadline is in doubt. Most countries have indicated they plan to “recalibrate their market access offers to take into account the lowered level of ambition for the agreement.”

Andean Agreement

The 3^rd Round of negotiations were completed the Week of July 26 in Lima, Peru. The U.S. laid down offers similar to the CAFTA agreement. The U.S. offer on textiles included a yarn forward rule of origin together with a 5-year phase out of textile and apparel duties. The Andean countries – currently Colombia, Ecuador and Peru, with Bolivia expected to be included at a later date—had submitted no text by the conclusion of the 3^rd Round but indicated they would do so within 15 days.

NCC has had dialogue with textile/apparel leaders from Colombia, Peru and Ecuador who report that they favor a yarn forward rule of origin, with no provisions for TPLs. Whether there will be agreement among Andean textile/apparel leaders on cumulation with Mexico is uncertain. Textile/apparel leaders from Colombia and Ecuador expressed concern about their governments having doubled applied tariffs on raw cotton imports during the course of negotiations – a move they see as posturing by their respective countries to establish a higher tariff rate to be phased down under anticipated provisions of an agreement. The Andean leaders appear to be uniformly in favor of immediate zero for zero tariffs on raw cotton. Because they believe their Agriculture Ministers are stronger than their Commerce Ministers, and will be predisposed to protect Andean agriculture at the expense of commerce, they would like to see cotton provisions negotiated with textiles rather than agriculture. NCC has also had dialogue with the staff director of the association representing Colombian raw cotton interests, who is advocating immediate zero U.S. tariff on raw cotton while retaining Colombian raw cotton tariff, initially.

The next round of negotiations is scheduled for the week of September 13 in San Juan, Puerto Rico.

Panama

The 3^rd Round of negotiations with Panama was completed the week of July 12 in Panama City. Initial tariff offers have been made, but the major work on the agreement remains to be done.

Thailand

On February 12, 2004, the Administration submitted its formal notification to Congress concerning its intent to enter into FTA negotiations with Thailand. The International Trade Commission has held a public hearing on the probable economic effects of a U.S. – Thailand FTA and was expected to release a report of its findings by August 19. Of the seven agricultural groups presenting testimony, six were generally in favor. The American Sugar Alliance expressed reservations, emphasizing that sugar should not be included in any possible agreement. The first formal round of negotiations was held the week of July 28, 2004.

China Trade Issues

Trade in Cotton Fiber

With significant export purchases and expanded tariff rate quotas, China's implementation of the cotton fiber TRQ has not been on the policy front-burner in recent months. However, there are concerns across agriculture with new phytosanitary rules issued by China. Within the cotton sector, falling international prices have led to increased concerns regarding defaults on existing contracts. China's 2004 cotton crop is expected to exceed 30 million bales.

China Textile Safeguard - The case for a threat analysis

As the January 1, 2005 date for lifting worldwide textile quotas approaches, the U.S. textile industry has focused its attention on the textile specific safeguard provision in the U.S. - China WTO accession agreement. The specific provisions of that safeguard are as follows:

In the event that a WTO Member believed that imports of Chinese origin of textiles and apparel products covered by the ATC as of the date the WTO Agreement entered into force, were, due to market disruption, threatening to impede the orderly development of trade in these products, such Member could request consultations with China with a view to easing or avoiding such market disruption. The Member requesting consultations would provide China, at the time of the request, with a detailed factual statement of reasons and justifications for its request for consultations with current data which, in the view of the requesting Member, showed: (1) the existence or threat of market disruption; and (2) the role of products of Chinese origin in that disruption; [emphasis added]

The Committee for the Implementation of Textile Agreements (CITA) has issued guidelines to govern the China safeguard procedures. CITA has imposed safeguards on three categories of products and is currently considering a petition filed on behalf of sock manufacturers.

One concern of the U.S. industry is that under the current guidelines, the U.S. industry will have to wait several months after January 1 to gather import data. Even after the petition is filed, CITA is not likely to act in any less time than 90 days. It is likely that 6 months could go by before a safeguard petition is acted upon. At that point, the limits will only be in place for 6 more months before the U.S. industry must reapply.

The timing issue would not be as significant if the U.S. industry could file a safeguard petition based upon "threat" of market disruption. The underlying agreement certainly contemplates this standard:

• the investigation focuses on whether "apparel products covered by the ATC" were "due to market disruption, threatening to impede the orderly development of trade...." (emphasis supplied)

This language shows that the petitioning party need not prove that the orderly development of trade has been impeded, but must prove that market disruption is "threatening" to impede orderly development.

The language on threat could be stronger. In the general China-specific safeguard codified in section 421(b) of the Trade Act of 1974, the language on market disruption provides as follows:

If a product of the People's Republic of China is being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product....(Section 421(b))

The difference is fairly easy to see, but still confusing. Under the general 421(b) statute, imports must be increasing to the extent they cause or threaten to cause market disruption.[5] Under the textile safeguard, apparel products must be "due to market disruption" threatening to impede the orderly development of trade.

What is market disruption? Market disruption in the general 421(b) statute exists whenever imports are increasing "so as to be a ... threat of material injury to the domestic industry." In the absence of express direction in the statute, the International Trade Commission has found that “material injury” in Section 421 cases represents a lesser degree of injury than “serious injury” under Section 202 of the Trade Act. The ITC has also found that “threat of serious injury” means “material injury that is clearly imminent.”

There appears to be solid arguments to uphold a threat category of cases under the textile safeguard, using ITC precedents. But, the U.S. - China agreement goes further and clearly contemplates a threat action as it states the U.S. must present data to China that shows "the existence or threat of market disruption."  

The guidelines issued by CITA to implement the safeguard do not explicitly address the "threat" issue. They do, however, require a demonstration that imports of China textiles are increasing rapidly.

In presenting a case for a threat analysis, the request must complete the analysis for CITA, stating what type of data would be sufficient and what that data would have to prove. That proof should not stray too far away from the ITC statement that the petitioning party must prove "material injury that is clearly imminent."