Good Afternoon. *
With the WTO, nothing is ever the same. The organization and the process are still in infancy and every year or so they mature in ways that were not anticipated and that catch many of the Members off guard.
But no one who carefully read the Uruguay Round Agricultural Agreement should have been surprised when the developing world awoke to its potential for them to challenge the agricultural programs of the United States and the European Union. The situation we are facing today was created in the language of that original agreement. Yet, when the WTO members met in Doha in November 2001, they named this negotiating round the “Development Agenda” apparently not fully appreciating the extent to which they would further raise expectations in the developing world.
I believe that the political nature of the agriculture negotiations makes criticism of specific language and specific proposals seem peripheral to the center, primary goal of getting an agreement. It seems one is either for or against a WTO negotiation in general. The actual outcome of the endeavor is almost anti-climatic.
The U.S. cotton industry is facing the most intensive international scrutiny ever devoted to a single agricultural commodity in the context of the WTO. We cannot be tentative in looking at potential outcomes. Nor can we afford to be gentle in our evaluation of the language we see evolving in the new Round. I don’t plan to be tentative today.
* The U.S. and the EU continue to be the central feud without which the rest of the participants simply wouldn’t know how to react. That feud has kept the door open to Brazil and developing countries and they have stormed through. In Geneva today, Brazil and the G-20 group of developing countries are significantly more central to the negotiations than are Australia or Canada – a dramatic change from 1993.
* As the Round works toward the Hong Kong ministerial in December, the Members will be trying to put flesh on the skeleton agreement reached last July. The Framework Agreement called for the elimination of export subsidies (but it did not establish a deadline); significant increases in market access; and significant reductions in trade distorting agricultural support. These are the “three pillars” of the agricultural negotiations. Unfortunately, the negotiations sprouted a fourth leg last year when the cotton subcommittee was established.
* The stated position of the United States and of U.S. agricultural interests in general is that this Round must conclude with significant gains in market access. Only market access gains can justify the U.S. agreeing to significant reductions in trade distorting agricultural support.
* The Framework agreement contained many of the right words regarding market access. For example, it called for higher tariffs to be reduced more than lower tariffs, and it called for significant increases in market access for all products. But it also contained exemptions for yet-to-be-designated Special Products and a new category of Sensitive Products. Developing countries are also insisting on a special agricultural safeguard mechanism available only to them. Importantly, the Framework contained no numbers indicating exactly how much tariffs would be reduced.
And ultimately, a truly positive result in market access is handicapped by the decision last year to make reductions from bound tariff rates rather than applied rates. In the U.S., our bound tariff rates are essentially equivalent to our applied tariffs. When we agree to reduce a tariff, there are immediate market access gains.
* However, the disparity in most of the developing world between bound and applied tariffs creates the situation where a celebrated 50% cut in tariffs does not result in any actual increase in market access, as it does not even approach a reduction in the actual applied tariff.
The G-20 group of countries tabled a market access proposal in July that has gained a fair amount of support. But while it contains some positive provisions, it also ingrains, I think permanently, the disparities between the treatment of developing country tariffs and developed country tariffs. In fact, that proposal ensures that the highest tariffs are not reduced the most. It also would ensure that the United States, one of the most open markets in the world, will not achieve reciprocity in market access.
Can such a likely outcome justify significant reductions in trade distorting agricultural support? To answer that question, we need to know whether those “significant reductions” are really significant, or are ephemeral - like the significant increases in market access.
* You recall that the Uruguay Round agreement breaks agricultural subsidies into three categories – amber (the most trade distorting and referred to as AMS); blue (programs that are exempt because they limit production); and green (programs that are exempt because they are deemed not to distort trade). The ceiling for the U.S. amber programs is $19.1 billion dollars, a level we have been able to live with. Until the cotton case, most of agriculture viewed the Uruguay Round Agreement as interesting, but not something that actually forced the U.S. to change its agricultural policy.
* The Framework Agreement, however, calls for significant reductions in the amber category, with the largest subsidizers to reduce the most, and it included a 20% down payment to get the ball rolling. It called for new product-specific caps and contained a redefinition of the blue category that would allow the U.S. counter cyclical program to qualify. It also introduced limits, for the first time, on the blue category of support. The G-20 do not like this new blue box and will work to whittle it back as much as possible over the next few months.
* There have been several recent press reports, albeit with questionable sources, that outlined a possible agreement. Those reports, coupled with the overall level of expectations among developing countries leads me to use the following possible outcomes as the basis for an assessment of Doha’s potential impact on the U.S. *
- Export subsidies are to be eliminated by a date certain. The effectiveness of U.S. export assistance programs will be dramatically affected.
- We will speculate that amber box, trade distorting subsides will be reduced by 50% for the U.S.
- We will also assume that the U.S. gets most of what it is seeking in the re-defined blue box and that decoupled payments continue to be exempt.
- I have to expect also that the demands of developing countries for special and differential treatment and the large discrepancy between bound and applied tariff rates seriously compromise any hope of actual, significant increases in market access for U.S. products around the world.
* If the amber category of support – the AMS or aggregated measurement of support – for the U.S. is cut by 50%, the allowed level for marketing loan gains in U.S. policy drops from about $11 billion per year to a little over $2 billion – another dramatic change.
In the previous Round we might have speculated that the EU would never agree to such a reduction. But times have changed. Even though the EU may be asked to take an even greater cut in its trade distorting agricultural support – say, 60% -- the changes it has made to its Common Agricultural Policy over the last several years enable the EU to meet such a target.
Looking at this possible new ceiling within the context of recent U.S. agricultural expenditures is disheartening. * While U.S. expenditures have been under our current AMS ceiling, we would have exceeded this new level in all but one of the past six years. So, this kind of a reduction is not like the corresponding reductions promised in bound tariff rates – this kind of a reduction will have real impacts.
* Because this would be such a significant reduction, the dairy and sugar programs would also face adjustments. Dairy and sugar, while not spending as much federal dollars, take up a high percentage of this amber category due to the degree to which consumers fund their programs through higher prices. Even with reductions in these other commodities, there would not be enough room to accommodate current loan rates.
* Using some fairly pessimistic price projections, it appears to Gary, Mark and I that a 7% cut in loan rates and in dairy and sugar AMS would probably fit into this new, lower amber box ceiling. A 7% cut in loan rates would take the cotton loan rate to about 48 cents per pound from the current level of 52 cents per pound. This single digit percentage reduction can, and probably would, have a very significant impact on marketing loan costs.
* All of that support would not necessarily be lost. If the US is able to redefine the blue box to its satisfaction, some of this lost support could be regained through counter-cyclical payments – but not all of it.
Likewise, decoupled direct payments could be increased. It seems, however, that in low price years, it would take a significant jump in direct payment rates to partially offset the reduction in actual support that arises from such a loan rate reduction. Other options include new approaches to environmental or conservation programs and maybe buyouts for some commodities.
* We should only consider these shifts, however, with the understanding that they could create new payment limit problems, have different budget impacts, and would affect some commodities differently than others. Under any scenario, the U.S. will have less effective export assistance, making it more difficult to export U.S. agricultural products and making it even more critical that a market access agreement truly increase access.
* I think it is imperative that U.S. agriculture unerringly evaluates the market access component of these negotiations. It would seem that such a potential reduction in U.S. programs could not be justified by a limited agreement on market access.
If the picture I just painted was not difficult enough, * cotton faces the potential of even more reductions due to the establishment of the cotton sub-committee within the Agricultural Negotiations and the [*] continuous call from the C-4 countries in Africa to end the U.S. cotton program. OxFam and others have continued to keep up the pressure.
[*] While the Council’s efforts in keeping the cotton subcommittee true to its mandate that it be a monitoring body – not a negotiating group – have so far been successful, it should be anticipated that the C-4 countries may threaten to torpedo the Hong Kong meeting if they do not achieve an early harvest in cotton.
* As the final international layer to what will be an eventful fall, the mid-September deadline for implementation of the serious prejudice component of the Brazil case will likely be the point at which Brazil truly evaluates its options. Brazil and the United States entered into a scheduling agreement that effectively delayed the July deadline until an unspecified later date in order to give the U.S. time to implement changes to the export subsidy component of the decision.
* The Administration’s proposal to eliminate Step 2 as soon as possible addresses, in the opinion of the U.S., both the export subsidy and the serious prejudice aspects of the Panel’s decision. If the U.S. is not moving forward with action on Step 2 by mid- to late September, I would not be surprised if Brazil moves to retaliate. That retaliation request would include the $300 million or so it already claims for Step 2 along with another $2 to 3 billion it would probably try to attribute to loan and counter-cyclical programs.
Note also that Brazil’s retaliation request included justification for something referred to as “cross-retaliation.” Brazil stated that increasing tariffs on U.S. imports would not work in this case. It has clearly signaled its intention to suspend its obligations regarding intellectual property as a central component of any retaliation. Whether that suspension is targeted at U.S. pharmaceuticals or biotech crops such as Bt cotton remains to be seen. And it remains to be seen whether the WTO will authorize this cross-retaliation. The threat, however, is credible and raises the stakes both within and without agriculture.
* I have already given you too much to digest, but with so much riding on our ability to export cotton fiber to China and given the threat China represents to U.S. textiles, it is necessary we consider a few aspects of trade policy regarding China.
* It is no surprise that when quotas have been lifted on Chinese apparel imports, dramatic increases in imports from China have occurred – often over 1000% increases. * With much effort and persistence, the U.S. textile industry has ensured that the China safeguard authority will be used by the U.S. to react to these kinds of import surges.
The recent success in establishing safeguards led China to open discussions with the U.S. on a broader agreement covering textiles through 2008. Such an agreement would create certainty in trade, while the individual category approach of safeguard actions breeds uncertainty.
* NCTO recently stated 5 points for a successful bilateral agreement with China, including keeping China apparel imports under tight quota control through 2008, stopping China’s unfair trade practices, and establishing a permanent textile safeguard in the WTO. We will all be monitoring these negotiations.
* At the 2002 Annual Meeting in Dallas, the general consensus was that a 4 million bale tariff rate quota for China represented an exceptional increase in market access and would open up that market. It has, to an extent, but we also know now that 4 million bales doesn’t begin to cover all of China’s import potential.
At first China just announced additional quotas with low tariffs to authorize additional imports. Recently, however, they have implemented a sliding tariff rate for over-quota imports based on domestic price. This trade barrier could increase incentives for cotton and polyester production within China and dampen the opportunities for increased U.S. exports. China’s decision to overhaul its classification system and go to HVI classing within 5 years is clear proof of China’s commitment to cotton and cotton production within China.
* Where are we?
First, in the next several months we can count on compliance with the Brazil case to be ever more controversial. Other compliance situations are also controversial, but this is the first significant one for U.S. agriculture, everyone is watching, and it will unfold in the middle of a budget reconciliation process, a potential payment limitation fight, and threats by African countries to boycott the Hong Kong ministerial.
Second, if there is a Doha Agreement, loan adjustments appear necessary, even if the U.S. gets many of the things it seeks in a new blue box.
Third, there is no way to avoid the conclusion that market access gains for U.S. agriculture will be much less than anticipated.
Fourth, Africa is a wild card for cotton that should not be underestimated.
Fifth, China may be the our only really significant export market that is employing import restraints that could dampen U.S. exports long-term. Our love/hate relationship with China will continue to complicate the future of the industry.
Finally, the U.S. textile industry, through persistence on safeguards and effective lobbying for CAFTA, appears to have tucked a few victories under its belt and strengthened itself from a policy perspective. We hope this strength will lead to a helpful bilateral agreement with China.
* Thank you Mr. Chairman, I will be happy to take any questions.
