The recent WTO ministerial meeting in Hong Kong produced a text on the latest negotiations in the Doha Round of talks. The text contains very little on market access and domestic support measures specific to agriculture. The expectations for the meeting had been substantially reduced as the EU and some other developed countries were unable to offer increased market access for agriculture. As pressure mounted on the EU, it again maneuvered to bring other issues to the forefront, particularly issues that were difficult for the United States.
In November and December of 2005 the National Cotton Council’s concerns were heightened with every official pronouncement seeking to reduce expectations for a broad-based agreement in Hong Kong. It was well understood by leaders in the National Cotton Council that less comprehensive negotiations in Hong Kong meant greater focus on cotton specifically. Our fears were not unfounded as the amount of time and energy devoted to cotton by the ministers in Hong Kong defies all logic and reason.
We now have a ministerial text from WTO Director General Pascal Lamy that discards the concept of a single undertaking in agriculture by isolating cotton for special, discriminatory treatment. Cotton is listed in a sub-section of the agricultural text and is singled out for special treatment. Just to put all this in perspective, the total word count on the agricultural text is about 1050. This is the coverage given to full range of agricultural negotiations on tariff reduction, domestic support commitments, and export subsidies. The word count for the cotton sub-section is 490. It is fairly clear that the priority of most of the members of the WTO in Hong Kong was cotton specifically, not an overall agricultural agreement.
Cotton Specific Text
Three specific actions or objectives are listed for cotton.
All forms of export subsidies for cotton will be eliminated by developed countries in 2006.
On market access, developed countries will give duty and quota free access for cotton exports from least-developed countries (LDCs) from the commencement of the implementation period.
Members agree that the objective is that, as an outcome for the negotiations, trade distorting domestic subsidies for cotton production be reduced more ambitiously than under whatever general formula is agreed and that it should be implemented over a shorter period of time than generally applicable. We commit ourselves to give priority in the negotiations to reach such an outcome.
The U.S. cotton industry is deeply concerned with the ramifications of this text. But it is also an ominous warning to other commodities. Now that one commodity has been culled from the herd and is being dealt with differently, what commodity will be next? How can cotton compete with the interests of the rest of the world’s economy? How can bananas, corn or wheat?
In a strange twist even for WTO negotiations, the text calls for the developed countries to eliminate all forms of cotton export subsidies prior to ratification of any agreement and while negotiations on much of the comprehensive package may not even be finished. So, no one has any idea what achievements will yet be reached in market access, but the developed countries have apparently already agreed to eliminate cotton export subsidies in 2006. This is probably not the best example of negotiating strategy by the developed countries.
The U.S. had 2 programs identified in the Brazil WTO cotton case as prohibited export subsidies. The WTO Dispute Settlement Panel said the operation of the GSM export credit program between 1999 and 2002 contained a prohibited export subsidy component. The panel also found that the Step 2 competitiveness provision was a prohibited export subsidy for upland cotton.
The compliance measures being taken by the US as a result of the WTO dispute findings have addressed this decision. Actions taken in July 2006 by USDA have eliminated some of the export subsidy components of the GSM export credit program, and the administration has proposed legislation which completes the elimination of any subsidy component by removing the cap on fees in the program. The Senate and House have included legislation in their respective budget reconciliation packages that cease operation of the Step 2 competitiveness provision effective August 1, 2006.
The Hong Kong draft text calls for the developed countries to provide duty and quota free access for cotton exports from the Least Developed Countries (LDCs) upon commencement of the agreement. The developed countries spin about 8% of a total world mill use accounting for 115 million bales. The three countries of China, India and Pakistan account for 72 million bales of annual mill use of cotton. The vast majority of cotton is spun in the developing world. Failure of the developing world to offer the same access to the LDCs is an unfortunate outcome that has brought little response from non-government organizations so bent on supporting West African cotton farmers. In fact, several NGOs criticized the developed countries for not giving something more for cotton, noting that most cotton is consumed in China.
The text of the 2004 Framework and the Hong Kong ministerial contains wording about intentions to obtain deeper and speedier concessions on cotton than other agricultural commodities. This type of action has been referred to as “early harvest.” The statement in the Hong Kong text that it is an objective of the negotiation to have steeper and speedier cuts in cotton programs is consistent with the intention to obtain commitments for some type of early harvest of trade-distorting subsidies specific to cotton. Neither the amount of this additional subsidy reduction nor the speedier timetable have been determined. However, the West African cotton producing countries, supported by Oxfam, have demanded an 80% reduction in all domestic cotton support by developed countries in 2006, with 10% in each of the next 2 years. They sought a total elimination of cotton support in developed countries within 3 years. That will be their starting point when the negotiations began later this month.
What Is Not Happening?
The WTO continues to fail to address disparities within the developing world. China has nuclear arms and a space program and yet is permitted to self-declare as a developing country and avoid the disciplines applied to countries such as the U.S., EU, Japan, and Australia.
This incongruity sustains a situation that grew out of the last round of negotiations. The Uruguay Round set the stage for extraordinary disruption in the world textile and apparel industry. The eventual complete elimination of the Multi-Fiber Agreement by January 1, 2005 was hailed by the developing world as freeing themselves for a great leap in industrialization through textiles and apparel. Unfortunately, because the Uruguay Round did not effectively discipline the industrial and trade policies of the developing world, these promised markets have been captured by only one or two stronger developing countries, leaving the rest with no realistic hope of using textiles as a developmental tool.
In 5 short years, China, India and Pakistan have moved from spinning 44.6 million bales and accounting for 48% of world cotton spinning to now using 72 million bales in their mills and accounting for 63% of world spinning. This was not just an industrial happenstance or market driven outcome. This has arisen through industrial policies, high border measures, tax incentives and the free financing of construction through the deliberate creation of non-performing loans.
For the past several years China’s mills have faced the highest price for cotton of any mills in the world and yet they expand at the expense of other country’s industries. In 2003 Chinese mills paid about 78 cents per pound for cotton while the “A” Index was 63 cents. In 2004, Chinese mills paid about 74 cents for cotton while the “A” Index was 62 cents. How do they pay an average of 18% more for their cotton than the rest of the world and take business for everywhere else?
The NGO’s that attack the policies and practices of the developed countries seem blind to the stark reality that China’s expansion in virtually all realms of manufacturing has precluded the developing world from most avenues of capital formation and industrialization.
The world increased its annual use of cotton by 22 million bales between 2000 and 2005 but these 3 countries expanded their mill use by 27 million bales. They not only took spinning business from the most developed countries like the US, the EU and Japan but also from the least developed countries in Sub-Saharan Africa and other parts of Asia. In the past, textiles and apparel were an avenue to industrialization in the developing countries. That is no longer the case. The WTO has played a significant role in promoting this change.
To further compound cotton’s difficulties, most of Asia went on a man-made fiber construction binge by the late 1990’s and early in this century. China alone produced 45 million bale equivalents of polyester in 2005, up from just 22 million bale equivalents in 2000. The formation of this capacity was subsidized with non-performing loans and tax incentives. Asia alone now produces more polyester than the entire world just a decade ago.
Cotton’s loss of share in the world’s fiber market apparently has no perceptible impact on developing countries that produce cotton, at least through the eyes of the NGOs and the WTO. Who speaks on this issue for the poor cotton farmers in the developing world? Not Oxfam, not the WTO. Recognition of this situation would diminish their focused frenzy directed at the U.S. cotton program. Dramatic changes, even elimination of the U.S. cotton program would not materially affect the impact that all this is having on the world cotton market. There are studies, cited by USTR Ambassador Portman from Texas Tech University, the International Monetary Fund and the Food and Agriculture Organization of the UN that have concluded he same thing.
The NGOs wave $2 to $3 billion in annual spending under the U.S. cotton program as prima facia evidence of damage. These are easy numbers to find in USDA reports and then blame the overbearing culturally bereft Americans for all the worlds ills.
How much was spent in China alone annually between 1998 and 2005 to add 25 million bale equivalents of polyester production and 22 million bales of cotton spinning capacity? That infrastructure investment is staggering in size, easily exceeding $2 to $3 billion annually. The NGOs turn a blind eye to massive fiber market distortions arising in Asia and then want the world to believe that it is U.S. that has turned its back on the developing world.
Ambassador Portman as much as told the African delegates this in Hong Kong, when he said that the analysis he had reviewed did not support their claims. While country after country waved U.S. spending as the root of all evil, Ambassador Portman forcefully stated that it was irresponsible to assert that elimination of the U.S. cotton program would have more than a minimal impact on world cotton prices. His recitation of the facts, as described here, appeared to fall on deaf ears.
Where Now in the WTO?
The trade ministers have set a date of April 30 to finalize modalities and July 1 for tabling schedules. This means an intense period of further negotiations is immediately ahead.
There are many statements from African countries and from non-governmental organizations that look upon these unprecedented concessions on cotton as being insignificant. They are discounting the duty-free, quota-free access that was given, and labeling the Hong Kong agreement as devastating to the developing world. Worse, some of them have treated our developmental efforts in Africa as meaningless unless the United States agrees to end its cotton program.
In short, we should expect no let up in the months ahead. Cotton is already being asked to give up more. There will be pressure, intense pressure, to make even further concessions. They will say in the ninth hour in April, with Oxfam and others right behind them, that without more concessions on cotton they will block the entire Doha agreement.
For the European Union, this is a grand game of chicken. If it can box in the U.S. on cotton, the EU can avoid any difficult decisions on overall agricultural market access.
Overall market access on agriculture is the key component of the Doha negotiation at this time. The US has proposed average cuts in agricultural tariffs of 75 percent. The EU has proposed average cuts of 46 percent. A number studies now indicate that if the average tariff cut is not between 60 to 75 percent, U.S. agriculture will not make any significant gains in market access.
If this very difficult issue can be addressed, it appears that there could be rapid agreement on reductions in domestic support at levels of 50 percent or more. At that point, there will again be a strong emphasis on cotton. If an agreement is reached to reduce overall agricultural support by 50% over 5 years, those same countries and NGOs expect cotton to have to reach a percentage higher than 50% sooner than 5 years. The U.S. negotiators have an extraordinary task before them to avoid such circumstances.
The National Cotton Council will continue to work closely with USTR and USDA to counter efforts to further isolate and discipline cotton. At the same time we will participate with other agricultural interest organizations to insist on the necessary gains in market access that must arise in order to sustain any commitments for reductions in overall domestic support that do not isolate cotton.