The Wall Street Journal’s Unfounded Attack on U.S. Cotton
National Cotton Council
The first victim of sensationalism is the truth. Surely, the editors of the Wall Street Journal (WSJ) are better informed than their May 21 editorial indicates, leaving us to conclude that they knowingly failed to report the full story of a U.S. - Brazil World Trade Organization (WTO) dispute, thus misinforming their readers. With their first sentence, the WSJ does not waste any time in presenting only part of the story. They are quick to point out the high level of government payments in 2009 without clarifying that the payments were elevated because of low prices stemming from the sharp decline in cotton demand due to the global recession. They also fail to note that the WTO found no fault with direct payments and crop insurance, which are included in the total payments cited in the editorial. The WSJ editors further decline to inform the reader that current spending on the price-based provisions involved in the dispute (i.e. the marketing loan and counter-cyclical program) likely will be zero for the 2010 crop.
Readers of the editorial do not even get past the first paragraph before encountering a completely inaccurate statement by the WSJ. In referencing the temporary fund of $147.3 million being established as part of the negotiated solution between the United States and Brazil, the editors falsely indicate that these funds are cotton payments to Brazilian growers. In fact, the agreement between the U.S. and Brazil explicitly forbids that any of the $147.3 million be used for direct payments to Brazilian farmers. The fund is designed to fund capacity building and technical assistance projects with transparency and auditing requirements. Also, the fund only lasts until Congress can address legislative changes to the programs in question.
Upon further review of the WSJ editorial, to assume the editors understood the dispute was, perhaps, giving them too much credit. The editors emphatically state that, “Here’s the problem:..” and then proceed to mischaracterize the crux of the dispute. The WTO did not rule that cotton programs under the current 2008 farm bill violate U.S. trade commitments. No, a WTO panel ruled that selected provisions of the cotton program from the 2002 farm bill along with the export credit guarantee programs for essentially all commodities were either causing significant price suppression or were prohibited subsidies. Amazingly, the editorial does not even mention the export credit programs even though the vast majority of possible trade retaliation is associated with this program.
As background, a WTO arbitration panel ruled in August 2009 that the U.S. export credit guarantee program, known as GSM-102, was an export subsidy damaging Brazilian agricultural interests. The WTO Panel described a formula for annually determining the damage to Brazil from the operation of this program. The Panel also described a formula to determine a damage threshold beyond which Brazil could seek cross-retaliation in intellectual property. At the same time, the WTO ruled that components of the U.S. upland cotton program known as the marketing loan and counter-cyclical program have caused serious prejudice to Brazil’s cotton interests at an annual fixed amount totaling $147.3 million.
In March 2010, Brazil claimed $682 million in retaliatory authority for GSM-102 based on the formula utilizing recent export credit guarantee data provided by the U.S. Department of Agriculture. Brazil also announced the determination of a cross retaliation threshold of $520 million. These data point to a possible intellectual property rights issue with Brazil stemming solely from the findings associated with the U.S. GSM 102 program. Combining the cotton and export credit guarantee estimates by Brazil bring a total retaliatory claim by Brazil of $829 million.
In March 2010, Brazil listed the U.S. goods and punitive duties that would apply under the retaliation that were set to begin on April 15. Within the WTO framework, the U.S. options are fairly limited: 1) seek a favorable compliance panel ruling based on the changes to U.S. programs in the 2008 farm law and updated market conditions (which would take a significant period of time all while Brazil applies retaliation) or 2) negotiate bilaterally with Brazil to temporarily suspend retaliation while determining the necessary administrative and legislative actions that bring compliance.
The U.S. has successfully negotiated a suspension in retaliation that protects U.S. manufacturing jobs. While retaliation is suspended, the U.S. Congress will legislate changes in the GSM-102 and the upland cotton programs as part of the 2012 farm bill.
U.S. – Brazil WTO Dispute
Omissions by the editors of the Wall Street Journal
· The Brazil – U.S. WTO case, with respect to cotton, is based on outdated analysis and on previous farm bills.
◦ The existing ruling failed to adequately consider US efforts to comply
◦ In 2006, after the first WTO Panel's ruling, Congress terminated the "step 2" cotton program, a part of the program that was found to be an export subsidy
◦ Congress also made further adjustments in the 2008 farm bill, reducing target prices slightly and making adjustments in the loan program
· The biggest adjustments, however, have been made by U.S. cotton farmers on their own.
◦ The U.S. industry has decreased cotton production to the point that the United States is not remotely a threat to any cotton exporting countries.
◦ Prices are at record levels and all cotton producers should be focused on eliminating market access barriers maintained by countries with centrally planned economies.
· The Brazil case has been effectively resolved by the market and is irrelevant in today's market.
· Despite this, the cotton industry has committed to Congress and the Administration that in recognition of the importance of maintaining a rules-based trading regime through the WTO, it will continue to work to resolve the dispute.
· The WTO ruling on the U.S. export credit program -- which affects all U.S. commodities -- is the more difficult aspect of the dispute at this point
◦ The arbitration ruling with respect to cotton was relatively small
◦ The arbitration ruling for the export credit guarantee program was formula based, and continues to grow -- predicated on our recent use of the export credit guarantee program
· Again, this ruling stands against our export credit guarantee program even though it is based on old law. We changed the program in the 2008 farm law by shortening tenor, making fees more risk-based and terminating one of the credit programs.
· It was necessary for U.S. negotiators in April to put together a proposal that convinced Brazil the United States was committed to a rules based system in order to avoid senseless and troublesome retaliation.
◦ Until recently Brazil provided no guidance other than declaring the action taken in 2006 and 2008 as insufficient; and
◦ Initiating action which would result in retaliation on up to $1 billion of US exports. Brazil also took the first steps toward cross retaliation against U.S. Intellectual property rights.
◦ Remember that more than three-fourths of the retaliation is based on the export credit guarantee program -- not the cotton program.
· The temporary agreement between the United States and Brazil is necessary to ensure that trade in goods valued at over $1 billion is not jeopardized and jobs not lost. It is essential to recognize that legislation changes to U.S. farm law normally are made at the expiration of current law which will next occur in 2012. Had Brazil been more forthcoming during the 2008 farm bill debate these matters may have been resolved at that time.
· The existing WTO rulings on the cotton program do not provide the United States with a clear path to compliance. They are vague and out of date.
◦ Likewise, many aspects of the export credit guarantee ruling is vague and leaves the United States in an uncertain compliance situation.
· The agreement with Brazil places Congress where it should be -- in the forefront of establishing U.S. farm policy.
◦ The agreement with Brazil also includes further promised adjustments to the export credit guarantee program and establishment of a fund which Brazil could use for capacity building programs but not for direct payments to farmers. Interestingly some proposals for use of the funds may actually generate added trade between the U.S. and Brazil.
◦ The funds are provided from the Commodity Credit Corporation (CCC) which funds many farm, trade, nutrition, conservation and commodity programs. Through the annual appropriations process Congress replenishes the CCC. Congress could decide to require reductions in expenditures in order to offset the funds established in the U.S. -Brazil agreement.
◦ The establishment of a funding mechanism, to temporarily resolve a WTO dispute, is not without precedent and the funding mechanism will end with enactment of the 2012 farm bill.
It should also be noted that this is not the only long running trade dispute. Others include the U.S.-Mexican trucking dispute involving failure of the U.S. to comply with a provision in NAFTA and a U.S.-EU dispute in which the United States has not complied with a WTO decision related to imposition of countervailing duties on dumping.