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CARD: Center for Agricultural and Rural Development

Spring 2005, Vol. 11 No. 2

pdf for printing The WTO Picture after the Cotton Ruling

Chad E. Hart

In early March, the World Trade Organization (WTO) released its report on the U.S. appeal in the cotton dispute with Brazil. The appellate ruling upheld much of the original ruling, including the finding that production flexibility contract (PFC) payments and direct payments are not Green Box measures. This means that these payments are to be counted against the agricultural support limit the United States agreed to under the current WTO Agreement on Agriculture. The rulings also state that the payments from the Step 2 program, marketing loan program, crop insurance, production flexibility contracts, market loss assistance, and other listed programs grant support specific to cotton and that they caused significant price suppression in the world cotton market.

Figure 1
The rulings are a major blow to U.S. agriculture because they call into question whether the United States has met its obligation to limit domestic farm subsidies. The blue line in Figure 1 shows the agricultural support limit the United States agreed to under the current WTO Agreement on Agriculture. The United States has reported agricultural support to the WTO through the 2001 marketing year. The gray line shows the reported agricultural support before the cotton ruling. By these original reports, the United States has complied with the WTO agricultural support limits. The United States reported PFC and direct payments as exempt payments. However, the cotton rulings indicate that the PFC and direct payments are not exempt. This drastically changes the U.S. agricultural support picture. Figure 1 shows how U.S. reported agricultural support would look if the PFC and direct payments are counted as non-product-specific support. Reporting these payments in this way follows the U.S. reporting of market loss assistance payments. If this precedent is followed, U.S. agricultural support was at the limit in 1998 and exceeded the limits from 1999 to 2001.

Figure 2
The inclusion of the PFC and direct payments in the reported agricultural support has a double impact. The U.S. reported support actually increases by more than the amount of the PFC and direct payments, because the other payments that were in the non-product-specific support but were exempted by de minimis rules must now be counted. These other payments include the net benefits from the crop insurance program, market loss assistance payments, state credit programs, and grazing and water subsidies. For 1999, the addition of the $5.47 billion in PFC payments turns into a $12.88 billion increase in reported support. Figure 2 shows a breakdown of our revised estimate of 1999 agricultural support. Marketing loan benefits (through loan deficiency payments or marketing loan gains) account for 30 percent of this support. PFC payments, market loss assistance payments, and price support programs for dairy, sugar, and peanuts each account for roughly 20 percent of the support. Crop insurance represents 5 percent, while other agricultural programs contribute the remaining 9 percent.
The end results of the cotton dispute are still uncertain. How Congress and the administration will respond to this ruling, either in modifying the current farm bill or in creating the next farm bill, is unknown. But the cotton ruling, combined with the federal budget pressures we are now seeing in the United States, has the potential to set off substantial changes in U.S. agricultural policy.