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The Impact of United States Agricultural Subsidies on World Trade in Context of the Brazil Cotton Dispute

September 08, 2015

In 2002, Brazil initiated a dispute settlement case against the United States through the World Trade Organization. Its claims against the U.S. cotton program included violations of the WTO’s Agreement on Agriculture, excess export subsidies, which gave an unfair advantage to U.S. cotton in international markets. The “Brazil Cotton Case” resulted in a framework agreement in 2010 to prevent trade retaliation and, in 2014, a permanent agreement was reached to settle the dispute. This case drew widespread scrutiny on agricultural subsidies and their implications on global trade. As the world becomes increasingly interconnected, countries must balance their individual domestic interests with policies that are better for the global community. 

By Zixuan (Yen-Yen) Gao, W’18

History of Agricultural Subsidies in the United States

As the United States became more and more industrialized in the late 19th and early 20th centuries, domestic agriculture began to decline. The fall in product prices after WWI led to the first legislative proposals to help farmers. Under the New Deal during the Great Depression, the Agricultural Adjustment Act (1933) was enacted to improve the economic situation for farmers and achieve income parity with pre-WWI levels. These programs included four main components: production controls, government purchase of commodities, subsidized sale for export and to domestic consumers, and direct payments in exchange for certain actions such as land idling and destruction of livestock.[1] The Agricultural Adjustment Act of 1938 included more permanent measures with built-in renewal every 5 years, setting the precedent for the current Farm Bills.

After WWII, U.S. agricultural exports increased under the Marshall Plan, from 4 million tons annually between 1935-1939 to 19 million tons annually from 1947-1950.[2] However, the exports were aided by subsidies to bring the price of U.S. products lower than world market prices and import quotas kept domestic prices higher than world levels. Post-WWII, export subsidies were prevalent worldwide. In the 1980s, under the Reagan Administration, the Export Enhancement Program was initiated to help the U.S. meet the subsidized price of competitor goods in foreign markets.

The Asian Financial Crisis in 1998 lowered world demand and export prices. Low prices triggered Congressional response in the form of the “marketing loan” program which created a guaranteed market floor price for farmers. As prices continued to fall, Congress adopted “market loss” assistance programs and expanded commodity program spending. The 2002 Farm Bill (Farm Security and Rural Investment Act) provided additional funding as compared to the 1996 Farm Bill. The total cost of this Farm Bill from 2002-07 was $270.2 billion; large portions of the funding went towards the food stamp program and farm support.[3] Critics of the expansion of the commodity program spending believed the policies to be in violation of the WTO guidelines.

The Brazil Cotton Case

The World Trade Organization was established in 1995 under the General Agreement on Tariffs and Trade (GATT) to regulate international trade and replaced the GATT, which had been in place since 1948. To cut the costly export subsidy competition in the 1980s and 1990s, the Uruguay Round of the GATT produced the Agreement on Agriculture in 1995; previously, the GATT included several loopholes regarding agriculture. Included in this agreement are reductions on tariffs, scaling back domestic policies which directly impact trade and production, and limiting export subsidies.[4]

In 2002, Brazil brought claims against the United States regarding violations of the Agreement on Agriculture in U.S. cotton production and trade. The U.S. is the third largest producer of cotton in the world. From the 1990s to the 2000s, its share in world cotton trade grew from 25% to an average 37%. As one of the principle crops, cotton has received large amounts of domestic support; an average of $3.4 billion a year is allocated towards production subsidies for cotton.[5] At the initiation of the dispute, the U.S. had three principal export guarantee programs to aid export of U.S. agricultural products (GSM-102, GSM-103, and Supplier Credit Guarantee Program). These programs extend credit to finance commercial exports.[6]

Brazil had six principal claims against the United States, including violation of the Peace Clause, which allowed limited levels of domestic support, and violation of the regulations against export subsidies. The initial panel released its ruling in 2004, which the U.S. appealed. The Appellate Body upheld most of the original panel’s rulings and set deadlines for U.S. compliance. The United States was ordered to remove prohibited subsidies, including major elements of the GSM-102, GSM-103, and SCGP programs which gave export credit guarantees, with a deadline of July 1, 2005. As the deadline expired with little action taken, the dispute continued as Brazil requested retaliatory measures against the U.S., until a procedural agreement was reached to temporarily suspend discussion of the measures. In 2006, Brazil requested a WTO Compliance Panel to review the compliance of the U.S. with the rulings. In 2007, the Panel found that the U.S. had failed to comply with several measures.

U.S. compliance was mainly accomplished through legislative action. In 2008, the 2008 Farm Bill was enacted and eliminated the GSM-103 and SCGP program and placed further restrictions on GSM-102 users.[7] Temporary resolution to the Cotton Dispute came in 2010 after the United States and Brazil negotiated a Framework Agreement to stall Brazilian retaliation measures, which were authorized by the WTO. Terms of the agreement included $147.3 million annual payments to the Brazil Cotton Institute, semi-annual review of the GSM-102 program by Brazilian officials, and quarterly discussion of U.S. Farm Programs. In 2014, the USDA announced that a formal settlement had been reached between Brazil and the United States to conclude the long running dispute.[8] Brazil will not bring any new WTO actions against the U.S. as long as the current programs operate along agreed terms.

US Commodity Support Notified to the WTO[9]

Analysis and Conclusion

The Brazil Cotton Dispute proves the interconnectedness of world trade. Whereas protectionist measures in the 20th century were favored to increase domestic development, it’s clear excessive support to domestic commodity programs will now draw international scrutiny. The 2014 Farm Bill continued the work of the 2008 Farm Bill in bringing U.S. agricultural policies more in compliance with the WTO. The GSM-102 program is capped at $5.5 billion for export credit guarantees and a loan rate adjustment has been added to marketing loans designed to provide operating capital to farmers.[10]

Since the creation of the WTO, the world has been moving towards increased fair and open trade measures. However, government officials in individual countries must balance this goal with their obligations to their citizens. Agriculture is a particularly contentious issue in the U.S. as farmers are seen as the “backbone” of the country. As the country becomes increasingly industrialized and urbanized, the majority of farms have become large conglomerates with political power through lobbyists and political action committees. The balancing act between political, constituent, and international interests will continue to make agriculture a field of constant debate domestically and internationally.

  [1]Anderson, Kym. Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007. Washington, DC: World Bank, 2009. ProQuest Discovery [ProQuest]. Web. 20 July 2015.

  [2] Anderson, Kym. Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007. Washington, DC: World Bank, 2009. ProQuest Discovery [ProQuest]. Web. 20 July 2015.

  [3] Strode, Ralph. “Farm Bill Budget and Costs: 2002 vs. 2007.” CRS Report for Congress (2008): n. pag. Congressional Research Service, 29 Jan. 2008. Web. 20 July 2015.

  [4] “Agriculture: Fairer Markets for Farmers.” World Trade Organization. World Trade Organization, n.d. Web. 20 July 2015.

  [5] Schnepf, Randy. “Status of the WTO Brazil-U.S. Cotton Case.” Congressional Research Service 106 (2013): n. pag. Congressional Research Service. Library of Congress, 12 Dec. 2013. Web. 20 July 2015.

  [6]“Export Credit Guarantee Program (GSM-102).” Foreign Agriculture Service. United States Department of Agriculture, n.d. Web. 20 July 2015.

  [7] “2008 Farm Bill.” United States Senate Committee on Agriculture, Nutrition, & Forestry. United States Senate Committee on Agriculture, Nutrition, & Forestry, n.d. Web. 20 July 2015.

  [8] USDA Office of Communications. “United States and Brazil Reach Agreement to End WTO Cotton Dispute.” United States Department of Agriculture. United States Department of Agriculture, 2 Oct. 2014. Web. 20 July 2015.

  [9] U.S. Trade-distorting Agricultural Support Declines with Higher World Commodity Prices. Digital image. United States Department of Agriculture Economic Research Service. United States Department of Agriculture, n.d. Web. 20 July 2015.

  [10] “2014 Farm Bill.” United States Senate Committee on Agriculture, Nutrition, & Forestry. U.S. Senate Committee on Agriculture, Nutrition & Forestry, n.d. Web. 20 July 2015.

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