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Draft Paper – Not to be cited without author’s permission

Appendix 2. The Confusing Case of King Cotton

Cotton arguably is one of the world’s commodities with prices most distorted by subsidies. It may well be a case where the common perception that subsidies cause dumping is correct.67 Yet the way the much publicized case has played out may actually make the kinds of alternatives envisioned by farmer organizations harder to achieve. 68

According

to

the

Overseas

Development

Institute,

more

than

one-fifth

of

the

value

of

world cotton production comes from government subsidies, principally in the U.S., China and the EU.69 In the U.S., for example, 2001-2002 subsidies totaled some US$2.3 billion, while the EU provided US$700 million and China US$1.2 billion. These subsidies encourage excess cotton production, which is then dumped on the world market at prices below the cost of production. This has driven down world cotton prices, severely hurting a number of poor countries which rely on exports of cotton as a substantial portion of their foreign exchange earnings. Chad, Burkina Faso, Mali and Benin brought this issue to the fore at Cancun. In these countries cotton accounts for 5- 10% percent of GDP, more than one-third of total export earnings, and more than two- thirds of the value of their agricultural exports. In Cancun they proposed that subsidies be gradually phased out, with transitional measures to ease the burden of lost revenues on

Least-developed Countries (LDCs). While their proposal received attention, it was eventually lost in the shuffle at the actual negotiations.

a

lot

of

media

In 2003 a much less poor country, Brazil, formally challenged U.S. cotton subsidies at the WTO, and in April of 2004 the WTO issued a preliminary ruling in Brazil’s favor, accepting the general form of the argument that domestic subsidies and supports distort trade.70 Brazil accused the U.S. of violating a WTO cap of US$1.6 billion/year in cotton subsidies, and of providing an additional US$1.7 billion in credits to U.S. manufacturers and agribusinesses to buy American cotton. According to Brazil, without these illegal subsidies U.S. cotton production—which currently holds a 40% global market share— would have fallen by 29%, and U.S. cotton exports by 41%, leading a rise of 12.6% in the world price of cotton, benefiting Brazilian producers. The U.S. contended that cotton subsidies are not directly linked to production, and thus are not illegal under the WTO,

calling them domestic supports that do not harm international markets.

The WTO decision on this matter has been widely hailed as the first nail in the coffin of farm subsidies, with challenges to domestic supports for other commodities to follow soon. As such, a broad spectrum of opinion, ranging from Third World governments to the New York Times, has seen the decision in a positive light.

On the other hand, family farm organizations, like those in Via Campesina, have tended to see the decision in a more negative light. They say it was overly broad in identifying a broad variety of subsidies and domestic supports as potentially illegal, and could open the door to challenges not just to wasteful and inappropriate subsidies, but to essential services and supports as well.

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