Torn to shreds

history will be made on June 18, when the World Trade Organization (wto) is expected to officially declare that the subsidies given by the us to its cotton farmers are illegal. It will be the first time that a developing country -- Brazil in this instance -- would have won a case against a developed nation's subsidies. Not surprisingly, celebrations have begun well in advance, with Brazil claiming victory on April 26 itself. Once the wto releases the report containing its ruling, it could open the floodgates to a slew of similar cases against countries like Japan, the us and members of the eu. These nations dole out approximately us $300 billion in agricultural subsidies each year.

Brazil's top wto negotiator, Clodoaldo Hugueney, reportedly said: "The wto agreed with a substantial part of Brazil's arguments." Hugueney added that the panel set up by the wto's Dispute Settlement Body on the issue would show how important it is to change the policy of developed nations. The us has expressed its "serious concerns" over the development and will challenge the ruling after it is made final. "We will be defending us agricultural interests in every forum we need to; we have no intention of taking unilateral steps to disarm when it comes to this," announced White House spokesperson Scott McClellan. He maintained that the us' farm policies were carefully designed to be consistent with the country's wto obligations.
The dispute It was in September 2002 that Brazil brought its case against us cotton subsidies to the wto (see also: How events unfolded). In its letter, the country argued that the subsidies paid to the us cotton farmers from 1999 to 2002 violated the rules laid down under the wto's agreements on subsidies and countervailing measures and agriculture. It was further pointed out that the us move contravened the 1994 General Agreement on Tariffs and Trade, too. Brazil argued that the subsidies had led to overproduction, depressed global cotton prices and hence distorted trade.

The us is the second largest producer of cotton and its biggest exporter. Brazil alleges that without subsidies, us cotton production would have fallen by 29 per cent and exports by 41 per cent. What is more, its share of exports would not have increased from under 20 per cent in 1999 to more than 40 per cent currently. International cotton prices would also have risen by about 12.6 per cent, thus benefiting Brazil's farmers.

For its part, the us asserts that its subsidies are "decoupled" from production. In other words, the subsidies are not directly linked to production and, therefore, do not act as an incentive to produce more. Although the details of the wto's report are not yet available, it is reliably learnt that the panel of the trade body has not bought the "decoupling" argument. In such an event, the eu's recent reform of its Common Agricultural Policy, which was also based on decoupling, is going to fall flat.

Upset with the ruling, the us has expressed its displeasure at having the issue of subsidies addressed through the wto's Dispute Settlement Body (dsb). "We've always believed that negotiations are the best way of resolving these issues," said Allen Johnson, the us' chief agricultural negotiator. He observed that such cases would not help in creating "the necessary energy and momentum" to move forward on the negotiations. Brazil contends that it raised the matter in the trade forum out of frustration on the lack of progress in negotiations. Anyhow, the us cannot take the moral high ground on the subject. For, both the us and the eu have done their bit to push issues into the wto through the dsb. Environmental matters are a case in point. So, all that the us seems to be getting is a dose of its own medicine.

The factor that seems to have clinched the issue for Brazil was that the us violated Article 13(b)(ii) of the Agreement on Agriculture, more commonly known as the "peace clause". The clause exempts countries from taking action against subsidies so long as the support does not exceed 1992 levels. In 1992, the us paid its cotton producers us $1.62 billion. But in 1999 and 2001 it breached that limit, and gave its cotton farmers us $2.3 billion and us $2.06 billion, respectively. As a result, Brazil claims its cotton producers missed sales worth us $600 million in the 2001-2002 season alone.

The fallout
The current ruling, even after being formalised, will be an interim one and can be appealed. But most such decisions that go to the wto's Appellate Body usually remain unchanged. However, the body is likely to come out with its verdict only close to the end of the year. While Brazil and other countries cannot take any action till then, the ruling has served as a wake-up call for industrialised countries. Consequently, they will have to rethink their farm policies.

In the us, the George Bush administration will be under external pressure to act. At the same time, there will be internal pressure to maintain the status quo. With presidential polls due in November and Bush seeking re-election, he would not like to antagonise the farm lobbies. The only option left would be to negotiate bilaterally with Brazil, and through the agriculture negotiations with other wto members.

The ruling gives developing nations more room to manoeuvre in the ongoing wto parleys on agriculture. Northern agricultural subsidies were one of the main reasons for the collapse of last year's wto ministerial conference in Cancun, Mexico (see: 'World Trade Outcry', Down To Earth, October 15, 2003). A group of large developing countries, comprising Argentina, Brazil, China, India and South Africa among others -- christened the g-20 -- had demanded that industrialised nations reduce and eventually phase out their subsidies. Four west and central African countries -- Benin, Burkina Faso, Chad and Mali -- had sought immediate relief for the damage that us cotton subsidies had caused to their predominantly cotton-dependent economies. However, their pleas fell on deaf ears. These countries now feel vindicated by the wto's ruling. They will be one of the biggest beneficiaries of the trade body's decision.

Meanwhile, with the peace clause expiring this year, a successful case against the us would encourage other countries to follow suit. In fact, reports indicate that law firms are currently approaching other countries to see if they want to bring a case. Brazil itself has already filed a case against the eu on its sugar subsidies. The country's top legal adviser to the foreign ministry was quoted as saying: "This is a precedent. It is a war that must continue (see also: At the forefront)." In the us, corn, soyabean and wheat could be other possible targets. Until then, the final report of the panel will be eagerly awaited.

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