Cotton in a Free Trade World
Pan, Suwen, Fadiga, Mohamadou, Mohanty, Samarendu, Welch, Mark, Economic Inquiry
Cotton has been at the center of much of the controversy surrounding the inability of the World Trade Organization (WTO) membership to reach consensus regarding significant agricultural trade reform. In 2003, four African countries (Benin, Burkina Faso, Chad, and Mali) circulated a proposal presented as their negotiating position for the Cancun Ministerial conference (WTO, 2003). This proposal called for the elimination of cotton subsidies worldwide due to its status as a "special product"--essential for agricultural and economic development in many less developed countries (LDC). Support for this proposal solidified among other developing countries (referred to as the Group of 21 [G-21]), with a leading role played by the nation of Brazil, which had filed its own grievance against U.S. cotton programs in 2003. Failure on the part of developed countries to meet the demands of the G-21 resulted in a collapse of the Cancun meetings.
At the recently concluded Hong Kong Ministerial Declaration, language was included in the Ministerial Declaration that reaffirms the intent of the WTO (2005) to specifically reform the global trading rules for cotton. While the text of this intent appears in brackets, indicating that it does not represent complete consensus on the issue by all negotiating parties, it is consistent with the wording of the July Agreement and the Cotton Initiative's call for an "early harvest" of cotton, as noted by WTO (2004).
Cotton has been described as the "litmus test" (SEATINI 2004) for the ideals of the Doha Development Agenda to deliver on its commitments to "... correct and prevent restrictions and distortions in world agricultural markets" (WTO 2001). Agreement on meaningful reform of the cotton trade might break the impasse that currently exists in agriculture negotiations. Failure to do so may threaten gains made in the Doha Round itself, as noted by Andrews (2005).
While the commodity-support programs of developed countries in general have been criticized in global trade talks, only recently has the legality of U.S. commodity programs been directly and specifically challenged, with a particular emphasis on cotton. Attention on cotton is predicated by the fact that in 2002/2003, the United States accounted for 40% of world cotton exports and 63% of world cotton subsidies, as noted in Goreaux (2004). But cotton production is subsidized in other countries as well. In the European Union (EU), Greece and Spain produce 2.5% of the world's cotton, yet receive 18.5% of the world's cotton subsidies, as observed by Goreaux (2004). As shown in Table 1, subsidies to EU cotton growers are approximately $1 per pound of lint compared to 20 cents per pound in the United States. In China, the world's largest cotton producer, the estimate of per pound assistance for cotton growers is 8 cents. Other per pound subsidies offered to cotton producers include Egypt at 14 cents, Mexico at 8 cents, and 6 cents in Turkey.
In addition to the trade-distorting effect of domestic support offered to producers, many importing countries have been using tariffs to restrict imports. China, the world's largest importer of raw cotton, has, as WTO mandated, two-tier tariff structure on cotton imports (known as a tariff rate quota [TRQ]). The in-quota tariff rate for cotton to China is 1%, while the out-of-quota tariff rate is 40% for any imports above 890,000 metric tons (about 4 million bales). (1) Other import tariffs rates by major cotton importers include India at 10%, Mexico at 9.7% (excluding tariff-free imports from the United States as part of the North American Free Trade Agreement), and Pakistan at 5%. Table 1 also provides a comparison of these cotton import tariff rates across importing countries.
As noted by the Overseas Development Institute (ODI) (2004), many studies have attempted to quantify the impacts of both United States and other countries' subsidies on world cotton prices and production. …