Uncle Sam got slapped on the side of the head last month when a World Trade Organization (WTO) panel ruled that multibillion-dollar subsidies by the US to domestic cotton producers violated international trade rules.
"This is big stuff," says Clyde Prestowitz, president of the Economic Strategy Institute in Washington.
That's because the WTO ruling might nudge forward reform of the world's costly farm subsidy programs.
The ruling - an interim one - found that American subsidies encouraged US cotton output, raised exports, depressed world cotton prices, and thus hurt Brazilian cotton growers.
To trade experts, the decision by the Geneva-based organization is important for three reasons:
• It pressures industrial nations to trim their farm subsidies.
• It may encourage the US to move forward in the Doha Round of world trade negotiations. A fight between the rich North and poor South over farm issues was a key reason a WTO meeting in Cancún, Mexico, last September failed to make progress.
• It may require the reopening of the US 2002 Farm Bill.
Rich nations "should find a way of helping their own farmers without hurting farmers in poor countries," says Gawain Kripke, a policy adviser in Washington to Oxfam America.
The cost to consumers and taxpayers in rich nations is enormous - nearly $1 billion a day, estimates the Organization for Economic Cooperation and Development (OECD) in Paris. Taxpayers shell out roughly a third of that sum in subsidies to farmers. The rest comes from higher prices that these programs force on consumers.
For example: one way to keep food prices high at home is to keep foreign food from coming in. So, not surprisingly, the average farm-product tariff in the OECD (essentially, the world's rich nations) is extremely high - 116 percent on dairy products, 78 percent on grains, 82 percent for livestock, and 64 percent for sugar and sweeteners.
Worse, the rich nations spend huge amounts to subsidize farm exports. The European Union, by far the worst offender in this regard, has been spending up to $6 billion per year.
US cotton is another case. America's share of world cotton exports is expected to reach 42 percent this marketing year, up from 24 percent in 1996. In 2002, cotton was exported from the US at 61 percent below its cost of production, the Institute for Agriculture and Trade Policy (IATP) found. That has hit cotton-dependent West African nations hard, including Benin, Mali, Burkina Faso, Chad, and Togo.
By hurting the farm exports of developing countries, agricultural protectionism probably more than cancels out the positive effects of the $60 billion or so that rich nations hand out in foreign aid each year.
But there's a catch. Whatever economic case one can make against farm subsidies, there's a compelling political argument to continue them. Farmers and agriculture-related lobbies are powerful and well-organized.
The WTO's cotton ruling, for example, didn't go down well in Washington. A US trade negotiator promised an appeal, probably delaying a final WTO decision until the end of the year. Two key congressmen, Rep. Bob Goodlatte (R), chairman of the House Agricultural Committee, and Rep. Charlie Stenholm, ranking Democrat of the committee, complained in a joint statement that "changes to countries' agricultural policies should come through the give-and-take of negotiations, not through decisions that do not appear based on WTO rules." [Editor's note: In the original version, Goodlatte's name was misspelled.] In an election year, politicians try to avoid resolving trade issues that can annoy constituents. In this case, there are 25,000 US cotton farmers. [Editor's note: The original version mistakenly implied that Rep. Goodlatte represented the state of Texas. He represents the state of Virginia.]
The issues won't go away, however. Another WTO panel is expected to decide soon on a Brazilian complaint about the European Union's protection of its sugar-beet farmers. This could light a fire under the EU. The WTO would like to see a "framework agreement" on farm issues worked out by the end of June, with actual negotiations starting early next year.
The Doha Round is supposed to fully incorporate agricultural products into the world system governing international trade. But successful negotiation of a global trade round takes years. Mr. Prestowitz isn't sure the Doha Round will end even in the next presidential term.
Surprisingly, even some US farmers who receive the subsidies grumble. That's because most of the money goes to big farms, usually run by corporations. Between 1995 and 2002, for example, a total of $1.68 billion was paid to 285 cotton exporters and millers under one part of the cotton program, according to a study by the Environmental Working Group, using data obtained under the Freedom of Information Act. A handful of corporations got an average of $80 million apiece. Allenberg Cotton Co. of Cordova, Tenn., was paid $106.9 million.
Prestowitz criticizes the administration for talking a free-trade line but acting in a protectionist manner by appealing the cotton case. The cotton decision, says Dale Hathaway, an expert with the National Center for Food and Agriculture in Washington, "will push in the direction of moving ahead with subsidy reform."