On April 26, 2004, a World Trade Organisation (WTO) Panel ruled that subsidised US cotton exports are illegal and violated WTO trade rules. If upheld on appeal, the ruling has profound implications for the global trade of agricultural products and for ongoing trade negotiations. The ruling has been described by Business Week as one: ". that could tip the power balance in world trade talks".

Brazil, who took the case to the WTO, argued that the US$3-billion-a-year cotton subsidy programme paid to 25,000 US cotton farmers led to a loss of US$600 million in sales in the 2001-2 season alone. The massive subsidies have not only negatively affected Brazil. They have led to world overproduction and depressed prices (about 61 per cent below cost) affecting cotton-producing countries across the world, particularly West African countries like Benin and Chad which are "third parties" in the Brazil case.

In these countries, cotton is a "cash crop" providing life or death income for their majority rural poor populations. US subsidies have contributed to the growth of the American share of world cotton exports from under 20 per cent in 1999 to more than 40 per cent in 2004, according to International Cotton Advisory Committee estimates.

Disagreement on cotton was one of the major issues that contributed to the collapse of the WTO Ministerial Conference in Cancún last year. It was part of the larger debate about the need to dismantle the colossal agricultural subsidies in developed countries that distorts the market and blocks market access and opportunities for growth by developing countries.
Taking the issue out of the negotiating arena, Brazilian officials expressed frustration with the trade talks and are now seeking a legal remedy through the WTO Dispute Settlement process.

The US defence is instructive. They argue that payment to farmers do not distort trade because they are "decoupled" from production. This means that farmers do not get extra payments for extra cotton produced. By not encouraging cotton farmers to overproduce, the US maintain that the payment to farmers does not artificially inflate supply or depress prices. This argument, however, was rejected by the WTO Panel Body.

Understandably a legal argument, such a defence nonetheless seems contrary to the latest negotiating stance of the US. In his Congressional Testimony last month, Robert Zoellick, US trade representative, emphasised the need to substantially decrease and harmonise trade-distorting domestic support and to eliminate agricultural export subsidies by a certain date. Zoellick has also expressed support for the recent move by the European Commission (EC) to eliminate 2.8 billion euros (US$3.3 billion) in agricultural export subsidies to get the stalled global trade talks moving again, promising that the US would reciprocate.

So, does all of this mean that subsidies are subsiding? Well, not so fast! France, the union's largest farming nation, has criticised the move and accused the EC of exceeding its mandate. The social, political and economic ramifications of unravelling over US$100 billion a year in support to European farmers should not be underestimated. Similarly, undoing the 2002 farm bill, which also provides US farmers with over US$100 billion in subsidies annually, especially in an election year, will not be easy. Responding to the WTO ruling, Senator Kent Conrad, Democrat of North Dakota, is reported to have said: "This has the potential to have extraordinary consequences up and down every main street in rural America."

Notwithstanding these seemingly insurmountable difficulties, the writing is on the wall - changes will be made to the existing subsidies arrangements. For example, following the WTO ruling that the foreign sales corporation/extraterritorial income exclusion tax law is illegal, the Senate is currently discussing a tax bill that will repeal the law. Since March this year, a five per cent duty has been imposed on about 1,600 US products entering the EU and will rise by one per cent a month until it hits 17 per cent if the US doesn't repeal the subsidy. The duty, now at seven per cent and expected to amount to about $300 million this year, is beginning to bite US producers.
What are the implications for Jamaica and Caricom? There are at least two that we must seriously consider:
1) Sugar is next! We can expect a similar outcome in the sugar case currently before the WTO Dispute Settlement Panel. Our preparedness and ability to face global competition in sugar, sooner rather than later, when the current preferential arrangement unravels, is again at issue. We cannot hide from this reality - we know it is coming. Are we ready?

2) While the focus in the subsidies debate has been about the unfair subsidies of rich countries that affect poor countries, it is not wise to assume that we will be able to continue our own subsidies indefinitely without challenge. "Levelling the playing field" suggests that Jamaica and Caricom will also have to get rid of subsidies, such as equity capital or loan guarantees by development banks and import duty exemptions. Do we really want a "level playing field" or do we want "special and differential treatment"? Do subsidies "distort the market" or are they necessary tools to transform our economies and facilitate competitiveness? Under the WTO rules, developing countries should have dismantled export subsidies in 2003. At the Doha Ministerial Conference, an extension was granted until 2007. Are we prepared for this deadline?
The world is changing fast. It's not business as usual. Cotton is just the tip of the iceberg.

Dr Rosalea Hamilton is a trade policy consultant and CEO of the Institute of Law & Economics www.ilejamaica.org
E-mail: rosaleahamilton@hotmail.com

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