A U.S.-Africa Dialogue on the Cotton Trade

Originally published by the Carnegie Endowment for International Peace
Participants: John Baffes, Elena Bryan, Uri Dadush, Crawford Falconer, Carol Goodloe, Marc Lange, Gary Clyde Hufbauer, Mamadou Sanou, Nadjindar Titdjebaye, Terry Townsend

Efforts to reduce subsidies for cotton have been called a litmus test for the commitment of participating nations to the WTO Doha Round of global trade negotiations. But despite significant barriers to trade in cotton—a crucial export of some of the world’s poorest economies—the issue failed to garner serious attention at last year’s WTO trade ministers meeting in Geneva.

Carnegie and the iDEAS Centre hosted a dialogue between representatives from the United States and Africa’s four major cotton producers: Benin, Burkina Faso, Chad, and Mali (the Cotton-4, or C4).

Major Issues in the Cotton Market
The cotton industry provides employment for almost 300 million people, many of whom reside in poor, rural areas in developing countries. Terry Townsend, executive director of International Cotton Advisory Committee, provided an overview of the major issues in the cotton market.

• Technological change and trade liberalization set forth in 1994 at the World Trade Organization (WTO) Uruguay Round led to a quadrupling of cotton production and consumption over the past six decades.
• In the last few years, high fertilizer prices, unusually high volatility in the cotton futures market, and sinking export demand driven by today’s crisis have posed great challenges to cotton producers.
• Internal Problems: The cotton industry faces challenges of environmental sustainability and increased competition from polyesters.  Cotton farmers and their governments must address these issues.
• External Problems: Distortive subsidies for cotton producers in developed countries pose an external problem for impoverished economies that are dependent on cotton as a major source of livelihood.  Spain and Greece provide the largest subsidies on a per pound basis, while the United States provides the most support in absolute dollar terms.

WTO Doha Round
Crawford Falconer, former Chair of the WTO Agricultural Negotiations Committee, shed light on why, despite the recent stalemate in the WTO Doha Round, there is reason for optimism that there will eventually be a conclusion to both the Round more broadly and the cotton issue specifically.

• Concern that nations might turn to protectionism in the wake of today’s crisis has galvanized a global reaffirmation of the value of open trade, as evidenced by the G20 commitment to conclude Doha by 2010.
• Although the cotton issue failed to receive serious attention at the July 2008 WTO ministerial, subsequent consultations between the four main parties concerned – the U.S., the EU, Brazil and the C-4 countries – has led to better understanding of the issues and priorities of each party.
• The United States and other countries with large cotton subsidies have not yet offered specific cotton proposals. It seems that real negotiations have yet to start. Progress will only be possible when all parties engage in concrete negotiations.
• Dismantling subsidies for cotton and supporting producers in a non-distorting way are key challenges facing today’s negotiators.
• The progress made in the 2005 Hong Kong ministerial was largely due to trust and positive personal relationships amongst negotiators.  The next ministerial must strive to follow this success.
• Concluding Doha by 2010 may not be a realistic target, given the many steps required for implementation.  The middle of 2011 may be an optimistic target.

WTO Dispute Settlement Mechanism
Gary Clyde Hufbauer, Senior Fellow at the Peterson Institute for International Economics, highlighted the significance of the WTO dispute settlement mechanism.

• Compliance with dispute settlement resolutions is essential to guarantee the credibility of the system. It has generally been good.
• Whenever international obligations are not directly linked to domestic laws, some noncompliance is inevitable.  When noncompliance does occur, developing economies are at a disadvantage; their small market size limits the leverage they have to implement effective countermeasures, which is the only WTO-legal response to an offending country that ignores a dispute resolution panel’s ruling
  .
• The case of the resolution panel’s 2004 decision in favor of Brazil’s complaints about U.S. cotton policies gave legitimacy to the dispute resolution system as a forum in which less developed countries can push for and obtain fair treatment by large economies.
• Dispute settlement should be reformed to allow for monetary compensation.
• The Obama administration and the Democratically-controlled U.S. Congress are more likely to support  cotton reforms than the past administration because they do not rely on political support from the wealthy cotton farmers who benefit from subsidies.  With all of their competing priorities – include climate change and healthcare reform – U.S. political leaders are unlikely to devote substantial political capital to the cotton issue.
• There are many at the U.S. State Department who are sympathetic to the cotton issue.  Hopefully they will play a constructive role in the dispute.

Central and Western African Trade
John Baffes, senior economist at the World Bank, discussed stalling cotton production and trade in Central and Western Africa.

• Since 2003, cotton prices have become decoupled from the rest of the agricultural market, failing to rise during the recent food price crisis.  Developed country subsidies, cotton’s uniqueness compared to other agricultural crops, and a bloated global supply caused by rapid expansion of biotech cotton in China and India contributed to this trend.
• Central and West African cotton producers face domestic challenges as well; poor marketing efforts, inefficient use of cotton by-products, and an inability to meet high-quality fiber requirements have had detrimental impacts the incomes of poor cotton farmers in the region. They have also been hampered by exchange rate disadvantages and expensive fertilizer prices.

Cotton Policies of the C4 Countries
His Excellency Mamadou Sanou, Minister of Trade, Entrepreneurship and Handicraft, Burkina Faso, and Coordinator of the C4, outlined the C4 countries’ cotton policies.

• The cotton industry serves an economically and socially critical purpose in the C4 countries by providing income and employment in poor, rural areas.
• Structural aid to enhance the production and marketing of cotton is vital.  Short-term aid should be targeted at providing a safety net for producers during years of poor production; however, it should not distort long-term growth.
• Development and structural assistance cannot be a substitute for equitable trading rules and a level playing field in the international cotton market.
• The resolution of an aggressive cotton agreement in the WTO will not only improve the welfare of C4 cotton farmers; it will also demonstrate the ability of smaller economies to join together and have their voices heard.
• The African countries have chosen negotiation rather than litigation to find a solution to their cotton problem. They have made concrete proposals and have obtained an agreement at the Hong Kong ministerial that cotton should be treated “ambitiously, expeditiously and specifically”. They are still waiting for a response from the United States and the EU.

U.S. Cotton Policies
Carol Goodloe, senior economist at the U.S. Department of Agriculture, outlined the United States’ cotton policies.

• In the past five years, the U.S. cotton industry has seen a sharp contraction, as U.S. farmers have shifted to more profitable crops.
• Lifting U.S. apparel quotas in 1995, as agreed upon in the Uruguay Round, increased competition from cotton imports, particularly from China.
• The current global recession has reduced demand for apparel, further hampering U.S. cotton producers’ profits.
• The United States believes that reforms of domestic support for cotton should occur within the context of general modalities at the WTO.  Only after those are reached should the specific cotton cuts be addressed.

Cotton Market Drivers
Mark Lange, president and CEO of the National Cotton Council of America, highlighted important factors affecting the cotton market, besides subsidies.

• Small farmers face increasing competition from middle-income countries.
• Protectionism in China and India undermines global cotton prices. Gaining access to the cotton and textile markets in these countries is a main challenge facing the Doha negotiations.

U.S. Efforts to Help Africa’s Cotton Industry
Elena Bryant, Deputy Assistance U.S. Trade Representative for Trade and Development, outlined the efforts of the U.S. government to help Africa’s cotton industry.

• The main funding mechanisms are through the U.S. Agency for International Development, the U.S. Department of Agriculture, and the Millennium Challenge Corporation.
• The West African Cotton Improvement Project allocates $27 million to cotton producers in the region to expand good practices, establish regional training programs for ginners, and expand access to high quality inputs.  Recipient countries must consult widely with the private sector, civil society, and donor partners to secure a support.

Societal Importance of African Cotton Production
Nadjindar Titdjebaye, of CotonTchad, highlighted the social aspect of cotton production in African countries.

• Cotton improves the standard of living for small farmers by increasing access to basic needs and schooling.
• Cotton cul¬tivation has also increased the overall productivity of the agricultural sector, generating benefits for grain and dairy production.
• A decline in the price of cotton reduces producers’ revenues and constrains the supply of fertilizers. Institutions may not be maintained properly, as the decline in price dampens purchasing power.  These effects may have destabilizing ramifications, as struggling cotton farmers migrate to find employment opportunities elsewhere.

Overarching Themes

• With regard to the dispute settlement system, what matters is compliance, not compensation.
• Other countries are also subsidizing their cotton production, but, in terms of volume, the United States remains the biggest cotton subsidizer and exporter.
• The C-4  initiative is based on trade and not on aid; however, U.S. responses were mostly concentrated on aid.
• The decrease in U.S. cotton production by 40% should allow the United States to be more forthcoming.
• The African countries want to rely less on aid and more on trade.