Will cotton subsidies ignite new trade dispute?

Odds are that you’re probably wearing cotton right now. Or maybe you’re drinking coffee brewed using a cotton coffee filter.

Cotton is everywhere, a part of the daily lives of millions of people. But few are aware that cotton has cost taxpayers hundreds of millions of dollars in recent years and could cost even more in the future.

From 2010 through September of last year, the United States paid nearly $147 million annually to Brazil’s cotton industry – thanks to its controversial cotton subsidies.

In 2002, Brazil – a major cotton exporter – challenged the U.S. subsidies on the grounds that they unfairly affected Brazilian growers. Brazil's complaint targeted two programs: the direct payments program, which bases farm subsidies on historic production; and an export subsidy that makes exporting cotton easier and cheaper for U.S. growers.

In 2009, after years of appeals, the World Trade Organization ruled against the United States and allowed Brazil to impose expensive tariffs to make up for its losses. To drive the message home, the WTO also authorized “cross-retaliation” – a rare tactic that enabled Brazil to take retaliatory actions not just against U.S. goods, including cotton, but also on U.S. copyrights and patents.

In response, the United States agreed to pay an annual fee and promised to revise its cotton subsidies in the next farm bill – the one currently being debated in Congress.

In hopes of avoiding future trade retaliation and expensive payments, the House and Senate Agriculture Committees created the Stacked Income Protection Program, known as STAX, a cotton-only insurance program designed to comply with WTO’s trade regulations.

STAX is a revenue insurance policy that pays cotton farmers when actual revenue losses in a given county exceed expected losses. To encourage farmers to participate, the government pays 80 percent of a farm’s insurance premium – the highest percentage of any federal crop insurance program.

By creating a cotton-only program, policymakers sought to end the subsidies that provoked the Brazilian trade dispute. However, what they created instead could – in conjunction with other new crop insurance programs – continue to violate the United States’ WTO commitments.

Not surprisingly, a Brazilian delegation that visited Capitol Hill recently was not encouraged by what they saw in the farm bill. After a series of Congressional meetings, Brazilian Cotton Growers Association President Gilson Pinesso told reporters, “We have not yet seen sufficient effort to make the new farm bill comply” with WTO regulations.

Interviews with the delegation offered few insights into the Brazilians’ specific concerns, but it’s very possible that the 80 percent premium subsidy raised eyebrows.

Whether you put stock in the Brazilian delegation’s comments or dismiss them as posturing, the threat of new WTO challenges – and new retaliatory measures – remains. In fact, the farm bill creates a whole suite of new farm subsidies that may well violate international trade agreements.

The United States has committed to limit “trade-distorting” domestic agriculture support to $19.1 billion a year.  And none other than the U.S. Chamber of Commerce has warned that several new subsidy programs in the farm bill (Price Loss Coverage, Average Revenue Coverage and other add-ons to crop insurance) will be deemed to be trade-distorting.

Joseph Glauber, the U.S. Department of Agriculture’s (USDA) chief economist, did research on his own that doesn’t necessarily reflect the agency’s views and wrote that if the U.S. is challenged on this front, it would most likely be required to include payments by these programs in its count of agricultural domestic support.

If that happens, reports by the Environmental Working Group, the University of Missouri’s Food and Agricultural Policy Research Institute and the American Enterprise Institute for Public Policy Research all show that the potential cost could eclipse the $19.1 billion annual limit and open the door to new WTO claims against the United States.

On top of that, factor in STAX.

The Congressional Budget Office anticipates that the STAX will cost more than $3.5 billion over 10 years. Because it is a commodity-specific program, it is not exempt from domestic agricultural support totals, and its costs would be counted toward the $19.1 billion annual limit.

If the proposals in the 2013 farm bill, including STAX, are enacted and their costs are as high as some expect, the United States could be in serious jeopardy of violating WTO trade commitments once again.

I like cotton – and coffee – as much as the next person, but the proposed cotton subsidies could create a world of headaches that not even a soft cotton pillow could solve.

Photo credit: U.S. Department of Agriculture Agricultural Research Service