The Cotton and Sugar Subsidies Decisions: Wto's Dispute Settlement System Rebalances the Agreement on Agriculture

Abstract

Acting on complaints by Brazil, the World Trade Organization (WTO) adopted in Spring 2005 two dispute settlement reports that not only require changes to U.S. and European agricultural subsidies, but alter the balance of concessions reached in the 1994 Agreement on Agriculture, further complicating the task of tightening agricultural disciplines underway in the Doha Development Round. The Cotton report reclassifies from the green box (permitted subsidies) to the amber box (subject to reduction commitments) two U.S. programs whose payments are based on historical acreage and yields and thus were thought by most observers to be decoupled both from price and production, the archetypal exemption from reduction commitments for non-trade distorting subsidies.

The panel concluded that the so-called "fruit and vegetable exception," which results in reduced payments if the grower plants certain crops, was sufficient to link payments to production, despite evidence that virtually all cotton recipients would in any event have continued to plant cotton on their base acreage. The panel went on to find that subsidies to cotton producers exceeded the U.S. reduction commitment in the Agreement on Agriculture and caused world cotton prices to be "significantly suppressed," an actionable form of injury to Brazil's cotton exporters under the WTO Subsidies Agreement.

We conclude that it is difficult to argue with the Panel's finding that price support programs tied to world prices have market insulating effects on farmers and a negative impact on world cotton prices. However, even in the absence of U.S. cotton policy, world cotton prices may be distorted from widespread use of subsidies by other cotton-producing nations. As a result, the Panel's statements concerning price suppression in the absence of U.S. cotton policy should be interpreted with caution, because price suppression can exist even in the absence of the U.S. cotton policy. Even more importantly, the Panel's failure to quantify either the magnitude of the subsidies or the nature of the price effects leaves governments without a road map to conform their agricultural support programs to these strict-liability interpretations of WTO mandates.

The EC sugar regime establishes production quotas for two categories of sugar, labeled "A sugar" and "B sugar." These are the maximum amounts of sugar that may be sold within the EC in a given year. Producers must export any surplus amounts, designated "C sugar." Domestic prices for A and B sugar are supported by an array of government measures and also receive direct export subsidies. EC sugar producers receive no additional funds from the EC if they export a large amount or no C sugar. The Sugar panel found that "A, B or C sugar are part of the same line of production and thus to the extent that the fixed costs of A, B or C are largely paid for by the profits made on sales of A and B sugar, the EC sugar regime provides the advantage which allows EC sugar producers to produce and export C sugar at below total cost of production."

The Sugar panel's finding that below-cost exports of an agricultural product may, even in the absence of "direct" export subsidies, represent proof of export subsidization if there is close linkage between these exports and domestic support programs makes the U.S. rice, corn, soybeans, and other commodities programs vulnerable to dispute challenge. The finding also substantially complicates the EC's task of bringing its sugar regime into compliance with its reduction commitments under the Agreement on Agriculture. If the 4 million tons of "C sugar" exports benefit from prohibited "export subsidies," either these exports must be eliminated or their subsidization must be ended. The former approach will put the EU in breach of its agreements with ACP countries and with India. The latter will be difficult, if possible at all, without elimination of domestic support for "A" and "B" quota sugar, because the Sugar opinions leave the EC with little guidance as what level of domestic support would end "C" sugar cross-subsidization. As in the Cotton case, the lack of quantification has left the losing WTO Member in a position of not knowing how to bring its subsidy program into compliance.

Using both subsidies law and trade economics, we argue that these decisions markedly change the starting positions in the Doha Round by blurring distinctions between the "boxes" that were clear to agriculture negotiators during the Uruguay Round, as well as distinctions between domestic and export subsidies crucial to the balances struck in the Agreements on Subsidies and on Agriculture. No matter how destructive of efficient markets large subsidies may be, these cases should not be seen as proof that developing countries can bring to justice rich nations that abuse their financial power to cause injury. The cases simply demonstrate that an agricultural superpower can take advantage of technical traps caused by imprecise drafting and an increasingly literal WTO dispute settlement system with a built-in bias against deference to national agencies to penetrate its most desirable markets.

Keywords: agriculture, subsidies, WTO, dispute settlement

JEL Classification: Q17, Q18, C53, F13, K33