Economics, Politics, Social Commentary and occasionally Superstring Theory.

Thursday, May 26, 2005

Upland Cotton

Arguably, one of the biggest cases that the U.S. has lost in front of the WTO Appellate Body ("AB") is the Upland Cotton decision (WT/DS267/AB/R). In the post below I will summarize the important arguments, rulings, and implications.

The Agreement on Agriculture
In a very general sense, the Agreement on Agriculture ("Ag Agreement") commits WTO members to cut agricultural subsidies. To find a violation of the Ag Agreement is essentially a two-step process. The first step is figuring out what programs count as agricultural subsidies. There are three types of agricultural subsidies under the Ag Agreement: green box, blue box and amber box.

Green Box- these subsidies do not count toward the AMS and are classified as having no or little trade-distorting effects. They must be government-funded and have no price supports.
Blue Box - these subsidies would be trade distorting if they did not have conditions that mitigate resulting trade distortion. An example would be payments with production limits on specific crops.
Amber Box - these are all subsidies that do not qualify as green or amber box subsidies.

Step two addressed the question of why it matters what "box" any of these subsidies fall in. The Ag Agreement commits members to cut subsidies that only fall within the amber box. A member can spend as much as they want in blue and green box subsidies and not run afoul of the Ag Agreement. Therefore, members who are being challenged in front of the WTO over their agricultural subsidy programs will want to argue that their programs fit within the green or blue box, not within the amber box.

In 1996, Congress allowed for the use of flexibility contracts for cotton growers (among other things.) The contracts essentially took a baseline amount of acres used for cotton production, and then paid farmers owning those acres a set amount per acre. The farmers were paid regardless if they grew anything on the land or not, as long as they didn't grow certain types of crops ("prohibited crops"). If they grew prohibited crops on the acres in question, the payments were reduced on a sliding scale down to a possibility of zero.

In 2002, direct payments were introduced to take the place of flexibility contracts. They worked essentially in the same fashion as the flexibility contracts, with the same prohibited crops, but also added wild rice to the list of prohibited crops.

Problem 1
The Green Box: More Than Where You Hide Your Stash
Brazil et. al. argued that these payments were inconsistent with the Agreement on Agriculture ("Ag Agreement") . Specifically, because the payments were dependent upon farmers not growing certain crops, the U.S. was in effect conditioning its support upon a type or quantity of crops grown, i.e. the prohibited crops list. That conditionality meant that the subsidies could not qualify as green box subsidies. The U.S. responded by saying that it was not positively encouraging specific crop growth, but was negatively doing so by prohibiting support if such crops are grown. The U.S. further argued that the Ag Agreement only envisioned payments made to positively affect production, not those that would negatively affect it. The AB Panel found for Brazil, finding that the text of the agreement had no "positively-affecting" language, but prohibited payments which were "related to the type of production undertaken." The payments themselves create an incentive to produce products other than those on the prohibited list, destroyiong a link between pure risk and return. Due to this incentive, the U.S. could not classify the payments made under this program as "green box" subsidy.

Problem 2
Don't Tread on My Non-Specific Support
Members cannot sue each other for product-specific subsidies in the amounts that were in effect during the 1992 marketing year. For instance, if the U.S. had $3m worth of product-specific subsidies in 1992, Brazil could not sue them for having the same amount of subsidies in 2005. However, if the U.S. had $5m in product-specific subsidies in 2005, Brazil could sue them over the difference. The U.S. therefore argued that its programs, summarized above, counted as nonproduct-specific subsidies and therefore could not be the basis for a WTO challenge.

More to come later


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