Apr 16, 2010

US pays Brazil $ 147 million a year in cotton subsidies to keep its mouth shut.

There isn't any respite for the dying cotton farmers in Vidharbha in central India. Nor is there any hope for millions of cotton growers in the four western African nations, popularly called "Cotton-4"  -- Benin, Burkina Faso, Mali and Chad. It was expected that Brazil might succeed in making a historic correction in US federal support to its cotton growers thereby forcing America to at least start phasing out the monumental but scandalous cotton subsidies.

Brazil had won the dispute panel ruling against US subsidies. It could impose $ 820 million in countermeasures against US goods and intellectual property rights. But the much anticipated trade sanctions against the US did not take place.

The US succeeded in bribing Brazil. It offered to subsidise instead Brazil's rich cotton growers to the tune of $ 147.3 million a year. This is a small fee to ensure that Brazil keeps its mouth shut. Which also means that the US can continue to distort the global cotton market by the huge subsidies it provides to its rich and pampered cotton growers. While the US cotton farmers can continue to go on an annual cruise around the world, cotton farmers in Vidharbha will continue to bear the brunt. Many more will die this year.

US cotton subsidies are primarily responsible for the depressed global prices, as a result of which cotton farmers in India are priced out. Many commit suicide, leaving behind wailing families.

The US continues to top the chart when it comes to a rogue trading nation. It continues to hold up fair and equitable trade negotiations. Often the stage managed negative role the US plays in WTO reminds me of the underworld in the Bollywood blockbusters. Everyone knows that the US is the bad guy, but none of the countries (blame their leaders) are even capable of pointing the bluff. Even the mainline economists shy from pointing a finger.
I was therefore pleasantly surprised when an American magazine -- Time -- came out with a real hard-hitting analysis. Knowing that not many American publications and TV channels would dare to stand up and be counted, I must admire the courage of the writer, Michael Grunwald, to call a spade a spade.

Anyway, here is what he wrote. In between, I have added a box just to illustrate what the cotton subsidies mean for the 'Cotton-4'.

Why the U.S. Is Also Giving Brazilians Farm Subsidies http://www.time.com/time/nation/article/0,8599,1978963,00.html

By Michael Grunwald

What could be more outrageous than the hefty subsidies the U.S. government lavishes on rich American cotton farmers?

How about the hefty subsidies the U.S. government is about to start lavishing on rich Brazilian cotton farmers?

If that sounds implausible or insane, well, welcome to U.S. agricultural policy, where the implausible and the insane are the routine. Our perplexing $147.3 million–a-year handout to Brazilian agribusiness, part of a last-minute deal to head off an arcane trade dispute, barely even qualified as news; on Tuesday, April 6, it was buried in the 11th paragraph of this Reuters story. (The New York Times gave it 10th-paragraph play.) If you're perplexed, here's the short explanation: We're shoveling our taxpayer dollars to Brazilian farmers to make sure we can keep shoveling our taxpayer dollars to American farmers — which is, after all, the overriding purpose of U.S. agricultural policy. Basically, we're paying off foreigners to let us maintain our ludicrous status quo. 

I've previously written that federal farm subsidies are bad fiscal, environmental and agricultural policy; bad water, energy and health policy; and bad foreign policy, to boot. Cotton subsidies are a particularly egregious form of corporate welfare, funneling about $3 billion a year to fewer than 20,000 planters who tend to use inordinate amounts of water, energy and pesticides. But the World Trade Organization (WTO) doesn't prohibit dumb subsidies. It only prohibits subsidies that distort trade and hurt farmers in other countries.


National Centre for Policy Analysis in the US says in its Analyses # 547 (Mar 24, 2006):

Every year, farm subsidies cost developing countries about $24 billion in lost agricultural income. Cotton is an excellent example:

World cotton prices have fallen by half since the mid-1990s and, adjusted for inflation, are now lower than at any time since the Great Depression of the 1930s.

Despite the plunge in prices, cotton production in the United States grew 42 percent between 1998 and 2001.

Due to subsidies, American cotton farmers receive up to 73 percent more than the world market price for their crop. To compensate for falling prices, U.S. cotton subsidies have doubled since 1992, and in 2001-2002 America's 25,000 cotton farmers received a $230 subsidy for every acre of cotton planted - a total of $3.9 billion. By comparison, wheat and maize subsidies amount to $40 to $50 per acre.

Cotton Subsidies Harm Africa. American cotton subsidies cost sub-Saharan Africa $302 million in 2001-2002 alone, according to Oxfam International, an antipoverty organization.

Specifically, West Africa's Burkina Faso lost 1 percent of its GDP, and export earnings declined 12 percent due to competition from subsidized U.S. cotton. In Burkina Faso, 85 percent of the population (more than two million people) depends on cotton production and over half the population lives in poverty. The cost to produce a pound of cotton is one-third the cost in the United States, but farmers there cannot compete in world markets against American cotton. There are similar problems in other countries that also rely heavily on cotton. In 2001-2002, Mali 's GDP fell 1.7 percent and export earnings dropped 8 percent; and Benin lost 1.4 percent of its GDP and 9 percent of export earnings.

Subsidies have devastated Central and West Africa, where more than 10 million people depend directly on cotton production. Millions more are indirectly affected because cotton is also the major source of foreign exchange and government revenue. The International Cotton Advisory Committee (ICAC) estimates that ending U.S. cotton subsidies would raise world prices by 26 percent, or 11 cents per pound. The results for African countries dependent on cotton exports would be substantial:

Burkina Faso would gain $28 million in export revenues;

Benin would gain $33 million in export revenues;

Mali would gain $43 million in export revenues. [See the figure.]

These additional revenues would help stabilize developing economies, fuel development, reduce dependence on foreign aid and significantly improve the lives of millions of people.

And yes, U.S. cotton subsidies do that too. By encouraging Americans to plant cotton even when prices are low, they promote overproduction and further depress prices. An Oxfam study found that removing them entirely would boost world prices about 10%, which would be especially helpful to the 20,000 subsistence cotton growers in Africa. In 2005 the WTO upheld a challenge that Brazil had filed against the cotton subsidies as well as some export-credit guarantees for all American farm products, but the U.S. essentially ignored the ruling.

So last August, the WTO gave Brazil the right to impose punitive tariffs and lift patent protections on $829 million worth of U.S. goods — including nonfarm products like cars, drugs, textiles, chemicals, electronics, movies and music. The retaliation was supposed to start Wednesday, April 7, and it would have driven home how our relentless coddling of farmers hurts other American exporters, paralyzing our efforts to open overseas markets to the nonfarm goods and services that make up 99% of our economy. But at the 11th hour, negotiators from the Office of the U.S. Trade Representative and the Agriculture Department reached a temporary deal with their Brazilian counterparts, so the retaliation is on hold.

The obvious solution, in an alternate universe, would have been for the U.S. to get rid of its improper subsidies. But the current farm bill does not expire until 2012, and the congressional agriculture committees don't want to mess with it because, well, they just don't. Senate Agriculture Chairman Blanche Lincoln of Arkansas and ranking Republican Saxby Chambliss of Georgia on Wednesday praised both governments for finding an alternative solution and pledged to "explore modifications" in 2012. Maybe they will, but don't bet on it — cotton, after all, is not unheard of in Arkansas and Georgia. (Here's the top recipient of federal cotton subsidies, with a cool $24.2 million from 1995 to 2006. Yes, that's an Arkansas farm.)

The U.S. negotiators did agree to modify the complicated export-guarantee program to make it less of an export-subsidy program. They also agreed to ease restrictions on Brazilian beef that have been justified as an effort to protect Americans from foot-and-mouth disease — and criticized as an effort to protect U.S. cattlemen from competition. But the big-ticket item is the settlement's "technical assistance" fund of $147.3 million, prorated, for Brazilian cotton growers. That just happens to be the precise amount of the retaliation the WTO had approved for the improper cotton subsidies. According to the U.S. press release, the fund will be replenished every year "until passage of the next farm bill or a mutually agreed solution to the cotton dispute is reached." So the total cost will exceed the price tag of the infamous Alaskan bridge to nowhere, which was at least designed for Alaskans; the annual cost will far exceed the $100 million President Obama ordered his Cabinet to cut from the federal budget last year. 

Of course, helping Brazil's Big Ag — which is just as big as our Big Ag — won't stop the U.S. (or Brazil!) from dumping cut-rate cotton into the world market, hurting subsistence cotton growers in Mali and Burkina Faso. (I've heard the deal may include modest aid for African farmers, but it's not in the press release, and government officials never replied to me with answers to my questions.) But there is at least one piece of good news from the fields: U.S. cotton subsidies have been declining lately, because U.S. cotton farmers want to be independent of government assistance.

Just kidding! U.S. cotton subsidies have been declining lately, but only because the government-subsidized ethanol boom has made government-subsidized corn and government-subsidized soybeans even more lucrative for farmers. The fix is still in when it comes to American agriculture. Congress might "explore modifications" in 2012, but somehow its explorations and modifications always end up shoveling even more cash.

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