September 27, 2002
Summary
Agricultural subsidies in the United States are at the heart of a deep crisis in world cotton markets. American cotton farmers are first among equals in the harvesting of subsidies, reaping windfall financial gains from government transfers. Rural communities in some of the world's poorest countries suffer the consequences. While the US advocates free trade and open markets in developing countries, its subsidies are destroying markets for vulnerable farmers. No region is more seriously affected by unfair competition in world cotton markets than sub-Saharan Africa.
The Brazilian Government has challenged US cotton subsidies through the World Trade Organization (WTO). That challenge has a wider significance. If it succeeds, it will improve prospects for poverty reduction in a large group of cotton-dependent countries. More importantly, it will address a problem that is undermining the potential of agricultural trade to reduce poverty: namely, the use of subsidies to dump agricultural produce on world markets at prices that bear no relation to the costs of production.
World cotton prices have fallen by half since the mid-1990s. Adjusted for inflation, they are now lower than at any time since the Great Depression of the 1930s. Only a limited recovery is in prospect.
Central and West Africa have been devastated as a result. More than 10 million people in those countries depend directly on cotton production. Many millions more are indirectly affected. Cotton is also the major source of foreign exchange and government revenue for countries such as Burkina Faso, Mali, and Benin. According to the World Bank, the region is among the lowest-cost producers of cotton. Yet despite this comparative advantage, it is losing world markets, and its cotton farmers are suffering rising poverty.
The US bears much of the responsibility for the slump in world prices. Estimates by the International Cotton Advisory Committee (ICAC), using its World Textile Demand Model, indicate that the withdrawal of American cotton subsidies would raise cotton prices by 11 cents per pound, or by 26 per cent.
America's only clear comparative advantage in cotton production is in the use of subsidies. More efficient producers in developing countries are losing out because of American subsidies. Costs of production for one pound of cotton are three times higher in the US than in Burkina Faso. Other major producers – such as Brazil – also have far lower production costs. Yet the US has expanded production in the midst of the price slump. Other countries have suffered as a result of both lower prices for exports and loss of world market share.
The scale of government support to America's 25,000 cotton farmers is staggering, reflecting the political influence of corporate farm lobbies in key states. Every acre of cotton farmland in the US attracts a subsidy of $230, or around five times the transfer for cereals. In 2001/02 farmers reaped a bumper harvest of subsidies amounting to $3.9bn – double the level in 1992. This increase in subsidies is a breach of the ‘Peace Clause' in the WTO Agreement on Agriculture, opening the door to the Brazilian complaint.
To put this figure in perspective, America's cotton farmers receive:
In an economic arrangement bizarrely reminiscent of Soviet state planning principles, the value of subsidies provided by American taxpayers to the cotton barons of Texas and elsewhere in 2001 exceeded the market value of output by around 30 per cent. In other words, cotton was produced at a net cost to the United States.
Domestic public-policy madness has international consequences. Using data from an International Cotton Advisory Committee model, Oxfam has attempted to capture the cost to Africa of American cotton subsidies in 2001/02. For the region as a whole, the losses amounted to $301m, equivalent to almost one-quarter of what it receives in American aid. Eight cotton-producing countries in West Africa accounted for approximately two-thirds ($191m) of overall losses.
The small size of the countries concerned and their high level of dependence on cotton magnify the effect of US policies. For individual countries, US cotton subsidies led to economic shocks of the following magnitude:
· Burkina Faso lost 1 per cent of GDP and 12 per cent of export earnings.
· Mali lost 1.7 per cent of GDP and 8 per cent of export earnings.
· Benin lost 1.4 per cent of GDP and 9 per cent of export earnings.
These losses have generated acute balance-of-payments and domestic budget pressures, and pushed several countries to the brink of a renewed debt crisis. The economic losses inflicted by the US cotton subsidy program far outweigh the benefits of its aid. Mali received $37m in aid in 2001 but lost $43m as a result of lower export earnings. The cotton subsidy program has also undermined the Heavily Indebted Poor Countries (HIPC) Initiative, costing countries such as Benin, Burkina Faso, and Chad more than they have received in debt relief. The financial damage inflicted by US cotton subsidies has grave implications for poverty. Cotton growers in the US can shift relatively easily to other crops, but the scope for substitution is much more limited in the Sahel. Grown alongside maize and other cereals, cotton is the main cash crop for a large section of the rural population. It is also an important source of government revenue for spending on health and education. Apart from exacerbating balance-of-payments pressures, lower world prices are transmitted to the poor in the form of reduced farm incomes, lower agricultural wages, and diminished provision of basic services.
Africa's experience in cotton raises wider concerns about American policy. Through its aid program, the Bush Administration has sought to promote free-market reforms in Africa. Similarly, trade preferences under the Africa Growth and Opportunity Act (AGOA) are conditional on African governments liberalizing agricultural markets, including in the cotton sector. Yet when farmers in Mali or Burkina Faso enter world markets they are forced to compete against heavily subsidized American exports.
Notwithstanding constant references to the ‘family farm' on the part of US policy makers, farm subsidies are designed to reward and encourage large-scale, corporate production. The largest 10 per cent of cotton farms receive three quarters of total payments. In 2001, ten farms between them received subsidies equivalent to $17m.
The Brazilian Government has claimed that its cotton sector has sustained serious losses as a result of US subsidies, and that these subsidies include prohibited export measures. That claim is fully justified. African governments would be equally justified in claiming serious injury. For the eight countries reviewed in this report, aggregate losses for the period 1988-2001 as a result of lower export prices associated with American subsidies amounted to $333m. This does not take into account losses in market share.
Several cotton-growing associations in West Africa have urged their governments to raise the problems associated with American susbidies at the WTO. The newly established Legal Advisory Centre at the WTO, created to help the poorest developing countries use multilateral trade rules to defend their interests, could play an important role in facilitating such action. However, the realities of political and financial power mean that African countries are highly vulnerable to retaliatory action because of their dependence on aid and debt relief and the threat of unilateral withdrawal of trade preferences. Looking beyond the Brazil-US case, Northern governments should agree to major reforms of their agricultural policy during the current WTO round, including:
· A comprehensive ban on agricultural export dumping, or the sale of products at prices below the costs of production.
· Agreement on a binding timetable to eliminate all forms of export support, including export credit subsidy programs, before the Fifth WTO Ministerial Conference in September 2003.
· The removal from the ‘Green Box' of currently permitted subsidies that generate over-production.
· The restructuring of domestic support in rich countries towards less-intensive agriculture and measures aimed at enhancing the welfare of small farmers rather than large-scale corporate agriculture.
Read the full report at http://www.oxfam.org/eng/pdfs/pp020925_cotton.pdf
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