The Hindu Business Line : US set to challenge WTO ruling on cotton subsidies

STUNG by an adverse WTO panel ruling in the cotton case, the US is bracing itself to appeal aspects of the panel report. A note to dispel what are termed as `myths' about support to American cotton farmers has already been circulated by the Office of the United States Trade Representative (USTR).

The US cotton programmes are widely believed to have caused a fall in cotton prices and hurt growers in other origins, especially those from developing nations such as in Africa.

When first released several months ago, the WTO's preliminary findings - the outcome a complaint filed by Brazil against the US - caused a furore across the world.

Essentially, the US is seeking to defend its position by saying that its programmes have not distorted trade, caused low prices and hurt foreign growers. Rather, they have operated as designed, supporting farmers' incomes while allowing them to react to market signals.

Rebutting the popular belief that the US support to cotton farmers resulted in low cotton prices, USTR is at pains to show that cotton prices have actually risen after introduction of Farm Bill 2002 despite alleged increase in US cotton support.

According to USTR, a high correlation between Chinese net import levels and price movements exists.

Denying that the support programmes have insulated US farmers from market price signals, the note goes on to state that American cotton farmers too, like their counterparts in the rest of the world, have reacted to market conditions.

It has been suggested that farmers in the US plant in the spring season based on what they expect the prices to be in the fall season. Futures market helps them discover forward prices and enables them make the planting decision, it is argued.

Policymakers in the US have termed the WTO panel ruling as a `mixed verdict', suggesting admission of correctness in some of the adverse findings, which would of course be challenged while some aspects would be negotiated, rather than litigated.

It is, however, clear that the cotton case will exert no immediate impact on the US farm programmes as also on the global cotton economy.

Of course, there are some unanswered questions. It is a fact that world cotton prices have been low and ruling at levels detrimental to the economic interests of growers in developing countries.

What are the contributory factors to low world prices? It is conceivable that a combination of factors has led to low prices. The question to be answered is whether the US cotton support programme is one of the contributory factors.

If yes, what is the extent of its contribution to low prices? Next, assuming that US cotton support programmes did not exist. Would global cotton prices have behaved any differently? Would they have risen more than they did since 2002?

Interestingly, USTR is at pains to demonstrate that the country's support programmes have in no way impacted world cotton prices. To what extent it would succeed in dispelling the so-called myths remains to be seen.

A striking paradox in the USTR report relates to the very rationale of having the cotton support programme. According to USTR, the support programme does not distort prices, does not help raise production, does not insulate US farmers from market conditions and that US farmers take their planting decision based on prices on the futures market.

If all these are accepted as correct, it follows that the US cotton economy is almost wholly market-driven and that American cotton farmers are not dependent on Government support.

What, then, is the real purpose of the support programme and the utility of huge funds spent? Farmers who have for long years enjoyed payments for producing more are unlikely to cut down on production even if a system of decoupled payments is introduced.

The US has successfully defended its position in the matter of decoupled payment from the claim of serious prejudice. But how does one ascertain that decoupled payments do not distort prices and markets?

Looked at from another angle, there are loads of lessons for the developing countries to learn.

The US is one of the most efficient producers of cotton and the position has been earned with the infusion of large resources - financial, technological and human, over a period of time.

By itself, farm support programmes alone do not and cannot guarantee higher yield, larger area and bigger output.

Large investment is required in a whole range of services and infrastructure - delivery of inputs, scientific farm management, pre- and post-harvest practices, and not the least, rural infrastructure including warehousing and marketing facilities.

The sooner developing countries that produce cotton, including India, start putting their houses in order, the better.