Developing World Wins WTO Cotton Against U.S. Subsidies

…From The Global Growth Blog

Two weeks ago, Brazil won a ringing victory at the World Trade Organisation (WTO) throwing out an appeal by the U.S. against the Brazil’s cotton growers. In September last year the WTO, in a landmark decision, ruled that the U.S. had to stop doling out the generous allowances it pays its cotton farmers every year to cushion them against the vagaries of the international market-place.

But the U.S., despite Bush’s free trade rhetoric, and well aware of the central role the subsidy system plays in turning the wheels of its agricultural production juggernaut, were not going to give up without a fight. Under Congressional pressure the U.S. trade representative appealed. The entire appeal hinged on a technicality: that the WTO judges who made the earlier ruling, had wrongly calculated the amount of subsidies that could be deemed as trade-distorting, as laid out by the Geneva-based regulator of global commerce. A dishonourable and shabby tactic, that deservedly failed last week when the WTO Appeals Body, which is something akin to the Supreme Court of the global trade dispute resolution, upheld the earlier ruling. It held that the U.S. subsidy policy was inconsistent with the trade agreements on cotton and freely given U.S. obligations.

The WTO endorsed Brazil’s position that the U.S. practice was inimical to the interests of small-scale farmers and had kept global prices of cotton at uneconomical, throw away levels.

This stance is shared by most Third World cotton producers, including members of Ecowas (Economic Community for West Africa States) like Burkina Fasso, which has bravely spearheaded a consistent and single-minded anti-subsidy crusade in Geneva and beyond, with some success. The latest ruling is significant, not just for its precedent-setting value. It tears at the very heart of the unspeakable injustice that plagues the entire practice of global trade. That even as Third World growers of commodities like cotton, labour in hostile terrain to cut costs and hopefully become efficient and price-effective producers on the global arena, their peers from the West have a clear head-start.

They can always fall back on the strong buffer of subsidies their governments offer to cushion themselves from the contingencies of the market, weather and other variables. It was the Kenyan Trade and Industry Minister, Dr Mukhisa Kituyi, who once likened this scenario to putting a heavyweight boxer and a lightweight competitor in the same ring. He was spot-on. In the case of some countries, the lightweight pugilist might as well be blind.

While U.S. and E.U. trade negotiators are some of the most strident defenders of free trade rhetorically, they continue to shamelessly abet a system that makes a mockery of competition. A farmer in the U.S. or the E.U. wins the global price challenge not because he is a better entrepreneur than his African equivalent, for instance, but because he has in his corner a taxpayer subsidy. The cotton farmer in Mali has no chance of competing with his counterpart from Tennessee on an equal footing.

The prognosis gets grimmer when the rich countries do not limit themselves to offering on-farm subsidies, but stretch their role in the supply chain to the export stage. In the latest case, the clincher was that the U.S. has included export credits, as part of the $3 billion support it gives to its 30,000 cotton farmers a year – as if an average of $100,000 each was not enough.

The Brazilian breakthrough punctuates a flurry of activity in international trade diplomacy as efforts to conclude the so-called Doha Round before the December deadline go into overdrive. Developing countries are pressing for a new order that is sensitive to the economic disparities among the 147 WTO member states, the key demand emanating from Doha was the removal of farm subsidies by the richer countries from the North.

Largely due to Western recalcitrance, progress has been scant and four years later, no agreement has been forthcoming on the so-called Doha Round. But the issue remains as potent as ever and it was the cause for the collapse of the last “ministerial” in Cancun, Mexico in 2003. An emboldened developing world constituency, chose to walk away. Having substantively lost the moral battle, it will be interesting to see how fast Washington moves to adhere to the WTO ruling by ending its illegal subsidies.

Past attempts to have rich countries reduce their payments have resulted in mere tokenism, as they look for ways to disguise the same. And this despite an August 2004, “breakthrough” that was to see these countries immediately cut their payments by 20%.

The E.U. recently changed its notorious Common Agricultural Policy (CAP), replacing its quantity-driven payout system for a flat rate. But it is a case of too little too late, as the rotten corrupt edifice remains intact. Clearly, if the U.S. and E.U. really want free trade, they should be ready to end agricultural subsidies or the deadlock will persist after the 2005 deadline. If you want to make poverty history, make trade free.

As much as I think agricultural subsidies in the EU and the US suck, I think it’s sad that so many developing countries have hinged their hopes on “agricultural exports”. That is a flawed approach to global trade. At least some wise people have written that there is no real reason for a farm product to travel 10,000 miles, be it from the North to the South, or vice versa. Grow enough to meet domestic needs, not to profit out of global trade.

On the other hand, the fastest, or maybe I should say the easiest, route out of poverty seems to be exports driven growth. The world’s economic gurus do not have the spine to say that there are other less competitive and unstable ways. For, to say that is to acknowledge the fallacy of uninterrupted growth. But this fallacy will work out well for us, if there are no nasty surprises. So, one should just ignore the truths, I guess.

Nevertheless, I will say this: The world is not a global village. And the more we attempt to make it so, the more we are going to build instability and inequality into the system. If we look at it as “Instability Vs Poverty”, instability is preferable. But personally, I don’t think that is the case. We have just made it so, and my hypothesis is that largely that’s been caused by the sell out of the US to it’s own financial markets.

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Posted on March 16, 2005, in Uncategorized. Bookmark the permalink. 15 Comments.

  1. As much as I think agricultural subsidies in the EU and the US suck, I think it’s sad that so many developing countries have hinged their hopes on “agricultural exports”. That is a flawed approach to global trade. At least some wise people have written that there is no real reason for a farm product to travel 10,000 miles, be it from the North to the South, or vice versa. Grow enough to meet domestic needs, not to profit out of global trade.

    Considering climate/weather/geographical issues favouring growth of certain crops, does it not follow naturally that some countries would be in a position to supply certain agricultural commodities better than other countries. In such a case, exports would be the norm, wouldn’t they?

    Secondly, my knowledge of WTO norms is still growing, but does the WTO have a say in imposing norms on every country’s subsidy decisions? Tomorrow if India were in a position where it’s cotton exports almost single-handedly fulfilled world demand and if it chose to preserve the interests of its own farmers, would the WTO have a say?
    I think it would, but how does the system work – all WTO members are subject to the WTO norms and hence world trade is regulated?

    • Considering climate/weather/geographical issues favouring growth of certain crops, does it not follow naturally that some countries would be in a position to supply certain agricultural commodities better than other countries. In such a case, exports would be the norm, wouldn’t they?

      I agree, but my answer does not change.

      Firstly, I think agriculture exports are not quite the same as other exports. Even if there are natural comparative advantages, pure market demand driven economics will change crop growth patterns, over the long term will probably reduce soil fertility, and in the absence of govt interventions will distort local prices (and to avoid that – the govt will introduce policy restrictions, which are a different kind of subsidy in any case), will result in an “economies of scale” approach to agriculture. I am no agriculture expert, but whatever I have read convinces me that such a transformation to an “economies of scale” approach will be destructive.

      But more importantly, I believe in something that E.F. Schumacher says in “Small is Beautiful”, and I think that particularly applies for agriculture simply because it is far too important, and therefore the most susceptible.

      The optimal pattern of consumption, producing a high degree of human satisfaction by means of a relatively low rate of consumption, allows people to live without great pressure and strain and to fulfill the primary injunction of Buddhist teaching: “Cease to do evil; try to do good.” As physical resources are everywhere limited, people satisfying their needs by means of a modest use of resources are obviously less likely to be at each other’s throats than people depending upon a high rate of use. Equally, people who live in highly self-sufficient local communities are less likely to get involved in large-scale violence than people whose existence depends on world-wide systems of trade.

      Btw, I am not saying “No exports” – export/redistribute surplus by all means, all I am saying is we should not make them the “growth engines”. It is more a philosophical thing, I guess.

      As for WTO, my knowledge is nascent too. But from what little I know, most countries are signatories to WTO today, and they have to follow the norms. There are exceptions however (i.e. not all items fall under WTO norms), and developing/underdeveloped countries are given more time to fall in line, at least in theory. greater market access and removal of subsidies are two important items on the WTO agenda. You are right that WTO has a say in that, but there is a lot of give and take – this particular article notwithstanding, agriculture subsidies, for instance, are still an unaddressed issue and a cause for considerable heartburn. May get addressed in due course, I guess. Regulating world trade is awfully difficult. Time will tell how the WTO works out in practice.

      • which are a different kind of subsidy in any case

      • In a sense, I can see where you are coming to. I was under the impression,and still am, that exports are more or less a country’s show of strength – a natural edge the country has by virtue of it’s existence in a certain geographical location,culture,etc. In that sense, surplus is definitely to be cashed in on. Putting too much pressure on a certain area to fetch income by way of exports might just cause the balance to tilt against the source’s favour.

        The lines you quote from Schumacher are apt. In a realistic sense however, countries can only aspire to reduce the income gap. A utopian vision of completely removing an income gap, asking people to live within their limits contradicts Maslow and other such people who analyzed human psychology threadbare. In that sense, WTO might be going in the right direction(I cannot say it with conviction for limited knowledge prevents me), but in an economic sense, individuals(and hence societies and countries) stabilize at their own levels based on access to resources and ability to use these resources to the fullest. World trade definitely ought to be regulated in some ways(no one knows where the balance between overmoderation and undermoderation lies), but what we need is atleast an environment where different people get access to the same kind of resources. How they choose to use it might be left to them.

      • I think my point is somewhat different: I am not looking at any utopian society. That is not what I imply, even if I dream of it in my weaker moments.

        However, I will say this – Excessive global integration will imply that we will move towards a society where 80% of the population will forever stay in the “lower order of needs” in Maslow’s hierarchy, simply because of the highly competitive nature of global capitalism, and the instability that comes along with it. A society structured so is a more recent phenomenon, and it has not always been so. And that is a great pity. Because I certainly believe we can do better than this. But it needs is a change in mindset, and conscious choices regarding the nature and kinds of growth.

      • Probably makes sense,although I’ll have to read more and assimilate to make sense of how global integration does or does not affect economies. Maybe considering the current state of the world where we have countries with widely different levels of economic prosperity, integration would have to be a slow process, if the disparities are bridged to levels that are not too far apart(ambiguous statement here – considering what is a comfortable level), rules could be equally applicable, if not with fewer limitations.On the contrary, we might never reach such a stage in world economy and hence the entire global integration concept falls apart.

        Don’t know much,mate, but thanks anyway for the inputs. Shall keep up with your posts.

  2. change in crop growth patterns leads…

    to apart from over used agricultural lands leading to decreased fertlity that you mentioned, there is also the possibilty of changes in “cultures” and life styles of nations which may not be sustianale in the long run after alll!!

    aneetha k

  3. Firstly, agriculture is already a mass-produced good in most developed countries. For example, here in the US, organic diary products (made from cows which eat real grass as opposed to being fed growth harmones and genetically modified feed) and organic produce (grown using natural pesticides and fertilizers) cost atleast three times more than their “in-organic” counterparts because of the lower yields and higher cost of production of organic produce. And the greater the drain on soil fertility, the more chemical fertilizers and pesticides are used to counter it. India is definitely aspiring to reach that state. Just compare our soil fertility and pollution levels for Punjab 20 years ago versus now.

    Secondly, the damage cannot be limited to agricultural exports per se. That’s only the bottle neck for the throughput, so to speak. Processed goods are the next big thing in exports. So instead of farm produce travelling 10000 miles, you’ll have fried potato chips coming into India in the form of Pringles, and ready-to-eat Tandoor Chicken going to the US thanks to MTR. Or processed cotton fabrics from Thirupur. The point of export is simply shifted from raw produce to processed goods. The underlying economics of production will not change. And as long as you need growth for progress and poverty removal, increased agriculural production is mandatory, whether it’s for exports or domestic consumption. And as long as you’re operating under the framework of capitalism, then in-organic agricultural produce is the only way to go.

    The point I’m trying to make is that you cannot aspire for growth for the purposes of reducing poverty, and still be choosy about how the growth is created. You simply don’t have that luxury.

    The discussion we should be focussing on is real the concept of poverty. Because that’s how we end up justifying capitalism everytime. Can you really measure poverty using per captia income standards? Or should you look at standard of living? Or the number of meals affordable per day per impoverished farmer? Or the variety of meals? Or the sets of clothing available? Or the ability to repay fertilizer and seed loans? Does poverty removal really require growth (in the sense of capitalistic growth)? Or would limited marginal improvements in agricultural production methods (accomplished by education) be sufficient? This is something we really have to look at very deeply da.

    • The point I’m trying to make is that you cannot aspire for growth for the purposes of reducing poverty, and still be choosy about how the growth is created. You simply don’t have that luxury.

      I am not so sure about that. There are ways of directing growth, making certain things attractive, certain things not so attractive. Taxes, subsidies etc are ways. Impose a heavy tax on inorganic produce, and you will make it uneconomical. We have choices, but unfortunately, I think, democracy has largely been weakened everywhere. I don’t mean democracy in the sense of a loss of freedoms or an inability to vote, but more in how policies, regulations, trade rules etc have been altered to serve certain interests. As a result, it is only when things turn really bad, that intellectuals and organizations suddenly rediscover their moral compass.

      Maybe that is the nature of capitalism. But I think it is more the nature of a certain kind of perverted capitalism. But we are an increasingly networked society, and at least in theory, if we reach a certain tipping point in terms of collective awareness to the problems of “growth as an ideology”, as opposed to a natural outcome of more modest technical innovations, we can change the nature of capitalism towards looking more deeply at the questions you raise in your last paragraph.

      I think Western economies are in a position to do so today – i.e change the nature of capitalism and build a better society for themselves. I am not so sure we are, because I don’t quite believe we have the ability to eliminate income poverty without some growth. My worry is about the methods we are choosing to make that growth happen.

      And eliminating income poverty is very important. One cannot look too deeply at other things so long as one is materially impoverished.

      I agree with what you have to say, but maybe we arrrive at similar conculsions from somewhat different starting points, eh?

      • I doubt if you can accomplish much by way of taxes. Just take fertilizers, a commodity which is currently heavily subsizided. Jayalalitha tried to lift the subsidies in TN last year and almost got ousted from her seat during the last national elections. There’s no way the farming or business community is going to accept taxes in the place of subsidies.

        I really don’t know why you keep linking growth with poverty removal da. Even the US has its share of poverty, you know. Its just on a different relative scale. There are homeless people and beggars and direlicts here too. In fact, over 50% of American families are bankrupt – its only because credit is so easily available that you don’t see poverty as a serious problem. Capitalism and growth can never get rid of poverty. As long as you have rich people, there are bound to be poor people. So we should come back to the question of what is poverty in the Indian context and how can it really be removed or minimized or managed. I agree that poverty removal takes highest priority – I just don’t agree with the current definition of poverty and the hypothesis that only growth can remove poverty. You can’t keep growing infinitely, and as long as some sections of the society grow faster than the other, you’ll have poor people and ultimately poverty. Its only the scale, measure or mainfestation of poverty that will change.

        Just think about it – before the East India company arrived here, there was no large-scale poverty. The only real causes of poverty were acts of God like the Bengal famine. How is it that in 100 years we have such a serious problem called poverty which is not the result of an act of god, but rather endemic and man-made? What really happened during that short period that caused millions of people to have no source of income or no means of livelihood? From self-sufficient economies we’ve moved to capitalism and our poverty situation has deteriorated steadily. Do you think that more growth will provide the solution?

        Western economies cannot change now da – they are too steeped in the concepts of growth-based economies to be able to change. You can have isolated communities like the Aamish, but no large scale deviations from the established path. Its only a country like India which is poised on the brink of change which can still decide its fate through careful deliberation. People like Manmohan Singh should take charge and boldly examine India’s policies regarding capitalization, ecological farming, captial account convertability, financial markets etc with a big picture perspective. Its a pity that even such brilliant people don’t pause to think about the direction they’re steering our country towards.

      • Growth as the primary objective, and the idea of continuous growth are flawed – I completely agree. I also accept that only growth cannot remove poverty. You are right about “coming back to poverty in the Indian context, and about the current definition of poverty”. I am going to think about that more.

        But, better to discuss in person.

  4. higher cost of production of organic produce!!?

    That is soooo absurd!! Atleast in countries like India where we have everything organic(cattle dung,crop residue, kitchen waste)just lying there, waiting to be used. I am sure its a different thing all together in the US where thy have to MASS produce “organic” manure first to use it to grow Organic produce.

    It is extremelly sad that farmers are told time and again they are laggards who are resistent to latest advances in genetic engineering etc. What do we expect? For them to accept with open arms “Terminator” seeds which he has to buy from the seed company every year(seeds that cannot be reused as seed for the next crop, cos they have been genetically modified)which is his rightful legacy.

    I guess i have taken the discussion on a tangent but still feel talking of things only in economic terms, does not suffice.

    • Re: higher cost of production of organic produce!!?

      talking of things only in economic terms, does not suffice.

      Sometimes one has to, but in this context, I can’t agree more.

    • Re: higher cost of production of organic produce!!?

      The higher cost of production is not because of high input cost, but because of lower yield per crop, greater loss due to insects and pests, and longer growth times. Organic produce are also not attractive looking (apples don’t come out smooth and shiny, tomatoes aren’t firm and get spoiled easily) – all these add up to the overall cost of production.

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