WTO's cotton decision: What now?

In the wake of the WTO's ruling against U.S. cotton subsidies, the vulnerability of other U.S. crop subsidies have been raised. In an interview with Delta Farm Press, Gary Hufbauer says while such concerns are legitimate, the international trade setup will likely hold off further complaints — at least for a while.

Hufbauer, senior fellow at the Institute for International Economics (a Washington, D.C.-based private, nonprofit, nonpartisan research institution) says the timeliness of the June 18 WTO ruling surprised him. “Oftentimes on a big case — and this is a big case — they miss the deadline. Not so here.”

As international trade deals proliferate, Hufbauer says, litigation before world bodies isn't surprising. “It's said that when diplomats fail, countries go to war. Well, when trade representatives fail, countries litigate. That's what we're seeing now.”

Among Hufbauer's other comments:

DFP: Okay, the WTO ruling has been announced. Where does the process go from here?

GH: After a few weeks of consultation between the sides, it will go to an arbitration proceeding where the countries that brought the case against the United States will find out how much they can retaliate. I don't know if the arbitration will make the next deadline, though (usually a 90-day period).

The arbitrator's decision in rebalancing trade between the sides is final.

This situation isn't like when the EU brought a case against the United States on steel. The countries involved in the cotton case aren't huge trading partners, and I don't know if they'll actually retaliate. They may be authorized to do so and then decline. Brazil may decide to do something of a symbolic nature.

There have only been a few arbitrations heard so far. Awards have been large. These awards allow the winning side to put on duties against U.S. exports. But countries have to decide whether or not to do that. There are many repercussions — not only internationally but domestically. As soon as you put a duty on, a native importer is hurt and that has to be taken into account politically.

DFP: Why international fear? Are they afraid the United States will find a way to retaliate itself?

GH: Yes. The United States wouldn't retaliate in a formal sense, but we can make things very difficult in many other ways. Trade outside cotton could be involved and on-going negotiations are always available (to be finessed). Every country has many fish to fry — but the United States has the most fish.

The African countries don't want to butt heads with us. Australia could do something, but that's unlikely since they're trying to set up a free-trade agreement with us. Egypt, which is a big trader of cotton, also desires a free-trade agreement with the U.S., so it's unlikely they'll retaliate. Pakistan is also a possibility. However, Pakistan currently has an alliance with the U.S. on important security issues.

The only country that I can see moving against the United States is Brazil since they initiated the case. But I doubt they do it in a big way.

DFP: How will this affect the U.S.?

GH: What this will do is put pressure on the U.S. to negotiate more in the current round of WTO talks. I believe the current round of talks won't be wrapped up until 2007.

Of course, much of this is speculation, but one thing that I'm certain of: the next president will have a momentous decision to make. The next president — whether Kerry or Bush — must make some huge trade policy decisions. He must decide whether or not to make a lot of progress in the WTO and get other countries to lower their barriers.

One of the prices for doing so will be to substantially liberalize American agriculture. If that route is taken, it will result in decoupled subsidies, a phasing out of subsidies all together, or both. In other words, the goal would be to get subsidies that are no longer linked to production.

But there is a huge political cost to suggesting that. Neither candidate is liable to grapple with this during the election run-up. They can probably only lose votes by broaching it.

DFP: Will there be other cases brought before the WTO? Has this ruling opened the floodgates?

GH: There is another case bubbling along regarding the EU's practices in the sugar market. Sugar is heavily subsidized in Europe.

Under GATT — before we had WTO in 1994 — the EU lost a couple of like cases on sugar. This case involves the same issues. They'll lose this one, too, and they know it.

I don't really think this will bring about a bunch of other cases against U.S. agriculture subsidies — at least not right away. There are a couple of reasons. One, while other countries now realize they can successfully litigate against us, they also know that between now and 2007 they're likely to gain more at the negotiation table. With the cotton ruling coming at the same time as the latest round of WTO negotiations, the big players will be forced to take a less hard-line position.

Second, these cases are time-consuming and expensive to bring. Such a case can't be wrapped up in less than two years.

That said, I believe we'll have a rest period. However, if there's no real progress in this round of WTO negotiations by, say, mid-2006, then more cases will be brought. And those cases, because of the precedent of the cotton and sugar cases, will be easier to bring and are very winnable.

DFP: So what happens to U.S. cotton subsidies? Will our government be forced to cut back or plow ahead and take care of it in court?

GH: That brings me back to the huge decision mentioned earlier. Our government doesn't have to move immediately. The next farm bill will be in heated discussion during 2006 and continue into 2007. That's the same timeframe as the WTO trade negotiations.

It will be most interesting to see how the president and Congress will play this. If the president decides not to reduce or de-couple subsidies and stand pat with the program as we now know it, you can count on more WTO cases. If that happens, it will mean a breakdown of the trading system as it's now known. Incidentally, Europe is more susceptible to such cases than the United States.

DFP: Regarding the WTO decision against cotton subsidies, is the USTR's (U.S. Trade Representative) public stance as defiant behind closed doors?

GH: The way that the U.S. has always approached these cases — as have other countries, we're no different — is to carry the process through. They can't be faulted for that. However, this is a loser no matter what. The question is how big an arbitration loser it will be.

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