The African Cotton Initiative and WTO Agriculture Negotiations

CRS Report for Congress
Received through the CRS W eb
The African Cotton Initiative and WTO
Agriculture Negotiations
Charles E. H anrahan
Senior Specialist i n Agricultural Policy
Resources, Science, and Industry Division
Summary
In W o rld Trade Organiz ation (W TO) Negotiations on agriculture, a group of
African countries have proposed that all s ubsidies for cotton be eliminated by the end
of four years. The p roposal also advocat es compensating African cotton p roducing
countries for revenues estimated t o b e l ost due to cotton s ubsidies. The United S tates,
which p rovides s ubstantial p r oduction-related s ubsidies t o cotton p roducers, agrees that
cotton subsidies distort trade, but maintains that the issue s hould be negotiated in a
comprehensive m anner. Disagreem en t over t he African cotton i nitiative has blocked
progress on an agreement o n agriculture in the current round of m u ltilateral trade
nego tiations kno w n a s t h e Doha Development Agenda (DDA). How to tackle the
question of cotton s ubsidies — either as a s tand-al one initiative or as part of a broader
agreem ent t o reduce t rade-distorting farm s ubsidies — will be on the agend a as DDA
negotiations continue in 2004. If the i nitiative were agreed to as proposed, U.S. cotton
producers would n o l onger be receiving 2002 farm bill marketing l oan, loan deficiency,
or counter-cyclical paym ents after four years. Under a U.S. alternative p roposal for
reduction i n t rade distorting s ubsidies, c o t t o n p roducers could s till receive paym ents
under t hose p rograms but in reduced amounts. This report will be updated.
The Af r i can Cotton I ni ti ati ve
Four cotton p roducing African countries — Benin, Burkina Faso, C had, and M ali —
have proposed in WTO agriculture nego tiat i ons the complete elimination of t rade-
distorting domestic support and ex port s ubsidies for cotton.¹ The four countries propose
an end t o cotton ex port subsidies over t h r ee years , followed by t he elimination of

¹ T he origi nal proposal, WT O Negotiations on Agriculture, Poverty Reduction: Sectoral Initiative
in Favour o f C o t t on: Joint proposal by Benin, Burkina Faso, Chad, and Mali , Committee on
Agriculture, Special Session, T N/AG/GEN/4, May 16, 2003, w a s r evised in WT O, General
Council, Poverty Reduction: Sectoral Initiative on Cotton: Wording of Paragraph 27 of the
Revised Draft Cancun Ministerial Text: Communication f rom Benin, W T / GC/W/516, October

7, 2003.T hese documents can be retrieved from [ http://www.wto.org] .

Congressional Research Service ˜ The Library of Congress

production-related domestic support over four years, in each case from J anuary 1, 2005.
In ad d i t i o n , the p roposal calls for W TO members t o establish a transitional financial
compensation m echanism i n favor of cotton- ex porting d eveloping countries affected by
the s ubsidies. Data from t he International C otton Advisory Committee (IC AC) would be
used to calculate developing country revenue losses.² Although not specifically mentioned
in the Doha round negotiating m a n d a t e , c o tton s ubsidies h ave b een identified as a key
issue t o resolve before DDA nego tiations can be successfully concluded.³
Cotton P r oducti on i n West and Centr al Af r i ca (WCA) a nd i n the
UnitedStates
Cotton production i s an important economic activity in W C A countries.⁴ Accordi n g
to data from t he United Nations Food and Agricul t u re Organization (FAO), cotton
production accounts for 5% to 10% of the gross domestic product (GDP) i n Benin,
Burkina Fas o, Chad, and Mali.⁵ Cotton accounts for around 30% of total ex port earnings
of W C A counties and more than 60% of earnings from agricultural ex ports. The W o rld
Bank reports that over 2 million farmers in the region p roduce cotton.⁶
Cotton p roduction i n t he United S tates does not occupy a s imilarly dominant role i n
the t otal U.S. economy, but it does o ccupy an important place in the U.S. a gr i c u l t u r a l
economy.⁷ Cotton p roduction accounts for just over t hree-hundredths o f a percent
(0.034% ) o f U . S . GDP (2002). C otton ex ports account for 1.4 % o f t otal merchandise
ex ports and 4 % o f agricultural ex ports. C otton production employs 173,447 people on
31,433 farms. An additional 200,000 jobs are p rovided by cotton ginning, m arketing and
transportation, and i n cottonseed oil mills and t ex tile mills. Total revenue generated by⁸

the entire s ector of $40.1 billion represents 3.8 % o f GDP.
² ICAC is an international organization composed of 43 member governments, including the U.S.
Government. It pro vi d e s s t a t i s tics on world cotton; serves as a clearinghouse f or technical
information about cotton and c o t t o n t e x tiles; an d s erves as a forum f or discussion of cotton
ma t t e r s of i n t e r n a t i ona l s i gni f i c a n c e . It s we b s i t e i s [ h t t p : / / www.i c a c .or g] .
³ St a t e m e n t b y t he Chairman of the General Council . Doha Deve lopment Age nda: Informa l
Heads of Delegation M eeting, December 9, 2003. Retrieved from t he Worldwide Web on
December 9, 2003: [http://www.wto.org/ english/news_e/news03_e/stat_gc _chair_9dec03_e.htm] .
⁴ T he W CA regi on includes Benin, Burki na Faso, Cameroon, Central African Republic, Chad,
Cote d’Ivoire, M ali, S e n e ga l , and T ogo. T hese countries share a common currency, the CFA
franc, and have similarly organized cotton sect ors. Other W CA cotton-producing c ountries that
do not share t he CFA c urrency a nd whose c otton s ect ors are organized differently include Ghana,
Guinea, a nd Nige ria. Smaller CFA franc zone c ountries (Guine a B i s s a u and Niger) also are
excluded.
⁵ P. For t ucci , The Contributions of Cotton t o Economy and Food Security i n D eveloping
Countries , UN Food and Agr iculture Orga niza tion, J une 2003.
⁶ World Bank , C o t ton Policy Brief : a quarterly news letter of t he World Bank on cotton s ector
policy r eform and implementation i ssues, J une 1999.
⁷ Ba s i c d a t a o n c ot t o n i s a va i l a bl e a t [ ht t p : / / www.e r s .us da .gov/ Br i e f i n g/ Cot t on] .
⁸ U.S. Census data reported by t he National Cotton Council of A me r i c a i n U.S. Cotton
Production: 2002 Crop Y e ar at [ ht t p: / / www.cot t on.or g/ econ/ wor l d/ det a i l .cf m? year =2002] .

The United S tates i s t he second larges t producer of cotton, but is the world’s largest
ex porter. Marketing year 2003 ex ports ar e e s t imated at 2.9 million m etric t ons and
account for 41% of world cotton ex ports. The W C A region i s t he third l argest producer,
accounting for 5% of world cotton p roduction and the s econd largest ex porter, accounting
for 12% of world cotton ex ports. Uz bekistan i s t he third l argest ex porter with about 10%
of world ex ports. C hina, t he world’s l argest cotton p roducer, i s also t he world’s l argest
importer of raw cotton.⁹
W C A countries are l ow cost producers o f cot t o n.¹⁰ For ex ample, i n 2001, the
average cost o f p roduction i n Benin, one of the four sponsors o f t he cotton i nitiative, was
31 cents per pound. In the United S tates, the national average cost of production was 68
cents per pound in 2001.
The Economi c Rati onal e for t he Af r i can I ni t i a ti ve
The economic rationale for the African cotton initiative i s based in part on an
analys is conducted b y ICAC which estimates t h a t c o t ton p roducers i n d eveloping
countries (not just Africa) face annual l osses of about $9.5 billion as a result of subsidies
that other countries provide their cotton farmers.¹¹ Lo sses o f t hi s m agni t ude, accordi n g
to IC AC, a r e the result o f t he ex cess p roduction s timulated b y s ubsidies t hat d epress
world cotton p rices. The IC AC study no t e s t h a t world prices for cotton at 4 2 cents per
pound (in 2000/2001) were at their l owest l evel in 30 years. Lo w cotton p rices, according
to IC AC, p articularly affect revenues earned b y s o m e o f t he poorest African countries;
while producers i n s ubsidiz ing countries are s hielded from p rice declines by subsidies.
IC AC points out that the United S tates p r ovides t he largest amount of subsidies t o
its cotton p roducers, which i t estimated at $2.3 billion i n 2001/2002. Other countries’
subsidies i n 2001/02 incl u d e d C h i na ($1.2 billion), European Union (EU) countries
Greece and S pain ($716 million), Turkey ($59 million), Braz i l ($50 million), and Egypt
($29 million). ICAC s imulated t he reduction i n cotton p roduction i f U.S. s ubsidies were
eliminat ed. According to the simulation, without subsidies, U.S. cotton production i n

1999/2000 would h ave b een 900,000 tons lower t han actual p roduction i n t h a t ye a r ,

700,000 tons less than actual p roduction i n 2000/2001, and 1.4 million t ons less than
actual i n 2001/2002.
The s imulated removal o f s ubsidies resu lting i n l ower production, leads t o h igher
prices in the s hort t erm. The s imulated d ecline i n U.S. p roduction results i n average
international p rices per pound of cotton 6 cents high er than realiz ed in 1999/00, 12 cents
high er than in 2000/01 and 2 2 cents high er th an in 2001/02. High er prices would reduce
the dem and for cotton. Thus the i nitial price increas es would be l owered by 1, 2, and 6

⁹ USDA. Foreign Agr icultural Servi ce, Cotton: World M arkets and Trade, 2003.
¹⁰ IC A C , Survey of the Cost of Production of Raw Cotton, A Report by t he Technical I nformation
Section of I CAC, September 2001. While noting t hat its data is the only s ource of information
on the cost of production of r aw cotton at t he international l evel, ICAC also notes that “the data
must be used carefully. Differences in production practices, variations in the i nput supply s ys tem
....make comparisons difficult among countries.”
¹¹ IC A C , Production and Trade Policies Affecting t he Cotton I ndustry , W ashington, DC, J uly

2002.

cents per pound respectively i n t he three marketing years s imulated. In itial p rice
increases also would b e o ffset by shifting world production t o non-subsidiz ing countries
in the m edium and long terms. Overall, however, t he IC AC study says that the removal
of cotton s ubsidies would have had a net positive effect on the world price of cotton by

3 cents in 1999/2000, 6 cents in 2000/01, and 11 cents in 2001/02.

U.S. and o ther country subsidies are not the only factor dep ressing world cotton
prices. ICAC s ays t hat weak consumer de m a n d r esulting from t he recent economic
slowdown and continuing competition from s ynthetic fibers are preventing world cotton
consumption from m ore rapid growth. In addition, says IC AC, improved t echnology, the
strong U.S. dollar, and t he ex pansion o f co tton p roduction i nto n ew areas contributed to
the i ncrease i n world cotton s upply i n 2001.
A recent W orld Bank report u sed results from t he IC AC study to illustrate the effect
of U.S. and o ther countries’ s ubsidies o n cotton p roducers i n t he W C A region.¹²
According t o t he World Bank R eport, IC AC’s estimate of a 1 1 cent p er pound increase
in the n et average world price for cotto n ( i n 2001/2002) would t ranslate into revenue
gains o f $250 million a year for W CA farmers. Ox fam, a British non-governmental
organiz ation, also contributed to the debate over t he im p a c t o f c otton s ubsidies, with
publication of a report t hat estimated revenue losses t o African farmers from U.S. cotton
subsidies.¹³ Both the W orl d Ban k and Ox fam have played a m aj or role in mobilizing
public opinion in support o f t he African cotton i nitiative.
The U. S. Response t o t he Cotton I ni ti ati ve
The U.S. responded t o t he cotton i nitiative by p roposing t hat cotton b e i ncluded i n
a comprehensive nego tiated agr e e m e n t t o cut subsidies and tariffs on all farm p roducts
and eliminate t ariffs and non-tariff barriers o n m anufactured goods, i ncluding tex tiles.¹⁴
The U.S. Trade Repres entative (USTR) m ai ntai ns that the problem s affecting cotton
ex tend beyond the i ssue of s ubsidies and incl ude fact ors s uch as competition by s ynthetic
f i bers, t he slowdown i n world economic growth, and high er yi elds due to favorable
weather conditions. USTR cites m any b arrier s t hat limit market opportunities and distort
trade o f cotton: trade d istorting domes tic suppor t applied by t he United S tates, the
European Union, China and some developing countries; h igh average allowed t ariffs for
cotton and tex tiles and clothing; non-tariff barriers s uch as non-transparent customs
procedures, d i f f i c u l t and costly marking and labeling requirements, and burdensome
testing m ethods; and industrial policies relat ed to man-made fibers that distort t he market
and d isplace sales o f cotton and cotton p roducts. As an alternative t o t he African sectoral

¹² Cotton Sector Strategies in West and Central Africa by Ousmane Badiane, Dhaneshwar Ghura,
Louis Goreux a nd Paul Masson, World Bank Policy Research Working Paper 2867, J uly 2002,
which draws on a r eport prepared by Louis Goreux, consultant to the Worl d Bank, entitled
Damage Caused to the C o t t o n I ndustry i n West and Central Africa Through Payments of
Subsidies by I ndustrialized Countries, J uly 2002.
¹³ Oxf a m, Cultivating Poverty: The Impact of U.S. Cotton Subsidies on Africa , Oxfam Briefing
Paper30,2002.
¹⁴ See Remarks on African Cott o n Initiative, Ambassador J osette Sheeran Shiner, Fifth World
T r ade Organization M inisterial, September 10, 2003, available at [ h t t p ://www.ustrade-
wto.gov/tr0911shiner.html ].

approach, t he United S tates p roposed a com prehensive initiative t hat would address four
areas : s ubsidies for cotton and man-made fibers; t ariffs o n fi b er, tex tiles, and clothing;
non-tari f f b a r r i ers; and o ther barriers s uch as s tate monopolies, special tax advantages,
and ex port requirements.
The National C otton C ou ncil of America (NCC),anorganizationthatrepresents
producers, gi nners, warehousers, m e r chants, crushers, cooperatives and t ex tile
manufacturers, allied itsel f with the USTR proposal to link W TO negotiations on cotton
with tex tile trad e n ego tiations.¹⁵ A b ipartisan group of U.S. Senators from cotton-
producing s tates ex p ressed t heir opposition t o t he African cotton i nitiative i n a letter t o
the U.S. Trade Repres entative.¹⁶ The S enators s tated t hat “the current round of
multilateral t rade negotiations offers an opportunity to increase m arket access and further
discipline t rade distorting domestic support and ex port s ubsidies....A sectoral initiative
focusing s p e cifically on the U.S. cotton program is counterproductive t o U.S. cotton’s
interest and distract s from m ultilateral reform of agricultural t rade.”
I m pl i cati ons for U. S . Cotton P r ogr ams
Adoption o f a stand-alone sectoral initiative, as proposed by the African countries,
coul d m ean t h at cot t o n p roducers woul d, aft er four years, no l onger be recei vi ng paym ent s
under 2002 farm bill programs that are linked t o p roduct i on, namely marketing l oan
assi st ance and l oan d efi ci ency payments.¹⁷ Cotton producers also could become ineligible
to receive paym ents under t h e 2002 farm bill’s new counter-cyclical paym ents (CCP)
program. CCP paym ents are linked t o t he level o f commodity prices. Direct paym ents,
also authorized by the 2002 farm bill, would not be affected if the i nitiative were adopted
because they are not production rela t e d . In FY2002, cotton p roducers received $721
million i n l oan d eficiency p ayments. CCP paym ents were included i n t he 2002 farm bill;
estimated CCP paym ents for cotton i n FY2003 total $1.247 billion.¹⁸ Di rect paym ent s i n
FY2003 are estimated t o b e $428 million. Credit gu arantees for cotton ex ports, an
estimated $234 million i n FY2002, also could be affected under a stand-alone initiative
as proposed by the Africans.¹⁹
Adoption o f t he U.S. proposal to reduce cotton s ubsidies as p art o f a comprehensive
approach to reducing t rade-distorting domes tic support, also could have s ubstantial, if less
drastic, consequences for cotton. The m ost r ecen t U .S. proposal for W TO agri culture

¹⁵ N a t i o n a l C o tton Council , USTR Proposal on Trade Distortion Discussions Much Needed ,Press
Release, September 11, 2003.
¹⁶ Let t e r f r o m Senators Cochran, Lincoln, a nd Chambliss t o UST R Ambassador Robert B.
Zoellick, dated September 8, 2003, available at
[ ht t p: / / www.cot t on.or g/ go v/ l o a d e r . c f m? ur l =/ commonspot / s ecur i t y/ get f i l e .cf m&PageID=16220] .
¹⁷ For a basic description of t hese programs see CRS electronic briefing book page on Commodity
Programs at [ h t t p : / / www.congr e ss.go v/ br bk/ h t ml / e bagr 8.ht ml ] .
¹⁸ Payment data are from USDA 2004 Budget, Explanatory Notes for Committee on
Appropriations , V olume 2, pp. 19-19 to 19-21, February 2003.
¹⁹ C R S R e port RS20858, Agricultural Export Subsidies, Export Credits, and the World Trade
Organization, M arch 27, 2001, discusses t he extent to which e xport c redit guarantees subsidize
agricultural exports.

negotiations is contai ned i n a letter from t h e U . S . Trade R epresentative t o W TO
members.²⁰ In the l etter, the USTR affirms t hat i t i s t he “objective of t he United S tates
to achieve substantial cuts i n t rade-distorting domestic support for agricultural p roducts,
incl uding cotton; the elimination of ex port s ubsidies for cotton and al l other agricultural
products; and substantial improvements i n m arket access for cotton, cotton p roducts, and
other agricultural goods.” Under t his l ates t formulatio n o f t he U.S. proposal, t rade-
di st ort i n g p rogram s l i k e m arket i n g l oan gai ns/ l o an defi ci ency payments would b e reduced
but not eliminated. The U.S. proposal, which recogn izes a s ubsidy elemen t i n ex port
credit programs, also could result i n changes in U.S. ex port credit guarantees for cotton
and o ther products.
While elimination or reduction of U.S. cotton subsidies could b en efi t farmers i n
Afri can and o t h er l o w-cost producers o f cot t o n (e.g. , A ust ral i a), t h e econom i c effect s i n
the United S tates could be both positive and negative. U.S. consumers could benefit from
lower p rices for p roducts made from cotton. (U.S. t ariffs and quotas on tex tiles would also
have t o be l i b eral i z ed for U.S . consum ers t o recei ve m u ch benefi t from cot t o n s ubsi d y
reduction o r elimination.) Tax p ayers could b en efit from not having to pay for support o f
cotton p roducers. However, cotton p roducers, industries t hat s upply i n puts t o cotton
production, and rural communities could b e a dver s ely affected. W orkers in gi nning,
tra n s p o r t a tion and marketing, warehousing, and cotton s eed crushing could all be
adversely affected. Those a f f ect ed could b e ex p ected to oppose t he elimination o f
subsidies and/or demand adjustment assistance to compensat e for adverse impact s of
subsidy elimination.
Status of the I ssue
The African cotton i nitiative rem ai ns on the W TO negotiating agenda and i s an i ssue
that appears t o b e b locking t he completion o f t he Doha round. The four African sponsors
of the p roposal, o ther African countries, and ot her d eveloping countries continue to insist
on a s e p a r a t e , s e ctoral approach to the co tton subsidy i ssue. The United S tates, on the
other h and, continues t o i nsist o n i ncludi ng cotto n s u b s idies i n a broader negotiating
approach. U.S. cotto n s u b s idies also are being challenged in WTO dispute settlement
where Braz i l i s argui ng t h at t h e U ni t ed S t at es h as ex ceeded i t s s u b s i d y reduct i o n
commitments for cotton.²¹ If Braz il wins this dispute, the United S tates either would be
obliged to alter its cotton s ubsidy p rograms o r accept t he imposition o f retaliatory tariffs
by Braz il on s ome of its products. In 2004, interested Members o f C ongress will be
cl osel y m onitoring the W TO agriculture negotiations, t he Afri can cotton i nitiative, and
the W TO cotton dispute.

²⁰ T he l etter i s at [ http://www. ictsd.org/ mi nisterial/cancun/docs/Zoellick-letter.pdf].
²¹ Information on t he Brazil-U.S. cotton dis p u t e ( d i spute no. DS267) is available a t
[http: / / www.wt o.or g/ engl i sh/tratop_e/dispu_e/dispu_subj ects_index_e.htm] . Select subj ect entry
“cotton.”