Will U.S. Comply with WTO Cotton Ruling?

Step 2 cotton program needs to be adjusted by July 1, but few expect action by deadline. Compiled by staff

Published on: Jun 14, 2005

A subsidy that doled out $264 million in 2004, known as the "Step 2" cotton program, was ruled illegal in March by the World Trade Organization. Under the WTO's rules, Brazil's victory means the Step 2 should be terminated as early as next month.

But no one expects American action by the July 1 deadline because the payments Step 2 provides to cotton millers and exporters are integral to the overall U.S. cotton subsidy system. Without "Step 2" payments, program proponents argue, cotton millers would not be able to afford cotton for domestic use and exporters would not be able to sell over-priced, subsidized American cotton overseas-a serious problem for U.S. growers, who rely on exports for 40% or more of their market in most years.

American officials have said that the U.S. will comply with the WTO decision on Step 2 and other cotton subsidies. But no one has said how it will do so, or when. Terminating Step 2 won't be easy. The 2004 payments brought the 10-year cost of the subsidy to more than $2.4 billion. (Last year was the fourth most expensive for the program over that period.)

The 160 recipients of Step 2 subsidies in 2004 ranged from Allenberg Cotton Company, a Cordova, Tennessee firm that collected $34.5 million, to Payola Yarns, Inc., of Statesville, NC, which received $16.00 according to USDA records.

No reform by the U.S. in response to the WTO cotton decision might mean no patent or copyright protection in Brazil for targeted American drugs, computers, biotech crops, or the latest music CDs and DVD movies.

Publicly, trade and agriculture officials in both countries diplomatically insist that it will not come to retaliation. Brazil and the United States will negotiate satisfactory changes in due course, they say, obviating the need for Brazil to propose any retaliatory measures for WTO approval, much less implement them.

But after decades of talk, the failure of the United States to make progress on subsidy reforms is precisely what provoked Brazil into pursuing its grievances through WTO litigation in the first place. The strategy paid off in the historic ruling, finalized in March. The WTO determined that multi-billion dollar U.S. cotton export subsidies are illegal. An array of direct domestic U.S. cotton subsidies to farmers will also require significant reform, because the WTO concluded they constitute 'serious prejudice' against the economic interests of the cotton industry in Brazil, and other cotton producing nations in Africa and elsewhere. Both sets of violations set the stage for trade retaliation by Brazil if negotiation fails.