International Trade Policy NCC 2010 Annual Meeting Memphis, TN 1 1 Good Morning. We prepared a relatively short trade policy report and passed it out this morning. My report today will concentrate on a few issue areas that were prominent during 2009. The Economic Services division of the National Cotton Council helped with the development of this report.
Overview •Arbitration decision announced in Brazil case •WTO December Meeting doesn’t create new movement in Doha Round •Haiti earthquake will lead to more Haiti trade preference legislation •Sluggish economy slowed surge of Chinese apparel products into US even though safeguards were lifted 2 2 Among the highlights we will be discussing this morning are -- The Arbitration decision in the Brazil WTO case The status of the Doha negotiations; and The call for new legislation providing economic assistance to Haiti
Brazil WTO Case •Retaliation is WTO enforcement mechanism •Usually additional duties on imports from the offending country •Brazil claimed -- •$1.4 billion retaliation for cotton aspect of case •$1.3 billion retaliation for GSM 3 3 There is a brief background on the Brazil case in the handout. The final step in a WTO proceeding is enforcement. Because the WTO cannot impose its will on a sovereign country, the victor in a WTO dispute is authorized to retaliate by putting extra duties on imports from the o fg ending country or taking other, similar economic steps. Brazil claimed it should be authorized to impose $2.7 billion in retaliation against the U.S. - $1.4 billion for cotton and $1.3 billion for the export credit guarantee program. The US disagreed with this calculation and the parties went to Arbitration. The decision was finally reached at the end of August.
Brazil Arbitration Award Brazil C azil Claim $2.7 Billion 3000 GSM $1.3 Billion Cotton $1.4 Billion Total $2.7 Billion 2250 GSM 1500 750 Cotton 0 Brazil Claim 4 4 I would like to step through the arbitration decision. Brazil claimed a total of $2.7 billion in retaliation authority - as indicated in the slide. This is as good a place as any to remind you that this case has two parts - 1) US cotton policy and 2) the export credit guarantee program which provides credit guarantees on a wide variety of US exports. The latest WTO Compliance Panel held that the export credit guarantee program (or GSM) was a prohibited export subsidy . It also held that the US cotton program caused serious prejudice to Brazil by suppressing world cotton prices to a significant degree -- but the Panel never specified exactly to what degree the US cotton program was suppressing world prices.
Brazil Arbitration Award Brazil C azil Claim $2.7 Billion 3000 GSM $1.3 Billion Cotton $1.4 Billion Total $2.7 Billion 2250 GSM Award 2 ard 2006 GSM Formula 1500 Cotton $147 Million Total $294 Million 750 Cotton 0 Brazil Claim Award 2006 5 5 Brazil’s arbitration award was considerably less than it claimed. For cotton, the Panel gave Brazil about 10% of what it asked for and awarded $147 million in annual retaliation authority. For the GSM or export credit guarantee program, the Panel established a formula to be used to annually calculate the retaliation amount. For 2006, this calculation was $147 million also.
Brazil Arbitration Award Award 2010 Award GSM $650 Million 800 Cotton $147 Million Total $800 Million 600 GSM If total retaliation 400 exceeds $400 million, cross- GSM retaliation also 200 authorized Cotton Cotton 0 Award 2006 Award 2010 6 6 However, in later years, the US had higher allocations of GSM export credit guarantees with a higher use by Brazilian banks. These two factors will cause the calculation to increase. The latest calculation, using the 2008 program, would authorize $650 million of retaliation for 2010 just for the GSM program. Cotton remains frozen at $147 million. Importantly, the Arbitration Panel also authorized Brazil to institute cross-retaliation if the total retaliation amount exceeds about $400 million. (The Panel also established a formula to be used to calculate this trigger amount. While the trigger will move, we do not expect it to move dramatically within the next few years.)
Arbitration Decision •GSM award formula based - considers size of program and other factors •For 2006 - $147 million •For 2010 - $650 million •Cross Retaliation conditionally authorized •Total retaliation authority must exceed $400 million +/- 7 7 In Cross-Retaliation, Brazil can abrogate intellectual property rights of US companies doing business in Brazil. If the 2010 GSM calculation of $650 million holds, then the retaliation authority for Brazil for 2010 will exceed the trigger for cross-retaliation. The WTO Dispute Settlement Body has determined that the GSM program is a prohibited export subsidy. Under WTO rules governing the calculation of authorized retaliation, a member is granted more flexibility with respect to a finding of a prohibited export subsidy than they are with respect to a rules violation that is based on a finding of a certain injury. In the injury case (like the serious prejudice aspect of this case) the retaliation amount must be more closely linked to an actual economic injury. There is no need to find injury in the case of a prohibited export subsidy. The program itself is the injury.
Brazil Arbitration Award 3200 $1.3 billion 2800 2400 GSM 2000 1600 $1.4 billion GSM = 1200 $650 million GSM = 800 Cotton $147 million 400 0 Brazil Claim 2006 2009 8 8 Putting all of this together, First, Brazil’s award was much less than it claimed; Second, the formula for GSM adopted by the Panel causes a rather small level of retaliation for 2006 to grow to over $650 million in 2009, triggering cross-retaliation and additional pressures on the cotton program and on the GSM program. Third, there are several steps USDA can take to take the GSM number lower, but it will be hard to get the combined GSM and cotton numbers under $400 million.
Brazil Case 2010 •222 articles on Brazil product list •Cross-retaliation plan not yet established •Threatens industries with no link to cotton •Significant nervousness among manufacturers •NCC supports new WTO proceeding 9 9 In late November, Brazil published a list of 222 items being considered for additional duties under its retaliation authority. Brazil has not formally indicated how it would implement any cross-retaliation. Because of the di ffj cult situation the formula approach to GSM creates, the NCC has asked the US Government to call for a new compliance panel. Under Secretary Miller and others at USTR have been somewhat pessimistic regarding this request. But I believe the numbers support the US in a new proceeding - both on cotton and on GSM.
WTO Ruling Should Be Reviewed 30,000 US Cotton Production 22,500 15,000 7,500 0 2005 2006 2007 2008 2009 10 10 While the U.S. cotton program continues to exist in a slightly modified form, the impact of U.S. cotton subsidies on the world market does not currently exist. Subsidies, either introduced or increased in China, India and Brazil, are exerting greater influences on world cotton prices today. Unfortunately, US cotton producers know these numbers all too well. • There has been a 45% decline in US cotton production since 2005 • There has been an 8 percentage point decrease in world market share attributable to the US since 2005 • The United States is one of the very few major cotton producing countries that has decreased cotton production (compared with 2005) in the face of weak world cotton prices
U.S. Upland Cotton Plantings 15,000 11,250 7,500 3,750 0 2004 2005 2006 2007 2008 2009* Source: USDA *2009 estimate USDA June Planting Intentions 11 11 US upland plantings are down since 2005, amounting to a 40% decline in US cotton acreage eligible for the cotton marketing loan program.
Cotton Production Comparison 2005 vs 2009 15,000 C-4 US 7,500 Brazil India China 0 (7,500) (15,000) C-4 & US Brazil, India, China 12 12 This comparison of cotton acreage shows when 2005 production is compared with 2009 production, the US (along with the C-4 African countries) has decreased production 10 million bales or more. While the US decreases production, Brazil, India, and China have stepped in to fill the gap.
C-4 Cotton Production 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 13 13 The C-4 continues to complain to the world that the US cotton program is destroying their industry and world prices, causing their production to decline -- and their production is also down as compared to 2005.
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