Editor's Note: The ongoing negotiations in the World Trade Organization have the potential to bring far-reaching changes in U.S. farm programs. Farm Press Executive Editor Forrest Laws recently sat down with Mark Lange, president and CEO of the National Cotton Council, to discuss the status of the Doha Round talks.
Q: There was a lot of news coming out of the WTO last week (Oct. 17-21), but we didn't hear much about its impact on cotton?
A: I remain hopeful we will be able to keep cotton in what's referred to as the “single undertaking” so that whatever is done in agriculture applies to cotton, and cotton doesn't get singled out in some manner. The U.S. Trade Representative's office continues to support such a position because it is fully aware that while some countries would like to single out cotton, there are others that would like to single out other commodities. If you start down that path, you probably begin to disassemble the whole concept of comprehensive negotiations, and everything becomes a rifle shot at whoever has the hot topic on a single commodity. This probably makes any negotiations more difficult than comprehensive negotiations.
The special subcommittee on cotton continues to meet in Geneva. That special subcommittee was created by the framework agreement adopted in 2004. The agreement specifically noted that the subcommittee was a monitoring committee, not a negotiating committee. And, so far, the chairmen, the first chairman, Tim Groser, and the current chairman, Crawford Falconer, have been able to keep the committee working as a monitoring body, and they've avoided the committee becoming a negotiating committee. But there certainly have been pressures on both chairmen to attempt to establish new negotiations on cotton.
And even the European Union's agricultural negotiator, Peter Mandelson, has added to the complexity by noting that cotton should be accorded some additional special treatment. In particular, he has talked about the “early harvest.” An early harvest means you might have a comprehensive agreement that called for a 10-year phase-in of new disciplines that would apply to agriculture in general but then you might have an early harvest agreement on cotton that said cotton would achieve its disciplines in five years or less. So far, the United States has resisted that, and even the chairman of the cotton subcommittee has said the single undertaking serves the best interest of the African countries.
Q: Are the West African countries and Brazil the primary movers behind this pressure for negotiations in the cotton subcommittee?
A: Of course, Brazil, as the so-called leader of the G20 group of countries, is attempting to use the special cotton subcommittee to maintain its leadership role with the less developed countries.
Q: The G20, G10, G33. Why do all these groups keeping springing up in the Doha negotiations?
A: There are so many of them that it's hard to keep track of. I find the relationship between Brazil and the African countries really puzzling because the amount of land devoted to cotton in the United States is fairly stable. It may move up or down 4 or 5 percent. The place with the most rapid expansion of the area devoted to cotton is Brazil. Brazil now has a cotton program. If I were a West African farmer and looking at who's going to be my competition; that is, the one who's adding bales and the new acres and the guy with the new program, it's Brazil. The United States is fairly stable.
Q: Traveling through Mato Grosso, the newest cotton-producing state in Brazil, you have to wonder if they have any constraints on how much they can grow?
A: Obviously, their biggest limitation right now is their infrastructure in terms of the ginning and the roads. That will be forthcoming over the next few years, and we're going to see a different cotton situation in a few years.
Q: What do you think the odds are the United States can keep cotton from being singled out for special treatment in the Doha Round?
A: Every time they meet I hold my breath. It's a negotiation that's in a constant state of creating a new dynamic, and we all know that those negotiators are there to eventually reach a deal. So we stay ever-watchful.
Q: Ambassador Rob Portman, the U.S. Trade Representative, was criticized after he proposed a 60-percent reduction in U.S. domestic farm support on Oct. 10. How does the cotton industry feel about the proposal?
A: I think the only way U.S. agriculture is able to tolerate something like that is if we see the extraordinary gains in market access that correspond to the reductions we're talking about in domestic support. It's apparent from the current crisis in the EU on these talks that market access is probably going to be every bit as difficult a negotiation as reducing domestic support.
You know there are two major areas in the market access pillar. One is the general reduction in tariffs, and the other is the so-called sensitive and special products area. It appears that the EU has some problems with both, and I think it's clear that the less developed countries as represented by the G20 are unwilling to discuss the sort of market access that the U.S. has put forward.
Q: Some groups have said they were willing to go to 1 percent and 1.5 percent caps on sensitive products or tariff lines?
A: Cotton is not a sensitive product for a number of countries. But this pursuit of capping the number of tariff lines that could be in the sensitive category obviously seems to be of huge importance for this group called the G10. That's the group that has used border measures to maintain high prices. A good example of that would be South Korea. If you look at agricultural spending in South Korea, it's not all that high. Of course, what they do is use border measures or tariffs to keep their internal commodity prices high.
For them a discussion about sensitive products is a very sensitive issue because they know what would have to happen if they were to agree to the kinds of market opening that is being sought. When their domestic prices came down to something like world prices they probably would be under pressure to have some sort of WTO-compatible program, the green box or whatever, to compensate some of their agricultural sector for what would be a rather substantial loss in income. I believe it would be their intent in those countries to maintain domestic production and not simply watch it disappear.
Just as food security has been an issue in the United States and the EU, I believe it's an issue in other countries, and how they address it in the constraints of the WTO is a difficult question because they don't have the money or a budget that allows them to do some of the things the United States can do.
Q: Ambassador Portman has said that while the United States has a ceiling of $19.1 billion on farm payments, we only use $14 billion to $15 billion, so 60 percent of that would take us to $7 billion to $8 billion for amber box payments….
A: One of the things in this $19.1 billion amber box ceiling is called a cap on measures of support, so it's not just spending. The principal spending there is marketing loan gains. Now, it's not checks written for loans; it's only the marketing loan gains and loan deficiency payments. Of course, Step 2 was in there and the Senate Agriculture Committee action would eliminate Step 2 by the end of July. If the House does something similar, I would assume Step 2 would not be an issue after this year. The other thing is that dairy and sugar don't have significant spending programs, but they do have significant border measures.
USDA each year has to estimate the subsidy equivalent of the border measures. By having these type quotas and high tariffs, it's as if we were making a payment to the producers supporting high domestic prices compared to world prices. In an average year, that comes out to about $5.5 billion that has to go into this amber box. So before we ever spend a dollar in marketing loan gains for grains, oilseeds and cotton, we already have $5.5 billion of the $19.1 billion claimed by dairy and sugar.
In a high-cost year like we saw in 2000 and 2001, when most commodity prices were hitting 30- and 40-year lows, I believe we spent around $8 billion for marketing loan gains for all the program crops. In those years, we came closest to actually hitting the cap of $19.1 billion because you take those actual spendings plus that $5.5 billion in support for dairy and sugar plus several hundred million dollars for Step 2 and a few other odds and ends.
A 60 percent reduction in the $19.1 billion gives you a spending cap of $7.6 billion. That would be your total of marketing loan gains plus whatever you do on dairy and sugar plus a few other miscellaneous programs. You couldn't exceed $7.6 billion. Well, that says very clearly that we're going to change the dairy and sugar programs. They're just not going to be able to have that big a score and chew up three-fourths of your cap. It also means if you have a year like we saw in 2000 and 2001 in terms of commodity prices with current loan rates that $8 billion in marketing loan gains and LDPs would blow through the cap by themselves.
So the recent proposal by the USTR has extraordinary implications for U.S. agriculture. The other thing that most of U.S. agriculture applauded in the framework agreement from July 2004 was the apparent ability of the United States to move the counter-cyclical program to the blue box in the WTO agreement. The U.S. proposal calls for a cap of 2.5 percent of value on blue box spending. If you look at the value of agricultural products in the U.S., say $215 billion a year, then you have a blue box cap of about $5.5 billion. If you look at today's programs with the loan rates, target prices and direct payments where they are, if all the commodities ran into a year where they were receiving the maximum counter-cyclical payments, I believe you would spend around $7.5 billion, which would exceed the cap on the blue box.
So it's not a matter of U.S. agriculture and the cotton industry looking at USTR's proposals and saying, “Well, we could move that around to where we're getting this support and still manage to have the same support.” Some in agriculture are also saying we could pull down some of the blue box or counter-cyclical support or maybe some of the loan support and transfer that into the green box and make direct payments larger than they currently are.
And from a policy standpoint it would be more WTO-prudent; that is, less trade distorting, less reliance on loans and more on green payments, which are considered minimally trade distorting. The problem is that for the average Sunbelt producer there's not a lot of room in the farm structure to pick up any more direct payments. They have a tight cap on them — $40,000. If all you did is go in and add to the direct payment on a per pound basis, I'm not sure all of agriculture sees that as way of maintaining support that would be less trade-distorting. I think it just takes away from some of our producers.
Q: We tried that in the 1996 farm bill.
A: Yes, we did. This really does concern me because when you start putting pencil to paper on meeting those kinds of commitments, it makes clear the kind of improvement in market access you have to achieve to be able to withstand such reductions in the safety net.
It's further complicated by the fact that not all agricultural commodities see the same thing when you say market access. For cotton, very few countries constrain the movement of cotton across their borders. For U.S. grains and U.S. oilseeds, they look at Europe and some other countries and see increased opportunities. But cotton, we look at China. That means that who's granting the access and how much they've agreed to become a much bigger issue.
Any agreement in this Doha Round gives China any sort of latitude they seek. They keep saying, “We had to make these extraordinary changes to get into the WTO in 2001. You all wrestled these from us in the WTO accession agreement. So now we should be given a free ride in the Doha Round.” Our position is that the Chinese came into the WTO in 2002 as if they had been in since 1994. In textiles, most of the textile world says that if they came in in 2002 when most of the world was finishing the phase-out of the 10-year multi-fiber arrangement, then the timetable for them should have run from 2002 to 2012. My view is they came in and got all the benefits as if they had been here since 1994. So they don't get any slack during this debate in 2005 and 2006 on whatever the commitments will be in this next round of negotiations.
Q: Some would say they haven't lived up to what they agreed to in the WTO accession agreement in 2002.
A: It took us a while to get to the point where I think, by and large from a raw cotton market access, they meet the letter of the agreement on the TRQ (tariff rate quotas) in the accession agreement that calls for about 4 million bales of access to China with a 1 percent duty. Initially, they were constraining the allocation to state-run enterprises and enterprises that were re-exporting the finished product. Through negotiations we have largely addressed that so they are meeting the letter of the agreement.
But what they've been doing this year is to issue that first TRQ. Then they issue several additional TRQs that have these variable levies on them so the government can collect up to as much as 40 percent duty on cotton coming in on the supplemental or additional TRQs. That means they maintain a much higher internal price for cotton in China and that becomes a border measure. We've been saying that what they're doing is keeping the price of foreign cotton equal to or above the price of domestic polyester in China so that in products for domestic consumption in China, mills have an incentive to use polyester rather than imported cotton. Our view is and we have provided sufficient evidence to USTR that this is what's happening, and we will have to continue to work on this.
Woods Eastland (National Cotton Council chairman) was in China in June for a world cotton conference sponsored by the China Cotton Association, and he made this point: It is important that the world cotton industry see that in its use of its market access provisions, China actually is stimulating the use of polyester in China.
Q: So something that was already a problem — the lack of cotton consumption inside China — is getting worse?
A: We have a heckuva problem there. The other thing is that this Doha Round has a long way to go. If the ministerial in Hong Kong in December doesn't fall apart, they're still going to take most of 2006 for countries to table what they believe they have to do to meet their commitments. Then you wrestle with the responses to that into 2007. So, even if there could be some conclusion to the Doha talks, it's not likely to be next year and it may not be the next.
The good thing is the United States has laid down a very aggressive proposal with respect to market access and domestic support. I certainly would anticipate that if negotiations reveal we're probably not capable of reaching the targets the United States had in the market access arena in terms of reductions in tariffs, then correspondingly we don't have to reach that 60 percent reduction in the amber box.
Q: Some have expressed concerned that the United States is pushing so hard for a Doha agreement that it might be willing to compromise on market access?
A: I think that really has to be talked about. I think we need constantly to be testing whether the concessions are sufficient to warrant continued support of the agreement. The necessary concessions may come with too large a sticker price. There would be those who would say that the failure to bring the talks to a successful conclusion would endanger the entire system. I don't see the WTO falling apart if these talks don't have the outcomes that people would hope. I do think as an economist that if we improve trade opportunities we generally see better economic performance. But we always have to test that by asking what's the cost?