Why India should expose US hypocrisy on cotton subsidies at the WTO

Published: January 2, 2019 1:42:58 AM

The US’s counter-notification against India’s cotton subsidies is a thinly-veiled attempt at diverting attention away from its own market-distorting practices in this sector, and shifting the blame to other countries. India should expose the hypocrisy of the US on cotton subsidy, and must continue to demand, at the WTO, steep reduction in trade-distorting support provided to farmers in developed countries.

What was relevant in the South Korea beef dispute may not necessarily apply in other situations, including India’s minimum support price scheme.

By Sachin Kumar Sharma & Parkhi Vats

Trade and World Trade Organisation (WTO) discussions thrive on perception. Recent actions by the US seek to portray India as flouting WTO rules and distorting the global market by providing huge subsidies to cotton. Left unchallenged, the hypocrisy of the US narrative on cotton could sway WTO members, particularly the cotton-producing African countries.

So, what is the fracas on India’s cotton subsidies all about? Shorn of legalese, the US has made a counter-notification at the WTO, alleging that India’s subsidies to cotton have breached the limit of 10% of the value of cotton production, as stipulated in the WTO’s Agreement on Agriculture.
The US contends that, during 2010-16, India’s market price support to cotton was 53% to 81% of the value of the annual production. On the other hand, in its notifications, India has claimed that the market price support has rarely exceeded 1.4% of the value of production during 2010-16.
What explains the reality behind these sharply divergent statistics? The explanation lies in three variables used in calculating the domestic support for each product under the WTO’s Agreement on Agriculture.

First, which currency to use in calculating the domestic support?
Second, what is the production eligible to benefit from the minimum price support?
Third, how many units of raw cotton are required for producing one unit of lint cotton?

While India has calculated the domestic support to cotton in terms of US dollars, the US insists that the calculations should be done in Indian rupee. Contrary to what the US insists, the methodology for calculating domestic support under the Agreement on Agriculture is not prescriptive. It provides a country the flexibility to choose the currency for calculating its domestic support.

The issue of “eligible production” is more complicated. India takes the volume of cotton procured at the minimum support price to be the eligible production. The US has argued that it should be the total production of cotton. The US bases its arguments on the findings in a WTO dispute involving domestic support provided by South Korea to beef. However, the US contention is negated by the reality that the findings in a WTO dispute are specific to the facts of the case under consideration. What was relevant in the South Korea beef dispute may not necessarily apply in other situations, including India’s minimum support price scheme.

On the point of conversion rate, the US contends that this figure is close to 3, while India has used a conversion rate of 2.35. The US appears to have ignored some key elements such as wastage, ginning and pressing cost, etc, that go into the calculation of the conversion rate.

In addition, what about the US’s own subsidies to cotton? Historically, the US has provided extremely high subsidies to its cotton farmers, who are typically rich and also constitute a powerful political lobby. For instance, in 2001, the product-specific support to the American cotton farmers was as high as 74% of the value of cotton production in that year. The high cotton subsidies not only depressed the global prices, but also devastated the economies of some African countries—such as Chad and Mali—which are overwhelmingly dependent on cotton for their overall development.
The cost of production of cotton lint is much higher in the US ($1.88 per kg in 2015-16) than in India ($0.71 per kg in 2015-16). The US exports 80% of its cotton production and tops the list of the cotton-exporting countries, while India exported only about 16% of its cotton output in 2018.

Between 1995 and 2017, the US provided subsidy to cotton farmers worth $38 billion through several programmes, with the top 10% of the recipients guzzling 82% of the total amount of subsidy. To make matters worse, the US dumped its highly-subsidised cotton in the international market, thereby crowding out millions of poor farmers of developing countries from the international market and undermining their livelihoods.
It is no surprise, then, that in 2003, the African countries were up in arms against the US cotton subsidies. Some observers contend that the Cancun Ministerial Meeting of the WTO in 2003 collapsed because the US found it politically inconvenient to even discuss this issue. However, given the economic devastation that the US subsidies had wrecked upon the African cotton producers, this issue unleashed strong emotions among many countries at the WTO.

In addition, during the Hong Kong Ministerial Meeting of the WTO held in 2005, the US was compelled to agree to cut its cotton subsidies “specifically, ambitiously and expeditiously.” However, the US dug its heels in, and 13 years have passed without any significant real reduction in the US cotton subsidies.

Here it is also relevant to mention that the rules under the Agreement on Agriculture are rigged heavily in the favour of developed countries, such as the US. While the rules constrain India to limit its cotton subsidies to 10% of its value of cotton production, the US is not constrained by any such limit. The limit on the US is for its total subsidies to all agricultural products, without getting fettered by limits on subsidies to individual products. As the limit on the total agricultural subsidies is very high for the US, effectively the US can concentrate its subsidies in just a handful of products and still continue to remain within the WTO rules.

In conclusion, the US’s counter-notification against India’s cotton subsidies is a thinly-veiled attempt at diverting attention away from its own market-distorting practices in this sector, and shifting the blame to other countries. The Indian government, therefore, should expose the hypocrisy of the US on cotton subsidy, and must continue to demand, at the WTO, steep reduction in trade-distorting support provided to the farmers in developed countries.

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