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The Cotton Initiative

26 September 2004

While the WTO regional workshop on cotton held in Cotonou from March 23-24th 2004 focussed on the "delivery and coordination of financial and technical assistanc "e number of the papers presented at the meeting dealt with the trade aspects of the cotton crisis. The meeting recognised the "systemic importance of the cotton secto "rn West Africa, given its contribution to employment, rural incomes and foreign exchange earnings. While the focus of the workshop was on the development aspects of the cotton initiative the centrality of achieving coherence between trade and development policies was frequently underlined. It is these coherence and trade aspects which is the focus of this extended brief.

World Bank Paper Sets the Context
This 75 page World Bank report on the cotton sector: analyses cotton sector developments over the past 40 years; identifies the policy distortions in the cotton sector, their impact on prices and trade and the prospects for reform; discusses the policy alternatives in both developed and developing country cotton producers.

The first part of the paper includes an analysis of the fibre market and cottons role within it, price trends, the dependence of developing countries on cotton, non conventional cotton production practices and the role of the second hand clothing market. The second part of the paper looks at the distortions generated by the policies of the EU, US, China and Uzbekistan. It goes on to reviews the preferential trade arrangements which indirectly affect the cotton market such as the agreement on textiles and the AGOA act. The third part of the paper reviews the impact of distortions and the prospects for reform by discussing current policy directions and the scope for deepening policy reform in developing countries and reducing and eventually eliminating support in major developed country producers. The final part of the report consists of technical appendices

The report notes how cotton prices have fallen 50% since 1996/97 and highlights the disproportionate dependence of certain developing countries on cotton production(40% of exports for Benin and Burkina Faso and 30% of export earnings in Chad and Mali) and its importance to livelihoods in West Africa. It notes how the cotton market has been subject to considerable market intervention, including subsidisation in the EU and USA. Since the 1950s real cotton prices have declined by 80%. The international cotton market has been profoundly affected by the rise of synthetic fibres, mainly polyester(up from 33% of fibre consumption in 1960 to 60% today). Cotton consumption has grown in line with population growth(1.8%) since 1960, while the use of synthetic fibre has grown by 4.7% per annum.

The report notes the substantial cotton sector reforms which have been undertaken by Sub-Saharan African cotton producers in the 1990s including in Tanzania, Uganda, Zambia and Zimbabwe and how the ACP have some of the lowest cost cotton producers in the world(especially Benin, Mali, Burkina Faso, Uganda and Tanzania). In contrast the EU in Greece and Spain has "probably the world’s highest cost cotton producers?, with other high cost producers including the USA, Syria and Israel.

The report notes how the current low cotton prices "have been influenced by the support provided by major player "snd this has "taken a toll on the rural sector of cotton dependent countrie "sn Benin the report suggests that cotton price declines between December 2000 and May 2002 led to a 7% reduction in rural per capita incomes in the short run and a5-6% decline in the long term. As a consequence the incidence of poverty rose in the short term from 37% to 59% amongst cotton growers.

The report notes how in future growth in cotton consumption is unlikely to exceed population growth(1.2%) and while prices are expected to recover from record lows they will never reach the heights attained in the 1970s or even mid 1990s. The report notes how price prospects for African countries would be improved considerably if "support by developed countries is reduced substantially or eliminated?. It maintains the removal of support in OECD countries would be to reduce production and consequently boost prices and how full liberalisation(including removal of both trade barriers and production support) would increase the cotton price by an average of 12.7%, expand African exports by 12.6% and result in decline in EU production of 70.5%. Not surprisingly, given this last outcome the report acknowledges that the "complete elimination of support is unlikely?, with the EU viewing its cotton policy as a poverty reduction mechanism for low income regions in southern Europe. In this context the report advocates moving over to less trade distorting forms of support.

However even here the report points out that all past efforts at decoupling(which is seen as less trade distorting) have only been partially applied. It maintains these past schemes did not include three key elements, namely:

  • substituting all existing support mechanisms with decoupled support;
  • limiting the duration of the programs which would have made them true transition mechanisms;
  • not requiring that land remain in agricultural use, which would reduce the overall supply of the commodities under consideration and hence lift world prices.

The report maintains that "unless these conditions are met, any attempts to restore the credibility of decoupled support policies and ultimately remove support to the cotton(and other) sector(s) are unlikely to have the intended beneficial impact?

Editorial comment

The final conclusion on the pre-requisites necessary for decoupled support to be non trade distorting have a relevance way beyond the cotton sector and is at the heart of unresolved issues in the WTO on international rules on domestic support. It furthermore strikes at the very heart of the EU CAP reform process which is predicated on international acceptance of EU definitions of what constitutes trade distorting and non trade distorting forms of support, with decoupled payments definitely being seen by the EU as non trade distorting. However, current EU decoupled payments do not comply with what are seen by World Bank economists as essential criteria for decoupled payments to be genuinely non trade distorting.