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The Cotton Initiative Beyond Cancun

26 September 2004

The issue of moving over to less trade distorting forms of support was taken up in a second paper to the technical workshop by Louis Goreux. This paper maintains that "by modifying the nature of subsidies and adjusting their mix, the depressive effect on world prices might be reduced by 70% on averag "end how "if in addition the level of subsidies. Were cut in half, the prejudice caused to LDCs would be reduced by 85%?. This is it held would "solve LDCs problems and allow industrialised countries to take care of their legitimate social concerns?.

The report however starts by reviewing the state of the debate over subsidies, noting how the World Bank, the IMF and the OECD have "repeatedly advised industrialised countries not to spend hundreds of billions of dollars a year to support agricultural prices, arguing that it was an inefficient way of solving problems at home and that it caused considerable damage to developing countries. But this advice had not been followed?. In this context the paper contends that "cotton provides a striking illustration of the incoherence between the policies of industrialised countries regarding trade and aid?, with Africa having a real comparative advantage which it is not allowed to exploit because of the policies of developed country governments.

Reviewing the past experience of attempts at imposing international disciplines on agricultural support the report notes that while commitments made under the Uruguay Round were met they "did not help African cotton producers?. It further notes how the proposals tabled in the run up to Cancun relating to subsidy reductions would not have improved the position of African cotton producers even if adopted, as they would still have allowed funds to be juggled between boxes and products.

The paper reiterates the message of the cotton initiative, namely: eliminate subsidies and compensate LDCS in the transition period while you are moving towards this objective. The paper goes into some detail about how compensation mechanism could work including the existing institutional structures which could be used to implement it. It also explores how the level of compensation should be calculated.

The report notes how in the EU "the cost of producing cotton in Greece and Spain was three times what would have been spent by importing i "tnd how cotton production in the EU has had a negative value added over the 1996-2002 period, with the costs of inputs other than labour and capital depreciation exceeding the value of total output at world market prices. The report highlights some of the anomalies of the existing EU policy, namely how within 13 years of its accession Greece has expanded cotton production three fold.

Looking at the current debate on EU cotton sector reform the paper calls fro the EU to:

  • reduce coupled payments to below 40% and "to progressively eliminate subsidies coupled with cultivated areas?;
  • link the area eligible for second window payments to the area under cotton at the time of Greece "s accession to the EU and not to the currently cultivated area which is 2.6 times larger;
  • ?classify second window payments in the amber category instead of the blue one?.

The report points out that the compensation requested by West African governments would "represent only 8% of US and EU subsidie "snd that while a case can be made against compensation this "should not be overplayed?. The paper suggest that to avoid any precedents being set in which the US and EU actually admit liability, funds could be deployed through "contributions aimed at improving productivity and reducing poverty in the African cotton belt?. The funds required for such an initiative in the four countries which sponsored the cotton initiative would represent just 14% of the toital ODA receipts of these countries. For its part the "EU contribution would represent 7% of ODA received by the four countries from the EU?. The paper argues that a unilateral EU compensation scheme would be feasible, with part of the fund going to growers and the other part of the funds being used for wider rural development initiatives.

The paper notes that while the recent price increase for cotton eases some of the pressure for compensation the issue of subsidies remains and that furthermore "reducing the distorting effect of cotton subsidies granted by the EC and US would be an efficient way of reducing poverty in Afric "at maintains that the elimination of subsidies would lead to a 15% increase in world prices and a 30% increase in net incomes of LDC cotton producers. This it is maintained "would substantially reduce poverty in cotton areas?.

The paper also makes important observation concerning the link between cotton production and cereals production, with cotton production having a positive spin off in terms of improved food security, as the organisational organisations associated with cotton production are exploited to develop domestic food production.

Some what controversially the paper suggest that the development of a textile industry is not a short term option in West Africa, given the high capital intensity of textile production, the high cost of electricity in the region, the limited domestic market and pending changes in international rules governing the textile trade. It maintains that in order to encourage investment discounted cotton would need to be made available which would harm cotton producers in the short term.

In terms of the impact of the cotton initiative beyond West Africa the paper sets out how much each cotton exporting LDC would benefit from the proposed compensation called for in the West African cotton initiative.

Editorial comment

The proposals for EU cotton sector reform put forward at the WTO technical workshop have largely been overtaken by events with the EU Council agreeing to a cotton sector reform involving:

  • a 65% decoupling of existing payments;
  • the maintenance of 35% of payments coupled to the area under production;
  • the granting of coupled payments to a maximum area of 455,360 ha(370,000 ha in Greece, 85,000 ha in Spain and 360 ha in Portugal);
  • the division of the Greek area into tow components - a base area of 300,000 ha at Euro 590/ha and 70,000 ha at Euro 342.85/ha.
  • The linking of these payments to cross compliance obligations.

The proposed use of the funds for both direct support to farmers and wider rural development measures is consistent with what the EU is in fact increasingly doing within the EU-15 and for new EU member states.