Take That, U.S. Farmers!

A WTO court ruling on subsidies could tip the power balance in world trade talks

When a World Trade Organization court ruled on Apr. 26 that subsidies paid to American cotton farmers flout international trade rules, it did far more than just administer a wrist slap to the Bush Administration. The U.S. -- and Europe and Japan as well -- put all of their chips on the WTO backing their position. But they were beaten big time by the world's struggling nations instead.

How has the U.S. lost? In two ways. First, the setback will probably trigger a flood of suits in the WTO court from emerging market countries, suits all modeled on the successful Brazilian challenge to U.S. cotton supports. These suits will question the legality of $200 billion in annual subsidies that support the pampered grain, cotton, and dairy farmers of the richest nations. Washington, Brussels, and Tokyo will fight back, of course. But if the Brazil decision holds, watch out. "Most developed countries thought they were immune to this kind of ruling," says former U.S. Trade Representative Charlene Barshefsky. "But they are going to find this a profound outcome."

The second way the U.S. and the other rich nations lose is in the maneuvering to dominate the next global round of trade talks. The U.S. and the European negotiators knew that their counterparts in Brazil, Africa, India, and elsewhere were desperate to see agricultural subsidies in the rich nations reduced and more doors opened for their own farm exports. The Americans and Europeans figured they could dole out crumbs to the developing nations -- a drop in a subsidy here, an exemption to a quota there -- in return for greater protections for intellectual property and the completion of other deals. But the decision on cotton demolishes that tit-for-tat negotiating strategy. "They were counting on trading these farm subsidies for other concessions from developing nations, but it turns out they aren't worth anything," observes John Magnus, a Washington attorney specializing in global trade.

The Bush Administration, taken by surprise, plans to appeal. In an election year, that's a no-brainer. "We will be defending U.S. agriculture interests in every forum we need to," promises Allen F. Johnson, U.S. Trade Representative for agriculture. But the U.S. has a poor record on winning such appeals.

The Brazilians know that, and they're rubbing their hands with glee. The decision on cotton "delegitimizes...domestic subsidies and increases our bargaining power in [trade] negotiations," says Brazilian Foreign Minister Celso Amorim. A clearly emboldened Brazil has also filed a case against Europe on sugar subsidies.

CAPTURING THE MARKET. If Brazil and its allies demolish the legal basis for subsidies in the rich nations, the shift could be traumatic. Farmers in industrialized countries receive up to 65% of their income from government support programs, according to a WTO study. The European Union doled out $110 billion to its farmers in 2002, and the U.S. paid subsidies of $40 billion, according to the Paris-based Organization for Economic Cooperation & Development. President George W. Bush signed a farm bill in 2002 with a record $114 billion in subsidies, including $3 billion a year for the 25,000 U.S. cotton farmers, who used the payments to capture 40% of the world market, according to various studies.

Most worrisome to U.S. trade officials: The WTO apparently rejected their argument that U.S. subsidies should be considered legal as long as they are intended for such purposes as land conservation, environmental protection, disaster relief, and so on. Brazil successfully argued that such aid allowed cotton farmers in the U.S. to cut prices 61% below the cost of production. As a result, Brazilian cotton growers lost $600 million in sales. "The U.S. was trying to get off on a technicality, but this ruling says that won't work," observes Ben Lilliston, an analyst with the Institute for Agriculture & Trade Policy.

The subsidies that lie at the heart of American and European agriculture won't disappear overnight. But the rules of the game in this vital area of global trade finally look set to change.

By Paul Magnusson in Washington, with Jonathan Wheatley in São Paulo

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