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Earlier this month, Brazil and the United States struck a landmark trade agreement over a longtime point of contention: cotton. The deal—the United States pays a hefty sum to Brazilian cotton farmers in return for an opportunity to continue subsidizing its own producers—had all outward appearances of a fair compromise. Under the surface, however, the agreement concealed an uglier truth about the misbalance of power in international trade.
Both Brazil and the United States are among the top five major cotton producers, accounting for approximately ten and 30 percent, respectively, of world cotton exports in 2014. The two have been feuding for more than a decade about the U.S. government’s generous subsidies to domestic growers. These subsidies deflate global cotton prices and wreak havoc on less protected farmers in Brazil. The new U.S. Farm Bill, passed this past February, renewed these and other agricultural protections for U.S. producers for another five years and was thus a thumb in Brazil’s eye.
Brazil responded by threatening to impose retaliatory tariffs on U.S. goods and services, setting in motion negotiations that culminated in the cotton trade pact. To settle the matter, the United States agreed to pay a lump sum of $300 million to Brazil (with the aim of helping Brazilian farmers become more competitive) and to scale back its export credit programs, a form of subsidies for exports. In return, Brazil pledged not to put forth any further challenges to the Farm Bill.
Although Brazil’s cotton farmers hailed the settlement as a major breakthrough, the victory is not as straightforward as it may seem. First, the history of many similar agreements—involving a dominant player and a growing economy—demonstrates that developing countries often find their concessions to be more expensive in the long run than they initially believe them to be. Second, the U.S.-Brazilian pact echoes an all-too-common conclusion to such disputes: a buy-off by the more powerful player rather than real steps to liberalize trade and reduce protectionism. On each point, Brazil is the loser.
This dispute over cotton is emblematic of the broader challenges that developing countries face when they try to pry open the agricultural markets of richer states and cajole them to play by the rules of free trade. Until three decades ago, the more dominant members of the World Trade Organization kept agricultural negotiations almost exclusively focused on their own agendas. The 1994 agreement on agriculture that culminated the WTO’s Uruguay Round, for example, mostly responded to the needs of the United States and the EU, which had negotiated the pact between themselves with minimal involvement by the developing countries. As a result, the agreement left most of the developing world’s agricultural exports facing peak tariffs in the U.S. and EU markets (as with cereal grains and sugar) or simply unable to compete with subsidized, and therefore cheaper, domestic products (as with cotton and meat).
This dominance began to recede in the late 1990s, as the world’s growing economies joined hands and strengthened their efforts to advocate for fair treatment. By then, however, many of the domestic subsidies and protections that now tilt the global trade field in favor of developed nations were already firmly in place.
Cotton is a case in point. By 2002—the year Brazil first filed a cotton-related complaint with the WTO—cotton subsidies around the world were suppressing the commodity’s global prices by 15 percent, according to an analysis by the International Cotton Advisory Committee. U.S. subsidies alone accounted for nearly half of the impact. In that same year, the U.S. government paid $3.4 billion to the country’s 25,000 cotton farmers—nearly twice its development assistance to sub-Saharan Africa during that period, according to Oxfam. Between 1995 and 2012, the total volume of U.S. subsidies approached $33 billion. Today, the United States exports 61 percent of the cotton it grows, supplying 30 percent of world cotton exports.
At the 2003 WTO summit in Mexico, trade ministers from the so-called Cotton Four countries—Benin, Burkina Faso, Chad, and Mali, all of them dependent on cotton for almost ten percent of their GDPs and 40 percent of their exports—vehemently called for the elimination of U.S. trade protections. The countries argued that cotton provided the livelihoods for ten million of their farmers and that U.S. policies cost them $400 million in forgone earnings. Washington responded with vague promises to accommodate the countries’ trade needs on a few points unrelated to cotton. Eventually, as in Brazil’s case, it sought to deflect the states’ criticism by providing foreign aid (totaling $16 million) to build the capacity of their cotton farmers. These meager concessions fell far short of what these countries would have earned from exporting their crops at better prices.
Meanwhile, the WTO finished examining the complaint filed by Brazil, ruling in 2004 that U.S. practices violated its free trade commitments. As its dispute with the United States dragged out, Brazil received special WTO authorization in 2009 to retaliate against U.S. free trade violations by imposing up to $830 million in sanctions against U.S. goods and services. Since then, eager to stave off this scenario, Washington has been shelling out $147 million per year to Brazil’s farmers—payments that will now become superseded by the lump-sum fine of $300 million.
Despite all the pressure, however, the powerful U.S. cotton lobby managed to keep the industry’s subsidies intact in successive farm bills. Most of these payments benefit rich cotton farms in states such as Arizona, California, Mississippi, and Texas. Three-quarters of the payments go to the top ten percent of producers, whereas smaller growers see few advantages. But rather than reconsider its policy at home, the government has chosen to pay fines abroad. Scaling back domestic protectionism—an option that would save federal funds while boosting the competitiveness of U.S. producers—never emerged as a realistic policy alternative (even though a number of U.S. congressmen advocated for it).
Brazil’s agreement with the United States demonstrates both the promise and the danger of using WTO dispute settlement procedures to resolve such long-term grievances. The WTO’s strength and flexibility do allow countries to threaten retaliation (as Brazil has done to pressure the United States) and to pay compensation for noncompliance (as the United States ultimately chose to do). But they offer no guarantees that such settlements would help the world move toward fairer and more open international trade rather than cement the status quo.
By accepting U.S. compensation, for example, Brazil perpetuated some of the market distortions that had sparked the dispute in the first place. And in the process, it has forgone its right to retaliate against the United States—and thereby push for deeper policy changes—for the next five years, the term of the new Farm Bill. Washington’s payment to Brasilia thus served a similar purpose as the foreign aid it granted the Cotton Four a few years earlier: settling the argument by buying off the other party without providing real trade concessions. In a way, it even deepened the underlying problems, allowing the U.S. government to subsidize cotton farmers abroad as well as at home.
The agreement does appear likely to yield some dividends in the short term. From an economic standpoint, for instance, the Peterson Institute for International Economics has noted that the $300 million will ultimately benefit Brazil’s farmers, whereas retaliatory tariffs against the United States would not. And for Brazil’s President Dilma Rousseff, currently struggling to win reelection, reaching an agreement on such a longtime contentious topic appears to have attracted valuable additional votes.
However, even as the settlement buries the hatchet between the United States and Brazil, it does nothing to address the similar grievances of other developing countries. Instead, these growing economies will see only a continuation of the status quo in agricultural trade. The U.S. cotton farmers, meanwhile, will continue to reap billions of dollars in domestic subsidies and earn incomes by selling their crops at discounted prices. In this sense, the cotton dispute offers scant hope that trade protections on commodities from the developing world will be a thing of the past anytime soon.