Losses in cotton case in WTO dispute with Brazil won't have immediate impact on U.S. farm policy

"Yes, U.S. cotton farmers lost a round in an international trade dispute; but don't panic," said Pat Westhoff, policy analyst with the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.

"Don't panic, but do pay attention," Westhoff repeated in a seminar for MU agricultural economists.

Early speculation that the ruling against government supports for cotton production and exports will change all future farm programs is premature, Westhoff said.

The World Trade Organization (WTO) did find that payments to users of U.S. cotton and the current USDA export credit program violate WTO rules. The panel also ruled that direct and counter-cyclical payments to farmers under the 2002 farm bill are not exempt from being counted as subsidies.

"The WTO panel did not accept all of the Brazilian arguments," Westhoff said. U.S. direct payments to farmers were not found to have a large effect on U.S. production and trade. This would head off U.S. having to pay compensations to other countries.

The WTO panel also failed to find large production effects from U.S.

crop insurance programs.

"Essentially, the panel found only payments somehow tied to prices, such as marketing loans and counter-cyclical payments, have significant potential for trade distortion." The first reason to not panic, Westhoff said, is that nothing will happen very quickly. International trade negotiations are always drawn out.

"Second, negative panel findings don't immediately translate into policy changes," Westhoff said.

In the next step, the U.S. will appeal the case. "If the U.S. wins the appeal on all counts, that is end of the story," Westhoff said.

However, if the U.S. loses on some, or all, points there will be time for the U.S. to change the rules and come into compliance.

Not just cotton farmers need to pay attention. Cotton happened to be the first commodity challenged. "Arguably, any program that encourages U.S.

production and export of any commodity could be challenged," Westhoff added. "This is especially true now that a 'peace clause' intended to discourage WTO cases has expired." Some unintended consequences could pop up. "Any policy change that results in less cotton production could lead to increased production of other commodities. That, in turn, could lead to lower prices." The main impact will be on future trade negotiations, Westhoff said.

This could lead to changes in U.S. policy on producer support, export competition and market access.

However, Westhoff said, "Press reports that the WTO framework will have particular impact on farm policy are premature at best." Westhoff admitted the case and its aftermath are complicated. For example the 377-page cotton panel report, with 1,000 pages of attachments, has just become available -- months after the ruling.

"There's a lot of fine print, with lots of qualifiers that matter a lot," Westhoff said. "In the current trade negotiations, there is more 'fine print' yet to be written." A WTO framework agreement in Switzerland in August was touted as a breakthrough by U.S. negotiators. However, that was mainly an agreement to continue talking.

Nothing will happen before the U.S. elections. "The original target date of an agreement this year just won't happen," Westhoff said.

The next major high-level meeting to push forward the WTO talks will be in Hong Kong in December 2005. That probably means no agreement before 2006.

"Remember, WTO target dates are often missed," Westhoff said.

In other words, "Don't panic. And don't hold your breath."