Daniel A. Sumner "Agricultural Trade Disputes and U.S. Farm Subsidies: Implications for Latin America" October 4, 2004

Daniel A. Sumner (seen here at the talk) is the Frank H. Buck Jr. Professor in the Department of Agricultural and Resource Economics at UC Davis and the Director of the University of California Agricultural Issues Center. Professor Sumner’s research includes all aspects of agricultural policy, with an emphasis on agricultural trade policy and the WTO and dairy industry issues.

The WTO Cotton Case: A Fair Trade Watershed?
By Simeon Tegel

Even an economic and political superpower like the United States will have to heed the recent World Trade Organization ruling that U.S. export subsidies to domestic cotton farmers violate international trade rules. Ignoring the judgment in the ground-breaking case brought by Brazil would damage the U.S.’s moral and political authority and the related enthusiasm of other nations to participate in further rounds of trade talks. “The leverage would be an unwillingness to negotiate seriously,” said Daniel Sumner, the UC Davis economist who provided analysis to Brazil for the case, as he forecast that Washington would respect the WTO adjudication.

Professor Sumner was speaking at CLAS about both his involvement in the ruling and its broader implications. In September, the WTO panel, made up of independent trade experts from Poland, Australia and Chile, published their June adjudication which found that some of the U.S. cotton subsidies, which total approximately $3 billion annually, exceeded permitted levels and thus contravened binding trade treaties ratified by the U.S. According to the ruling, Washington used “prohibited” financial supports that caused “serious prejudice” to Brazilian farmers by depressing world cotton prices and therefore the revenues of growers in Latin America’s largest country.

Washington, which needed only to show that its policies were in line with WTO agreements rather than that they were “fair” to overseas cotton farmers, is appealing the ruling. Brasilia may also appeal some of the details of the adjudication, despite its success in winning the substantive arguments in the case. Professor Sumner said the U.S. representatives to the WTO had been “outclassed” by their Brazilian counterparts in the case, brought by Brazil in response to the 2002 U.S. Farm Bill. That piece of legislation maintained the subsidies, solidifying Washington’s controversial position in the Doha Round of WTO talks. It also provoked “universal” distrust among other WTO members of the Bush administration’s intentions. An appellate body is expected to meet for two or three days later this fall with a final ruling due in December or January. Although the WTO appellate body tends to uphold panel decisions, Sumner warned that the cotton case was “atypical” and more complex and technical than most.

The U.S. is the world’s second largest producer of cotton, after China, and the largest exporter. Around 70 percent of the four million tons of cotton grown in the U.S. each year is sold abroad. Brazil alleged that Washington’s subsidy program has driven down world cotton prices, particularly during the period from 1999 to 2002. According to Professor Sumner’s projections for the Brazilian government, the U.S. would have produced approximately 30 percent less cotton, and cotton exports would have shrunk by around 41 percent in volume, without the subsidies. As a result, world cotton prices would have been approximately 12.6 percent higher. The impact of the cotton glut on world markets has been particularly harmful to growers in developing regions including Brazil, Turkey and West Africa, who have struggled to cover their costs in the face of subsidized U.S. competition.

Professor Sumner used an econometric simulation model that had been developed by the National Cotton Council and partially funded by the U.S. Congress to make his calculations about dozens of alternative scenarios. He believed he could have developed a better model from scratch, although the results would have been substantially the same, but wanted to avoid an “innovative or academically interesting” study that would have been vulnerable to charges that it was unproven or based on contested assumptions. During the WTO hearings, the U.S. government lawyers questioned and criticized Sumner’s results and methodology but never offered their own alternative model or calculations.

The case has been widely hailed as a major victory for developing nations in their battle to gain freer access to developed markets for their agricultural products and to have agricultural subsidies reduced or removed in the First World, principally in the U.S., the European Union and Japan. It also constitutes a major precedent for the WTO, which was founded in 1994 and therefore has a relatively small but growing pool of past rulings comprising its case law, Professor Sumner noted. Farm subsidies have been particularly controversial, helping to forge some unusual alliances among their opponents; development NGOs have found themselves lining up with free trade advocates such as the libertarian Cato Institute, which believes the subsidies are an inappropriate use of taxpayers’ money, removing the agricultural sector’s decision-making processes from the pressures of the market.

Professor Sumner’s participation as a consultant to the Brazilian government in the case has been contentious within the U.S. In turn, attacks on his role have been viewed as a threat to academic freedom. The President of the California Cotton Growers Association, Earl P. Williams, even went so far as to suggest that the softly-spoken professor’s actions were the equivalent of “treason” while calling on financial contributors to the University of California to question their continued support. Professor Sumner, who has never visited Brazil and who would have provided the same analysis for the U.S. had they contracted him, freely concedes that one result of the case is that some U.S. cotton acreage will be transferred to other crops and that some agricultural land may drop in value. However, he said that he had felt relatively “insulated” from the attacks thanks to the support of the UC system. He added: “A certain amount of pressure was placed on the University of California. So far, as far as I can tell, that pressure has been resisted.”

Assuming the appellate body upholds the ruling, Professor Sumner forecasts an upsurge in production and revenues for Brazilian cotton growers. However, he also warned that the effect of U.S. agricultural subsidies on farm profits in other countries may be more complex than portrayed by some development NGOs. For example, in Africa weak price transmission from international markets to cotton farmers, means they are less likely to benefit than their Brazilian counterparts from the WTO ruling. Equally, increased soy production in the U.S., on land formerly dedicated to cotton, could hurt Brazilian soy farmers.

Professor Sumner also questioned assertions by President George W. Bush that the subsidies were contributing to the “independence” of the U.S.’s agricultural sector. Currently, the range of government payments to cotton farms averages about half of their total revenues, including one support for which the farmers do not even have to actually produce cotton, a situation which appears to reduce self-reliance among cotton growers at the expense of the U.S. taxpayer. A restructuring of U.S. agriculture may well have been coming anyway and it is still likely to be phased in over time and include compensation to cotton growers opting to switch crops. “The timing and implementation demanded by Brazil will be reasonable,” said Professor Sumner, predicting that Brasilia will exercise its new role as a moral and political leader of the G20 group of developing nations, which includes powerful states such as India and China, with prudence and realism.

More broadly, the ruling may well mark a sea-change in trade relations between the developed and developing worlds. It establishes a precedent that may be used in a predicted wave of cases brought by other Third World countries to gain greater access to developed markets and a more level playing field with agricultural products from the First World. In an attempt to preempt those challenges, both the U.S. and the EU may reduce other farm subsidies and restructure their agricultural sectors. Equally, negotiations to extend NAFTA to the rest of the Western Hemisphere under the Free Trade Area of the Americas (FTAA) may now run more smoothly with the effective removal of one of the major stumbling blocks between Washington and her Latin American neighbors.

Nevertheless, Professor Sumner cautioned, the new era of trade rules would not by itself enable small farmers in developing countries to rise out of poverty. Internal economic and legal reforms will still be necessary, although these may now be more likely as a result of Brazil’s WTO victory, if many nations in the Global South are to fully take advantage of the new rules of the international trade game.

Professor Daniel Sumner holds the Frank H. Buck Jr. Chair at UC Davis’s Department of Agricultural and Resource Economics and is Director of the UC Agricultural Issues Center. He spoke at CLAS on October 4, 2004.

Simeon Tegel is a graduate student in UC Berkeley’s Latin American Studies MA program.

Professor Sumner talks with a student after the presentation.