Stephen J. Powell and Andrew Schmitz
July 21, 2005

As far back as Ricardo’s shattering insight as to comparative advantage in 1817, agriculture has enjoyed special favor in trade. The unique place of farming was so well established by the time the 1947 General Agreement on Tariffs and Trade (GATT) was negotiated that GATT’s tight disciplines on government interference with free trade not only exempted government protections to growers, but in fact were drafted to be fully consistent with the agricultural policies of the major signatories. While it would be an exaggeration to argue that GATT’s first half century was without impact on agricultural benefits, the sector at any rate took center stage during negotiations to create the World Trade Organization (WTO), because by the time these talks began in 1986, subsidy-induced overproduction had led to widespread displacement of efficient producers from their traditional markets, Many felt this result was far from realization of David Ricardo’s compelling economic case for the smallest possible government intervention.

While widely hailed for bringing agriculture – at last – under the GATT/WTO umbrella, 1995's Agreement on Agriculture more than lived up to the promise of Article 20 that “substantial ... reductions in support and protection resulting in fundamental reform is an ongoing process.” Both as to export subsidies – those contingent upon export performance and thus with the most direct impact on export prices and trade – and the remaining domestic subsidies, the Agriculture Agreement’s ambitions are so modest that many experts believed its generous exemptions and undefined terms rarely would permit successful reining in by dispute settlement panels of the nearly $1 billion a day developed nations provide to their farmers.

Two decisions issued by WTO dispute settlement panels on September 8, 2004, belie that prediction. Brazil, an agricultural superpower in its own right, was a complainant in both cases. In the first case, a Panel found U.S. subsidies to upland cotton were sufficiently in excess of those granted by the United States during the baseline 1992 marketing year to be actionable under the Subsidies Agreement despite the protection of the “Peace Clause” of the Agreement on Agriculture. The Cotton Panel went on to find that these subsidies caused serious prejudice to Brazil’s cotton growers within the meaning of the Subsidies Agreement. In the second case, which involved the EU’s Common Agricultural Policy, a Panel held that the European Union had exceeded in both the amount of exports and the level of subsidies its agreed commitments on sugar.

Not only is Cotton notable as the first WTO decision to find that domestic farm support caused injury, but the report is important because it also concluded that serious prejudice – and thus a WTO violation – was shown by the size and nature of the government benefits to the cotton industry on the ground that they caused world prices to be suppressed. U.S. cotton producers received $13.1 billion in subsidies during the examined period of 1999 to 2003 for a crop valued at $13.94 billion in those four years. The Panel’s conclusions, which have been upheld by the WTO’s Appellate Body, will have significant impact on agricultural policies for specialty and program crops of the United States, Europe, and Japan. The Sugar Panel’s finding that below-cost exports of an agricultural product may, even in the absence of “direct” export subsidies, show export subsidization if there is close linkage of domestic support programs with these exports makes the U.S. rice, corn, soybeans, and other commodities programs vulnerable to dispute challenge.

This paper will analyze the major holdings of the Sugar and Cotton decisions from both a legal and an economic perspective, assess the WTO implications of those holdings on other crops and on Doha Round agriculture negotiations, and examine the effects on other U.S. exports of the failure of the United States to implement the decisions separate from Doha Round negotiations.