Consensus eludes cotton subsidies

The WTO is yet to address one of the unfinished agendas of disciplining the trade-distorting cotton subsidies in rich countries that push millions of poor cotton farmers into poverty. Despite the Hong Kong Ministerial Decision in 2005 to reduce the cotton subsidies “ambitiously, expeditiously and specifically”, the WTO has failed to deliver on the promise even after 18 years. Sadly, the 12th Ministerial Conference marks yet another WTO conference with no solid outcome on this mandated issue.

Even with 13th Ministerial Conference approaching in 2024, there is no consensus on cotton subsidies between members. In this vein, it is important to revisit the role of cotton subsidies in international trade, especially in the context of sustainable development goals, a pivotal principle in guiding contemporary trade negotiations.

How would the cotton subsidies in rich countries affect the farm income of poor countries? When cotton produce is highly subsidised and subsequently exported, it causes a dip in international prices. It makes the cotton production and exports by poor countries uncompetitive in the international market against the subsidised cotton exports. The issue of cotton subsidies garnered global attention in 2002 when Oxfam published a report titled ‘Cultivating Poverty’. The report found that enormous US cotton subsidies destroyed the livelihoods of cotton farmers in Africa by depressing international cotton prices and diminishing their prospects of cotton exports. While the African countries — namely, Benin, Burkina Faso, Chad and Mali (referred to as the ‘C-4’ countries), along with Côte d’Ivoire — were the most affected by the US’ cotton subsidies, significant damage was also done to other developing countries. These enormous subsidies from rich countries confer an artificial competitive advantage to their farmers at the expense of poor farmers of developing and least-developed countries.

Global scenario

Currently, India, China, Brazil and the US are leading cotton producers. However, the US has been exporting more than 90 per cent of its cotton produce in the international market and is the largest exporter accounting for a 28 per cent share in global export in 2023. Similarly, the C-4 countries including Côte d’Ivoire are also exporting more than 90 per cent of their cotton produce reflecting the high level of dependence on the international market. On the other hand, India exported only 8 per cent of its cotton production in 2023.

The US has some 8,100 cotton farmers with an average farm size of 624 hectares. On the other hand, the number of people engaged in the cotton sector is massively higher in developing and least-developed countries. Moreover, the average farm size in India, China and African countries ranges approximately from 0.7 to 2 hectares. Besides, farmers from poor countries suffer from multiple challenges in terms of marketing problems, inadequate institutional support, low farm income, and farm distress, among others. Despite these challenges, the cost of cultivation is significantly lower in India and African countries in comparison to the US, which gives them a natural competitive advantage.

However, the US has been providing substantial support to cotton farmers through a wide range of measures including crop insurance, price deficiency like payments and market facilitation programmes which essentially offset the natural competitive advantage of developing countries. The US has spent more than $40 billion on cotton subsidies between 1995 and 2020.

In some years, the cotton subsidies were more than 75 per cent of the value of total cotton production in the US. Furthermore, per farmer cotton subsidy is significantly higher in the US ($117,494) as compared to India ($27), and China ($295). In recent times, the level of support for cotton has also substantially increased in China mainly on account of direct payments. These high levels of trade-distorting subsidies have a disastrous impact on agricultural growth, export earnings and welfare of the millions of poor cotton farmers and eventually trap them in a vicious cycle of poverty.

Rules at the WTO

Though both developing and developed countries can subsidise cotton production, there are limits on the amount of trade-distorting support a country can provide under the Agreement on Agriculture (AoA) at the WTO. As per the rules, most developing countries can provide support only up to a maximum limit of 10 per cent of their total value of cotton production. If the limit is breached, their policies can be challenged at the WTO. Whereas this limit is not applicable for the developed countries.

For instance, in 2001, the US provided a cotton subsidy that constituted 74 per cent of the value of cotton production and yet was compliant with the WTO rules. Meanwhile, the developing countries with a ceiling cap on their flexibility to support cotton farmers do not enjoy such benefits. The WTO thus curtails the flexibility of poor countries to support their cotton producers, while simultaneously conferring exclusive additional flexibilities for the developed countries.

In order to address the discrimination in the WTO rules, the C-4 countries along with many developing including least-developed countries have been consistently demanding a substantial reduction in the developed countries’ flexibilities to provide trade-distorting cotton subsidies since the 2003 Cancun WTO Ministerial meeting.

Despite their best efforts in highlighting the discrimination in the WTO rules at various subsequent Ministerial meetings, their demands have not been met so far. The rich countries have been unwilling to yield to the requests made so far, and continue to maintain trade-distorting cotton subsidies that essentially displace exports from farmers of poor countries.

The collective demand of the C-4 and others to discipline trade-distorting cotton subsidies needs to be met expeditiously since it will reduce the elbow room available to the rich countries to depress international prices. It will raise the farm income of poor farmers by making their cotton produce more competitive. This would go some distance in reducing the inequalities embedded in the WTO rules and essentially help in achieving Sustainable Development Goals of eradicating poverty and hunger.

Sharma is Associate Professor, and Shajahan and Mathur are Research Fellows, at Centre for WTO Studies, Indian Institute of Foreign Trade

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