By and  on May 20, 2008

WASHINGTON — The $300 billion farm bill passed by Congress last week by enough votes to sustain a threatened veto from President Bush could ring the death knell for the Doha Round global trade talks aimed at lowering tariffs and subsidies among World Trade Organization members.

WTO trade diplomats have been trying to hammer out a global trade accord for more than six years but a stalemate between poor and rich countries over the level of cuts in agricultural subsidies has thwarted their efforts time and again. WTO director-general Pascal Lamy has warned that negotiators have only a matter of weeks to reach an agreement on the basic outlines of a trade accord if they are to meet the targeted goal of a final global pact by the end of the year.

Trade negotiators have said they want to capitalize on what they see as a renewed push by key countries to finalize a deal this year. But the U.S. farm bill, which provides funding for five years for subsidized farm programs, including cotton growers, amid some reform of government-assistance initiatives, could be the spoiler in Geneva, according to the Bush administration, the business community and many lawmakers.

"This is trade-distorting support that makes our programs vulnerable to challenge from abroad at a time when trade is more important than ever to our farmers," Agriculture Secretary Ed Shafer said last week.

WTO trade negotiators, still sorting through the details of the farm bill, are expressing concern about it.

"To have some impact on the Doha talks, we need to have some effective subsidy cuts in this U.S. farm bill," Alberto Dumont, Argentina's WTO ambassador, said in Geneva. "But we first need to see the numbers and it's not an easy task to decode the language of the farm bill into WTO commitments."

Similarly, trade officials from major developing nations in Asia, such as Indonesia and India, say the U.S., which is pushing for major openings in emerging countries, needs to come forward with bigger cuts in trade-distorting subsidies.

The issue on which a broad cross section of rich and developing country envoys concur is that the U.S., as one top official put it, will have to agree to deep cuts on cotton subsidies. A current WTO agriculture blueprint calls for the U.S. to slash its cotton support levels by 82 percent, an amount the U.S. has repeatedly said is unacceptable since it was presented in July. Since then, the U.S. has not put forward a counter offer, but senior trade envoys said it is key for a deal to fall in place that satisfies West African and Brazilian cotton farmers.

The provision in the farm bill that seems to specifically fly in the face of Doha goals and could trigger a trade war is one that partially reinstates a broader U.S. cotton subsidy program that was deemed illegal by the WTO in 2004. Brazil challenged and won a case in the WTO against U.S. cotton subsidies and the U.S. was forced in 2005 to scrap the key farm program, known as "Step 2," that provided $2.4 billion worth of subsidies to cotton farmers, textile mills and exporters between 1995 and 2004, according to the U.S. Department of Agriculture.

Among its provisions, the Step 2 program included federal financial support for U.S. textile mills as part of a program that restrained them from buying imported cotton because of a tariff-rate quota that protects cotton farmers from imports. U.S. mills must buy higher-priced U.S. cotton unless the price reaches a certain threshold over a period of time.

Although the U.S. eliminated the program, the WTO ruled last year that the American government did not go far enough to comply with its earlier rulings that found U.S. cotton subsidy programs in general breached global trade rules. That means Brazil could have the right to retaliate, if the U.S. loses an expected appeal, for as much as $1 billion a year in sanctions until the U.S. brings the measures into full conformity.

Congress, in the new farm bill, renewed some of the Step 2 payments to U.S. textile mills, giving them 4 cents a pound on the cost of the domestic and imported cotton they use. That might be all it takes to provoke Brazil.

"The farm bill tries to increase subsidies when we are trying to decrease them and to increase them in a most dramatic manner," Brazil's WTO ambassador, Clodoaldo Hugueney, said in Geneva. "And on cotton they are trying to recover programs found illegal by the [WTO] appellate body."

Deputy Secretary of Agriculture Chuck Conner told reporters last week there are two provisions in the bill, including the textile mill subsidies and a domestic sugar content requirement, that "really are going to give us major problems with our international trading partners."

Conner pointed to the long battle at the WTO the U.S. had in defending the Step 2 subsidy program.
"How do they [Congressional lawmakers] respond to that?" he asked. "They respond to that by creating yet another payment program...for domestic textile mills. This is going to be a big problem."

As for how he expects developing countries to react, Conner said: "They are going to be incensed and we would expect them to protest in every way they can."

One of the targets of potential retaliation by Brazil is U.S. apparel, footwear and accessories exports.

Nate Herman, director of international trade at the American Apparel & Footwear Association, said he believes Brazil will move to get the WTO to approve retaliation immediately.

"Within six months or so, you are probably going to see Brazil impose punitive duties on U.S. exports to Brazil," Herman said. "They might also go back and ask for a bigger number. This is an excuse a lot of developing countries need to kill the round."

The beneficiaries of the new textile mill subsidies in the bill defended the program and said it would comply with WTO rules.

"The U.S. Trade Representative's office looked at it, the Hill looked at it and the lawyers looked at it," said Cass Johnson, executive director of the National Council of Textile Organizations. "They learned their mistakes the last time [with Step 2] and this new program is WTO legal."

Johnson argued the WTO ruled as illegal a portion of Step 2 that provided subsidies to U.S. cotton merchants that export subsidized cotton. The program was found to be against the rules because it put foreign exporters at an unfair disadvantage. He said several U.S. mills were forced to close when Step 2 was eliminated, particularly yarn spinners, because about 75 percent of the cost of yarn is raw cotton.

Johnson also underscored another argument that many trade experts have put forth: That if the U.S. were to cut subsidies dramatically in the farm bill, it would take away a key bargaining chip in the Doha talks to force developing countries to open their markets in the trade round.

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