By and  on March 4, 2005

WASHINGTON — Millions of dollars in subsidies to U.S. cotton growers and yarn spinners may be threatened by a World Trade Organization ruling on Thursday that found U.S. programs for these industries violate international trade rules.

The WTO rejected a U.S. appeal and upheld a claim by Brazil that Washington’s cotton-subsidy programs are illegal. The global trade body’s decision could have far-reaching implications for U.S. cotton growers, exporters and mills that annually receive subsidies and export credits.

Any changes to the U.S. farm program would require action by Congress. Many U.S. lawmakers with agricultural constituencies would fight against reducing or eliminating subsidies for cotton farmers. Under WTO rules, Brazil may opt to get approval from the WTO to impose sanctions on U.S. goods if the Bush administration does not comply in time. The WTO Panel has said the U.S. must end the cotton subsidies by July 1.

A spokesman for the Office of the U.S. Trade Representative said the most effective way to address trade-distorting government support is through a comprehensive reform program.

“We are disappointed with aspects of the report because our program is designed to comply with our international obligations,” the spokesman said. “We continue to believe that multilateral negotiations, not bilateral litigation, is the most effective way to address distortions in agriculture trade.”

He said the U.S. and Brazil share many of the same objectives in the current round of global trade talks.

In September, a WTO dispute panel upheld Brazil’s original complaint and ruled that more than $2 billion in annual outlay by the U.S. government violated international trade laws. The U.S. appealed that ruling on Oct. 18.

At risk are the U.S. “Step 2” payments, a crucial part of the farm program, to cotton farmers, exporters and textile mills that have amounted to $14.1 billion between 1995 and 2003, according to the Environmental Working Group, a consumer advocacy group opposing agriculture subsidies. Each year the amount of subsidies fluctuates based on a formula established by Congress that is intended to offset the higher price of U.S. cotton when world cotton prices fall.

During the 1995-2003 period, Parkdale Mills Inc., Gastonia, N.C., the largest U.S. cotton spinner, received the fifth-highest amount of subsidies of about $98 million, the largest sum given any textile mill. The sixth-largest recipient overall, and second-biggest textile mill recipient, is yarn and fabric maker Avondale Mills Inc., Sylacauga. Ala., with $86 million.Brazil alleged the U.S. cotton subsidy programs were illegal, and distorted and depressed world cotton prices.

The South American nation, citing U.S. Department of Agriculture figures, said U.S. cotton producers received $12.47 billion in subsidies between August 1999 and July 2003, while the value of the U.S. cotton crop produced during the same four-year period was $13.94 billion.

Brazil said its cotton farmers have lost more than $600 million in sales because of the subsidies. Developing countries such as Brazil argue the agricultural payments prevent their commodities from competing with the U.S. This position has gained traction in recent years at the WTO, where the current round of talks is aimed at improving the lot of poorer countries.

However, until Brazil brought the cotton case, no headway was made in dislodging agricultural subsidies, which are also common in the European Union. Two years ago, crucial WTO talks in Cancún collapsed largely because of a handful of African countries’ anger over the U.S. and EU’s unwillingness to cede turf on the issue outside of the agricultural portion of the talks.

The WTO ruling confronts Congress with a complicated political problem. Cotton subsidies — one of several commodity-payment programs in place for 70 years — are widely supported among Republicans and Democrats in many states with cotton and textile production.

Now the WTO is forcing U.S. lawmakers to confront at least the cotton payments, a politically sensitive issue since the subsidies are paid out across numerous states. It’s unclear whether Congress could find an alternative to the existing program that would be WTO compliant.

Gaylon Booker, former president of the National Cotton Council and now a consultant to the association, said the ruling is a “disappointment,” although he remains confident Congress will find a legislative fix and avoid eliminating the programs.

“There are fixes to get around it,” Booker said. “There are multiple fixes that will enable the U.S. to operate the cotton program and be WTO consistent.”

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