White House Seeks Repeal of a Cotton Subsidy Program

The Bush administration Tuesday moved to short-circuit a potential trade war with Brazil by asking Congress to eliminate a cotton subsidy program.

The move sets up a potential battle on Capitol Hill, possibly pitting the powerful cotton industry against U.S. entertainment, technology and drug industries, which might be hurt by Brazilian retaliation if Congress doesn’t overturn the support program. The cotton industry has successfully fought off previous efforts to reduce subsidies.

Agriculture Secretary Mike Johanns said Tuesday that ending the so-called Step 2 program, which subsidizes cotton sales to fabric mills and exporters, would bring the U.S. into compliance with a World Trade Organization cotton ruling.

After hearing a complaint from Brazil, which contends the subsidies hurt its burgeoning cotton exports, the international trade body found in March that such U.S. assistance to cotton farmers distorted world prices by encouraging overproduction. The U.S. Department of Agriculture also moved to change a program that allowed developing nations to purchase American cotton on favorable financial terms.

“This step is essential for the United States to continue to be a leader in the WTO [free trade] negotiations, which are crucial to U.S. market access and the long-term prosperity of our farmers and ranchers,” Johanns said.

Johanns was referring to the so-called Doha round of global trade talks that are progressing slowly in part because poorer nations are resisting proposals to open their markets unless the United States and other wealthy nations curb their farm support programs.

Brazil acknowledged the latest Bush administration move as a “positive step” but at the same time asked the WTO for permission to take retaliatory measures worth $2.9 billion if Congress did not follow through with President Bush’s proposal, said Roberto Azevedo, general coordinator of disputes at the Brazilian Foreign Affairs Ministry.

“We want to make clear that we are not taking action yet,” Azevedo said in an interview from Brasilia. “We are just reserving our rights.”

Typically nations slap high tariffs on a market basket of goods as retaliation in trade disputes, but Brazil is considering taking the unusual step of suspending the intellectual property rights of American products.

Such a strategy is designed to get Hollywood, Silicon Valley and the pharmaceutical industry -- the industries most vulnerable to wholesale copying -- to act as a counterweight to the powerful cotton lobby and pressure Congress to approve the Bush change in farm policy, said Pedro de Camargo Neto, head of a large Brazilian farm organization and a former trade official who oversaw Brazil’s successful challenge of the U.S. cotton payments.

The U.S. entertainment industry has questioned the legality of such a tactic. When a proposal easing copyright rules was introduced in the Brazilian Congress last month, Neil Turkewitz, an executive vice president of the Recording Industry Assn. of America, the music industry’s largest trade and lobbying group, called the effort “state-sanctioned piracy.”

Azevedo said Brazilian trade officials were waiting to see whether -- and how quickly -- Congress would change the cotton payment program. And he noted that the WTO might block any efforts by Brazil to suspend copyright protection for American goods.

Nonetheless, Tuesday’s USDA announcement demonstrates that “the Bush administration is taking the WTO seriously,” said Ken Cook, president of the Environmental Working Group, a nonprofit organization that tracks farm subsidy payments and agricultural trade issues.

About $264 million of the $1.6 billion in subsidies that the Environmental Working Group tracked as going to U.S. cotton farmers last year could be attributed to Step 2 payments, Cook said.

“This is a significant move,” said Cook, “but Bush still has to get Congress to go along with his farm policy.”

The National Cotton Council, the industry’s chief trade group, declined to comment on the Bush proposal Tuesday.

“I don’t think the industry is pleased with this idea,” said Mark Bagby, spokesman for Calcot Ltd., a cooperative of nearly 1,500 cotton growers in California and Arizona that received $9.9 million in Step 2 subsidies in 2004, according to the Environmental Working Group. The cooperative posted revenue of $448 million in 2003. “But the WTO ruling was pretty clear and I am not sure we have a lot of wiggle room here.”

Keith Collins, the USDA’s chief economist, estimated that cutting the program could cause cotton exports to fall by between 200,000 and 250,000 bales out of 15 million, and drop the price farmers get for a pound of cotton by a couple of cents from the current price of about 52 cents. He said growers were protected by other programs that give farmers support payments when cotton prices fall.

“Our price may have to come down a bit so that we are competitive with foreign producers,” Collins said. “But we don’t think it will have that much effect on the industry.”

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Top California recipients

The nation’s largest beneficiary of the Step 2 cotton subsidy program is a Tennessee grower, Allenberg Cotton, which received $34.6 million in 2004. Here are California’s top five recipients.

Top California recipients of Step 2 cotton subsidies in 2004 (in millions)

Dunavant, based in Fresno and Memphis, Tenn.: $23.9

Calcot, Bakersfield: $9.9

Jess Smith & Sons, Bakersfield: $5.1

Houchin Cotton, Bakersfield: $2.1

White Gold Assn., Bakersfield: $2

Source: Environmental Working Group

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The top 5 states

States whose cotton farmers received the most Step 2 cotton subsidies in 2004 (In millions)

Tennessee: $82.3

North Carolina: $42.3

Texas: $41.4

California: $27.2

South Carolina: $23.3

Source: Environmental Working Group