Western Cotton subsidies endanger African Farmers


In March the Union économique et monétaire ouest africaine (UEMOA) presented its cotton initiative in Brussels. Many least developed countries are dependent on cotton for rural livelihoods and export revenue. But few places rely on it to the extent of UEMOA members Mali, Benin, Burkina Faso and Chad (known as the Cotton-4 or C-4) where it accounts for 5%-10% of the Gross Domestic Product (GDP)[1]. With an average GDP per capita of $637 and among the least developed countries on earth, the C-4 rely on cotton more than any other commodity for their export revenues. In these countries cotton provides the livelihood for 10 million of the world’s poorest people.


These countries produce cotton more cheaply than anywhere else – a competitive advantage that logically should place the C-4 in an excellent position to benefit from the world’s ever increasing desire for cotton products. However, the subsidies paid to their producers by the US and the EU, as well as China and India, have fatally undermined the C-4’s ability to trade their way out of poverty. The cotton initiative offensive aims to put the demands of the C-4 group of West African cotton-producing countries for cotton sector reform back at the top of the World Trade Organization's (WTO) agenda.



The harmful impact of subsidies on cotton farmers in Africa


In the last nine years $47 billion have been handed out by the United States, the European Union, China and India to their cotton growers. Over $24bn of this $47bn have gone to US farmers. China subsidised its cotton growers with more than 15bn and the EU gave almost 7bn to its farmers. The United States is the world’s biggest exporter of cotton. In the most recent figures, it accounts for 34% of global exports. West Africa today produces about 4% of global production. The C-4 nations export virtually all of their cotton, mostly to China.


It is American growers and, to a lesser extent Europeans, who enjoy the benefits of subsidies, so creating a global price dampening effect. Even in spite of a recent cotton price spike, cotton has lost more than half of its value compared with 1975. For the C-4, it is a situation that spells economic ruination. With no subsidies to bail them out, African farmers struggle against insuperable odds to compete. In turn the lack of revenue generated by the cotton sector means C-4 governments cannot afford to build roads, ports and other infrastructure to catalyse a garment industry that could employ millions of people and create greater value in an underdeveloped sector.


The decline in real terms of cotton prices has disproportionately disadvantaged African farmers as they are so heavily reliant on cotton exports for their livelihoods. This partly explains why cotton production in the 12 main African cotton producers fell by almost 50% between 2005 and 2009. Increases in cotton prices on world markets between the end of 2007 and 2008 passed West African farmers by because the dollar was weak against the CFA franc.


Global cotton prices are not only dependent on the supply and demand of cotton. They also depend on the level of subsidies available to producers and exporters in other nations. A subsidy is given to cotton producers based on the difference between the world price and a set support price. In addition to output subsidies, EU cotton producers also receive subsidies on inputs such as credit to invest in machinery, insurance and publicly financed irrigation. US farmers receive a guaranteed price whatever happens to cotton prices in the future. Therefore, they are encouraged to continue to produce cotton.


A guaranteed price causes production decisions not to be entirely market driven. Subsidies lead to higher levels of production that demand and supply would naturally determine in a free market. The world price slumps when the supply of cotton is artificially increased in this way. If subsidies were eliminated, production would decline in countries that subsidise cotton, but would rapidly expand in other countries in response to higher prices. As a result production would shift toward lower-cost producing countries like the C-4.


The International Cotton Advisory Committee (ICAC) says subsidies reduce prices by 10%; the World Bank says by 12.9%, amounting to an annual revenue loss to African producers of $147m. Oxfam calculates that removing US cotton subsidies alone would increase world prices by 6-14%, producer prices in West Africa by 5-12%, and average household income in West Africa by 2-9% – enough to support food expenditure for a million people.


According to the ICAC, the US is not only the world’s leading exporter but also the country with some of the highest costs of production: whilst the average cost of production is $0.80 per pound in the US, the cost of production is $0.35 per pound in Benin. The US therefore subsidises its exports to be competitive with the world’s poorest countries who also hold a natural competitive advantage in cotton.


The US may have the overall highest amount of subsidies but the EU hands out the largest amount of subsidies per pound of cotton. The 2009/10 average assistance per pound produced in the EU was $2.51 compared to $0.14 in the US. Cotton subsidies in the EU began as part of the Common Agricultural Policy (CAP) in 1981 when Greece was the first cotton producing country to join the then European Community. Spain shortly followed into the EC, and today, cotton subsidies are distributed to around 100,000 producers in Europe: 10,000 in Spain and 90,000 in Greece.


The European Commission is aware of the harmful impact of its cotton subsidies on African cotton farmers. The 2007 Policy Coherence for Development Report recognises that "the EU continues to spend €800-€900 million per year related to cotton farming, while the same product is grown in Africa at a lower cost supporting the livelihood of over 15 million people. The EU is not an important cotton producer globally. But by further reducing its cotton production, the EU would take a step that is likely to assist African producers."[2] At the same time no concrete step was taken by the EU to react to the findings of the report.



The cotton issue at WTO level


In 2005, the WTO attempted to create a cotton trade framework that would see the phase-out and elimination of US and EU trade distorting cotton subsidies. However, pledges made have not been implemented. Trade ministers from every WTO member state, including those of the EU and the US, solemnly agreed in the WTO Hong Kong declaration that cotton had to be treated ‘ambitiously, expeditiously and specifically’. However, the declaration was not followed by concrete action.


Chances for the C-4 to obtain a meaningful success in a legal case at the WTO are slim. In 2002, Brazil used the WTO dispute settlement system to file a legal complaint against the US due to America's cotton subsidies. Brazil argued that US cotton subsidies violated agreements made during the previous global trade deal, the Uruguay Round and that US cotton subsidies harmed Brazilian cotton growers. In a long drawn-out legal battle at the WTO, Brazil in 2009 won the right to retaliate against the US. The WTO condemned the US for using prohibited export subsidies and exceeding the cap on the amount of trade distorting subsidies. In early 2010 an interim agreement between the two nations resulted in Brazil suspending retaliation until the US passes a new cotton support regime in the framework of the next Farm Bill expected in 2012.


During the case the US proved ability in pushing the WTO system to the limit. It used procedures and appeals to prolong and postpone final rulings. Eventually, settlement with Brazil does not seek to eliminate subsidies – only to cap them.


The C-4 has the same legal case as Brazil and could also launch a dispute case against the US. However, for the C-4, introducing their own dispute settlement could only give them a moral victory. In practice, retaliatory measures are applied to imports. Brazil has many ways to retaliate against the US, but C-4 countries do not import much from the US. Sanctions on this small amount would not hit the US economy hard. Moreover, the dispute settlement has as its objective compliance with existing laws and commitments. What the C-4 wants and needs is a new commitment to eliminate all trade-distorting cotton subsidies. The only means available for that are negotiations within a round such as the Doha Round. However, with the Doha Round negotiations going nowhere at present, new opportunities need to be found to address the issue. In this sense the UEMOA cotton initiative is an important first step to attract attention and highlight the difficulties cotton farmers in Africa face.



Thomas Lazzeri

[1] Data in this article are taken from Fairtrade, 2010, The Great Cotton Stitch Up.

[2] European Commission, 2007, EU Report on Policy Coherence for Development, p. 138

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