Rep. Ron Kind (D-WI) and Rep. Earl Blumenauer (D-OR) are promoting legislation that would force the US to be a scofflaw. Last week, two members introduced legislation that would prohibit the US from making an annual payment of $147 million to Brazil.  They’re outraged that the US makes this payment – a sort of hush-money – to induce Brazil from punishing the US with more painful penalties under a WTO ruling against US cotton subsidies.

A cotton field in North Carolina. Photo: Liliana Rodriguez / Oxfam America

Kind and Blumenauer think it’s absurd to be paying off Brazil when we have a budget crisis, and want to bring pressure on Congress to reform the cotton subsidies rather than make this annual payment.  This would happen through the Farm Bill, which Congress was unable—or unwilling—to pass last year.  The House Agriculture Committee will restart the process on May 15 with a “markup” in the committee.

Even if Congress does pass a new Farm Bill, it’s not clear that it will reform cotton subsidies.  Last year’s draft versions of the Farm Bill didn’t come close, and Brazil could still retaliate.

Strangely, Brazil has been very gentle with the US and has refrained from harsher penalties for years.  When Congress failed to pass a Farm Bill and reform cotton subsidies last year, Brazil meekly agreed to keep the current payment.  They might not get their full payment this year, actually, as US Agriculture Secretary Vilsack may think the budget sequester, which shaves spending all over the government, will apply to the Brazil payment.

Perhaps, Brazil’s patience with the US over cotton subsidies can be explained by the fact that the Brazilian Ambassador to the WTO, Roberto Azevedo, is vying for a new job as head of the WTO. It certainly wouldn’t help his campaign to alienate one of the biggest member states. I’ve met Minister Azevedo and respect and like him a lot, so I don’t mean to impugn him or imply anything unethical.

At some point, the WTO job will be filled and then, perhaps, the US will have run out of leverage and exhausted Brazil’s patience.

Every now and then, I get a call from a colleague in Geneva, asking me about the Farm Bill. Although colleagues in Geneva often find Farm Bill politics confusing, they are quite interested in Farm Bill policy. That’s because US agriculture policy is, effectively, trade policy, since the USA is such a large exporter of agriculture products. And Geneva is the global capital of trade policy, home to the World Trade Organization.

A useful analysis of the next Farm Bill comes from the Geneva-based ICTSD. The authors question whether the new Farm Bill will distort trade more or less than the old one. To do this, they dig through the House and Senate versions of the Farm Bill and try to understand the dazzling complexity of both the existing and new proposed farm programs. Of course, the new Farm Bill is not a finished product, and the House of Representatives has not even passed a bill yet. But the authors do their best.

Central to the new Farm Bill policy is eliminating “direct payments” and using the savings to create or enhance a variety of price and revenue guarantees. Direct payments don’t vary at all based on behavior, weather or prices—they are just automatic payments to farmers. Trade purists like direct payments because they don’t influence farmers’ planting decisions (because they are paid no matter what) and don’t distort trade. But everyone else hates them because they seem like a ridiculous government payout to farmers for doing almost nothing.

The paper concludes that:

“The overall thrust of the new farm bill is that decoupled direct payments that have minimal impact on planting decisions will be replaced by coupled safety net programs that potentially have a large impact on planting decisions.”

The authors project the impact of the new Farm Bill programs, and find rather modest changes; this is because current high crop prices mean government subsidy programs don’t have to pay out. But if prices decline in the future, the new Farm Bill could be more expensive to taxpayers and more influential on farmer’s business decisions.

The paper argues that the new Farm Bill will be more likely to distort trade and harm foreign producers of agriculture products than the status quo. The authors do us a favor and identify which countries’ farmers might be most bothered by the new Farm Bill:

The new Farm Bill will shift the balance of support among commodities. The study finds that projected subsidies for cotton are about three times higher than for other  commodities, which could induce farmers to shift to cotton from other crops—something Brazil is likely to be unhappy about.  And rice producers get a pretty sweet deal in the new Farm Bill, which could induce farmers to produce more rice, something Haitian rice producers might not be excited about. 

Why are cotton and rice winning the Farm Bill? Two maps tell the story.

This map shows where different commodities are grown—notice cotton and rice in orange and black:

And this map shows where farmers are more dependent on government direct payments for their crops in blue and orange :

You can see a rough correlation between farmers who depend more on government direct payments (first map) and areas where cotton and rice (and peanuts) are grown (second map).

In the insular and circular logic of the Farm Bill, commodities that lose subsidies in one area demand—and expect—those subsidies to be made up somewhere else. Since direct payments are being eliminated, the lobbyists for cotton, rice and peanuts have pushed hard—and successfully—for a bigger share of the new Farm Bill subsidies.

But more trade-distorting subsidies for cotton and rice and peanuts is the wrong direction for US farm policy. A better farm policy would be supporting a robust, diverse, and resilient agriculture that is more flexible, less tied to government policy. We need farmers to respond to changing markets and changing weather, rather than Farm Bill dictates. They should invest in creative farming rather than lobbyists. Rigging subsidies and markets only makes the system more rigid, more vulnerable to corruption, to disaster, to bad behavior. Government policy should not be picking one crop over another, one sort of farmer over another.

US cotton field. The WTO granted Brazil the right to retaliate for unfair US cotton subsidies. Liliana Rodriguez/Oxfam America.

What do ketchup, shaving cream, and Viagra have in common?

They all could be targeted for retaliation by Brazil if Congress doesn’t reform the Farm Bill. US exporters of these products, and hundreds more, could pay higher tariffs or lose their patent rights if the Brazilian government imposes trade retaliation against the USA for violating WTO rules on farm subsidies. Brazil brought a legal case to the WTO complaining about US cotton subsidies in 2002. They won the case, proving that US cotton subsidies were huge and unfair. The USA never fully reformed the subsidies, so Brazil asked for, and was granted, the right to retaliate. Hence, the list of products (English version here).

It’s interesting to think about the political calculations underneath the products chosen. Creating a retaliation list is an exercise in practical political economy. How do you create enough economic and political pain on the United States to force a reform of cotton subsidies? Which industries or companies do you target? Do you try to target specific politicians by hitting products and companies that are from their constituency? Or do you try to gain some economic advantage by raising tariffs on some products? Certainly, there are domestic businesses in Brazil that are eager to hurt their foreign competition and lobby for tariffs in their sector.

The thing about raising tariffs is that it hurts the exporting producer, but it also hurts the importing consumer by raising prices and reducing choice. In order to hurt the US, Brazil also has to hurt some Brazilian consumers of US products.

According to the rules, Brazil can impose more than $800 million in retaliation. But $800m in new tariffs is painful for Brazilians also. So Brazil asked for permission from the WTO to retaliate in a different way. Brazil can suspend intellectual property rights on certain products. This is where the retaliation gets really interesting. Brazil hasn’t published a list, but has identified categories for intellectual property rights retaliation. Products could include patents and copyrights on medicines, agrochemicals, music, videos, and software. These products won’t face new tariffs, but Brazilian producers might be able to manufacture and sell these products without paying royalties or licenses.

Brazil was days away from imposing this kind of retaliation in 2010 when officials from the US Trade Representative’s office flew down to hurriedly negotiate a compromise. The agreement was that Brazil would postpone retaliation and the US would pay Brazil $147.3 million annually until a new Farm Bill was enacted.

So far, no new Farm Bill. Not even close. This week Congress will decide whether to extend the current Farm Bill by three months or by a year. Either way, Brazil will have to decide what the next step is. Brazil is once again preparing to retaliate. Brazil may alter the retaliation list and has convened a technical committee to review the list.

In Congress, a game of bluff and bluster is playing out around the Farm Bill. The issue is whether the leaders of the House Agriculture Committee can cajole or coerce the House Republican leaders to bring the Farm Bill to the floor of the House for approval. Time is running out before Congress goes on vacation, and as the calendar gets short, the chance of passing a new Farm Bill into law gets smaller and smaller.

 The Senate, having passed a version of the new Farm Bill, is waiting. The House Agriculture Committee passed a Farm Bill out, but it is stuck in limbo before it reaches the full House of Representatives. The Committee Chair, Frank Lucas of Oklahoma, and the senior Democrat, Collin Peterson of Minnesota are pleading and pushing to get time on the calendar. But House Speaker John Boehner of Ohio has been coy. And the clock is ticking.

Speaker Boehner once sat on the House Agriculture Committee, but he’s no aggie. In the past, he’s taken on agriculture interests in the name of free-market principles and small-government budget thrift. He recently said, “we have a Soviet-style dairy program in America today” and has a record of voting against Farm Bills in the past.

The author sits on a pile of organic cotton produced in Mali with an Oxfam colleague. Cotton producers around the world complain about the US Farm Bill subsidies for cotton. Credit: Oxfam America

There’s a real question as to whether the Farm Bill has the votes to pass. The bill is unpopular among liberals, mainly because it cuts US food assistance programs for poor people. But the bill causes heartburn for many conservatives because it’s anything but a “free market” solution. A conservative think-tank says about the Farm Bill, “the conservative movement has united against these trillion dollar takeover bills that seek to expand the federal government’s role into nearly every sector of American life.”

With opposition across the spectrum, it may be hard to forge the 218 votes needed to get the Farm Bill over the line in the House. Even then, it will have to be negotiated and merged with the Senate version and then re-voted by the House and Senate. All before January, and with very few working days on the Congressional calendar.

A quiet presence on the Farm Bill has been Brazil. For years, Brazil has been waiting for Congress to pass a new Farm Bill, with the expectation that the new legislation will bring the US into compliance with WTO agreements. Brazil won a legal challenge against US cotton subsidies and has the right to retaliate against the US. The US pays Brazil for their patience to the tune of $147m annually, which is a lot of money, but still less than the $800m+ Brazil is entitled to inflict on the US under the WTO rules.

Seeing that Congress likely won’t pass a Farm Bill this year, US trade and agriculture officials flew down to Brazil last week to make sure Brazil doesn’t rush into trade retaliation. They agreed to extend the current agreement for a few more months or until a new Farm Bill is passed.  

But Brazil is sharpening its sword. Because even when a new Farm Bill is finalized, there’s little chance that it will satisfy them and remove unfair subsidies for US cotton production. In June, Brazil reactivated a technical group to decide which US export products would be taxed if they retaliate and products for which US intellectual property rights would be waived. It would be interesting to be a fly on the wall to listen in to the discussion of that group.

Oxfam has long argued that US cotton subsidies damage lives and livelihoods of smallholder farmers in developing countries at a high cost to American taxpayers(see also this study). Unfortunately, subsidies for US cotton producers included in the Senate Farm Bill proposal continues this trend rather than reverses it.

In 2002, Brazil, joined by Chad, Burkina Faso, Benin, Mali, and Senegal  (C4+1), brought actions against US cotton subsidies in the WTO. These nations claimed that as a result of cotton programs in the United States, especially programs that paid American cotton farmers to increase production as market prices went down, the market was rigged against producers in other nations that counted on an unbiased market. In 2009, Brazil won a case in the WTO equivalent of trial against US cotton subsidies. As a result, the US government—taxpayers—now make annual payments to subsidize the Brazilian cotton industry at a level of almost $150M per year. The payments are intended to be made until US cotton subsidies are removed.

Fanta Diarra next to her cotton crop in Mali. Macina Film/Oxfam.

In 2011 and 2012, National Cotton Council worked with Congress to draft a cotton subsidy program for the industry that they claim will resolve the distortion that led to losing the WTO case in the first place. Their proposal is called the Stacked Income Protection Plan (STAX). In general, STAX provides insurance against even modest losses of revenue resulting from poor harvests or low prices. With highly subsidized producer premiums, it is taxpayers who are on the hook.

Will this readjustment of the cotton program satisfy the complaints of Brazil and the West African cotton producers? Not according to Brazil: In a recent letter to Congress, Robert Azevedo, Brazil’s Representative to the WTO, wrote, “From the data we analyzed… the STAX proposal would likely result in the highest level of trade distortion of all the proposals examined by us. … In our view, no farm program can be WTO-compliant and cover ‘shallow losses’—thereby insulating farmers from market forces—to the extent foreseen in the aforementioned NCC proposal.”

Making matters worse, in a sleight of hand that may seem innocuous, the STAX program will fall under a section of the Farm Bill that will shield cotton from payment limitations, conservation compliance rules, and the individual producer transparency that is required for farmers growing corn, soybeans, or any of the other “program” crops supported through Farm Bill spending. Shielded from these requirements and safeguards, cotton producers basically get a free pass from the oversight and responsibility that comes with other subsidies.

At the House Agriculture field hearing held in Dodge City on April 20, Little River, KS farmer Kendall Hodgson said that he “would ask the Committee to be mindful of WTO compliance. We like to think of ourselves as a nation that follows the law. We stand to lose more by noncompliance than to gain. I understand the realities of the Brazilian threat of a WTO suit concerning our cotton program and our subsequent payments to Brazil to keep that suit from happening but this is something of a black eye for our farm programs that only invite criticism from our detractors.” Hodgson, a diversified farmer, reminded legislators that when cotton violates trade agreements, it jeopardizes markets for all producers.

The proposal put forth by the National Cotton Council—and adopted by the Senate Agriculture Committee—has no intention of correcting the wrongs created by earlier cotton programs. In fact, on top of shunning any kind of accountability to resource protection and to taxpayers, the current proposal makes no modification to the worst component of trade distortion: the marketing loan program. And farmers like Kendall Hodgson in Kansas, and cotton farmers in West Africa will continue to be at risk because the cotton industry refuses to play fair.