Cotton Subsidies and Trade Barriers

The Cotton Wars

Feb 7, 2014 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 428 Views    No Comments

The Brazilian cotton saga continues…or maybe it has ended.

Our story starts with the $150 million a year that the US had been giving to Brazilian cotton growers. We were sending close to $12 million a month because Brazilian farmers protested that the subsidies US cotton farmers received gave them an unfair advantage in world markets. In 2009, the World Trade Organization (WTO) agreed and told the US to stop. To make everyone happy, instead of eliminating payments to US farmers, Congress decided to pay the Brazilians subsidies also.

All went well until sequestration.

Do you remember the sequester? It began with the 2011 Supercommittee that was supposed to resolve Congress’s debt ceiling impasse. Unable to agree on a deficit plan, the committee defaulted to automatic spending cuts that began March 1, 2013. Examples of those cuts included Navy aircraft purchases and some of the NASA budget. The Brazilian cotton subsidy was sliced with other non-defense discretionary spending. Because of the sequester, the payments to Brazil’s cotton farmers stopped.

Now, with the new Farm Bill that just passed, the domestic US cotton subsidies that the WTO opposed were (sort of) eliminated. Instead of direct payments that farmers are paid whether they plant or not, they can get crop insurance. Like tradiitonal isurance, you hedge against risk. If cotton prices are too low, insurance kicks in.

The big question is whether Brazil says that the new crop insurance plans and other subsidy substitutes are simply subsidies with a different name.

If yes, then retaliation might be the next step. Diminished patent protection for US pharmaceuticals, movies and music is one kind of ammunition that Brazil has threatened to use if the US does not follow the WTO directive. The glory of retaliation is that someone else will fight their battle. If pharmaceutical patent protection is at stake then the pharmaceutical manufacturers will oppose cotton farmer support.

Economically, even with crop insurance, we are still talking about government aid that maintains farmers’ income. On a graph, government support increases supply because cost and risk decrease. As a result, world price declines and the Brazilians might remain unhappy.

Trade Barriers Cotton Subsidies

Sources and Resources: Making the story much more than details about subsidies, NPR’s Planet Money interviewed the people and produced a fascinating podcast that I enjoyed during one of my morning walks in 2010. More recently, they have returned to the topic while thehill and the Southwest and Southeast Farm Press articles as well as this academic paper have all looked at the new Farm Bill and cotton subsidies.

Please note that some content came from previous econlife posts.

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