The Global Spin on
Trade Policy for Cotton
By Steve MacDonald and James Johnson
G is for GATTGeneral Agreement on Tariffs and Trade. G is also for "gone." Thanks in good measure to successive GATT rounds, gone is the protective trade legacy that haunted the centurys first 50 years, policies that were imposed after World War I and expanded during the Great Depression of the 1930s.
In more recent years, multilateral negotiations have brought the trade-weighted average of tariffs on all manufactured products down from 40 percent to 4 percent, and international trade has again become the engine of global economic expansion and development.
The outcome of the most recent GATT round, the Uruguay Round Agreement, contained significant changes for agriculture and textiles, two sectors that had developed regimes with standards distinct from those applied to trade in other goods.
Another significant change took place in public awareness of trade. With the conclusion of the Uruguay Round, the GATT received a name-change. Its now known as the World Trade Organization (WTO).
For agriculture, the agreement introduced the tariffication of the quantitative limits on imports that many countries had adopted for agricultural products, and for textiles it brought a timetable for the removal of bilateral, and aggregate, quantitative limits on imports.
While agricultural reform is expected to be an important component of WTO discussions in the years ahead, the WTOs strongest impact on cotton is likely to be indirectthat is, through reform in other agricultural commodities and other sectors of the economyrather than directly through reform in cotton-specific policies.
One reason is that the markets where trade-distorting forms of agricultural support are rampant are generally not in places where much cotton is grown. For example, while the European Union (EU) ensures that cotton producers in Greece and Spain receive prices that are as much as double world levels, the EU is a more active importer than exporter. In fact, the EU remains the largest net importer of cotton in the world, with little in the way of import restrictions.
Then, too, as an input into textile and apparel production, cotton affects employment and export earnings throughout the world. There is little incentive for most countries to impede the flow of cotton imports, so a zero tariff is generally applied, and quantitative import restrictions are few.
Theres been one notable exception in recent yearsChina. There, quantitative restrictions have played an important role in reducing imports from 4.1 million bales in 1994/95 to an expected 150,000 bales in 1999/2000.
China's accession to the WTO is likely to occur under terms that prevent such restrictions by creating a tariff-rate quota much closer to the 1994/95 level of imports than to the expected 1999/2000 level.
Several major cotton producing and consuming countries are not yet members of the WTO; notably China, Taiwan, and nearly all of the countries located in the former Soviet Union and the Baltics (Latvia and Estonia are members).
While Chinas and Taiwans accession processes are well advanced, some countries have yet to apply for accession--such as Turkmenistan and Tajikistan--while others, like Uzbekistan, have at least initiated bilateral market accession talks. The Krygyz Republic is already a member, and, according to the WTO, Georgia is likely to become the next member of the WTO after it ratifies its accession agreement.
Interestingly, restrictions on exports rather than imports has been identified as a trade-distorting policy applied to cotton. Some cotton-producing countries have sought to support their textile industries by ensuring preferential access to their domestic cotton crop. Export quotas, export licensing, export taxes, state trading programs, and minimum export prices have been used to supply domestic textile industries with cotton at below-world prices, conferring an advantage for their textile and apparel exports on world markets.
Certain exporters have in the past used export subsidies to reduce surpluses of cotton; however, the Uruguay Round Agreement limited this practice and in fact no WTO member has used export subsidies on cotton since 1995. The likely terms of China's accession to the WTO would also prohibit China from using export subsidies.
Before the Uruguay Round Agreement was implemented, Pakistan pursued restrictive policies that resulted in different prices for domestic and export use. Even though Pakistan has generally permitted free trade since 1996, various import and export restrictions have been adopted for relatively brief periods in recent years.
India also has a tradition of regulating the flow of its cotton to export markets, and although it has adopted a policy of seeking to be a reliable supplier to world markets, exports continue to be formally governed by quotas.
Uruguay Round Agreement on Textiles and Clothing
As a result of the Uruguay Round, world trade in textiles and clothing is in the process of substantial liberalization as the norms governing trade in other manufactured products are extended to cover textiles and clothing.
The Uruguay Round superseded the Multi-fibre Arrangement (MFA), which had previously governed much of this trade in textiles and clothing with quantitative restrictions. These restrictions, applied to developing countries exports to developed countries, were variously estimated to be equivalent to tariffs between 14 and 32 percent.
Developed countries account for more than 40 percent of global consumer end-use of cotton, but only about 22 percent of the industrial use of raw fiber. Thus, about 20 percent of world cotton end-use is exported from developing countries to other developed countries.
Therefore, from the point of view of developing countries, the integration of textile trade into the broader WTO regime represents one of the biggest benefits of the Uruguay Round Agreement. Under the new agreement, the old MFA quotas, which covered about 15 percent of textile trade and 40 percent of apparel trade, have their built-in increases accelerated through 2005, and are being phased out by Jan. 1, 2005. The Uruguay Round Agreement also reduced existing tariffs on textiles and apparel. With freer trade in textiles, prices will fall and textile consumption will rise, as will consumption of cotton and other fibers.
Next WTO Round
Only agriculture and services have a "built-in agenda" for the next Round. That is, a continuation of the reform process begun in the Uruguay Round is mandated. All other sectors, including industrial tariffs which cover textiles and clothing, are open for negotiation as to whether further liberalization will continue. Although all quotas under the MFA will be eliminated by 2005, tariffs will remain in place.
In agriculture, the United States is advocating further trade liberalization using the existing framework of the Uruguay Round Agreement. General U.S. goals for the next round include: expand and improve market access; eliminate all export subsidies; and tighten disciplines on domestic support.
Under market access, the United States is calling for further cuts in tariffs on agricultural products, including over-quota tariffs and tariff rates, as well as for enlarging tariff rate quotas (TRQs). U.S. cotton imports are subject to TRQs, which could be affected under future trade liberalization. Colombia and South Africa are the only other major countries with TRQs for cottonand imports have exceeded TRQ levels in recent years.
In the category of domestic support, the U.S. is calling for further cuts on trade-distorting domestic support. We continue to eliminate export subsidies for all commoditiesincluding cottonin the years ahead.
MacDonald is an agricultural economist with USDAs Economic Research Service. Tel.: (202) 694-5305; Fax: (202) 694-5823; E-Mail: MacDonald@fas.usda.gov
Johnson is an agricultural economist with USDAs Foreign Agricultural Service. Tel.: (202) 690-1546; E-Mail: firstname.lastname@example.org