The World Trade Organization

It is hypocritical to preach the advantages of free trade and free markets and then erect obstacles in precisely those markets in which developing countries have a comparative advantage
Nicholas Stern

The World Trade Organization was established on January 1, 1995. The WTO deals with the regulation of international trade and provides a process for resolving disputes between participating nations with regard to trade agreements. The WTO, along with the World Bank and the IMF, conducts research and analysis of the global economy.

The WTO was designed to operate democratically, with each member allotted one vote, but formal voting rarely takes place. Trade agreements are typically made between countries based on negotiations, with each country’s bargaining power dependant on its market size. The result is that low and middle-income nations have little input into the treaties that affect them, and this has often led to a poor outcome for these countries.

During the Uruguay Round of trade talks at which the WTO was established discussions focused on liberalizing finance and skilled labour and reinforcing intellectual property rights. Developed countries were allowed to impose tariffs on developing countries that were four times higher than what they could impose on their fellow developed countries. The result of the talks was that 70% of the benefits went to developed countries, which have 15% of world’s population, while the rest went mainly to middle-income countries like Brazil. Many low-income countries were worse off as a result of the Uruguay trade talks, and sub-Saharan Africa lost $1.2 billion a year in income. In many cases the limited benefits gained by developing countries did not materialise, with wealthy countries failing to meet their commitments.¹

An example of this is the Agreement on Agriculture, an international treaty that came into force when the WTO was founded in 1995. Wealthy nations heavily subsidize their farming industries, thereby undermining this vital revenue source for developing countries where around 70% of the population depend on agriculture for their livelihood. The AoA was meant to address this issue by requiring WTO members to reduce their agricultural subsidies.²

By exploiting loopholes in the AoA rich countries have managed to avoid reducing their agricultural subsidies, and in some cases they have massively increased them instead. An extreme example of this was US cotton subsidies, which increased tenfold from 1995 to 2009.²

Despite the AoA developed countries subsidised their agricultural industries to the tune of $343 billion in 2022, more than double what they gave the developing world in aid in 2019. Developing countries cannot subsidize their farmers to the same degree, as is evident by the fact that from 1995 to 2000 the US gave its cotton farmers more financial support than the entire GDP of Burkina Faso, a country which generates more than half of its export revenue from cotton.^{2, 3}

The US defends its excessive agricultural subsidies by claiming that the EU does it too, which may be true, but it is hardly a valid excuse. In some cases the subsidies seem absurd, such as the fact that cows in the EU receive $2.20 a day in subsidies, while around 1.2 billion people in the world must survive on less than this.⁴

Public outrage at the treatment of poor nations led to mass demonstrations at the WTO conference in Seattle in 1999. The WTO subsequently promised that the 2001 talks in Doha would address the inequitable treatment of poorer countries. The ensuing ‘development round’ turned out to be bogus, with rich countries making few concessions and often reneging on those they did make, especially the reductions to agricultural subsidies.⁵

During the fifth round of talks in Mexico in 2003 the G20 developing nations again called for an end to agricultural subsidies within the US and the EU, but the talks broke down without coming to a resolution.

In September 2002 Brazil lodged a legal challenge with the WTO against the US, contending that the subsidies provided to the US cotton industry were inconsistent with the obligations of the US under the AoA. The WTO ruled US cotton subsidies harmed Brazilian cotton farmers and violated WTO rules, so the US agreed to end cotton export subsidies by the end of 2006 and phase out all agricultural export subsidies by 2014. In 2007 the US gave its cotton farmers over $2 billion in subsidies.⁵

On September 8, 2004, the WTO declared the US in breach of a clause in the AoA that prevents countries from raising subsidies beyond levels set in 1992, and that some US programmes seriously harmed Brazil’s interests due to their suppression of international cotton prices. The US, utilizing a complex web of farm supports, subsidies and credits, had been spending around $50 billion a year on agricultural programmes, nearly three times its limit of $19 billion.⁵

In August 2006 a WTO Compliance Panel declared that the US had failed to reform its agricultural subsidies enough to comply with its rulings, and that Brazil was entitled to start retaliation procedures.⁵ 

Countermeasures were authorized by the WTO in March 2010, but were not imposed by Brazil, which informed the WTO that it had reached a ‘Framework for a Mutually Agreed Solution to the Cotton Dispute’.When you consider that the US managed to delay proceedings for eight years, far longer than the 12-16 month maximum for non-urgent cases, there is clearly a problem with the WTO’s ability to enforce its regulations and rulings on developed nations.⁵

Although the US was eventually forced to reduce its cotton subsidies, which fell from almost $2.5 billion per year from 2000 to 2009 to $700 million per year from 2010 to 2019, the problem persisted. China stepped in and replaced the US, subsidizing its cotton farmers to the tune of $4.1 billion a year from 2010 to 2019. Then when China slashed its subsidies to $300 million in 2022 India took up the baton, subsidizing its cotton industry by nearly $2 billion in 2022. It has been three decades now since the AoA came into effect, yet cotton producers in Africa have received little respite from the price suppression caused by these subsidies, which has been considerable.⁶

A 2002 report by the Centre for International Economics found that the removal of cotton subsidies and tariffs would have led to a cotton price increase of around 14%. And a 2004 report by Gillson et al estimated that the elimination of cotton subsidies would have led to a price increase of 18–28%. These increases are substantial, yet they appear conservative considering that the subsidy-fuelled overproduction of cotton from 1998–2001 was a major factor in the price of cotton falling to 42 cents per pound in 2001, well below the long-term average of 72 cents (a reversal of this price drop would have seen an increase of 71.4%).⁷

Cotton accounts for more than a third of export revenue in Burkina Faso, Benin, Chad, Mali, and Togo. The benefits of a 14–28% increase in the price of cotton to these countries, which are some of the poorest nations on Earth, would be immense.

I have focussed on cotton because it is not a food crop, and subsidies cannot be justified as being necessary to maintain food security. Also, the cost of the cotton only accounts for a small fraction of the cost of the manufactured goods, so the price of cotton products would barely be affected if the subsidies were eliminated. Agricultural subsidies on food can be justified as necessary to maintain a secure domestic food supply, but this does not justify dumping these products on the world market.

A 2002 Oxfam report titled ‘Cultivating Poverty’ found that US subsidies led to losses of over $300 million in potential revenue in sub-Saharan Africa during the 2001/02 season. One example given was Mali, which received $37.7 million in US aid in 2001 but incurred losses of $43 million due to agricultural subsidies. According to Mark Malloch Brown, former head of the UN Development Programme, the $360 billion the West spends on farm subsidies each year costs low-income countries around $50 billion a year in revenue.^{2, 8}

The loss of revenue due to price suppression is a relatively minor issue compared to the revenue losses due to loss of market share. Developing countries can often produce agricultural products cheaper than developed countries, and without subsidies many western farmers could not compete. The 2002 Oxfam study found that if developing countries could increase their share of global exports by 5% it would generate an extra $350 billion per year, more than double what they were receiving in aid at the time. And farmers in developing counties are not the only ones being adversely affected; taxpayers in developed countries are paying the subsidies to keep an inefficient industry in operation.²

References

1. Stiglitz, J. ‘Making globalization Work’ Penguin Books, London, 2006, p. 86. https://farm.ewg.org/progdetail.php?fips=00000&progcode=cotton – Total US farm subsidy payments 1995-2024.
2. Watkins, K. ‘Cultivating Poverty: The Impact of US Cotton Subsidies’ Oxfam Briefing Paper, Oxfam International, United Press International, September 2002.
3. www.oecd.org/en/data/indicators/agricultural-financial-support.html – Total agricultural financial support.
4. www.aei.org/carpe-diem/farm-subsidies-gone-wild-cows-in-europe-earn-more-per-day-2-20-than-1-2-billion-poor-people/
5. Stiglitz, J. ‘Making globalization Work’ Penguin Books, London, 2006, p. 77-82. www.wto.org/english/tratop_e/dispu_e/cases_e/ds267_e.htm – US vs Brazil cotton dispute.
6. https://academic.oup.com/isagsq/article/4/2/ksae012/7642831 – Cotton subsidies India and China.
7. Centre for International Economics ‘Trade Distortions and Cotton Markets: Implications for Global Cotton Producers’ May 2002; Gillson, I. et al ‘Understanding the impact of Cotton Subsidies on developing countries’ WTO Working Paper, May 2004, p. 7, 28.
8. Address by Mark Malloch Brown, UNPD Administrator, Makerere University, Kampala, Uganda, November 12, 2002.