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Some Strings Attached: Cotton, Farm subsidies tie up global trade talks

by Pratap ChatterjeeSpecial to CorpWatch
December 13th, 2005

cartoon by Khalil Bendib

In a village in central Mali, a farmer guides two donkeys dragging a plow over parched red earth. If the rains come, the fields that stretch between the rocks and cliffs that dominate this arid Sahel landscape will be covered in white dots, the individual cotton bolls that are the region’s only export commodity.

This week, a world away in Hong Kong, the WTO will make decisions that resonate in this tiny African village and in thousands like it around the globe. In a good year, these Malian farmers hope to produce about a metric ton of the "l'or blanc" (white gold) from every hectare (2.45 acres), and sell it for about $400. Out of this they must pay all their costs: Fertilizer alone will set them back about $190, pesticides will add $45, and the sprayer will cost another $20 on an average.

Most farmers rarely make the $145 potential per hectare annual profit for a variety of reasons: the rising cost of chemical inputs, low market prices, poor yields, unpredictable weather, and loan repayments. Some families end up with $60 a year in profit; others simply add to their debts. For almost all of these small farmers, electricity, telephones, even clean drinking water and health care will remain a distant dream.

For Mali, which ranks among the poorest nations in the world, cotton is vital because it supplies 30 percent of the national export income. But the landlocked West African country has a hard time selling cotton in the world markets because of fierce competition from farmers in the United States.

Meet Gerard Louis-Dreyfus, a 73 year old Frenchman, who commutes between the country of his birth, the city of Manhattan, and the wealthy upstate New York village of Mount Kisco. He owns a somewhat obscure company named after his family, which in turn owns Allenberg Cotton a company registered in Cordova, Tennessee.

European Farm subsidies

The main umbrella organization of European national farmers association is COPA-COGECA (Committee of Professional Agricultural Organisations in the European Union). As one of the first European lobby organisations, it mainly represents the interests of large-scale industrial farmers and big cooperatives. In the current trade negotiations, COPA-COGECA has defended export subsidies and sought to maintain domestic subsidies. A recent Oxfam analysis shows why: the European Commission’s own statistics show that the top 15 percent of French farming businesses consume a massive 60 percent of its direct payments. Most small French farmers – 70 percent of them – receive only 17 percent of the subsidies doled out by Paris. About 70 percent of EU agricultural payments goes to 20 percent of the largest farms in Europe. But not just largescale farmers benefit from European Union payments. As Oxfam has shown, some of the European Union’s largest multinationals, such as Nestlé, Campina and BASF, as well as the Dutch arm of Mars (makers of the chocolate bars) and Heineken (beer), receive high payments out of the European Union agricultural budget. At the same time, millions of farmers in Europe – knowing that their products will be sold below the cost of production - had to leave their job, farm incomes in the UK have declined by 40 percent in recent years and France has lost half of its farmers over the past 20 years.

Only recently, the European Union has again reformed its agricultural policy: But the much praised “decoupling”- policy, i.e. payments decoupled from production, leads to sinking prices within the European Union, making it impossible for many European family farmers to live on selling agricultural products. This new model allows downstream agribusiness, i.e. processors and supermarkets to buy products below production costs. The direct payment paid to the farmers therefore can be considered “as an indirect payment to agro-industry and supermarkets, far from the benefits for farmers and consumers claimed by the European Commission.”

excerpted and adapted from “The European Corporate Trade Agenda” Seattle to Brussels Network, November 2005

In 2004, the United States government paid Allenburg $34 million in subsidies for his cotton crop; the total over the last ten years topped $186 million, according to the Environmental Working Group, a non-profit research organization. Defenders insist that these subsidies provide vital support for U.S cotton farmers, who--like their Malian counterparts--struggle under low market prices coupled with the high cost of fertilizers and pesticides, and loans.

The problem is that Louis-Dreyfus is not a poor farmer. Forbes magazine estimated his 2005 net worth at $3.2 billion, almost 100 times his company’s subsidies for its 2004 cotton crop. The Louis-Dreyfus Group has an annual turnover of $20 billion, more than four times the gross domestic product of the entire country of Mali, population 12.3 million.

By contrast, Moussa Sangaré of Fana, Mali, aged 26, has to support an 11-member household on the income he ekes out from three hectares of cotton. Unable to get to hospital, his mother recently miscarried and died.

"Most of the time, if you are lucky, you can get a little more than CFA 500 (about $1) from your harvest. So you're not paid well for your production," Sangaré recently explained to Oxfam activists.

Many small U.S. farmers are also unable to make ends meet and are being driven out of business at the rate of 330 farms every week "due mainly to industrial agriculture's expansion, urban development, and other economic shifts in agriculture," according to a campaign by Ben and Jerry's ice cream company to save America’s family farms. Their ranks include many of small cotton farmers, some of whom are forced to sell their crops at roughly half their cost of production.

Meanwhile, the big producers who know how to tap government subsidies and have access to global markets are thriving. Allenburg Cotton’s domestic sales topped 3 million bales of cotton last year. The company is privately held so exact profits or losses are not disclosed.

According to the Environmental Working Group’s analysis of U.S. Department of Agriculture, more than 72 percent of cotton subsidies go to the richest 10 percent of farmers (mostly big businesses not individual farmers) in the sector. The richest 1 percent collects 23 percent of subsidies.

World Trade Organization

It is this conflict between the Sangarés and the Louis-Dreyfuses of the world that will take center stage in Hong Kong this week at the international trade negotiations hosted by the World Trade Organization. The WTO claims to be negotiating a complex new free trade agreement to help poor farmers and workers in developing countries. It hopes to boost trade for the world’s cheapest producers by removing trade barriers, such as import taxes, subsidies, complex rules, and quotas intended to prevent international competition.

The WTO, which describes itself as "the only global international organization dealing with the rules of trade between nations" grew out of the General Agreement on Tariffs and Trade (GATT) established in Havana, Cuba, in the aftermath of World War II. It was part of a grand attempt to formalize rules and create institutions to govern the global economy. In 1994, after almost five decades of negotiations, the WTO replaced GATT and took its place alongside other international financial institutions including the World Bank and the International Monetary Fund (IMF).

There were just 15 countries at the table when the GATT was created, and the U.S. as the most powerful player has dominated discussion from the very beginning. More than half a century later, the presence of 148 countries at the WTO table and the creation of the European Union have shifted the power balance. Quite a few of the powerful Western governments are beginning to realize that removing trade barriers and subsidies can have devastating consequences at home, including the decimation of small farming and the relocation of manufacturing jobs to countries like China and service jobs to India.

Supporters of free trade say that the last 60 years of negotiations have resulted in vast new wealth; the WTO estimates that between $109 billion and $510 billion has been added to the global economy in the last decade alone. Theoretically this boon should help poor countries where wages and environmental standards are lower. But in practice they cannot compete against the major players who can reduce costs by growing or manufacturing goods on a vast scale that overwhelms the small producers. In addition there are the subsidies that protect rich country producers.

But activist groups such as Friends of the Earth International point out that the world's largest multinational corporations, like Louis Dreyfus, are the driving force behind the current world trade system. Just 500 companies account for about two-thirds of world trade, and 40 percent of that trade occurs within these companies. The world's top 200 companies–which account for one quarter of world economic activity – employ less than 1 percent of the global workforce.

Christian Aid, a British non-profit organization, recently estimated that the economic boom pegged to trade liberalization has not benefited all countries alike, let alone struggling individual farmers or producers. In its June report, "The Economics of Failure," the group estimated that sub-Saharan Africa has lost $272 billion in the last 20 years. The report suggests that if Mali had not liberalized its markets in 1991, its income in 2000 would have been $191 million higher than its actual gross domestic product of $2.4 billion.

Hong Kong Agenda

The latest round of trade talks, which began in 2001 in Doha, Qatar, was dubbed the "development" agenda because it focused on helping Third World countries. The key issues in the "Doha" agenda are agriculture, special and differential treatment of developing countries, and non-agricultural market access (meaning manufactured goods).

Learn More, Follow the Talks

Want to know exactly who gets farm subsidies in Europe and the U.S.?
Follow the talks at the links below:

Christian Aid
Focus on the Global South
Friends of the Earth International
Oxfam
Third World Network
World Trade Organization

Read the reports cited in this article:

"The Economics of Failure," Christian Aid
"Truth or Consequences," Oxfam
"Finding the Moral Fibre, " Oxfam
"The European Union, Corporate Trade Agenda," Seattle to Brussels Network

But the big issue is agriculture. Both the United States and the European Union have been under fire for not making sufficient cuts to their farm subsidies.

Cotton subsidies is just one example, but there are dozens more that flagrantly violate WTO trade rules. A recent Oxfam International report ("Truth or Consequences") claims that the European Union and the U.S. are illegally subsidizing their production of corn, rice, sorghum, fruit juice, canned fruit, tomatoes, dairy products, tobacco, and wine.

Of the 11 commodities researched for the report, the U.S. and the EU distort world trade by paying out total annual farm subsidies worth $9.3 billion and $4.2 billion respectively. Oxfam found that this unfair competition is disadvantaging 38 developing countries ranging from larger nations such as Mexico and Brazil, to poor countries such as Malawi and Mozambique.

Take for example, tomatoes. All told, Oxfam says that the European Union pays 300million Euro ($360 million) a year to tomato processors mainly in Greece, Italy, Spain and Portugal, which have helped them become the world's leading exporters of tomato paste. These subsidized products are overwhelming cheaper producers right across the Mediterranean Sea in Morocco and Tunisia, where – despite lower costs – farmers must struggle to sell their vegetables on the world markets. Growers in South Africa and Chile are also losing out.

Southern Bloc

The failure (or success) of the trade talks in Hong Kong will revolve around these angry developing countries, not simply because development is the focus of the talks, but because these countries have begun to assert their power.

The WTO, unlike the World Bank or the IMF, is not governed by the rich countries but by consensus. Any one country can derail the process by refusing to sign to the final agreements.

At the 2003 WTO ministerial meeting in Cancun, Mexico, for the first time and certainly not the last, the talks were scuttled by the emergence of the Group of 20 (G-20), a powerful bloc that challenged the reigning powers: the United States, European Union, and Japan. Led by Brazil, South Africa, India, and China, the G-20, which represents 85 percent of the world's farmers and more than half the global population, refused to play along.

Also in Cancun, four major West African cotton producers, Benin, Burkina Faso, Chad, and Mali, created an international uproar when they challenged the United States on cotton subsidies. They charged that the program was illegal and was destroying the livelihoods of the 15 million West Africans who depend on cotton farming.

"These countries subsidize their agricultural producers, ignoring the rules of the WTO. Such practices are undermining the fragile national economies of countries that depend on cotton," Blaise Compaoré, the president of Burkina Faso, was quoted as saying.

The U.S. has taken this challenge very seriously. A year ago U.S. Trade Representative Robert Zoellick, the equivalent of the trade minister in other countries, visited Benin, Mali, and Senegal, to discuss the WTO. He has since dispatched other high-level negotiators to offer the West Afrcian countries more aid in return for supporting the U.S. agenda.

But the aid that the U.S. has paid out pales in comparison to the cotton subsidies: The U.S. gave Mali $43 million in aid last year, compared to $264 million in subsidies to America’s 25,000 cotton farmers.

Doomed to Failure


It is such inequities that lead most analysts to predict failure for the Hong Kong meeting. Protestors are planning to disrupt the meeting as they did at the 1999 ministerial meeting in Seattle where their human roadblocks brought the negotiations, and the city, to a standstill.

The activist groups who campaign or lobby government in national and international capitals can legitimately claim to have helped shape this collapse, but in truth, Seattle and the upcoming Hong Kong ministerial meeting were already doomed by deadlocks on issues such as subsidies. The trade negotiators, who work year round on these matters in Geneva, have simply been unable to reach a consensus.

Peter Mandelson, the European Union's trade commissioner, has already declared that the Hong Kong meeting will not produce a final agreement, accusing countries including Brazil and India of not pulling their weight.

"I simply can't keep on putting more on the table on agriculture from Europe if others are not prepared to make sensible offers," Mandelson said last week. "If I'm going to make proposals which are going to cost very many jobs and livelihoods in agriculture, I've got to be able to show we're going to get something back; fresh employment, new jobs, where we have a comparative advantage.''

The Financial Times veteran trade writer Guy de Jonquières wrote gloomily last week: "That ministers' priority is to avoid the embarrassment of yet another failed meeting is a sad verdict on the body that was supposed to be the foremost rule-making machine for the globalised economy."

Activists have a sunnier analysis. "If Europe and the U.S. administration get their way, it will lead to unemployment, increased poverty and destruction of the environment as multinational corporations move in to profit from the natural resources of the developing world at the expense of poor farmers, workers, fisher folks and indigenous peoples," says Ronnie Hall of Friends of the Earth International.

"No deal at the WTO is definitely better than a bad deal. What we need now is a halt to trade liberalisation negotiations and an urgent review of the impacts of international trade rules on the impoverished and the environment," she added.