US proposes end of cotton subsidy cited by WTO

The Bush administration will send legislation to Congress to end Step 2, a cotton subsidy that was at the heart of a ruling that US subsidies violated world trade rules, Agriculture Secretary Mike Johanns said on Tuesday. The World Trade Organisation ruled earlier this year in a case brought by Brazil, which is quickly becoming one of the world's largest cotton exporters.
Brazilian leaders said the main prize of the ruling was WTO's call for an end to Step 2.
Along with ending Step 2, which pays exporters and millers an incentive to buy higher-priced US cotton, the administration said it would propose statutory termination of the long-term export credits known as GSM-103. They provide government guarantees for loans running up to 10 years.
"By implementing these proposed changes, we are being fully responsive to the WTO decision," Johanns said in a statement. "We very much appreciate the close co-operation of the industry groups in developing this approach and will work with Congress as this proposed legislation is considered."
Congressional staff workers say the cotton proposals probably will become part of a budget-cutting package this fall. The Senate and House Agriculture committees are under orders to find ways by September 16 to cut USDA farm subsidy, conservation and public nutrition spending by $3 billion over five years.
Some lawmakers want to find new ways to assist cotton growers to make up for the loss of Step 2 and export credits. Step 2 payments have ranged from $182 million to as much as $640 million a year.
Along with ending Step 2 and GSM-103, the administration said it would ask Congress to remove a 1 percent cap on fees that can be charged on the remaining short and medium-term credit guarantees.
The Agriculture Department said last week it was revamping the credits so the fees are based on the risk posed by each country and how often payments are scheduled. Removal of the cap will facilitate the new risk-based approach, USDA said.
At the same time, USDA administratively shut down GSM-103, saying it would not accept any requests for new credits.
US cotton growers rely heavily on exports, a reflection of the textile boom in Asia and shrinkage of domestic weaving. USDA estimates three-fourths of this year's crop will be exported. The United States is the world's largest cotton exporter.