Select Committee on International Development Written Evidence

Supplementary memorandum submitted by the Department of Trade and Industry (following the evidence session of Tuesday 30 November 2004)


  The Committee asked when the African cotton producers might see an end to cotton subsidies which EU and US cotton farmers benefit from. The main driver in this respect will be progress made in the context of the WTO's Doha Development Agenda, now thought likely to conclude in early 2007. This contains explicit commitments on subsidy reductions, including a commitment to eliminate all forms of export subsidy by a date to be negotiated. Meanwhile, there have been other developments affecting cotton subsidies in both the EU and the US.

EU cotton production is small in world terms, around 2% of world total. EU domestic subsidy payments to cotton producers represent a similar percentage of the Common Agricultural Policy budget; no export subsides are payable. Nevertheless, African producers maintain that EU subsidies have a disproportionately high impact as EU cotton competes directly with African production. With this in mind, and under strong pressure from the UK and certain other member states, the EU agreed last April to a reform of its cotton regime, to take effect from 1 January 2006. The reform provides for decoupling of subsidy from production (in line with the 2003 CAP reform agreement) at a rate of 65%. This means that in future, 65% of aid will be Green box compatible under WTO rules ie non or, at most, minimally trade-distorting. The remaining 35% will be subject to production constraints, thus falling within the WTO Blue box (less trade-distorting).  Part of the reform included a commitment by the EU Commission to report on the impact of EU subsidies on African cotton production before the end of 2009.

US cotton production is much more substantial. The US is the world's second largest producer and the main exporter onto world markets. Cotton production benefits from a complex set of support measures which have been the subject of a recent WTO Dispute Panel hearing, brought by Brazil. The Panel found against US on a number of separate counts; the US has formally appealed these findings. Any implications for the future of US cotton support must now await the outcome of that appeal, expected in early March 2005.


You suggest that supply side capacity might be a unique problem for the uptake of EBA. This is not the case. It affects developing countries' ability to trade generally, whether through preference schemes or as a result of greater market access following the reduction of tariffs that is gained through regional or multilateral trade agreements. The supply-side response can be limited by a number of factors, as set out in the Government's Trade and Investment White Paper (see p 84)[4]. These factors include:

    —  good macroeconomic policies;

    —  a functioning domestic market;

    —  reliable infrastructure;

    —  the skills base of the population;

    —  the governance and regulatory environment (affecting, for example, the ability to attract foreign investment); and

    —  capacity in trade-related areas, such as effective customs procedures.

  We believe that there are two additional reasons why uptake of EBA is low:

    1.  rules of origin are more restrictive than under the Cotonou Agreement. This means Least Developed Countries have less choice over from where they can source inputs and still benefit from EBA preferences.

    2.  ACP countries and businesses were used to trading using the Cotonou Preferences and there was insufficient incentive to learn how to operate under a different preference scheme.

  The OECD published a study on the "Assessment of utilisation and motives for under-utilisation of preferences in selected LDCs" in June 2004 that may be of interest to the Committee.

Rules of origin

  I enclose a copy of the Government's response as requested.[5] Please note that the Commission has not, as yet, announced its response to this consultation process.

Amanda Brooks

Director, Trade Negotiations and Development

4   DTI Trade and Investments White Paper 2004: making globalisation a force for goodBack

5   Commission Green Paper on the Future of Rules of Origin in Preferential Trade Agreements: UK Response. Not printed. Copy placed in the library. Back

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