Sample Research Paper On The Memorandum OF Agreement
Question: You are a large cotton grower in any country other than Brazil or the US (pick your own country). Analyze the impact of the final settlement on your potential for economic growth. Consider both domestic and international factors.
The Brazil-U.S. cotton case began in the year 2002. However there were various other third party countries included in this case. These countries are Australia, Argentina, Benin, China, Canada, Chinese Taipei, Europe, India, New Zealand, Pakistan, Paraguay, Venezuela, Thailand and Japan. The final resolution took twelve years and was finally settled on October 1, 2014. This WTO dispute settlement case was filed against the U.S by Brazil. The U.S was charged with cotton programs that were reducing the cotton prices around the world. This led to reduction of Brazil’s cotton exports and hence hitting its cotton sector. The U.S provides its cotton farmers very high subsidies in order to manufacture a large amount of cotton and sell it at reduced rates all over the world. This affects the exports of other developing cotton manufacturing countries. As an Indian cotton grower, these effects can be fully appreciated by me.
When the authorities investigated the matter, they found that some of the U.S. agricultural support guarantees and payments were not in line with the WTO commitments. This is what was causing market distortions and the depression of international cotton prices. Additionally certain U.S. agricultural export programs were found to be illegal under the rules set by W.T.O. Hence, this required two different measures by the U.S to correct the two varied problems. The subsidies that were identified to be distorting the market were the actionable subsidies. The WTO panel directed the U.S to take remedial steps by the September of 2005. The U.S was directed to either withdraw the price-contingent subsidies or remove the distortions. Some price contingent subsidies were the marketing of loan provisions, domestic user marketing, countercyclical program, market loss assistance payments, etc. Secondly, the prohibited subsidies were identified as those that were deemed illegal under the regulations set by WTO. Programs like GSM-102, GSM-103 and the Supplier Credit Guarantee Programs were identified under this category. In the year 2005, the United States started making changes in its cotton programs. Brazil continued arguing that the efforts were inadequate and brought in a motion to impose three billion dollars against the prohibited subsidies. The United States objected and this led to a suspended arbitration between the two parties. Finally, A WTO panel rules in Brazil’s favor in the December of 2007.
In this paper, written from the viewpoint of a large India cotton grower, I will consider how this issue affects India and my potential for economic growth. Let’s consider the Indian cotton industry and how important it is.
India’s Cotton Industry:
Cotton is very important to the Indian economy. India’s textile industry is primarily cotton based. We are among the largest producers and exporters of cotton yarn. The Indian textile industry provides around eleven percent to the entire industrial production. It also makes up for fourteen percent of the manufacturing sector and contributes four percent to the GDP. The main cotton producing states are Maharashtra, Gujarat, Andhra Pradesh, Punjab, Haryana, Madhya Pradesh, Karnataka, Rajasthan and Tamil Nadu. As a large cotton manufacturer in the Maharashtra state of India, this is my analyses of how the recent settlement between the US and Brazil will impact me and others like me.
One of the biggest countries, India exports cotton to is China. Apart from China, there are Turkey, Bangladesh, Indonesia and Cambodia that are demanding cotton from India. According to our textile commissioners there is a huge surge on the global demand and our manufacturing and processing capabilities need to be improved. The Prime Minister also has encouraged growers to adopt good practices in cotton agriculture. The estimated cotton output this year is up to thirty nine million bales. With the economy relying so heavily on cotton exports, big growers like me will have to take several factors into account based on the final settlement.
Though the two countries reached a temporary agreement in 2011 in order to avoid any trade retaliation, a final outcome was decided only last October. There are two main areas that are important for our consideration; the current status and the final resolution and the altered US agricultural policies. The case specifically targets the farm programs and policies of the U.S. The case got a tremendous amount of visibility due to cotton being a very important product and effects of the final settlement have been widespread. The dispute between the two biggest agricultural countries ended on October 1, 2014. A new memorandum of understanding (MOU) was signed by the two countries.
This MOU dictates the terms of agreement. A previous MOU had been created in the year 2010; however, the countries signed a second and final MOU in 2014. The MOU spells out the following terms of agreement between the two countries:
Brazil will give up its rights to any further disputes against the U.S. trade operations.
For the GSM-102 export credit guarantee program, The United States of America will agree to new governing fees. This fee will be risk-based and will have an added component if the tenor exceeds twelve months but is less than eighteen months.
Brazil has agreed to a temporary Peace Clause with respect to any new WTO steps against the cotton programs of the U.S. during the 2014 Farm Bill being in progress. The same holds true for agricultural export credit guarantees (GSM-102) if the program is being operated under the terms of agreement.
The United States has agreed to make a one-time payment amounting to 300 million dollars to the
Brazil Cotton Institute (BCI). This payment can have be used for technical, capacity-building, infrastructural or research activities.
Additionally, both the U.S. and Brazil have agreed a routine and semi-annual compliance reporting with respect to the terms of the MOU.
This MOU will hold well till 30th September, 2018 along with the farm bill of 2014. Along with this MOU, there have been several changes in the U.S policies as a result of this cotton case. Ever since the year 2005, United States started making changes in its cotton program and its export credit programs. These were attempts to be in compliance with the WTO recommendations. The Congress eliminated Step 2 programs to address the actionable subsidies issues since under this program $3.9 billion payments were made till 2006. USDA also created temporary fixes by introducing risk-based fee structures for credit guarantee programs. A higher participation fee would be charged and this would ensure high benefits returned since these programs would cover their operation costs thereby eliminating the subsidy components. The U.S was also directed to make payments of $12.275 million every month to a Brazilian cotton fund every month, totaling to $147.3 million annually.
All current cotton growth support programs have been repealed. The direct payments, the counter-cyclical and the average crop revenue lection programs which were made available under the 200 Farm Act have all been repealed. This is a big concession for the U.S cotton industry. Cotton has become ineligible for coverage any new support or price programs and has reduced marketing loan programs. Due to a settlement being reached, a huge trade war was avoided. These changes impact the U.S. farmers and the Brazilian farmers. However, these alterations are a huge sigh of relief to the African and Indian farmers. The governments of our countries cannot match the subsidies offered by the U.S government. Hence, even having competent farmers and cotton-fertile land, these countries are unable to hold huge market shares for cotton. Additionally, the plight of the farmers in these countries is very different from the U.S farmers. Indian farmers are not paid this well nor are the offered top facilities. This case also highlighted the special treatment cotton and the U.S was enjoying. Farmers all around the world have to work hard. It is unfair when one country brings down the price of such an important item.
Factors affecting my growth potential:
It is important to consider how this final settlement will affect my economic growth potential. Domestic and International factors will be at play to affect my growth potential.
The government wants us to increase the cotton growth in line with global demand.
With WTO final settlement and strictness with rules, amount of government subsidies in India also may be regulated
India has a huge internal market for cotton. Higher global price might raise prices in India also.
With increased world market share, the quality may decrease especially due to increase in prices and demand.
The reduction in U.S subsidies, large Indian cotton growers like me will have higher demand.
Raised global prices will help my economic potential and I can use better technologies.
Higher demand may lead to reduced supply.
There may be a lower supply in India markets and smaller growers may suffer.
There are over seventy countries in the world that produce and export the cotton crop. And far more countries depend on importing cotton lint for running their textile industries. Eight countries produce over eighty-one percent of the global cotton output. These countries are Pakistan, Uzbekistan, U.S.A, China India, Turkey, Brazil and Australia. Over the last four decades, cotton has grown at an average of two percent annually. And though the production has been increasing in the U.S, it has declined considerably in the East African countries. Developing countries like India and various African countries primarily rely on their agricultural exports to boost their economy. However, with industrial giants like the United States taking up a huge market share due to unauthorized subsidies, these developing markets are hit very badly.
It is obvious that there will be a huge all over the world price rice for cotton by getting rid of the U.S subsidies on cotton. And these cuts are big enough to cause a hug positive effect on the profits and revenues of other cotton producing countries like India. Even a price rise like twelve percent is big enough to make the distinction between profits or losses for farmers. The relief this would bring to farmers in a country like India is unimaginable. Even though food is the most important thing in countries, the farmers in India do not have an enviable lifestyle. Apart from being totally dependent on the climate for crop growth, they hardly enjoy any government benefits. Since the government cannot provide huge subsidies, they get caught on the net of loan sharks. These loan sharks provide loans to these farmers at inflated rates and if the farmers are not able to pay the money back, these loan lenders occupy their lands. Additionally, the pesticides and other substances and technologies needed for agriculture do not come cheap. The farmers get caught in this vicious cycle and thus live in poverty all their lives. In fact, the scenario of farmers in developing countries is so bad; that many of their generations have to remain in debt to loan lenders. This leads to poorer crop quality and nutritional deficiencies in the population. Cotton is just one crop but is hugely important to India’s economy. This is the reason that India also became a party to this WTO case between the U.S and Brazil. Even though Brazil initiated this case for its benefit; by it getting sanctioned, developing countries all around the world have benefited. With the world price of cotton rising, major producers of cotton can afford to continue to growth and export of the crop and also benefit themselves by proper demand and supply models. Such measures should be ensured for all important crops around the world.
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