The Impacts of Eliminating Step 2 Program on the U.S. and World Cotton Market

Brazil made a formal complaint to the World Trade Organization (WTO) Dispute Settlement Panel against U.S. cotton programs in 2003, alleging that these subsidies depressed world cotton price and were injurious to Brazilian farmers. The petition was supported by Australia and West and Central African cotton producing countries. After long deliberations, the WTO appellate body came out with their final ruling in March 2005 that upheld most of the initial decisions of the WTO Dispute Settlement Panel. In addition to the finding of serious price suppressing effects of U.S. cotton programs during the period 1999/00-2002/03, the ruling also included a June 30, 2005 deadline to withdraw Step 2 and export credit guarantee programs. In an attempt to comply with the WTO findings, the United States Department of Agriculture (USDA) recently proposed legislative changes to modify credit guarantee fee structures for the GSM-102 and Supplier Credit Guarantee programs (SCGP) to a risk-based method and eliminate the Step 2 program.