USDA Proposes Legislation to Eliminate Step 2 Cotton Program, Export Subsidies

The Bush Administration announced Tuesday its second significant step to complying with a recent World Trade Organization cotton decision in a dispute with Brazil. Agriculture Secretary Mike Johanns sent Congress proposed statutory changes to the Step 2 cotton program and export credit guarantee programs.

Last week the administration announced minor changes to cotton programs. The Step 2 cotton program changes require legislative action for full WTO compliance. WTO required action by July 1, 2005 for the cotton programs classified as trade distorting.

"By implementing these proposed changes, we are being fully responsive to the WTO decision," says Johanns. "This step is essential for United States to continue to be a leader in the WTO Doha negotiations, which are crucial to U.S. market access and the long-term prosperity of our farmers and ranchers. We very much appreciate the close cooperation of the industry groups in developing this approach and will work with the Congress as this proposed legislation is considered."

The proposed statutory changes would eliminate the Step 2 program, remove a 1% cap on fees that can be charged under the export credit programs, and terminate the Intermediate Export Guarantee Program (GSM-103).

Repealing the Step 2 program would remove both the export subsidies and import substitution subsidies that the WTO cited and address issues related to suppression of cotton prices in world markets. Eliminating the 1% fee cap would make the Export Credit Guarantee Program more risk-based. Terminating the GSM-103 program would reinforce the recent U.S. decision to stop using longer-term export credit guarantees.

On June 30, USDA announced that beginning July 1, the Commodity Credit Corporation (CCC) would use a risk-based fee structure for the Export Credit Guarantee Program (GSM-102) and the Supplier Credit Guarantee Program (SCGP). Fee rates are now based on the country risk that CCC is undertaking, as well as the repayment term (tenor) and repayment frequency (annual or semi-annual) under the guarantee. The new structure responds to a key finding by the WTO that the fees charged by the programs should be risk based.

In addition, the CCC no longer accepts applications for payment guarantees under GSM-103. Any remaining country and regional allocations for GSM-103 coverage under fiscal year 2005 program announcements will be reallocated to the existing GSM-102 program for that country or region.