This paper aims to determine whether domestic cotton support permitted by the current or potential World Trade Organization (WTO) rules would be sufficient to compensate the cost to China's cotton farmers if the sliding scale duty (SSD) on cotton imports is removed.
The simulation was conducted using a static spatial equilibrium model (SEM) of the world cotton market. First, a base model was specified to provide a good representation of the world cotton market's conditions. Second, simulations were conducted to evaluate the effects of replacing the SSD and subsidizing cotton producers pursuant to the current or potential WTO rules on domestic cotton support.
The results of the simulations suggest that China's cotton farmers are bound to incur losses. In either case, cotton subsidies permitted by the current or potential WTO rules are not sufficient to compensate for the cost to China's cotton producers if the SSD is eliminated.
It should be pointed out that these findings could suffer from a bias, primarily because the authors assumed that the WTO's blue box subsidies have no incentives for farmers to produce, and no substitution between cotton and alternative products. Thus, additional work is needed to reflect a more realistic situation in future studies.
The simulation estimation contributes to a better understanding of the issue of whether China should replace the current SSD with cotton subsidies to protect cotton producers.
