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There is a long tradition in the quantification of the impact of agricultural trade distortions on global markets, trade, and individual countries, notably in the context of the ongoing multilateral trade negotiations. This paper analyses the case of cotton in this context. Recently, the issue of cotton subsidies and their likely negative effects has attracted considerable attention and controversy. There are some model-based assessments of the impact, and their results differ markedly. While the models utilized are similar in structure, the differences are in the assumptions about the levels of subsidies, as well as market parameters. This study presents some fresh estimates of the likely impact of cotton subsidies on both subsidizing and non-subsidizing countries using the UNCTAD-FAO ATPSM model. The analysis is based on official subsidies as notified to the WTO. However, the paper also reports in an annex the corresponding ATPSM simulation results based on subsidies as estimated by the International Cotton Advisory Committee (ICAC), which, although unofficial and controversial, was considered useful for comparative purposes as several recent studies assumed ICAC subsidies in their analyses. The results showed that the long-term impact of complete elimination of domestic subsidies as notified to the WTO, and tariffs, would be for the world price of cotton to rise by 3.1 percent in the base scenario and up to 5 percent under alternative assumptions about supply and demand elasticities, compared with a range of 3-15 percent impact in various other studies, most of which assumed the much higher levels of domestic subsidies as estimated by the ICAC. A number of sensitivity tests were done, which verified that most of the results of other studies fall within the range of values estimated in these sensitivity runs when different assumptions about subsidy levels and supply and demand elasticities are taken into account. It was verified, and also stressed, that even when the impact on the world market price is relatively small, there could be substantial shifts in production and trade, and so substantial gains for non-subsidizing countries. The paper reports impacts on a variety of other indicators such as export earnings and welfare measures. A particularly useful contribution of this paper is an extensive review of assumptions made in some recent model-based studies on cotton, which should help to clarify the differences in views about the impact of the cotton subsidies.

Key words: Cotton, domestic subsidies, trade liberalization, model.

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