The U.S. Department of Agriculture on Tuesday proposed a legislative remedy aimed at eliminating the Step 2 cotton subsidy at the center of the Brazilian victory at the World Trade Organization last year.

It was the second announcement of sweeping changes in domestic agriculture policy to bring the United States into compliance with WTO rulings that suggest subsidies to growers and exporters are harmful to other international cotton exporters. The deadline for compliance passed Friday.

The leadership of the Memphis-based National Cotton Council was huddling Tuesday and promised a statement today. Economists say a significant portion of the $1 billion to $3 billion that taxpayers pay to subsidize cotton flows through the Mid-South economy, where cotton is still the largest cash crop.

U.S. Rep. Harold Ford Jr., D-Tenn., and several of his Mid-South colleagues urged a deliberative approach.

“Congress should move carefully to evaluate the impact of the elimination of Step 2 on the Mid-South’s cotton producers. It’s important that whatever we do, that we consider the competitiveness of our cotton producers in the global marketplace,” he said.

Congress could deal with a Step 2 solution that will ultimately save taxpayers millions of dollars annually during the budget reconciliation process this September, although some are predicting a gradual transition .

Brazil said Tuesday that it was seeking WTO permission to impose retaliatory penalties if the talks fail, The Associated Press reported. Last week, Brazilian agriculture officials said that a remedy that fell short of eliminating Step 2 would be unacceptable.

Just before 6 p.m. Tuesday, the Office of the U.S. Trade Representative, which negotiates trade agreements and handled the WTO dispute, announced an agreement with Brazil that suspends the WTO arbitration process for the time being and prevents any imminent retaliation. Spokesman Richard Mills said the United States has now taken adequate steps to comply with its WTO obligations.

Ken Cook of the Washington-based Environmental Working Group, which assisted the Brazilians and had been critical Friday that Step 2 hadn’t been eliminated, hailed the Bush administration’s decision to move forward as “historic.”

“The administration really now can say that at this stage they’ve done what they needed to do to comply with the WTO and meet their obligations,” Cook said. But he said proposing a change in the law is far from assuring it’s enacted.

“Some in Congress have been trying to make out as if it’s a negotiating card for us to play,” he added. “That’s somebody who’s already essentially folded trying to place a bet.”

On Friday, Secretary of Agriculture Mike Johanns announced changes in USDA export credit guarantee programs to make them more sensitive to real market risks. On Tuesday, Johanns suggested that Congress do away with Step 2, a marketing program that pays exporters and mills to buy higher-priced American cotton. In one recent year, Step 2 paid out more than $600 million.

Between 1995 and 2002, three of the nation’s largest cotton marketers with operations in Memphis – Dunavant Enteprises Inc., Allenberg Cotton and Cargill Cotton – received nearly $300 million through Step 2.

Rep. John Tanner, D-Tenn., whose district is the seventh-largest cotton producer in the country, released a statement: “Step 2 has long been important to many Tennessee farmers, and we are disappointed that there is a need to make changes. We are anxious to see details of the Bush Administration’s proposal and how those recommendations will affect our cotton growers.”

Rep. Marsha Blackburn, R-Tenn., said: “We’re stuck between a rock and a hard place because our cotton growers and farm organizations tell us they absolutely need access to these foreign markets in order to make a living. That is why this is being proposed.”

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