The Impact of US Subsidies on the World Cotton Market: A Reassessment

Following a critical review of the existing quantitative literature on cotton subsidies, a vector autoregression (VAR) is used to model the effects of US subsidies on the world cotton market from 1965 to 2001. Surprisingly, subsidies are found to have only a limited impact on prices despite their effects on production and consumption. The dynamic relationships between quantities, prices, stocks and subsidies are found to be considerably more complex than those suggested by basic theory. Finally, simulation results indicate that even large reductions in US subsidies will not necessarily lead to significantly higher world prices.