Agricultural Marketing: U.S. Cotton Market Before and After Import
Assessments (Letter Report, 01/22/96, GAO/RCED-96-49).

Pursuant to a legislative requirement, GAO assessed the: (1) growth in
the U.S. market for cotton and cotton products; (2) extent to which
import restrictions have affected importers' ability to take advantage
of any growth in the U.S. market; and (3) relevant U.S. international
trade obligations and the compliance factors for imported cotton and
cotton products.

GAO found that: (1) the cotton import assessment has not affected the
growth rate of cotton imports; (2) the volume of imported cotton
products has increased from 1.5 billion pounds in 1984 to 3.8 billion
pounds in 1994; (3) the assessment is in compliance with U.S. trade
obligations and is based on the principle of national treatment; (4) the
Department of Agriculture (USDA) established an administrative framework
for assessing cotton products, held a referendum for cotton producers
and importers on whether to assess imports, set an assessment rate
equivalent to domestic producer rates, and established collection
procedures for cotton products with the Customs Service; (5) cotton
importers frequently pay duplicative assessments on cotton products
containing U.S. cotton because they have difficulty meeting the
exemption criteria; and (6) producers and importers disagree on the
management and oversight functions of the Cotton Board.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-49
     TITLE:  Agricultural Marketing: U.S. Cotton Market Before and After 
             Import Assessments
      DATE:  01/22/96
   SUBJECT:  Import restriction
             International trade regulation
             Tariffs
             Agricultural products
             Clothing industry
             Trade policies
             Agricultural programs
             Commodity marketing
             Agricultural policies

             
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Cover
================================================================ COVER


Report to Congressional Committees

January 1996

AGRICULTURAL MARKETING - U.S. 
COTTON MARKET BEFORE AND AFTER
IMPORT ASSESSMENTS

GAO/RCED-96-49

Check-off Assessment on Imported Cotton

(150913)


Abbreviations
=============================================================== ABBREV

  AMS - Agricultural Marketing Service
  ERS - Economic Research Service
  GATT - General Agreement on Tariffs and Trade
  HTS - harmonized tariff schedule
  USDA - U.S.  Department of Agriculture
  USTR - U.S.  Trade Representative

Letter
=============================================================== LETTER


B-270635

January 22, 1996

Congressional Recipients

As authorized by the Cotton Research and Promotion Act Amendments of
1990, the cotton research and promotion program was extended to
include assessments on imported cotton.  This program, commonly known
as the cotton check-off program,\1 has collected assessments on
domestic cotton since 1967.  The program's activities are intended to
strengthen cotton's competitive position in relation to synthetic
fibers and maintain and expand domestic and foreign markets for U.S. 
cotton.  The Cotton Board, composed of producers and importers, is
responsible for the check-off program and develops research and
promotion plans and related budgets.  The Cotton Board contracts with
a single organization, Cotton Incorporated, to implement the
check-off program.  The U.S.  Department of Agriculture's (USDA)
Agricultural Marketing Service (AMS) is responsible for ensuring that
the program complies with its authorizing legislation. 

The 1990 act required that we analyze (1) the growth in the U.S. 
market for cotton and cotton products, particularly following the
imposition of assessments on imports; (2) the extent to which import
restrictions, such as quotas, on cotton and cotton products have
permitted or prevented importers from benefiting from any such growth
in the U.S.  market; and (3) the relevant U.S.  international trade
obligations and the compliance of the assessment on imported cotton
and cotton products with these obligations.  The act also required
that we report on the administration of the cotton check-off program
for imports. 


--------------------
\1 The term "check-off" refers to the way that the promotion and
research programs are funded:  A small amount is deducted from the
revenues that producers and/or other members of an industry receive
from the sale of their products. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The U.S.  market for raw cotton and cotton products grew at about the
same rate--about 6.6 percent annually--before and after the
imposition of the assessment on imports in 1992.  Industry experts
believe that it is unlikely that the cotton import assessment has had
any measurable effect on the growth rate because the assessment is a
relatively minor cost for imported cotton products--about one-half
cent for a man's cotton shirt, for example, or a total of about $14
million annually on imported cotton products valued at $19 billion.\2

Since 1984, quotas and tariffs have not prevented imported cotton
products from sharing in the growth in the U.S.  market.  The volume
of imported cotton products has increased even faster than the U.S. 
consumption of cotton, expanding from 1.5 billion pounds in 1984 to
about 3.8 billion pounds in 1994, an average annual increase of about
10 percent.  Imported cotton products accounted for almost half of
the domestic consumption in 1994. 

The assessment on imported cotton products complies with U.S.  trade
obligations, according to the Assistant U.S.  Trade Representative
for Agricultural and Commodity Policy, Office of the U.S.  Trade
Representative (USTR), and officials from the Foreign Agricultural
Service's Tobacco, Cotton, and Seed Division in USDA.  These
officials told us that U.S.  trade obligations are based on the
principle of treating imported products in the same manner as
comparable domestic products are treated--the principle of "national
treatment." The cotton import assessment is in accord with this
principle because the assessment imposed on imports is the same as
the assessment imposed on like domestic products and because
importers have benefited from the check-off program at least as much
as domestic producers, as measured by the increasing import share of
the U.S.  market. 

USDA has established the administrative framework outlined in the
1990 act for assessing cotton imports.  Among other things, USDA held
a referendum of producers and importers on whether to assess imports,
set an assessment rate for cotton imports that is equivalent to the
rate charged domestic producers, and established collection
procedures with the U.S.  Customs Service (Customs). 

While USDA has put in place the administrative framework for
assessing cotton imports, two major issues remain unresolved.  First,
importers are paying assessments on the U.S.  cotton content of
imported cotton products, even though provisions in the 1990 act
allow for an exemption because the assessments have already been paid
by U.S.  producers.  To receive an exemption from the assessment,
USDA requires importers to document the presence of U.S.  cotton in
imported products.  Importers generally do not find it cost-effective
to provide this information.  Consequently, we estimate that
importers are paying import assessments of about $2.1 million
annually on cotton products containing U.S.  cotton on which
assessments have already been paid.  Second, producers and importers
disagree on the broader management and oversight functions of the
Cotton Board.  Overall, importers believe that the Cotton Board does
not adequately oversee the activities of Cotton Incorporated, the
industry organization that operates the check-off program. 
Producers, on the other hand, believe that the program is successful
as currently managed and does not require significant changes. 


--------------------
\2 Almost all U.S.  imports of cotton are textile and apparel cotton
products, not raw cotton. 


   BACKGROUND
------------------------------------------------------------ Letter :2

During the 1960s, in an effort to address the decline in demand for
cotton brought on by competition from synthetic fibers, cotton
industry organizations proposed legislation to create a federally
authorized, industry-funded program aimed at expanding consumers'
demand for cotton.  Subsequently, the Cotton Research and Promotion
Act of 1966 authorized the creation of the Cotton Board and charged
it with increasing cotton's share of the textile and apparel market
through a research and promotion program.\3

The 1966 act gives the Cotton Board the primary responsibility for
administering the cotton check-off program, including developing
program plans and budgets.  The act also directs the Cotton Board to
contract with an organization, governed by cotton producers, to carry
out its research and promotion activities.  Since 1967, that
organization has been a nonprofit corporation called Cotton
Incorporated. 

From 1967 to 1991, all domestic producers had to pay cotton
assessments.  However, the act allowed producers who were not in
favor of supporting the program to request a refund.  In the late
1980s, about one-third of the assessments collected were refunded. 
In November 1990, the Congress enacted the Cotton Research and
Promotion Act Amendments of 1990, which was included under title XIX,
subtitle G, of the Food, Agriculture, Conservation, and Trade Act of
1990 (known as the 1990 Farm Bill).  These amendments authorized two
fundamental changes in the funding procedures for the cotton
check-off program:  (1) the imposition of assessments on imported
cotton and cotton-containing products and (2) the elimination of
refunds.  To become effective, however, these revisions had to be
approved in a referendum by at least half of the domestic producers
and importers voting.  About 60 percent of those voting approved
these revisions in July 1991.  In effect, the approved changes made
the program mandatory for both domestic producers and importers. 

After the final regulation was issued and other administrative
procedures were completed, import assessments on cotton products
began to be collected on July 31, 1992.  The assessments are
collected by Customs and remitted to the Cotton Board through AMS on
a monthly basis. 

Domestic producers pay an assessment when they sell their raw cotton. 
The current cotton assessment is a fixed rate of $1 per
500-pound-bale plus 0.5 percent of the market value.  Based on a
market value of 60 cents per pound, the total assessment per pound of
raw cotton is about one-half cent.  Importers pay an assessment on
the raw cotton equivalent of imported textiles and apparel.  To
calculate the assessment rate for imported cotton products, USDA has
established procedures for estimating the amount of raw cotton used
to manufacture about 700 different cotton products.  (See app.  I for
examples of how AMS calculates rates for an imported cotton product.)

Because the check-off program is federally authorized, the Secretary
of Agriculture and AMS have certain oversight responsibilities.  The
Secretary must approve the Cotton Board's recommended program plans
and budgets before they can become effective.  AMS' responsibilities
include (1) developing regulations to implement the check-off
program, in consultation with the cotton industry, and (2) ensuring
compliance with the authorizing legislation and AMS' orders and
regulations.  Generally, the act and AMS' regulations specify
allowable activities, such as the type of promotion or research
activities, the level and collection of assessments, the composition
of the Board, and the types of allowable expenditures.  To ensure
compliance, AMS reviews the Board's budgets and projects to, for
example, prevent the Board from engaging in prohibited activities,
such as lobbying.  However, AMS' oversight role does not include
reviewing the program's effectiveness.  AMS is reimbursed by the
Cotton Board for its oversight costs. 

The assessment on cotton imports and the elimination of refunds have
contributed, in large part, to the substantial growth in the Cotton
Board's check-off revenues since 1990.  In 1990, the Cotton Board
received check-off revenues from producers of about $27.6 million
after refunds.  In fiscal year 1994, the Cotton Board's check-off
assessment revenues totaled about $56.8 million--$43.2 million, or 76
percent, from domestic producers and $13.6 million, or 24 percent,
from importers. 


--------------------
\3 Two GAO reports provide information on U.S.  agricultural research
and promotion programs, including the cotton program:  Agricultural
Marketing:  Federally Authorized Commodity Research and Promotion
Programs (GAO/RCED-94-63, Dec.  29, 1993) and Agricultural Marketing: 
Comparative Analysis of U.S.  and Foreign Promotion and Research
Programs (GAO/RCED-95-171, Apr.  28, 1995). 


   U.S.  COTTON CONSUMPTION HAS
   CONTINUED TO INCREASE AFTER
   IMPOSITION OF THE ASSESSMENT
------------------------------------------------------------ Letter :3

The imposition of the cotton import assessment has not prevented
increases in the U.S.  consumption of cotton.  Between 1984 and 1991,
the U.S.  consumption of raw cotton and cotton products grew from 4
billion pounds to 6.2 billion pounds, an average annual growth rate
of 6.6 percent.  Following the imposition of the cotton import
assessment in 1992, the U.S.  market continued to grow at about the
same rate through June 1995.  The U.S.  consumption of cotton may
exceed 8 billion pounds in 1995.  (See fig.  1.)

   Figure 1:  U.S.  Domestic
   Consumption and Imports of
   Cotton and Cotton Products,
   1984-94 (In millions of pounds
   of raw cotton equivalent)

   (See figure in printed
   edition.)

Source:  GAO's analysis of data published by USDA's Economic Research
Service. 

Government and other experts knowledgeable about the U.S.  textile
and apparel industry\4 agreed that the imposition of the cotton
import assessment beginning in July 1992 has had no significant
impact on the long-term growth in U.S.  consumption of domestic
cotton.  They pointed out that the relatively small size of the
cotton import assessment--about one-half cent per pound of raw cotton
equivalent--is likely to have little effect on retail prices. 

According to these experts, the primary factor explaining the growth
in cotton consumption since 1984 is consumers' increasing preference
for cotton apparel--per capita consumption increased from 17 pounds
to 30 pounds between 1984 and 1994.  They also said that
technological developments, such as wrinkle-resistant cotton fabric
and different denim finishes, have further enhanced consumers'
preference for cotton apparel. 

In addition, these experts said that the cotton check-off program has
contributed to consumers' preference for cotton, although they could
not cite any study measuring the extent of the program's
contribution.  According to USDA's Chief Economist, a positive
correlation generally exists between increased promotion and
increased sales of a particular product.  However, he also said that
researchers measuring this positive correlation have found that it
can vary from small to large, depending on the product, the time
period involved, and other factors. 


--------------------
\4 These industry experts included USDA's Chief Economist and the
president of the Cotton Board.  We also spoke with staff from the
International Cotton Advisory Committee, the Department of Commerce's
Office of Textiles and Apparel, the U.S.  International Trade
Commission, and USDA's Economic Research Service. 


   QUOTAS AND TARIFFS HAVE NOT
   PREVENTED IMPORTERS FROM
   SHARING IN THE GROWTH OF U.S. 
   COTTON CONSUMPTION
------------------------------------------------------------ Letter :4

As discussed in the conference report on the 1990 Farm Bill,\5 some
lawmakers were concerned that while importers would be contributing
to the check-off program on an equal footing with domestic producers,
they would be denied equivalent access to the U.S.  cotton market
because of tariffs and quotas.  According to the USTR, in 1992 the
United States maintained quotas for about 67 percent of imported
cotton products. 

Despite these concerns, quotas and tariffs have not prevented cotton
imports from sharing in the growth in the U.S.  market.  Cotton
imports have grown even faster than U.S.  consumption, increasing
from 1.5 billion pounds in 1984 to about 3.8 billion pounds in 1994,
an average annual growth rate of about 10 percent.  In addition,
imported cotton products accounted for 48 percent of U.S.  cotton
consumption in 1994, up from 37 percent in 1984.  Industry experts
attribute the growth in these imports primarily to the growing U.S. 
market for cotton products and lower-priced apparel manufactured in
developing countries with low wages.  These experts also pointed out
that in the absence of quotas and tariffs, cotton imports would
probably have increased at an even higher rate, although they could
not say by how much. 

The experts cited several reasons for the increase in cotton imports,
even with quotas.  First, not all countries are subject to U.S. 
quotas.  Second, countries subject to these quotas vary in the amount
of their quota, and the United States has generally agreed to annual
increases in the quotas.  Third, not all countries fill their quotas. 
And fourth, when countries do fill their quotas, U.S.  retailers and
major textile and apparel exporters have become adept at finding
alternative sources of supply in countries that have not filled their
quotas.  The experts also pointed out that current bilateral quotas
negotiated under the Multi-fiber Arrangement will be phased out over
10 years under the Uruguay Round agreement, negotiated under the
General Agreement on Tariffs and Trade (GATT).\6

Similarly, as a result of the Uruguay Round agreement, the United
States has agreed to slightly reduce textile and apparel tariffs to
an average of 15 percent over 10 years.  However, experts note that
tariffs--currently an average of 17 percent of the value of imported
apparel--have not prevented cotton imports from increasing even
faster than domestic consumption.  This increase has occurred because
imported apparel apparently has a substantial cost advantage over
domestic apparel. 


--------------------
\5 H.R.  Conf.  Rep.  No.  916, 101st Cong., 2nd Sess., 1155-1156
(1990). 

\6 The Arrangement Regarding International Trade in Textiles, known
as the Multi-fiber Arrangement, has governed world trade in textiles
and apparel since 1974.  The Multi-fiber Arrangement allows
signatories to place quantitative limits, or quotas, on most imports
of textiles and apparel. 


   USDA AND THE USTR BELIEVE THAT
   THE COTTON IMPORT ASSESSMENT
   COMPLIES WITH U.S.  TRADE
   OBLIGATIONS
------------------------------------------------------------ Letter :5

According to USTR's Assistant U.S.  Trade Representative for
Agricultural and Commodity Policy and officials from the Foreign
Agricultural Service's Tobacco, Cotton, and Seed Division in USDA,
the assessment on cotton imports complies with the requirements of
U.S.  trade agreements.  The primary guiding principle of these
agreements for imports is that of "national treatment," which is
established in the GATT, Article III, National Treatment on Internal
Taxation and Regulation.  This principle holds that imports (1) shall
not be subject to internal charges that are higher than those applied
to like domestic products and (2) shall be treated, under national
laws and regulations, as favorably as like domestic products. 

According to USDA documents and our discussions with officials from
the Foreign Agricultural Service and the USTR, the implications of
the cotton import assessment were discussed during USDA's rule-making
process for cotton imports in 1991 and during GATT negotiations
during 1992.  Officials concluded that the cotton import assessment
complies with the principle of national treatment because the
assessment imposed on importers is the same as the assessment imposed
on domestic cotton producers and the assessment is mandatory for both
importers and producers.  Furthermore, importers have shared in the
growth of U.S.  cotton consumption as much as domestic producers, as
measured by the increasing import share of the U.S.  market. 

During 1991 and 1992, some major importers and foreign countries
objected to the U.S.  imposition of the check-off assessment on
cotton imports.  They contended that such an assessment is a
nontariff trade barrier, which is contrary to the GATT's overall
objective of reducing trade barriers and liberalizing trade.  Some
importers also questioned whether they received benefits from the
program comparable to those received by domestic producers.  However,
the USTR and USDA officials said that they were not aware of any
country that had filed a formal challenge to the import assessment
with the USTR or the World Trade Organization, the arbiter of
international trade disputes.  Some experts we talked with suggested
that challenges may not have been filed because the amount of money
involved is insignificant compared with the value of the trade taking
place.  Import assessments collected in 1994 totaled about $14
million, compared with an estimated value of $19 billion for cotton
imports. 

USDA and USTR officials also told us that they are not concerned
about the possibility that other countries could impose check-off
assessments on U.S.  exports.  They pointed out that check-off
programs expand market demand within a country, which can increase
U.S.  exports to that country.  Therefore, as long as countries
impose such assessments in line with the principle of national
treatment, such assessments could have long-term benefits for U.S. 
exporters. 


   ADMINISTRATIVE ISSUES ARE
   UNRESOLVED
------------------------------------------------------------ Letter :6

USDA has put in place the necessary framework for administering the
cotton check-off program as it relates to assessing imports. 
However, two significant administrative issues concerning the
assessment on imported cotton are unresolved.  First, importers are
paying assessments on products containing U.S.  cotton for which
assessments have already been paid.  To get an exemption from this
assessment, importers must document the U.S.  cotton content of
imported products, as USDA requires.  However, because importers find
it difficult to provide such documentation, they rarely use this
exemption.  Second, importers and producers on the Cotton Board
disagree over whether the Board has adequately carried out its
responsibility to oversee the activities of Cotton Incorporated. 


      USDA HAS ESTABLISHED AN
      ADMINISTRATIVE FRAMEWORK FOR
      ASSESSING IMPORTED COTTON
      PRODUCTS
---------------------------------------------------------- Letter :6.1

USDA has carried out the activities specified in the 1990 legislation
to assess imported cotton products.  For example, USDA held a
referendum on whether to assess imports and eliminate refunds of
assessments.  A majority of producers and importers who voted
approved assessing imports and eliminating the refund provision. 
Working with Customs, USDA established procedures for calculating,
collecting, and remitting assessments on imported cotton products. 
USDA also established equivalent assessment rates for imported cotton
products; issued relevant orders and regulations governing the
program's operations; established procedures for exempting imports
containing U.S.  cotton; and provided for the representation of
cotton importers on the Cotton Board. 

Appendix II contains detailed information on the administrative
requirements for imports set forth in the 1990 amendments and on the
actions taken by USDA to implement them.\7


--------------------
\7 In December 1995, USDA's Office of Inspector General issued a
report on AMS' and the Cotton Board's administration of the cotton
research and promotion program (Audit Report No.  01099-1-At, Dec. 
7, 1995).  The report stated that AMS and the Cotton Board generally
performed their responsibilities in accordance with the Cotton
Research and Promotion Act and Order.  The Office of Inspector
General also reported that the import assessments collected by
Customs differed each month from the amounts paid to AMS and
transmitted to the Cotton Board.  For a 2-year period, reported
collections exceeded payments to AMS and the Cotton Board by about
$500,000.  The Office of Inspector General recommended that AMS work
with Customs to develop procedures for reconciling and resolving
monthly differences between the collections reported and the
collections paid to AMS and the Cotton Board. 


      PROCEDURES FOR OBTAINING
      EXEMPTION FROM ASSESSMENTS
      ON U.S.  COTTON IN IMPORTED
      PRODUCTS ARE DIFFICULT TO
      COMPLY WITH
---------------------------------------------------------- Letter :6.2

The 1990 act required USDA to establish procedures to ensure that the
domestic cotton used in imported products has been subject only to
the one assessment provided for by law and that the assessment has
not been paid twice--once when the raw U.S.  cotton was sold and
again when the same cotton was used in imported textiles and apparel. 
In response to the statute, USDA and the Cotton Board have developed
procedures under which importers can be exempted from the assessment
if they can document the domestic cotton content of the articles they
import. 

However, generally cotton importers cannot readily obtain the
information needed to document the amount of U.S.  cotton in imported
products because U.S.  cotton is not easily identifiable in imported
products.  For example, foreign mills may import U.S.  cotton and
combine it with cotton from other countries to produce cotton
products.  These products may then be shipped to factories and mixed
with other cotton textiles before the final product is exported to
the United States. 

With this complicated flow of cotton products, importers generally
cannot document at a reasonable cost which products contain U.S. 
cotton.  Importers, who are primarily retailers, note that the
country of origin of the raw cotton contained in their products has
generally not been of interest to them and therefore they do not
collect such information.  Consequently, some importers are paying
more in assessments than they should.  Using USDA's Economic Research
Service data on the U.S.  cotton content in imported cotton products,
we estimated that importers are paying import assessments of about
$2.1 million annually on cotton products containing U.S.  cotton,
which should be exempt from the assessment.\8

USDA considered alternatives to use in place of requiring
documentation during the rule-making process but decided that they
were either inequitable or not practicable.  One alternative proposed
was an across-the-board reduction in the import assessment rate. 
USDA believes this alternative disproportionately benefits countries
that manufacture cotton products with little U.S.  cotton.  The other
alternative was to adjust the import assessment rate for each country
on the basis of the estimated amount of U.S.  cotton used in
manufacturing cotton products exported to the United States.  Customs
believes that maintaining different assessment rates for each
exporting country is not administratively practicable.  Recognizing
that the current approach results in double assessments on U.S. 
cotton, the Cotton Board is exploring the possibility of identifying
which foreign mills use mostly U.S.  cotton as a way to help learn
which imported products contain significant amounts of U.S.  cotton. 


--------------------
\8 The Economic Research Service estimated in 1993 that the U.S. 
cotton content in imported cotton textiles and apparel totaled about
968 million pounds out of total cotton imports of about 3.6 billion
pounds.  About 42 percent of the 968 million pounds of U.S.  cotton
was contained in textiles and apparel assembled in Mexico and
Caribbean countries.  These assembled cotton products from Mexico and
the Caribbean are apparently easily identified as containing U.S. 
cotton; the other 58 percent of the U.S.  cotton was contained in
textiles and apparel imported from other countries that cannot be
easily identified, according to importers. 


      IMPORTERS AND PRODUCERS
      DISAGREE OVER THE COTTON
      BOARD'S OVERSIGHT ROLE
---------------------------------------------------------- Letter :6.3

While producers are generally satisfied with the Cotton Board's
efforts to oversee Cotton Incorporated, importers are more critical. 
In fact, one importer who was a member of the Board's executive
committee resigned from the Board in February 1995, charging that its
oversight was inadequate.  Importers we spoke with contend that the
Cotton Board has relinquished its fundamental oversight
responsibility and left important management decisions to Cotton
Incorporated.  However, by statute, importers are excluded from
Cotton Incorporated's board of directors, thereby leaving importers'
interests unrepresented. 

More specifically, importers argue that the Cotton Board's current
procedures for approving Cotton Incorporated's proposed budget amount
to "rubber stamping." They contend that budget submissions do not
contain sufficient detail for adequate review.  For example, they
cite an event that came to their attention only by accident--an
annual, one-night public relations event costing an estimated
$370,000, which was not identified in the 1995 budget.  Importers
questioned whether the budget contains other such unidentified items
that the Cotton Board should be aware of. 

Furthermore, these importers said that the Cotton Board's meetings to
review the budget are not conducive to raising "tough-minded,
business-oriented" questions about the budget.  They attributed this
situation, in part, to the fact that the members of both Cotton
Incorporated's board of directors and the Cotton Board are producers
nominated by the same state associations.  Therefore, producers on
both boards know each other.  Also, over the course of a few years,
former members of Cotton Incorporated's board of directors may serve
on the Cotton Board and vice versa.  Equally important, the expertise
and experience needed to carry out the cotton check-off program
reside primarily with the staff of Cotton Incorporated.  For these
reasons, the Cotton Board is inclined to accept the plans and budgets
submitted and approved by Cotton Incorporated. 

Producers we spoke with are generally satisfied with the Cotton
Board's oversight and do not see the need to "micromanage" the
check-off program, which they believe has had a clear record of
success.  However, producers also recognize that the Board's
oversight could be strengthened.  Therefore, as suggested by the
importers, the Cotton Board has agreed to have an outside contractor
conduct an overall evaluation of the program.  The Board has also
agreed to hold a 1-day meeting to begin developing a long-term plan
that sets out goals and priorities to guide Cotton Incorporated's
activities.  While importers are willing to participate in these
efforts, they still believe that producers have not addressed the
need for the Cotton Board to play a more assertive role in carrying
out its oversight responsibility.  In addition to an improved
planning process, importers would like to see the Board develop a
budget process that allows more time and opportunity to ask in-depth
questions about budget expenditures. 

These differences between producers and importers could make it
difficult to achieve the confidence in and support for the program
that the Congress has recognized as essential to the continued
operation of check-off programs.  With reference to all such programs
under which imports are assessed, in section 1999S(a) of the 1990
Farm Bill, the Congress found that: 

     "(6) the producers and importers that pay assessments to support
     the programs must have confidence in, and strongly support, the
     checkoff programs if these programs are to continue to succeed;
     and

     "(7) the checkoff programs cannot operate efficiently and
     effectively, nor can producer confidence and support for these
     programs be maintained, unless the boards and councils
     faithfully and diligently perform the functions assigned to them
     under the authorizing legislation."

Because the cotton check-off program is industry-funded and
-operated, AMS has found it to be more effective for the industry
than for AMS to assume primary responsibility for deciding how to
strengthen the Cotton Board's oversight role.  AMS officials said
that they have consciously decided to focus on guiding rather than
prescribing the efforts of the Cotton Board to strengthen its
oversight.  For example, AMS program officials met with the Cotton
Board and Cotton Incorporated to discuss the need for more useful and
detailed budget information.  This approach resulted in an improved
budget report for fiscal year 1995.  In addition, consistent with its
approach of guiding the industry's efforts, AMS, in October 1995,
called for a meeting of the Cotton Board, including staff and
representatives of producers and importers, to help resolve the
conflict between importers and producers.  AMS envisions this
meeting, which may be held in early 1996 at the start of the annual
budget process, as an opportunity to chart a course of action to
better integrate importers into the check-off program. 

Even if the Cotton Board exerts more oversight, finding common ground
between the producers and importers will be difficult.  The major
importers are large retailers who do extensive brand-name advertising
and see little benefit from the research and promotion program's
generic advertising.  Importers generally did not want to participate
in the program--61 percent of the importers voting in the 1991
referendum opposed the assessment on cotton imports.  Also,
importers, who are outnumbered 5 to 1 on the Cotton Board and are not
represented at all on Cotton Incorporated's board of directors, find
it difficult to influence the program's direction. 

Nevertheless, importers told us that they are willing to work with
producers to develop an efficient and effective cotton program. 
However, importers also told us that they would have more influence
over the program's direction and their interests would be better
served if they were represented on the board of directors of Cotton
Incorporated.  AMS officials, producers, the president of the Cotton
Board, and the president of Cotton Incorporated told us that they
would have no objection to having importers on Cotton Incorporated's
board of directors, but they noted that the authorizing legislation
would have to be revised to allow this representation. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

The cotton check-off program's promotion efforts have probably
contributed to cotton's growth in the U.S.  market.  In addition, the
U.S.  consumption of cotton and the import share of the U.S.  cotton
market continued to increase following the imposition of the
assessment on imported textiles and apparel.  The value of this
assessment--about one-half cent for a man's cotton shirt--is not
likely to slow consumer demand for cotton.  Furthermore, this
assessment is in accordance with U.S.  international trade
agreements, according to USDA and USTR officials. 

While USDA has established an administrative framework for assessing
imported cotton, two major issues raised by importers have yet to be
resolved.  The first of these issues--double payments on
assessments--may be addressed to some extent by current efforts to
identify foreign mills that use a significant amount of U.S.  cotton. 
The second issue, however, is more difficult to resolve--the extent
of the Cotton Board's oversight over Cotton Incorporated.  While the
Cotton Board and AMS are taking steps to address this issue, these
efforts do not deal with importers' lack of representation on Cotton
Incorporated's board of directors.  Neither producers nor AMS
officials object to including importers on Cotton Incorporated's
board of directors.  However, the legislation authorizing the program
must be amended to allow such representation.  But even if this issue
is resolved, developing a cooperative working relationship between
producers and importers will be difficult, given their fundamentally
different perspectives on the program. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :8

To conduct this review, we analyzed data from USDA's Economic
Research Service on U.S.  cotton consumption and imports of textiles
and apparel for 1984-95.  We discussed the results of our analysis
and related issues with knowledgeable officials, including USDA's
Chief Economist and the president of the Cotton Board.  We also spoke
with staff from the International Cotton Advisory Committee, the
Department of Commerce's Office of Textiles and Apparel, and the U.S. 
International Trade Commission.  We discussed U.S.  international
trade obligations with staff of USDA's Foreign Agricultural Service
and the USTR.  Furthermore, we reviewed the relevant legislation and
USDA's orders and regulations pertaining to the cotton check-off
program and other relevant documents and studies. 

To provide information on the administration of the cotton check-off
program for imports, we discussed the program's administration and
related issues with officials of USDA's Agricultural Marketing
Service and Customs.  We also discussed the program's administration
with the president, the chairman, and the treasurer of the Cotton
Board; the president of Cotton Incorporated and the chairman of its
board of directors; and representatives of importers on the Cotton
Board.  We reviewed relevant legislation, regulations, orders, the
memorandum of understanding between USDA and Customs, and studies of
the cotton check-off program.  We also discussed various legal issues
with USDA's Assistant General Counsel for Marketing. 

We performed our work between July 1995 and December 1995 in
accordance with generally accepted government auditing standards. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

We provided copies of a draft of this report to AMS for its review
and comment.  We met with AMS' Cotton Division officials, including
the Director, Deputy Director, and Chief of the Research and
Promotion Staff.  These officials generally agreed with the
information discussed and provided some clarifying comments that we
have incorporated into the report where appropriate. 


---------------------------------------------------------- Letter :9.1

As agreed with your offices, unless the contents of this report are
publicly announced earlier, we plan no further distribution of this
report until 7 days from the date of this letter.  At that time, we
will send copies of this report to the Secretary of Agriculture and
other interested parties.  Copies will also be made available to
others upon request. 

Please contact me at (202) 512-5138 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
III. 

Robert A.  Robinson
Director, Food and
 Agriculture Issues

List of Recipients

The Honorable Richard G.  Lugar
Chairman
The Honorable Patrick J.  Leahy
Ranking Minority Member
Committee on Agriculture,
 Nutrition, and Forestry
United States Senate

The Honorable William V.  Roth, Jr.
Chairman
The Honorable Daniel Patrick Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Pat Roberts
Chairman
The Honorable E (Kika) de la Garza
Ranking Minority Member
Committee on Agriculture
House of Representatives

The Honorable Bill Archer
Chairman
The Honorable Sam Gibbons
Ranking Minority Member
Committee on Ways and Means
House of Representatives


EXAMPLES OF CALCULATIONS OF COTTON
IMPORT ASSESSMENTS
=========================================================== Appendix I

This appendix contains two examples of how (1) the import cotton
assessment is calculated (including the conversion from pounds to
kilograms) and (2) an assessment on a sample cotton import shipment
is calculated. 


   CALCULATION OF THE TOTAL
   ASSESSMENT ON IMPORTED COTTON
   PRODUCTS
--------------------------------------------------------- Appendix I:1

The per-kilogram assessment represents the sum of the assessment and
the supplemental assessment.  An example of how the assessment is
calculated follows: 

  One bale = 500 pounds
  One kilogram = 2.2046 pounds
  One pound = 0.453597 kilograms

The $1-per-bale assessment is converted to kilograms: 

  A 500-pound bale = 226.8 kilograms (500 x 0.453597)
  The $1-per-bale assessment = $0.002000 per pound (1/500) or
   $0.004409 per kilogram (1/226.8)

The supplemental assessment of 5/10 of 1 percent of the value of the
cotton is converted to kilograms: 

  Average price received = $0.683 per pound or
   $1.5057 per kilogram (0.683 x 2.2046)
  5/10 of 1 percent of the average price in kilograms =
   $0.007529 per kilogram (1.5057 x 0.005)

The two assessments are added to obtain the total assessment per
kilogram: 

  $1-per-bale assessment $0.004409
  Supplemental assessment $0.007529
  Total assessment per kilogram $0.011938


   CALCULATION OF THE ASSESSMENT
   ON A SHIPMENT OF IMPORTED
   COTTON
--------------------------------------------------------- Appendix I:2

Men's cotton knit pullover (116 dozen or 1,392 shirts)
HTS (harmonized tariff schedule) number 6110.20.2065

  Total value of shipment = $13,325
  Tariff at 20.3 percent = $2,705 ($13,325 x 0.203)
  Cotton check-off assessment = $10.14

The cotton check-off assessment is calculated as follows: 

  Weight of shipment = 734 kilograms
  Conversion factor = 1.1574 (applied to determine the raw
    cotton fiber content of the shipment)
  Total assessment per kilogram = $0.011938

 734 x 1.1574 = 849.5316 kilograms
   849.5316 x $0.011938 = $10.14

Source:  Based on information obtained from a Customs entry document
provided to GAO by an import broker serving the John F.  Kennedy
Airport port of entry. 


USDA ACTIONS TO IMPLEMENT THE
ADMINISTRATIVE FRAMEWORK OUTLINED
IN THE 1990 AMENDMENTS
========================================================== Appendix II

The Cotton Research and Promotion Act Amendments of 1990 set forth
administrative implementing procedures for the U.S.  Department of
Agriculture (USDA) to extend the research and promotion program to
cotton imports.  Table II.1 lists these procedures and the actions
USDA took to implement them. 



                                    Table II.1
                     
                        Administrative Requirements in the
                           Legislation and USDA Action

Administrative requirement in the
Cotton Research and Promotion Act
Amendments of 1990                       USDA's administrative action
---------------------------------------  ---------------------------------------
Implementing referendum

Section 1993 (2) --The Secretary of      USDA held an implementing referendum
Agriculture shall, within a period not   during July 17-26, 1991. The proposed
to exceed 8 months after the date of     amendment was approved by a majority
enactment of the act, conduct a          (60 percent) of the importers and
referendum among cotton producers and    producers voting in the referendum.
persons that are cotton importers to     Results were announced in a nationally
ascertain if a majority of those voting  distributed press release on August 2,
approve the proposed amendment to the    1991.
order.

Assessment on imported cotton products

Section 1992 (3)--If the proposed        USDA's final rule was published in the
amendment of the order implementing the  Federal Register (57 FR 29181) on July
Cotton Research and Promotion Act        1, 1992. The rule provided for Customs
Amendments of 1990 is approved in the    to collect assessments on cotton and
referendum, each importer shall pay      cotton products imported into the
assessments on imported cotton           United States on or after July 31,
products.                                1992.



Termination of refunds to producers

Section 1996 (2)--The right of a         The actual elimination of assessment
producer to demand a refund shall        refunds to cotton producers became
terminate if the proposed amendment of   effective on September 1, 1991, 30 days
the order implementing the Cotton        after USDA announced the results of the
Research and Promotion Act Amendments    July 1991 referendum.
of 1990 is approved in the referendum.
Such right shall terminate 30 days
after the date the Secretary of
Agriculture announces the results of
such referendum if such amendment is
approved. Such right shall be
reinstated if the amendment should be
disapproved in any subsequent
referendum.

Importers' representation on the Cotton
Board
                                         USDA's final rule amending the
Section 1992 (2)(B)--An appropriate      regulations for Cotton Board membership
number of representatives, as            was published in the Federal Register
determined by the Secretary of           (56 FR 65929) on December 20, 1991. The
Agriculture, of importers of cotton on   rule provided for an initial
which assessments are paid, will serve   representation on the Cotton Board of
on the Cotton Board. The importers'      four importers. In addition, the rule
representatives shall be appointed by    stated that additional importer members
the Secretary of Agriculture after       could be added to the Cotton Board
consultation with organizations          after consultation by the Secretary
representing importers, as determined    with importer organizations and after
by the Secretary.                        consideration of the average annual
                                         volume of imported cotton that would be
                                         subject to assessment for 5 preceding
                                         years.

                                         In June 1995, four organizations
                                         represented importers: (1) United
                                         States Association of Importers of
                                         Textiles and Apparel, (2) United States
                                         Apparel Industry Council, (3) American
                                         Association of Exporters and Importers,
                                         and (4) American Import Shippers
                                         Association.

Import assessment rate comparable to
domestic producer rate
                                         USDA' s final rule, published in the
Section 1992 (3)--The rate of            Federal Register (57 FR 29181) on July
assessment on imports of cotton shall    1, 1992, established a rate of
be determined in the same manner as the  assessment for imported cotton and
rate of assessment per bale of cotton    cotton products that is the same, on a
handled, and the value to be placed on   raw-cotton-equivalent basis, as the
cotton imports for the purpose of        rate imposed on domestically produced
determining the assessment on such       cotton.
imports shall be established by the
Secretary of Agriculture in a fair and
equitable manner.

De minimis amount not subject to
assessment
                                         Section 1205.510 (b)(3) of USDA's final
Section 1997 (1)(B)--Imported cotton     rule established a de minimis value of
shall not be assessed for any entry      $220.99 per line item on Customs entry
having a weight or value less than any   documentation. Any line item entry in
de minimis figure as established by      which the value of the cotton contained
regulations. The de minimis figure that  therein is less than $220.99 is not
is established should minimize the       subject to the assessment.
burden in administering the import
assessment but still provide for the
maximum participation of imports of
cotton in the assessment provisions of
the act.

Procedures to ensure cotton content of
imported products is not subject to
more than one assessment                 Section 1205.510 (b)(5) and (9) of
                                         USDA's final rule (FR 29181, July 1,
Section 1992 (3)--The Secretary shall    1992) automatically exempts textile
establish procedures to ensure that the  articles assembled abroad in whole or
upland cotton content of imported        in part of fabricated components,
products is not subject to more than     produced in the United States and
one assessment.                          articles imported into the United
                                         States after being exported from the
                                         United States for alterations or
                                         repairs.

                                         Section 1205.510 (b)(6) of USDA's final
                                         rule allows imported cotton and cotton
                                         products, which contain U.S.-produced
                                         cotton or cotton other than upland
                                         cotton, to be exempted by the Cotton
                                         Board.

                                         Section 1205.520 of USDA's final rule
                                         allows each importer of cotton or
                                         cotton-containing products to obtain a
                                         reimbursement on that portion of the
                                         assessment that was collected on cotton
                                         produced in the United States or cotton
                                         other than upland cotton.

Reimbursement of federal agencies'
costs
                                         In 1993, USDA billed the Cotton Board
Section 1992 (3)--The order shall        for about $128,000 in reimbursable
provide for reimbursing the Secretary    costs (which included first year start-
of Agriculture for up to $300,000 in     up costs of almost $45,000) \associated
expenses incurred in connection with     with collecting import assessments on
any referendum, and for up to 5          cotton products. In November 1995,
employee years in administrative costs   Customs reported costs of about $56,000
after an order or amendment thereto has  for fiscal years 1994 and 1995.
been issued and made effective. The
order shall also include a provision
for reimbursing any agency in the
federal government that assists in
administering the import provisions of
the order for a reasonable amount of
the expenses incurred by that agency.

Required reports from USDA and Customs

Section 1998--Not later than 1 year      In August 1993, USDA submitted its
after imported cotton products are       report to the Congress.
subject to assessment, (1) the
Secretary of Agriculture was required    Customs officials were not able to
to prepare a report concerning the       determine whether the agency had
implementation and enforcement of the    prepared such a report.
cotton check-off program and any
problems that may have arisen in the
implementation and enforcement as it
relates to imports and (2) the Customs
Service was required to prepare a
report concerning its role in the
implementation and enforcement as it
relates to imports.

USDA 5-year review of import program

Section 1993 (2)--After the              Results of Secretary of Agriculture's
implementing referendum is held, the     review are scheduled to be announced by
Secretary of Agriculture will conduct a  September 1996.
review once every 5 years to ascertain
whether another referendum is needed to
determine whether producers and
importers favor continuation of the
amendment provided for in the Cotton
Research and Promotion Act Amendments
of 1990. The Secretary is required to
make a public announcement of the
results of the review within 60 days
after each fifth anniversary date of
the referendum.
--------------------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

Juliann M.  Gerkens, Assistant Director
Louis J.  Schuster, Project Leader
Carol Bray
James L.  Dishmon, Jr.
John F.  Mitchell
Carol Herrnstadt Shulman


*** End of document. ***