Fast-Track Authority:
Implications For U.S. Agriculture
Increasing access to foreign markets is essential for a profitable and growing agricultural sector. Production is rising more rapidly than domestic consumption, and the value of U.S. agricultural products sold to foreign markets has grown three times as rapidly as domestic sales. Comprehensively addressing agricultural trade issues will require multilateral and regional negotiations. Fast- track authority would increase the effectiveness, efficiency, and speed of negotiations.
“Fast-track authority” enables the President to submit a trade agreement to Congress for approval under special, expedited procedures. The most recent fast-track authority expired 3 years ago, after approval of implementing legislation for the Uruguay Round (UR) agreements. A new fast-track authority would focus on broad World Trade Organization (WTO) issues after the UR, and also extend to regional trade agreements.
Markets Expanding In Southeast Asia
The economies of Southeast Asia have been among the world's fastest growing during the 1990's, emerging as key markets for a wide range of U.S. agricultural commodities. Imports from the U.S. reached a record of almost $3.3 billion in 1996. Underlying the increase are new consumption patterns accompanying economic growth and urbanization; climatic and land resource constraints on the region's agricultural sectors; expansion of textile and leather product manufacturing; and import policy changes. Long-term agricultural import patterns in Southeast Asia provide a wide range of opportunities for U.S. exporters of products made from temperate-climate crops such as wheat, corn, soybeans, and apples.
NIS And Baltics As WTO Candidates
The Baltic countries and 10 of the 12 Newly Independent States (NIS) of the former Soviet Union have begun the application process to join the World Trade Organization. Since these countries are high-cost producers of agricultural goods, particularly livestock and other high-value products, U.S. agriculture could benefit from their accession through increased exports. More generally, the main benefit both to the acceding countries and to their trade partners would be to restrain growing protectionist pressure which, if unchecked, could impede growth in NIS and Baltic trade. Before accession, several problematic issues must be addressed–e.g., state trading activities, food safety and product standards, and the level of domestic support to the farm sector.
State Trading Enterprises: Their Role As Importers
For many countries, the creation of a central agency, or state trading enterprise (STE), to handle domestic procurement and to plan import needs is perceived as essential to the achievement of government policies such as assurance of abundant, low-cost food supplies and stable farm prices. Such import-oriented STE's often have considerable power to control access to domestic markets.
WTO member-countries committed in the Uruguay Round to increase access for imported commodities and to reduce support for agricultural producers. However, trading partners have expressed concern that lack of transparency in the operations of STE importers makes it difficult to determine whether STE importers actually restrict trade and the extent to which they subsidize domestic agricultural producers. STE's in Indonesia, Japan, South Korea, and Mexico–all countries whose governments control imports of important staple commodities–are among the largest enterprises that can be classed as STE importers. State trading practices will become increasingly important as countries with centrally planned economies or countries in the process of privatizing their agricultural production and marketing apply for membership in the WTO.
Overview: Major U.S. Field Crops
Weather conditions have been mixed this year for the major U.S. field crops as harvests near completion. A record crop is forecast for soybeans in 1997, and the third-highest output on record is expected for corn. U.S. wheat production is forecast to be the highest in 7 years–the hard red winter production region has recovered dramatically from the 1995-96 drought, rebounding from the low yields of the past 2 years and producing a record crop in Kansas. Rice production is also forecast to be higher in 1997, on the strength of a 13-percent jump in planted acreage.
With good harvests expected, season-average prices for wheat and soybeans are expected to drop significantly from last year. However, corn and rice prices are forecast to remain relatively firm in 1997/98 due to strong domestic and export demand.
Cotton production is forecast to be lower in 1997, as some acreage was diverted to soybeans, but output would still be the fourth-largest on record.
U.S. farmers are forecast to harvest a record soybean crop in 1997, with production up 14 percent from last year. Extremely high soybean prices during the spring months triggered a 10-percent increase in seedings, resulting in the largest planted area of soybeans since 1982 and the third highest on record. In addition, timely rains during August in several midwestern states improved potential yields and helped to speed crop development.
Total soybean use is forecast up for 1997/98, as crushings are driven higher by near-record domestic use and exports of soybean meal. In addition, soybean exports are forecast record high in 1997/98 with a rapid pace of sales to China, the European Union, and Brazil. But with the largest U.S. soybean harvest in history and abundant international supplies anticipated, the U.S. season-average farm price is forecast down sharply to $5.75-$6.85 per bushel, from $7.38 in 1996/97.
U.S. corn production for 1997 is forecast up slightly from last year at 9.31 million bushels, despite the highest planted corn acreage since 1985. After a very promising start to the season, crop conditions generally deteriorated from early July through the middle of August due to widespread dryness across the Corn Belt. Nevertheless, the 1997 corn crop is forecast to be the third largest ever.
Forecast total use in 1997/98 is up sharply from 1996/97. U.S. corn exports are expected to be 13 percent greater in 1997/98 as reduced competitor supplies–particularly in Argentina, South Africa, and China–lessen competition in international markets. Lower domestic feed grain prices have also boosted U.S. corn usage in 1997/98. Season-average farm prices for corn are forecast at $2.55-$2.95 per bushel, compared with $2.70 in 1996/97 and a record $3.24 in 1995/96.
The 1997 U.S. wheat crop is forecast 11 percent above last year and the largest in 7 years. Much of this increase resulted from a strong recovery in hard red winter wheat production in the Southern and Central Plains. Yields in Kansas, Oklahoma, and Texas had been severely reduced the past 2 years because of prolonged dry conditions during critical growing periods and large areas of winterkill.
U.S. wheat exports are forecast slightly higher for 1997/98, due to production declines for several export competitors. But most of the increase in U.S. wheat production is forecast to build 1997/98 ending stocks, rising by 50 percent over 1996/97. As a result, 1997/98 U.S. farm prices are projected lower at $3.30-$3.70 per bushel, compared with $4.30 in 1996/97.
Winter wheat planting for the 1998/99 crop year is currently underway in the Southern and Central Plains. Conditions are presently favorable because of abundant soil moisture in both Kansas and Oklahoma. The first USDA forecast of winter wheat seedings will be released on January 10, 1998.
Cotton production is forecast to decline 3 percent in 1997 as acreage reductions occurred in Louisiana, Mississippi, and Tennessee. Higher prices of soybeans relative to cotton at planting time encouraged greater soybean area, largely at the expense of cotton. Despite lower acreage this year, 1997 is forecast to be the fourth-largest cotton harvest on record as crop conditions have improved continually through the growing season.
Slightly stronger domestic mill use and exports are forecast for 1997/98, resulting in a moderate buildup in projected ending stocks. The pace of cotton export sales to several major buyers to date, including Mexico, Japan, and South Korea, has been strong.
Growing U.S. Supplies, Uncertain Export
Outlook Pressuring Meat Prices
Increasing U.S. supplies of meats–both seasonal and year-over-year–are pressuring prices of pork and broilers downward this fall. At the same time, meats continue to trade under the shadow of uncertain domestic and international demand. Hog and broiler prices have been hit hardest by a combination of expected large production increases (6-9 percent) in 1998 and current exports falling below early expectations, especially for pork. Although the recent cattle herd liquidation is expected to lead to a fall of about 2 percent for beef production in 1998, beef prices will be pressured by lower prices for pork and chicken.
U.S. hog prices fell over $10 per cwt over the last 3 months, from the high $50's per cwt in July to the mid-$40's in October. During the same period, broiler prices dropped close to 10 cents per pound, from the mid-60's to the mid- 50 cents. Choice steer prices remain steady in the mid-$60's per cwt. In the final quarter of 1997, hog prices are expected to remain in the mid-$40's, and broiler prices are expected to recover slightly but remain in the mid-50-cent range, while Choice steers move up slightly into the high $60's per cwt.
High-value wholesale broiler and pork cut prices also declined sharply from July to early October. Chicken breast meat prices dropped from 99 cents to 74 cents per pound, and whole pork loin prices declined from $123 per cwt to around $100. These lower prices will make chicken breasts and pork chops more attractive for retail featuring than the more expensive choice beef cuts, limiting the competitive position of choice beef.
Despite recent price pressure, hog and broiler producers' returns have been relatively favorable this year, and since feed costs in 1998 are expected to be somewhat lower than this year, expectations are for continued expansion in both industries. The September Hogs and Pigs report confirms the June report that producers are planning to increase the number of sows farrowing in the coming months–farrowing intentions for September 1997-February 1998 are up 7 percent over actual farrowings a year ago. On September 1, the broiler hatchery supply flock was 5 percent higher than a year ago, which would support a large increase in production.
In contrast, beef cow numbers were down 3 percent as of July 1, predicting a smaller 1997 calf crop than in 1996. A smaller number of calves will tighten feeder cattle supplies in the coming year, reducing the number of cattle placed on feed and ultimately the supply of U.S. beef.
Slower-than- expected increases in export sales of broilers and pork have influenced the recent weakening of prices. Although broiler exports in 1997 are expected to grow about 5 percent, they are well below the double-digit growth forecast earlier this year and witnessed over the past several years.
USDA has lowered its forecast for U.S. pork exports for 1997 and 1998, due largely to weaker Japanese import demand than anticipated. The U.S. is expected to export a total of 1.064 billion pounds of pork in 1997, down 22 percent from the April forecast following the foot-and-mouth disease (FMD) outbreak in Taiwan in March. Exports in 1998 are expected to be 1.15 billion pounds, down 27 percent from the initial May forecast.
Higher pork prices this year in Japan and the U.S., particularly since the FMD outbreak, have reduced Japanese pork consumption and limited U.S. exports to Japan. The Japanese government even took the unusual step of waiving the 4.7-percent tariff on pork imports for the month of August to increase available pork supplies and moderate high domestic prices. U.S. pork has also faced increased competition for the Japanese import market; Canada and South Korea, in particular, have been aggressively marketing pork to Japan since last spring.
Additional difficult-to-measure factors may be moderating demand for U.S. pork in Japan. Food safety concerns may have caused a shift in demand away from imported products. It is difficult to determine whether reluctance to consume imported meat products indicates a permanent shift in Japanese consumer preferences, or whether consumers will resume more normal consumption patterns as E. coli outbreaks decline and animal disease problems such as BSE and FMD come under control.
Japanese pork demand may also be affected by consumer responses to differences in appearance and taste between U.S. and Asian pork. Pork produced in Taiwan, for example, is darker in color, sweeter in taste, and somewhat tougher in texture than U.S. pork. The absence of the anticipated surge in Japanese demand for U.S. pork products since the FMD outbreak in Taiwan, could be a signal that Japanese consumers view U.S. pork as a distinct product rather than a substitute for pork produced in Taiwan or Japan. Macroeconomic factors in Japan–continued slow income growth, an increase in the consumption tax in the second quarter, and a continued appreciation of the U.S. Dollar relative to the yen–are also likely slowing demand for U.S. pork.
While forecasts for exports to Japan have moderated, U.S. shipments to Canada, Mexico, and South Korea have increased so far in 1997 and are expected to continue to rise into 1998. U.S. pork exports have filled the gap created in the Canadian market by exports of Canadian hogs to the U.S. and by concerted efforts by Canadian packers to increase market share in Japan. Exports of Canadian hogs to the U.S. are expected to moderate in 1998, however, as Canadian packers bid more aggressively for hogs to fill new, lower cost packing capacity and continue their efforts to service the growing export market in Japan.
Mexican economic growth has translated into a 38-percent increase in imports of U.S. pork, and first-half 1997 U.S. pork imports by South Korea are 40 percent greater than in 1996. Continued growth in U.S. exports to Korea is expected, following Korea's July 1 liberalization of its frozen pork import market structure in accordance with WTO commitments.
What Determines U.S. And EU Trade Market Shares?
A common perception is that the European Union (EU) has become an important export supplier of agricultural commodities solely because of the Common Agricultural Policy (CAP) that provides large subsidies for European farmers. However, policies affecting supply are only part of the equation affecting aggregate market share. Shifts in the composition of world demand for agricultural goods can also alter the relative importance of the U.S., the EU, and other agricultural supplying nations.
Income growth, technological change, and the lowering of trade barriers have increased worldwide trade in consumer-oriented processed products, especially since the early 1980's. Trade of fresh produce and chilled meat among developed countries has also sharply accelerated, because of greater efficiencies in transportation. Increased competition in the shipping industry and improvements in container technology permit perishables to be transferred seamlessly across road, rail, and water. Expanding imports of higher valued agricultural products by the newly industrializing countries have outpaced expansion of wheat, rice, and other bulk-commodity imports. This changing commodity mix of global agricultural trade has affected the market shares of both the U.S. and the EU.
Aggregate market shares of the U.S. and EU are weighted averages of market shares in all foreign commodity markets. The weights are a country's share of the world market for a specific commodity. Changes in the importance in world trade of bulk commodities (unmilled grains and oilseeds), intermediate products (feed, flour, and refined sugar), horticultural and fresh produce (fruits, vegetables, and flowers), and consumer-ready processed products (grain-based foods, meat, and beverages) help explain changes in U.S. and EU market shares.
The longrun share of bulk commodities in world agricultural trade has, with the exception of an interlude during the 1970's, steadily declined, and the share of consumer-ready processed products has increased. In contrast, the relative importance of intermediate agricultural commodities did not change appreciably throughout the 1962-94 period.
The U.S. is the world's principal supplier of wheat, corn, and soybeans. Bulk commodity exports comprised about 60 percent of total U.S. agricultural shipments between 1962 and 1994. In the early 1970's, the Soviet Union shifted away from a policy of self-sufficiency and began importing grain. In the same period, floods ravaged South Asia, and droughts plagued Sub-Saharan Africa. As a result, the relative importance of bulk commodities in world trade increased, and total U.S. agricultural market share soared. Between 1970 and 1981, the U.S. market share jumped nearly 7 percentage points, and 82 percent of the gain was from bulk commodities. In contrast, bulk commodities contributed only 20 percent to the 5-percentage-point rise in the EU agricultural market share during this period.
U.S. market share reached a high of 25 percent in 1981, then fell precipitously, dropping more than 7 percentage points to just under 18 percent by 1986. Part of the U.S. market-share decline was due to the global recession and debt- repayment problems which hampered many developing countries' ability to pay for bulk-commodity imports. As aggregate EU market share was climbing, U.S. market share declined because the structure of world agricultural trade moved away from bulk commodities.
Consumer-ready processed products are a significant and growing component in EU agriculture. Exports from this sector comprised 45 percent of total EU agricultural exports as early as 1962. Mirroring global trade, the composition of EU agricultural exports has moved toward more consumer-ready processed products. By 1994, these products comprised 55 percent of total EU agricultural exports. Much of the increases in the aggregate EU market share can be explained by shifts in world agricultural trade toward more consumer-ready processed products, goods in which the EU had retained higher market shares than for the bulk commodities.
The growing importance in world trade of consumer-ready processed products as well as horticultural and fresh produce accelerated between 1986 and 1994. Collectively, these two consumer-oriented product sectors contributed more than 3 percentage points to U.S. market share during this period. The U.S. also increased its shares in most bulk-commodity markets at this time, but this improved performance did not translate into a higher U.S. aggregate share for agricultural exports because the importance of bulk commodities continued to decline in global trade.
Market distortions, induced by policies such as the CAP, affect the individual commodity market shares of the U.S. and the EU. However, the changing mix of demand for commodities also influences aggregate shares. Changes in aggregate market share of the U.S. and the EU reflect not only shifts in performance in individual commodity and product markets but also shifts in the structure of world agricultural trade.
Fast-Track Authority: Implications For U.S. Agriculture
A global proliferation of trade agreements is having an increasing impact on U.S. and world trade patterns. In the past decade, the U.S. negotiated 20 multilateral, 2 plurilateral, and over 180 bilateral trade agreements. Of these, one-fourth directly affect U.S. agricultural interests. The effects range from multilateral reductions in trade distortions such as export subsidies, import tariffs, and domestic support, to increased U.S. access to a specific foreign market for a specific product–e.g., beef in Japan.
U.S. agriculture is increasingly linked to the rest of the world. Production is growing more rapidly than domestic consumption, and the value of U.S. products sold to foreign markets has risen three times as fast as domestic sales. Increasing access to foreign markets, through reductions in foreign trade barriers and trade-distorting policies, will be essential for a profitable and growing agricultural sector. Comprehensively addressing remaining agricultural trade issues will require multilateral and regional negotiations addressing non- tariff trade barriers and related regulatory matters (e.g., sanitary and phytosanitary restrictions, agricultural subsidies, antidumping and countervailing duties, and government procurement or supply management). U.S. ability to credibly and effectively negotiate such treaties will require some form of “fast track authority.”
Fast-track authority explicitly enables the President to submit a trade agreement with implementing legislation for congressional approval under special, expedited procedures. Congress retains the right of final approval of the agreement and of the implementing legislation that makes necessary changes in Federal laws or regulatory statues.
Under past fast-track procedures, the President could submit to Congress the text of a trade agreement with one or more foreign nations, along with draft implementing legislation to make any “necessary and appropriate” changes in U.S. laws. Congress then had a maximum of 60 legislative days (90 for legislation involving revenue) to approve or disapprove the complete package, with no amendments permitted. The most recent fast-track authority expired 3 years ago after approval of implementing legislation for the Uruguay Round agreements.
Fast track is intended to strengthen the President's negotiating authority and credibility by reassuring foreign trading partners that implementation of agreements will be considered expeditiously by Congress and not be subjected to changes that would force a return to the bargaining table. The negotiators of most other nations have the authority to make binding commitments for their countries.
In the past, fast-track authority has stipulated general and specific negotiating objectives for the U.S. and included such requirements as advance notification of Congress and advance consultations with relevant House and Senate committees before an agreement could be concluded. Lawmakers, in effect, used these consultative requirements as informal legislative markups to address, in advance, the various policy issues that otherwise might be debated during enactment of the implementing legislation.
Not all U.S. initiatives to reduce trade distortions and gain increased access to foreign markets require fast-track authority. The President can negotiate, without prior congressional approval, executive agreements with foreign nations, although Congress must be notified of the intent. Congress has also granted authority, through legislation, to the Secretary of Agriculture to ensure U.S. food safety, including negotiating with foreign governments the rules governing inspections of agricultural products and processing procedures.
The Office of U.S. Trade Representative (USTR) also has authority to pursue unfair trade practices and remedies and to enter into trade agreements that will benefit U.S. trade, although any agreements requiring changes in Federal law require congressional approval. The Secretary of Agriculture and USTR have effectively used their authorities to negotiate trade agreements involving food safety and the removal of unfair barriers in specific foreign markets.
Farm trade initiatives negotiated bilaterally by the U.S. that did not require changes in Federal law have achieved significant trade gains by enhancing market access through reductions in both tariff and non-tariff barriers. Estimated U.S. net farm export gains from eight such agreements implemented in the early 1990's amounted to about $3.3 billion. The U.S. can continue without fast-track authority to negotiate directly with trading partners to lower specific high tariff and/or technical barriers remaining after the Uruguay Round, but is limited in the range of concessions it can make.
However, extensive trade agreements requiring changes in Federal law have to be submitted to Congress for approval. Without fast-track authority, such legislation would be subject to the normal uncertainties of the legislative process. The agreement or implementing bill might not come to a vote at all, or would be subject to committee and floor amendments that might be inconsistent with the agreement's provisions and significantly delay action.
Potential Uses For New Fast Track Authority
The fast-track process was first adopted in the Trade Act of 1974 and has been used to enact bills to implement a number of trade agreements, beginning with the Tokyo Round in 1979. Implementing legislation for the U.S.-Israel Free-Trade Area Agreement (1985), the U.S.-Canada Free-Trade Agreement (1988), and the North American Free Trade Agreement (1993) were all enacted under fast-track procedures. The most recent use of fast-track authority was the Uruguay Round Agreements Act (1994) which provided implementing legislation for a package of 54 multilateral and plurilateral agreements, understandings, and ministerial decisions and declarations.
A new fast-track authority with more limited negotiating objectives would focus on broad World Trade Organization (WTO) issues remaining after the Uruguay Round: tariff reductions, market access, export subsidies, and domestic support. A new fast-track authority would also extend to regional trade agreements and issues such as state trading, sanitary and phytosanitary barriers, and technical barriers to trade. In addition, some groups advocate incorporating environmental and labor concerns that may affect competitiveness in trade.
The Uruguay Round's (UR) Agreement on Agriculture requires that negotiations for continuing the reform process be initiated 1 year before the end of the implementation period (1995-2000). A new round of WTO agriculture negotiations is scheduled to begin in late 1999. The agenda will most likely cover issues defined in the Agreement on Agriculture, particularly those relating to market access, domestic support, and export competition. In addition, new issues have surfaced with implementation of the Agreement on Agriculture, such as tariff-rate quotas used by importing countries to administer their market access commitments. Other issues not directly addressed by the Agreement on Agriculture, including the use of state trading enterprises and technical barriers to trade, may be added to the negotiating agenda.
Chile and the U.S. began negotiations for Chile's accession to the North America Free Trade Agreement (NAFTA) in 1995, but talks were suspended, in part because Chile wanted the U.S. to renew fast-track authority before discussing what it views as sensitive issues. Meanwhile, Chile has negotiated its own trade agreements with several other individual countries, including Canada and Mexico, and with the Common Market of the South (MERCOSUR). As a result, U.S. food and agricultural products headed for Chile face tariffs 11 percent higher than those encountered by MERCOSUR countries (Argentina, Brazil, Paraguay, Uruguay). Although Chile is not a major U.S. trading partner, its accession to NAFTA is considered a significant step toward broader economic integration in the Western Hemisphere.
Formal negotiations among 34 Western Hemisphere nations for a Free Trade Area of the Americas (FTAA) are to begin in 1998. Already more than 30 bilateral and regional trade agreements are operating in the Western Hemisphere, and the U.S. is party to only one–NAFTA. At the same time, the European Union is discussing a trade agreement with MERCOSUR, and Japan and China are sending trade delegations to MERCOSUR countries. With the spread of preferential agreements that exclude the U.S., competition in these markets will become more difficult for U.S. exporters.
Many of the Asia and Pacific Rim countries that are experiencing the most rapid growth in incomes and consumer demand for U.S. food and farm products belong, with the U.S., to the Asia-Pacific Economic Cooperation forum (APEC). APEC is seeking to establish free trade and investment arrangements by 2010 among members with industrialized economies and by 2020 among those with developing economies.
Such an agreement could have a significant influence on U.S. trade, since it could reduce trade barriers for many U.S. products sold to the fastest growing markets in the world. A general commitment to a comprehensive agreement means that agriculture would be included as a key element. Other alliances in the region, notably the Association of Southeast Asian Nations (ASEAN), also have agendas for trade liberalization in which the U.S. and its agricultural community will have a major stake.
In the past, fast-track authority has been limited to international agreements focused on trade and trade policies. Some interest groups would like fast- track authority to allow inclusion of labor and environmental standards in trade agreements. These groups argue that unfair labor practices or lax environmental standards in other countries would give them a competitive advantage over the U.S. Potential economic gains from trade agreements could then be outweighed by the prospect of U.S. capital and jobs being exported to countries where labor standards and environmental requirements are weaker. Conversely, opponents of including such issues under fast-track authority argue that fast track might be used to force new labor and environmental regulations for the U.S. through Congress, or to erect unfair barriers to imports from developing countries.
Trade agreements may not be the most effective way to remedy most environmental problems, since they are designed to reform trade policies, not to provide disincentives to pollute. International agreements focused on the environment are the preferred, although often more difficult, method of achieving gains in international or transboundary environmental goals.
The Unfinished Business Of Trade Liberalization
Export markets are critical to U.S. farm prices and farmers' prosperity. Domestic production is increasing more rapidly than consumption, with U.S. agricultural exports growing three times as fast as domestic demand for food. Agricultural exports have risen from 18 percent of gross farm cash receipts in 1986 to 30 percent in 1996, and the share is expected to increase in the future.
With an efficient agricultural sector, abundant natural resources, and an excellent physical and institutional marketing infrastructure, most of U.S. agriculture can effectively compete in a liberalized world trade environment. But trade liberalization for agriculture is far from complete. U.S. producers, processors, and exporters continue to face tariff and non-tariff barriers, unfair trading practices, and preferential trading arrangements in key markets around the world.
Preferential trade agreements like MERCOSUR in South America, ASEAN in Asia, and the Canada-Chile trade agreement provide members preferential access to each other's markets for a broad range of agricultural products. Without similar access, U.S. producers and suppliers face constrained sales opportunities in some of the world's most dynamic regional markets.
State trading enterprises in some of the world's major trading nations monopolize sales or purchases, creating unfair competition or restricting U.S. access to their large markets. In a number of countries, agricultural products face high import tariffs, low tariff-rate quotas, and/or state trading agencies that resell at high markups. Agricultural products also face sanitary and phytosanitary barriers based on questionable scientific standards.
Successful efforts to open international markets will contribute to sustaining export growth. Such efforts include negotiation of trade agreements that reduce tariffs, address technical barriers to trade such as sanitary and phytosanitary issues, curtail the use of trade- distorting domestic and export subsidies, and generally provide a more transparent world market. Export growth advanced by further liberalization of agricultural trade will also benefit off-farm income earners, taxpayers, and consumers. U.S. agricultural exports generate close to a million jobs, many of them off the farm. Reduced U.S. subsidies for exports would lower tax burdens. Finally, consumers will benefit from a wider variety of available products and the stimulation of general economic growth.
Despite significant progress in opening markets over the past several years, agriculture remains one of the most protected and subsidized sectors of the world economy. Because U.S. agricultural producers are among the most competitive in the world, trade distortions in agriculture that limit access to markets are a particularly pressing issue for the U.S. Although bilateral trade agreements and trade disputes pursued under a WTO framework by the U.S. government will remain important means of opening foreign markets, multilateral negotiations through the WTO process are necessary to comprehensively address issues such as high tariffs, trade- distorting subsidies, and other non-tariff trade barriers.
If the U.S. leaves it to other nations to form new trade pacts and write future rules for trade, U.S. producers, processors, and exporters could be at a major disadvantage in the competitive marketplace of the 21st century. For the U.S. to continue to play a major role in writing the rules of international agricultural trade, it will need to participate in these negotiations. Fast-track authority would increase the effectiveness, efficiency, and speed of such negotiations.
Agricultural Trade Issues For Future Negotiations
High Tariffs: High tariffs in importing countries impede trade by reducing the ability of lower cost producers in exporting nations to compete. In some cases, tariffs are high enough to completely shut exporters out of markets. The Uruguay Round Agreement on Agriculture generally required governments to convert non-tariff barriers to tariffs, but lacked strong guidelines for establishing the tariff rates. Many countries set tariffs at very high or prohibitive levels. Further reductions in tariff rates will increase market access for U.S. goods.
Tariff- Rate Quotas (TRQ's): To administer market access commitments made during the UR's Agreement on Agriculture, many countries have established TRQ's, which allow specific quantities of products to be imported at zero or low tariff rates. But there are a variety of ways to allocate quotas, some more trade distorting than others, and the WTO guidelines are not precise. Small quota quantities and high duties for out-of-quota amounts–quantities above the quota limits–effectively cap U.S. exports, and restrictive methods of administering TRQ's also impede trade. Renewed multilateral trade negotiations could increase TRQ's to allow greater imports and could establish rules that ensure TRQ's will be administered in a more transparent, predictable manner.
Export Subsidies: Efficient producers do not require export subsidies to compete as long as other countries are not driving them out of markets with subsidized products. Further reductions in export subsidies will likely be a focus of the next round of negotiations.
Domestic Support: Domestic policies that encourage production of specific commodities distort trade. Policies that indirectly support agricultural producers, such as disaster relief, selected environmental programs, and regional and rural development programs, can also distort production and trade. The trade agreement disciplines on output-enhancing producer subsidies are likely to be controversial in future negotiations.
State Trading: State trading enterprises (STE's) in some of the world's major trading countries monopolize purchases or sales. The activities of importing or exporting STE's lack transparency and can be used to disguise protection or support. More rigorous disciplines could be imposed on the activities of STE's in future negotiations.
Sanitary And Phytosanitary (SPS) Barriers: SPS impediments to imports that are not based on sound science and risk assessments can result in protectionism disguised as concerns for public health. SPS measures are increasingly being used as barriers to trade. Further trade negotiations could increase the transparency of SPS rules and clarify the standard for scientific justifications underlying those rules.
Regional Trade Agreements: Preferential trade agreements among other countries that exclude the U.S. represent a growing threat to U.S. export prospects. MERCOSUR is increasing its presence in Western Hemisphere trade, ASEAN in Asian trade, and an expanded European Union in European trade. Chile has signed trade agreements with a number of countries. Regional trade agreements generally provide preferential access for members' exports, making it more difficult for U.S. products to compete in these markets.
Southeast Asian Agricultural Imports From The U.S.
The economies of Southeast Asia are among the fastest growing in the world in the 1990's, emerging as key markets for a wide range of U.S. agricultural commodities. Imports from the U.S. totaled a record of almost $3.3 billion in 1996.
Together the Philippines, Indonesia, Thailand, and Malaysia–the largest markets in the region–increased imports of U.S. agricultural products at an annual rate of 17 percent from 1990 to 1996, and this growth accounted for 10 percent of the expansion of U.S. agricultural exports over this period. The Philippines and Indonesia are the largest U.S. markets among the four countries, but Malaysia has been growing the fastest.
Southeast Asia emerged in the 1990's as a market for U.S. agricultural exports, despite its substantial agricultural sector. The region remains a strong producer and exporter of tropical products, but has become an importer of commodities grown in temperate climates, such as wheat, corn, soybeans, and apples. A variety of factors–principally rapid economic growth–have driven the demand for U.S. agricultural products. However, the recent currency devaluations in the region, which sharply boost import prices, are likely to curtail import growth in the short run.
Rising Incomes Create Trade Opportunities
Long-term economic forces have led to a sharp increase in U.S. agricultural exports to Southeast Asia. Underlying the increase are the effects of economic growth and urbanization on consumption patterns; climatic and land resource constraints on the region's agricultural sectors; expansion of textile and leather product manufacturing drawing on the region's low-cost labor; and import policy changes.
Since 1990, income growth as measured by gross domestic product rose 6.8 percent annually in Southeast Asia, and most of this growth was concentrated in urban centers. Rising incomes and urbanization explain much of the import consumption increases occurring in Southeast Asia. Higher incomes allow for consumption of more expensive foods such as meat and fruit products.
From 1984 to 1994, meat consumption increased more than 4 percent annually, compared with an annual increase of less than 1 percent in cereal consumption. Also, wealthier households purchase more processed foods, such as instant noodles and bread made from wheat, to save time spent in food preparation. Finally, urban residents have easier access than rural residents to a wider variety of food choices, including imported items.
Changes in the population's consumption patterns are outpacing the capacity of domestic agricultural producers. Land resources of the region are best suited for tropical crops. Thailand is a significant producer and exporter of rice, cassava, sugar, poultry meat, and rubber. Malaysia and Indonesia are large producers and exporters of palm oil. The Philippines produces and exports coconut oil and sugar.
To meet the demands of rising meat consumption, more corn and soybean imports are needed to supply the feed requirements for expanding livestock sectors. Although corn and soybeans are grown in Southeast Asia, yields are low compared with temperate climate standards because suitable varieties have not been developed for tropical environments. Consequently, output expansion tied to rising yields will be limited.
Converting forest land to agricultural use is one possibility for output expansion. Land conversion in the 1980's was an important factor in the expansion of agricultural output as more than 12 million hectares (about 30 million acres) were converted to agricultural production. But environmental constraints and the rising cost of new land development have slowed expansion. In Thailand, in particular, extensive clearing of upland areas for growing corn for export has led to severe erosion and flooding problems.
The largest country in the region, Indonesia, still has large areas in tropical forests, and large-scale projects are planned to convert more forest land to field crop and tree crop production. One particularly large project involves converting 1 million hectares of forests to crop production on the island of Kalimantan. The peat soils of the area, however, will slow the conversion process because these soils are not very fertile, cannot hold moisture easily, and tend to subside.
Besides constraints on expanding production, domestic supplies of several key agricultural inputs for manufacturing are also limited, thereby heightening the role of imports. As high wages in East Asia reduced the competitiveness of their clothing and leather goods industries, these labor-intensive manufacturing operations shifted to lower-wage Southeast Asia and China. With this shift, Southeast Asian imports of U.S. cotton and cattle hides increased sharply over the last decade, especially for Thailand and Indonesia. Cotton is not a competitive crop in tropical climates, and domestic supplies of cattle hides are generally of low quality from old draft animals whose hides have been damaged over a long life or through inappropriate slaughtering practices.
The region's policy regimes affecting imports vary, but generalizations can be made across three broad categories of imported items; staple foods, intermediate inputs for manufacturing, and consumer products. Southeast Asian governments have typically protected their domestic producers of staple foods–particularly rice and soybeans–and have sometimes controlled the import of wheat, an increasingly important foodstuff. The import of intermediate inputs–feedstuffs, cotton, and cattle hides–is generally less regulated than staple foods. The import of consumer products, particularly livestock products, is highly regulated and/or taxed to protect domestic production.
Trade And Consumption Begin To Shift
Rice is the region's traditional staple food. But with diet diversification, the substitution of other foodstuffs for rice is leading to changes in import patterns. Wheat imports are rising as bread and noodle consumption increases. Feedstuff imports are expanding to produce the needed livestock products for increased consumption of meats. Horticultural imports are up as higher incomes–and sometimes lower import tariffs–make these consumer items affordable to a wider range of consumers.
Staple Foods: Most Southeast Asian countries have traditionally placed a high value on self-sufficiency in rice. However, these countries have been significant importers during periods of unexpected production shortfalls. For example, poor weather conditions forced Indonesia to import 3 million tons of rice in 1995, more than three times the level of imports in 1994. While these imports made the country the world's largest rice importer, they were still only 9 percent of its total rice consumption. Droughts caused by the current El Nino may result in larger-than-normal rice imports by both Indonesia and the Philippines. When rice imports are needed, these countries use their government-controlled state trading enterprises to limit imports to target levels.
Wheat-based products are an increasing part of Southeast Asian diets. In the Philippines, Indonesia, Thailand, and Malaysia, wheat's share of total wheat and rice consumption has increased from 12 to 19 percent over the past decade. The region's consumption pattern of wheat has also changed. Demand for wheat-based oriental noodles has rapidly increased. For example, in Indonesia, the largest wheat importer in Southeast Asia, consumption of noodles as a share of wheat consumption has doubled to 55 percent in the past decade.
For the region as a whole, oriental noodles now account for about 42 percent of wheat use. The increasing consumption of oriental noodles is noteworthy because Australia's white wheat is often favored over U.S. hard red wheat for certain popular types of oriental noodles–particularly in Thailand and Malaysia, where the U.S. share of the wheat market is relatively small.
Soybean products are an important source of protein for people in Southeast Asia, particularly in Indonesia. The tendency has been for governments to protect their domestic soybean producers from lower cost producers outside the region by restricting imports and assessing import duties. But as the region's livestock sector expands, these policies are coming under increasing challenges from local feed manufacturers and livestock producers looking for cheaper feedstuffs to fuel rapid development.
Feedstuffs: Corn is important as both foodstuff and feedstuff in Southeast Asia. However, the region's trade in corn is related primarily to feed use. Across the region, food use is becoming a smaller proportion of use as livestock industries expand rapidly.
The value of livestock amounted to only 15 percent of total agricultural output in Southeast Asia in the late 1970's and 1980's. Growth in livestock output began outpacing crops in 1990, achieving a 20- percent share by 1995. Although the region's domestic corn production will increase, it is not expected to keep pace with the rapidly expanding livestock sector, a trend sharply reinforced when Thailand–the region's only major corn exporter–recently switched from exporter to importer of corn.
To ensure adequate feedstuff supplies, these countries are expected to give their feed manufacturers easier access to low-cost imported corn and soybean meal. For example, to reduce feedstuff costs, Indonesia deregulated soybean meal imports in 1996. BULOG, the country's state trading enterprise, no longer controls the import of meal, and feed manufacturers can directly import soybean meal as needed. Thailand replaced its system of approving corn and soybean meal imports on a case-by-case basis with a tariff-rate quota system in early 1997.
U.S. exporters are sometimes at a disadvantage in supplying feedstuffs in the region because U.S. exporters use larger ships than some of the region's ports can handle. Chinese corn exports, for example, are transported in smaller ships more suitable for such ports.
Consumer Products: The leading horticultural exports to the region are apples, grapes, frozen potatoes (french fries), and citrus. Markets for these temperate climate products have grown rapidly as trade barriers and tariffs have been reduced. For example, fruit imports by Indonesia, with the lowest average income of the four countries, have grown rapidly since limits on fruit imports ended in 1991. Tariffs have been cut twice and U.S. fresh fruit exports to Indonesia have increased more than twenty-fold from 1990 to 1996.
Temperate-climate product imports by these tropical countries are likely to continue to expand as incomes rise. Imports of frozen french fries should continue to grow with the expansion of western-style fast-food restaurants. Although potatoes are an important crop in Southeast Asia, many Asian consumers prefer the characteristics of U.S. french fries.
U.S. meat exports to Asia have expanded rapidly, but not to Southeast Asia. Import markets for U.S. meats in Southeast Asia are limited mostly to hotel and restaurant sectors, partly because of government policies that restrict meat imports for other domestic uses. Indonesia, the Philippines, and Thailand regulate meat imports through trade restrictions and licensing, and Malaysia licenses importers.
In addition to these policy barriers to trade, the lack of refrigeration infrastructure often limits the import of perishable products, such as fresh fruit and meats. Without refrigeration, it is difficult to transport perishable products inland from ports without excessive spoilage.
Long-term agricultural import patterns in Southeast Asia have provided a wide range of opportunities for U.S. exporters of products made from temperate-climate crops. The currency crisis in Southeast Asia will slow import growth, particularly for consumer products, in these countries for the near term. But the devalued currencies could boost the competitiveness of Southeast Asian textile and leather exports, resulting in increased demand for cotton and cattle hides. Once the region's economies stabilize, more trade opportunities will develop as consumption patterns continue to evolve with rising incomes, increasing urbanization, and changing trade policies.
Southeast Asia's Currency Crisis
Since July of this year, the countries of Southeast Asia have been the focus of the world's financial markets. Country after country in the region has been forced to devalue its currency, lowering estimates of economic growth in the near term. The disarray in the financial markets has also dimmed U.S. export prospects to the region for the near term.
Economic growth in Thailand, Indonesia, Malaysia, and the Philippines has been fueled by export expansion, largely of processed agricultural products and nonagricultural products. The principal markets for these exports have been the U.S., Japan, and Western Europe. Many of these export products are from facilities financed by foreign investors taking advantage of low-cost labor. Malaysia, Indonesia, and Thailand have been among the top 12 recipients of foreign direct investment among developing countries since the 1970's.
Most Southeast Asian countries had pegged their currencies to the U.S. dollar. When the dollar dropped relative to the yen in the 1980's, Japanese investments, in particular, flowed in and cheap exports flowed out. Southeast Asian countries' policies of linking their currencies to the U.S. Dollar partially underlies the financial crisis that has swept through the region since July of this year. As the dollar gained in exchange value against the yen and European currencies, Southeast Asia lost export competitiveness over the past year.
The exchange rates of these countries are now floating after large devaluations against the U.S. Dollar. The currencies of Thailand, Indonesia, Malaysia, and the Philippines (as of mid-October) had dropped 31, 33, 23, and 22 percent since early July. This crisis is still unfolding, and its consequences for Southeast Asian national economies are uncertain.
Regional Agricultural Profile
Agriculture is still a key sector in the economies of Southeast Asia. In Indonesia, the Philippines, and Thailand, rice and corn account for 50-60 percent of the area harvested. Malaysia's crop production is dominated by two tropical tree crops–oil palm and rubber. Tropical tree crops are also important in Indonesia (coconut, rubber, oil palm), Thailand (rubber), and the Philippines (coconut). Rice is the principal staple food in all the countries, with corn, cassava, and soybeans having minor roles, except in the Philippines and Indonesia where these three crops have been important foodstuffs since colonial times.
Corn has been grown primarily as livestock feed in Thailand, and now increasingly for feed in the Philippines and Indonesia. Corn supplies livestock sectors dominated by poultry and swine. Poultry is the largest livestock sector everywhere, except for the Philippines where swine are dominant. Livestock in the region is produced to supply domestic demand, except in Thailand, which is a major exporter of poultry meat. For the region as a whole, the expansion of poultry and pork production occurred within a structure of large-scale commercial farms and intensive livestock operations. Pork production is limited in the predominantly Muslim countries of Indonesia and Malaysia.
Cattle feeding is limited, as the region lacks extensive grasslands for cow-calf herds. The Philippines and Indonesia import range cattle from Australia (more than 500,000 head in 1996) for short-term intensive feeding. Dairy production is also limited.
The two major feedstuffs in Southeast Asia are soybean meal and corn. Soybean meal is crucial in the region despite the production of large amounts of palm kernel meal and copra meal. Because of their high fiber and low protein content, these tree crop meals are unsuitable for non-ruminants such as poultry and swine which predominate in the region. As poultry and swine production expands, demand for imported corn and soybean meal will rise, providing increased opportunities for U.S. trade.
October 23, 1997
USDA, Washington, D.C.
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