Senate Banking, Housing and Urban Affairs Committee

Subcommittee on International Trade and Finance

Hearing on the Effects of International Institutions
on U.S. Agricultural Exports

10:00 a.m., Tuesday, May 4, 1999

Prepared Testimony of the Honorable August Schumacher, Jr.
Under Secretary for Farm and Foreign Agricultural Services
U.S. Agriculture Department

10:00 a.m., Tuesday, May 4, 1999

Mr. Chairman, members of the Committee, I am pleased to appear with Ambassador Peter Scher to discuss the two topics of today's hearing: the U.S. goals for the next round of multilateral trade negotiations under the World Trade Organization and the importance of the International Monetary Fund (IMF), the World Bank, and other international organizations to U.S. agriculture.

U.S. Goals for the Next Round

The next round of WTO negotiations, which will be launched on November 30 in Seattle, Washington, is our best hope for a more open, comprehensive, transparent, and strong world trading system. Although the Uruguay Round was a landmark agreement for agriculture, we recognize that agriculture still has a long way to go to complete its reform and be fully integrated into the world trading system.

Our goals for the next round, while easily stated, will not easily be achieved:

Cut--and where possible eliminate--tariffs on farm products. Under the Uruguay Round, developed countries cut their tariffs by an average of 36 percent, but the tariffs most U.S. products face remain too high -- about 50 percent on average -- compared to less than 5 percent for products entering the United States. High tariffs encourage inefficient producers and drive up consumer prices. In the global trade market of the future, we cannot afford to allow tariffs to staunch the free flow of goods and distort trade. High tariffs insulate domestic producers from the international marketplace and result in inefficient industries. This is not the way to prepare for the new agricultural era.

Substantially increase or effectively eliminate tariff-rate quotas (TRQs) by cutting the out-of-quota duty. Seek improved market access opportunities for products under TRQs and negotiate improvements in TRQ administration.

Eliminate export subsidies. Under the Uruguay Round, developed countries cut expenditures for export subsidies by 36 percent and subsidized quantities by 21 percent. By the year 2000, under the Uruguay Round, the European Union (EU), for example, would still be allowed to outspend the United States by more than 10 to 1 ($8 billion vs. $600 million).

Reform state trading enterprises (STE's). These monopoly importers and exporters can distort trade and provide an unfair advantage. Their operations must be made much more transparent.

Clarify rules on domestic subsidies. Protective tariffs and unfair export subsidies frequently are used because domestic subsidy regimes distort the production incentives facing farmers. Generous subsidy programs that encourage farmers to produce as much as possible without regard to efficiency or environmental costs can only be sustained by keeping out the competition and having the luxury of dumping surplus production on world markets.

By telling farmers what to produce, these subsidy programs interfere with comparative advantage and farmers' ability to adjust to the demands of consumers. In the WTO, we have already agreed that this support should be allowed only when it does not distort trade. More work needs to be done to ensure that domestic support programs are truly non-trade distorting. Existing trade-distorting support also needs to be cut.

In the last round of multilateral trade negotiations, countries began the process of dismantling protection and delinking farm support from production decisions. Consequently, reforms have been undertaken by some countries. The United States has delinked the bulk of domestic support from our farmers' production decisions. We have retooled most of our farm programs to rely on market forces to determine farm prices. To help our producers make a transition to this new system, we have supplemented farmer income through direct payments delinked from a farmer's volume or type of production so as not to distort production incentives. However, many of the reforms recently approved by the EU in Agenda 2000 do not meet our minimum expectations for the upcoming WTO negotiations. To meet budgetary concerns, the final Common Agricultural Policy reform portion of Agenda 2000 was watered down from the original proposal. The result reduced the original proposal's price support cuts and further delayed reforms. Under Agenda 2000, some sectors, such as dairy, will continue to be subject to production and price distorting policies that will almost certainly ensure dependence on export subsidies.

Tighten rules on technical barriers that unjustifiably restrict trade. Unfortunately, current world trade rules do not adequately discipline countries from erecting cumbersome or prohibitive non-tariff barriers to trade. This trend threatens to short-circuit the entire process of globalization in agricultural trade. The upcoming negotiations need to ensure that countries neither hinder nor prohibit imports of new products unless they have legitimate scientific concerns. Too often these actions are merely a guise to protect domestic agriculture from import competition and fail to adhere to the WTO principle that such measures be grounded in sound science. We will continue to work through the WTO to further encourage the adoption of international standards that facilitate trade while giving full protection to consumers' health and safety. Consumers have the right to insist on such safeguards, and farmers have the right to a level playing field. Our most important concern is to ensure that sound science governs the establishment of sanitary and phytosanitary measures.

Address scientific innovation as it relates to trade in agricultural products. The products of scientific innovation have become the focus of increased trade tensions, especially with the EU, but also to a lesser extent with Japan and developing countries. It remains to be seen whether the SPS and the Technical Barriers to Trade Agreements provide enough guidance to settle the disputes raised by these new products. That is why the upcoming negotiations need to address and clarify this area. We must ensure that trade and regulatory frameworks encourage the development and transmission of these technologies from laboratory to market. Creating a supportive environment for the propagation of yield-enhancing products of biotechnology is critical for meeting the food needs of the world in the new millennium.

Address special needs of net-food-importing countries. Finally, for the next round to be truly successful, full participation by developing countries is essential. We are encouraging developing countries to participate in the upcoming negotiations and also in the preparatory process by identifying issues of concern. For example, next week, under the Cochran Fellowship Program, we will host a workshop in Washington for 40 delegates from 20 African countries to discuss the importance of the next round of the World Trade Organization and Africa's role in implementing food safety and other sanitary- phytosanitary international standards.

In addition, we recognize that some countries may require technical assistance to adjust to, and take advantage of, the new global trading system. In Brazil, for example, we are working with the government and private sector to train several thousand animal and plant health inspectors. Our country has a long history of providing such assistance and we will work to ensure that the concerns of developing countries are not overlooked in the next round of the WTO negotiations.

Another key to a successful negotiation will be whether WTO members come to the table prepared to make a serious commitment to reform. As part of our preparations for the new round, USDA and the U.S. Trade Representative will hold a series of listening sessions around the country to hear first hand what our producers, exporters and others believe that our trade priorities should be. These joint sessions will be in California, Florida, Montana, Texas, Kentucky, Iowa, Nebraska, Wisconsin and other states over the course of the next three months.

In addition, we are working with other countries on preparatory issues -- identifying areas of concern, defining the specific negotiating mandate -- to ensure that serious negotiations begin on time. As part of this process, Secretary Glickman will be attending the Quint Agricultural Ministerial in Vancouver, Canada, this summer. The five members of the group -- the United States, Australia, Canada, the EU, and Japan -- are key players in world agricultural trade. It is important to use this gathering to advance the necessary preparatory work in support of the WTO Ministerial Conference next November. The focus of the 1999 Quint discussions should be to move the preparatory process forward and further develop the decisions that need to be made at the WTO Ministerial Conference, so that substantive negotiations on agriculture may begin in early 2000 as mandated by the Uruguay Round Agreement on Agriculture.

International Organizations and U.S. Agriculture

I would now like to turn to the second topic of today's hearing: the importance of international organizations to U.S. agriculture. One need only to recall last year's newspaper headlines to realize the importance of international organizations to American agriculture. When the Asian financial crisis was at its worst and there was near panic in Asian financial markets, we wanted to respond in the way that would best preserve our agricultural exports to that region, and give the countries access to needed imports of key commodities from the United States. That meant use of our GSM-102 export credit guarantees. But GSM-102 has a strict, legislated creditworthiness criterion that must be met before we can make allocations. We need to verify that there is a strong probability of repayment.

In the face of the financial turmoil, there was no way we could make this determination based only on what we knew of the dwindling foreign exchange availabilities and other problems in these economies. But the quick actions of the International Monetary Fund (IMF) and the World Bank in negotiating stabilization packages gave us the confidence we needed to go forward with our program. With the additional resources made available by the IMF and the World Bank, and the economic reforms negotiated with each country, we had a reasonable assurance that the credits by U.S. banks that we were guaranteeing would be repaid when due. We could then move forward as we did with more than $2 billion in credit guarantee allocations.

As a result, last year U.S. exporters registered sales of nearly $1.7 billion to five Asian countries. That figure is the measure of how much more U.S. agricultural exports could have fallen to the affected countries had we not been able to use the GSM-102 program. And, over the longer term, the structural reforms that the IMF has negotiated will advance our trade agenda by increasing competition and transparency within each country.

This combination of IMF efforts and our export credit guarantees also was used successfully during Mexico's economic problems in 1994. Today Mexico is our third largest single country market, estimated to buy a record $6.7 billion worth of U.S. agricultural products in 1999.

The Congressional passage of the Agriculture, Rural Development, Food and Drug Administration and Related Agencies Appropriations Act of 1999, which provided much needed funds to the IMF, was an acknowledgment of the important role the IMF plays in ensuring worldwide financial stability. These funds are helping Brazil stabilize its financial situation. While Brazil is not a major market for U.S. agriculture, it does play a strategic role in the overall financial situation in Latin America, and Latin America is developing into an important market for our farmers.

These are just two examples of how international financial institutions helps preserve valuable foreign markets for America's farmers and ranchers. But the importance of international organizations extends beyond the balance of payments support. International Banks and organizations also help U.S. agriculture by addressing scientific and technical issues that affect agricultural production; undertaking efforts that facilitate trade; and promoting economic development.

Through the Consultative Group on International Agricultural Research (CGIAR) and other international research efforts, international organizations bring multilateral resources to bear on problems that would be impossible for one nation alone to resolve. International research institutes were instrumental in fighting numerous destructive pests and diseases, such as the Mediterranean Fruit Fly, African Swine Fever, Desert Locusts, and African Screwworm to name just a few.

Other organizations, such as the Food and Agriculture Organization (FAO) of the United Nations, the Inter-American Institute for Cooperation on Agriculture (IICA), and a number of smaller international organizations dealing with food and agriculture are particularly important in helping to expand world agricultural trade. For example, FAO's Codex Alimentarius and International Plant Protection Convention help increase U.S. agriculture's competitiveness and profitability by harmonizing sanitary and phytosanitary standards and by establishing internationally accepted grade and labeling guidelines for agricultural commodities. A decision of the Codex Alimentarius Commission affirming the safety of growth hormones in beef production has strengthened international recognition of U.S. arguments that the European Union has no valid scientific basis for restricting sales of U.S. beef.

International organizations also support U.S. agricultural interests by promoting economic development, world food security, and the proper use of scarce resources. The World Food Program is distributing over one million tons of U.S. food aid to needy people around the world. The World Bank finances long-term development projects that help improve nations' economic situations and help them move from aid recipients to cash customers. It has also helped the Asian countries in crisis coop with shorter terms problems, such as unemployment, by focusing immediate assistance on the social sectors. International financial agencies & organizations provide fora for discussion of critical issues affecting the future of world food security, including new technologies, bio-diversity, and protection of genetic resources.

As you can see, the actions of international organizations can have far-reaching consequences. That is why it is we at USDA are fully engaged with these banking organizations. Doing so keeps U.S. agricultural interests in the forefront of discussions as international organizations develop programs and policies that can affect U.S. agriculture.

Mr. Chairman, the IMF and other international organizations play important roles in fostering global financial stability, economic growth, and trade. Participating in these organizations is clearly in the best interests of U.S. farmers, ranchers, and exporters.

Mr. Chairman, that completes my statement. I would be happy to answer any questions.

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