Public Comments on the Free Trade Area of the Americas Negotiations, submitted

to the Sixth Business Forum of the Americas, Agricultural Workshop

This paper is submitted on behalf of the Ranchers-Cattlemen Action Legal Fund (R-CALF) in response to the Business Forum of the Americas call for papers encouraging comment with respect to the negotiations toward a Free Trade Area of the Americas (FTAA).  R-CALF, a non-profit legal foundation is made up, almost exclusively, of members who produce cattle throughout the United States.  R-CALF’s chief focus is to monitor trade and legislative issues which affect cattle producers, and we appreciate the opportunity to provide input into the dialogue surrounding the negotiations designed to liberalize trade in the Western Hemisphere.  R-CALF believes that liberalized trade, in order to be sustainable, has to be beneficial for all participating countries and sectors.  In the cattle and beef sector, trade liberalization has not been mutually beneficial due to substantial distortions that affect most markets and lack of transparency in the pricing structure.  R-CALF’s support for trade liberalization is premised upon the elimination of such distortions and the leveling of the playing field.

INTRODUCTION

  The cattle industry is the single largest sector in American agriculture, with more than one million operators who generate more than $30 billion in agricultural revenues annually. As such, a profitable cattle sector is critically important not only to those in the industry, but also to the thousands of rural communities where ranchers and their families live.  Until recently, this major sector of the American economy had been in a state of substantial economic decline.  Financially, the industry had incurred more than five consecutive years of substantial losses.[1]  The years 1996-1998 were especially difficult, as prices for cattle plummeted and cow-calf operators and feedlots lost many billions of dollars in equity.   The recent upturn in cattle prices is certainly welcome.  It will, however, take years of strong prices for the industry to recover from the damage incurred during 1994-1998.

R-CALF recognizes the significant and important potential of the FTAA to expand exports of U.S. cattle products to other countries in the Western Hemisphere.  U.S. cattle producers have already proven their competitiveness in the Americas in certain cattle product areas, namely, (1) cattle genetics (including purebred animals); (2) high-value cuts for the restaurant and hotel sector; (3) offals such as livers and sweetmeats; (4) tallow; (5) and meat for the fast food sector.  In addition, with growing middle classes in many countries in the Western Hemisphere, R-CALF believes that foreign markets for U.S. exports of fresh, frozen, and chilled beef from the United States will expand.[2]  The increasing number of wealthy consumers will recognize grain-fed U.S. beef as a flavorful alternative to the grass-fed beef prevalent in many parts of the Americas.

We also realize that the FTAA will likely result in increased competition with imports in the United States.  R-CALF welcomes the opportunity to compete with other cattle producers in the Western Hemisphere, but only if the FTAA negotiations result in a framework that will maintain and strengthen fair trading rules, eliminate distortions in the marketplace, and maintain market stability.  In addition, R-CALF believes producers of cattle throughout the Americas must be provided with instruments to permit them to solve the problems facing their respective industries.  Many of the current mechanisms are either ineffective or will take too long to work to save numerous ranchers and other cattle producers who are on the verge of bankruptcy.

I.          Market Access – Tariffs

  Tariff negotiations must distinguish between tariffs on cattle and tariffs on beef and beef products.  U.S. tariffs on imports of live cattle are either “free” (e.g., for purebred breeding cattle and cows imported for dairy purposes) or 1.4 cents per kilogram (e.g., live cattle for slaughter).[3]  R-CALF endorses expedited duty reductions to zero for imports of live cattle, so long as such duty reductions are simultaneous and reciprocal, so that countries with already low tariff levels do not reduce levels to zero before all FTAA trading partners have likewise done so.

            With respect to tariffs on beef, both in-quota and out-quota U.S. tariff rates are low, particularly when compared to tariffs in some other countries in the Western Hemisphere. Brazil’s WTO bound rate for fresh and frozen beef is 55 percent for example,[4] Colombia’s bound rates exceed 100 percent; Guatemala’s bound tariff rates exceed 60 percent, while Venezuela’s bound rate is 50 percent.[5]  By contrast, U.S. in-quota tariff rates are 4.4 ¢/kg., or four or ten percent ad valorem, depending on the specific item, and 27.2 percent for out-quota product.[6]  Accordingly, it is essential that tariff negotiations on beef be conducted separate and apart from tariff negotiations on cattle.  Countries with already low tariff rates with respect to beef should not be placed in a situation in which they are forced to zero while other FTAA countries phase out higher tariff levels over long time frames.  Accordingly, when proceeding to eliminate beef tariffs, reductions in tariff rates must be zero-for-zero, reciprocal and simultaneous.[7]  To that end R-CALF supports the proposal of the Camara de Industrias del Uruguay & Asociaicon Rural del Uruguay that tariff reductions in cattle and/or beef must be faster in those countries with higher tariffs.[8]  Finally, any tariff reduction for either cattle or beef must be based on a country’s WTO bound rates or its applied rates, whichever is lower in order to ensure meaningful reductions occur in a timely way.[9]

II.        Subsidies and Market Access Barriers. 

The FTAA negotiations should result in immediate elimination of trade distorting subsidies and market barriers (such as state trading enterprises) that harm the cattle industry, including subsidies that are permitted under the World Trade Organization.  Presented below are a few exemplars of programs that cause distortions in international trade flows in this sector of the type that should be examined as negotiations proceed.  

            A.        Argentina.

            In 1999, the Government of Argentina launched the Plan Nacional Ganadero, a program to promote cattle business.  The program consists of helping producers with 25 percent of the interest rate for credits used in cattle production.[10]  The United States’ Foreign Agricultural Service reports also indicate that both the national and provincial governments periodically provide incentives to cattlemen to increase their herds.[11]  The Government of Argentina also provides an export rebate to beef, as to all products exported from Argentina, to give back taxes incurred prior to exportation.[12]

B.         Brazil. 

              The most recent Foreign Agricultural Service report on Brazil’s livestock indicates that the National Bank for Economic and Social Development (BNDES) provides long-term subsidized loans for pasture improvements and breeding programs for unspecified    Brazilian livestock producers.  BNDES provides the loan through other state and commercial private banks.   These loans carry an interest rate of around 8 percent, which is much lower than commercial rates in Brazil.  The loans also have grace periods prior to first required repayments of at least 3 years.[13]

The Brazilian government has offered tax and tariff incentives to promote exports.  Exporters can receive an exemption from withholding tax for expenses in other countries for loan payments and marketing.  Exporters can also be exempted from Brazil’s financial operations tax for deposit receipts on export products.  Excise and sales tax exemptions apply to agricultural export products, including beef.[14]

C.        Canada

The Canadian Wheat Board (CWB) is a state trading enterprise which exercises a monopoly on exports of feed barley.  In 1996, a United States agency study highlighted the problems and concerns that governments and individuals have with STEs.  “STEs that have monopoly buying authority for certain domestic products may gain advantages as a result of their overall control of the domestic supply.”[15]  In turn, these advantages can be trade distorting, such as where STE authority allows cross-subsidization between domestic and foreign markets or between foreign markets.[16]  Government financial support for STEs involving either direct and indirect subsidies also provides advantages for STEs over their private competitors in world markets thus distorting world trade patterns. “Additionally, relationships between STEs and foreign buyers can provide advantages through the ability to charge different prices in different markets.” [17] 

The CWB’s control over feed barley exports and the cost advantage such control gives to the Canadian cattle industry by reducing the domestic price for feed barley has long been a source of concern to U.S. cattle ranchers.  In field hearings during 1998, Canadian barley farmers stated that they believed Canadian feed barley prices would equal world market prices if the CWB control over exports were removed.[18]  In later testimony Canadian cattlemen urged their Senators not to change the CWB because the current marketing structure of the CWB depressed feed barley prices which resulted in lower input costs to ranchers.[19]  R-CALF urges that the FTAA eliminate state trading enterprises in its multilateral negotiations.  If Canada insists on maintaining the CWB intact (as it is likely to do), then the FTAA should at least prohibit any CWB- (or other STE-) controlled exports to FTAA members.

D.                    Domestic Support

R-CALF believes there is a legitimate role for government support where such support is directed at improving the quality and safety of cattle and beef (e.g., through genetic research) or to restore competitive conditions in the national market between cattle producers and processors of beef.  However, domestic support payments and programs that simply encourage greater production of cattle and beef than for which there is demand simply add surplus product to world markets, thus depressing prices.  A priority objective should be to impose disciplines and seek the rapid phase out of domestic support payments whose primary aim is to encourage or expand production capacity. 

III.             Tariff Rate Quotas and Special Safeguards.

  The cattle industry, like many other agricultural industries, is cyclical in nature meaning that producers will have periods of high income and periods of low income.  In the cattle industry over the course of ten years a rancher might have 2-3 “good” years and 2-3 “bad” years with the rest falling somewhere in between.  The 2-3 “good” years of high income and profits need to sustain the ranch during the 2-3 lean years when income is very low and the operation is financially in the red.  Since agricultural industries are cyclical, and because most of them are commodity-based markets, even small volumes of imports can have significant economic effects both short and long-term. 

Yet agricultural industries have relatively few workable mechanisms in place to help it weather difficulties.  Unlike large companies that can simply shutter production lines, shuttering production on a ranch or farm often results in the loss of home, livelihood and way of life.  One mechanism however that can be of some assistance with regard to imports is a system of tariff rate quotas (TRQs), which became operative upon the implementation of the Uruguay Round Agreements Act in 1995.  A second mechanism is the special safeguards provision for imports of certain products, including beef in the United States, which also went into effect in 1995 and operates in accordance with Article 5 of the Agreement on Agriculture of the WTO.

A.        Tariff Rate Quotas.

The importance of the beef TRQs to the domestic U.S. industry can be seen from the historical evidence from Canada, which has been exempted from the TRQs as a result of the U.S.-Canada Free Trade Agreement and the North American Free Trade Agreement.[20]  In 1989, imports of fresh, chilled and frozen beef from Canada totaled 87,110 MT.  Those imports steadily increased to more than double that amount in 1994 and to 300,279 metric tons in 1998 and 310,894 metric tons through November 1999.[21]  Presumably, had TRQs for Canada been in place, these import volumes would not have grown so substantially, thus displacing beef produced from U.S.-raised cattle.  Canadian imports have displaced U.S. product and, at least indirectly, contributed to the closing of ranches and farms with cattle production. [22]

As intra-American trade can be expected to grow significantly in coming years due both to the FTAA and the eradication of FMD in Western Hemisphere countries, the importance of TRQs in promoting stability in the price sensitive meat sector will be heightened.  As such R-CALF proposes that TRQs be kept in place, by any country that currently has such measures, on any or all beef products as part of any FTAA.[23] 

B.         Special Safeguards      

Article 5 of the WTO Agreement on Agriculture includes a special safeguard provision which permits countries to resort to additional duties in the event that the volume of imports of a particular product exceeds a threshold or “trigger” level, or the price of those imports falls below a trigger price level.  R-CALF believes that the special safeguard protection provides a needed and independent safety measure for agricultural industries, including the cattle and beef sector.  As such special safeguard rights should be maintained in full in any FTAA negotiation.[24]  While special safeguard provisions should remain in effect, the FTAA process should not expand the list of agricultural goods upon which there currently are WTO safeguard rights. 

IV.              Agriculture and Sanitary/Phytosanitary Issues

Sanitary and phytosanitary standards have become increasingly important and both the consuming public and agricultural producers have a tremendous stake in ensuring a safe food supply.  Events in the European Union have taught all agricultural producers that consumer confidence in the food supply must be maintained or commodity markets will collapse.  As an example, Argentinean beef exports to Europe during the last quarter of 2000 dropped substantial due to the BSE crisis eventhough Argentina’s beef supply is safe from the disease.[25]  Furthermore, agricultural producers have seen SPS standards used as a non-tariff trade barrier in markets throughout the globe.  In either case it is clear that sanitary and phytosanitary standards must be a high priority in any FTAA Agreement.[26] 

As an initial matter the FTAA negotiations should work toward ensuring that all sanitary and phytosanitary standards continue to be based on valid scientific evidence in accordance to the requirements of Article 2.2 of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures.

In addition, the FTAA should strive to increase the contact between the respective national authorities who administer sanitary and phytosanitary standards in this hemisphere.  Such contact should go beyond what the WTO SPS Agreement dictates.  The WTO SPS Agreement provides that Members must notify each other of the sanitary and phytosanitary standards in place in each country.[27]  While certainly a necessary minimum step the FTAA should go beyond this and encourage its Member states to actively establish hemisphere wide-standards, as well as sponsor joint research and testing projects and regulatory exchange programs. 

Establishing hemisphere wide standards, a development encouraged by the WTO SPS Agreement,[28] would greatly facilitate trade.  Agricultural producers who now might have to deal with dozens of chemical, hormone or other sanitary and phytosanitary standards for various countries, would be easily able to identify all the relevant sanitary and phytosanitary standards for any potential export market within the FTAA because such standards would be standardized hemisphere wide.[29]  Such a development would greatly ease the burdens placed on agricultural producers, including cattle producers.  Further, joint research projects, administrative exchanges, and joint testing centers would also greatly benefit trade.[30]  Such efforts would have multiple effects: first, joint research and testing would help standardize the sanitary and phytosanitary standards in the hemisphere thus directly facilitating trade; second, administrative exchanges among the hemisphere’s regulatory bodies could quickly establish a uniform codex of standards; and finally, such joint efforts could benefit smaller scale economies by quickly modernizing their SPS standards and thus expanding the range of products safely allowed into these countries.

Special Note on Brazil

According to the United States’ Foreign Agricultural Service, a prohibition against the use of growth promotants in beef cattle has remained in place in Brazil since 1991.  The purpose of the ban is purportedly to improve Brazilian beef exports, with the European Union a major export destination target.  In recent years, consumer groups have begun pressuring government officials to prohibit imports of beef from countries that allow hormones in raising beef cattle.[31]  R-CALF hopes that the United States and Brazil can avoid another beef hormone debacle.  However, these reports make clear that vigilance will be required in these negotiations.

V.                 Rules of Origin

R-CALF notes that the Market Access working party is developing uniform standards to determine product classification and rules of origin.  This work must receive significant input from the hemisphere’s agricultural producers.  What any FTAA rules of origin must recognize is the integrated nature of agricultural production.  Most primary agricultural products, including cattle, must be processed before eventual sale to consumers.  R-CALF Strongly proposes that in order for a product to be considered of “FTAA origin” such products must be “Wholly obtained” within a FTAA country.  With regard to cattle and beef that would mean that wholly obtained refers to:

0102 Live animals retain the country of their birth

0201 & 0202 Fresh, chilled or frozen beef obtained or produced in a FTAA country solely from animals born and raised in an FTAA country(s)

At minimum FTAA rules of origin must establish some form of “value-added”/ “regional content” threshold in order to have products be considered of “FTAA origin”.  For example, beef produced from live cattle shipped from the EU into a FTAA member should not be considered of “FTAA origin” simply because at slaughter such cattle change tariff chapters (from 0102 to 0201/0202).  FTAA rules of origin must therefore take into account the amount of “value-added” (in the form of fattening with regard to beef) that products incur within the FTAA before establishing whether a product is of “FTAA origin”.

VI.              Agriculture and Competition Policy 

Due to the peculiar nature of the agricultural industry and the small amount of revenue that is returned to producers, it is critical that ranchers and farmers have some ability to maintain minimum prices and be able to control the quality and quantity of their products in the market.  Such measures lessen the impact of adverse temporary market conditions that would otherwise drive producers out of business.  For most of this century, the United States government has provided such mechanisms to farmers and ranchers.  

Recognizing the special circumstances faced by the agricultural sector, the United States under the Capper-Volstead Act (7 U.S.C. § 291-292) provides a limited antitrust exemption for agricultural cooperatives, including cooperative composed of ranchers, from antitrust laws.  Courts have held that cooperatives may set minimum floor prices for agricultural products under this law.[32]  Nothing in the FTAA agreements should threaten the ability of the United States, or any other country, to maintain the protections from competition enforcement that the Capper-Volstead Act embody.  In addition, as markets in the Western Hemisphere will become more integrated as a result of the FTAA, the antitrust exemption for agricultural cooperatives underlying the Capper-Volstead Act should become applicable throughout the FTAA region.  Therefore, the Competition working party should work during negotiations for the application of the principles of the Capper-Volstead Act throughout the Western Hemisphere.  Such a policy would permit cattle producers in the Americas to work together to create stability in the market.

While recognizing that Capper-Volstead protections are extremely valuable, the Competition working group should also ensure that in crafting competition rules for the hemisphere that any rules recognize the unique and special nature of agriculture.  Primary agricultural producers are often in unfavorable trading relationships with downstream processors.  As such domination, either regionally or nationally, can place producers in precarious positions vis-à-vis processors.  Competition authorities and laws must not only be cognizant of this situation but more importantly competition laws must be enforced vigorously to ensure fair, free and open competition exists in these sensitive markets.

Finally, R-CALF and other primary agricultural producers in the United States have long recognized that they are at times at a distinct disadvantage in negotiations over the prices for their products.  In the livestock sector very often a limited number of meat packers control the prices for regions and indeed the country.  Rather than buy in open cash markets, these and feed their own animals or use private marketing arrangements--such as forward contracts, formula pricing, and exclusive purchase agreements--for which prices and terms of sale are not publicly disclosed. This makes it difficult for producers, particularly smaller-sized ones and those that want to utilize open cash markets, to determine a "fair" market price.  In 1999, the United States passed important legislation providing for the mandatory reporting of prices paid by packers for cattle.  Such legislation allows producers access to the data needed to quickly and easily compare bids from different packers and to negotiate the best possible price for their livestock.  R-CALF believes that the Competition and Agriculture working groups should work together to encourage the adoption of such a policy of price reporting for livestock throughout the FTAA countries.

VII.     Antidumping and Countervailing Duty Laws.

  R-CALF strongly supports the continued availability of antidumping and countervailing duty laws as internationally recognized trade remedies to economic harm caused by unfairly priced or subsidized imports.  It is important to recognize that the rules of the FTAA will not necessarily eliminate opportunities and incentives for producers in certain countries to dump their products or to obtain unfair subsidies.  Therefore, antidumping and countervailing laws must be maintained and strengthened.

R-CALF supports maintaining judicial review by the relevant national judicial authorities over antidumping and countervailing duty decisions.  R-CALF therefore opposes extension of a NAFTA Chapter 19 “Dispute Settlement” type process into an FTAA.  Among other concerns, there are serious questions about the ability and resources of numerous potential FTAA members to provide the necessary panelists.    

VIII.        Special Rules Are Needed for Remedying Commodity Price Collapses, Exchange Rate Manipulations and for the Problems Unique to Perishable Commodities

 

A.                 Price Collapses

The cattle sector, as well as numerous other agricultural sectors, have suffered serious economic difficulties stemming from commodity prices that have collapsed and have not recovered sufficiently to sustainable levels.  In 1999, the U.S. Department of Agriculture forecast that net farm income in the United States would fall in the year 2000.  “Total crop receipts for 2000 are forecast at $93.3 billion, $1.7 billion below 1999, and the lowest since 1994. The reduction stems largely from low commodity prices.”[33]  Cattle prices in 1998 were the lowest in a decade.  Although prices recovered in 1999, at present, they are still lower than they were at the beginning of the decade and have recently started to fall again.  Farmers and ranchers can only reduce their costs so much.  While these examples reflect the experience of farmers in the United States, the situation is not unprecedented, and other countries throughout the hemisphere have had experienced similar price patterns.  Some internationally-agreed mechanism must be found to remedy the devastating effects of collapses in commodity prices. 

B.                 Exchange Rate Manipulations

            Currency exchange rates can have major impacts on trade flows, including the trade flows of agricultural products.  Indeed, some countries have used exchange rate controls as a method of altering trade flows in agricultural products.  Such manipulations can create serious harm in marketplaces throughout the hemisphere.  R-CALF urges the FTAA’s Agricultural, Investment and the Market Access working groups to consider this problem and attempt to craft an FTAA provision to address it.  Indeed, R-CALF proposes that the Western Hemisphere forbid such manipulations.  As a necessary first step the FTAA should establish a review board to determine if any FTAA Member’s currency is undervalued and then what corrective action should be taken.

C.                 Seasonal and Perishable Commodities

Many agricultural product sectors include seasonal and perishable commodities, such as fruits, vegetables, and livestock.[34]  As international trade has liberalized the unique nature of seasonal and perishable commodities have been recognized, including in the WTO agreement.  Barriers to trade can disproportionately affect these products, and as the FTAA process moves forward, the characteristics of seasonal and perishable commodities need to be reflected in the FTAA. R-CALF urges the Agricultural Working Group to include this topic as an issue for the negotiations to consider, including the possibility of special rules and protections which acknowledge the sensitive nature of these products.

CONCLUSION   

  R-CALF welcomes the opportunity that the FTAA negotiations provide to remove distortions in the international marketplace that adversely affect cattle producers.  When negotiating tariff reductions FTAA negotiators should separate cattle from beef classifications, ensure stringent rules of origin standards, and guarantee that reductions in tariff rates be zero-for-zero, reciprocal and simultaneous.  Negotiators should aggressively work for the removal of trade distorting subsidies and other barriers in the Western Hemisphere that harm cattle producers.  In light of the price sensitivities of the beef and cattle industries, the negotiators should maintain TRQs on beef and safeguard provisions for beef, in some form.  Negotiators of the FTAA should also advocate that rigorous enforcement of competition law as applied to agriculture, and that the improvement of the sanitary and phytosanitary standards system be a high priority in any FTAA.  Finally, negotiators should ensure the continued availability and strengthening of the antidumping and countervailing duty laws, and work toward an agreement on remedies for commodity price collapses. 

                                                                        Sincerely

                                                                        Leo McDonnell, Jr.

President,

Ranchers-Cattlemen Action Legal Fund