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February 14, 2003

The Honorable Marilyn R. Abbott
Secretary
U.S. International Trade Commission
500 E Street, S.W.
Washington , DC   20436

Re:      Comments of the Ranchers-Cattlemen Action Legal Fund – United Stockgrowers of America ( R-CALF USA ) on the Impact of Trade Agreements:  Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the Uruguay Round on the U.S. Economy

Dear Ms. Abbott:

The Ranchers-Cattlemen Action Legal Fund – United Stockgrowers of America (R-CALF USA) is pleased to have the opportunity to submit comments to the U.S. International Trade Commission (ITC) regarding the effect of the Tokyo Round, the U.S. Israel Free Trade Agreement (FTA), the U.S.-Canada FTA (USCFTA), the North American Free Trade Agreement (NAFTA), and the Uruguay Round on the U.S. economy.  (See 67 Fed. Reg. 59077 ( September 19, 2002 ))

        R-CALF USA is a non-profit association that represents thousands of U.S. cattle producers on issues concerning national and international trade and marketing.  R-CALF USA is dedicated to ensuring the continued profitability and viability of the U.S. cattle industry.  R-CALF USA ’s membership consists primarily of cow-calf operators, cattle backgrounders, and feedlot owners.  Its members are located in 42 states, and the organization has over 30 local and state cattle association affiliates.  Various main street businesses are associate members of R-CALF USA .   

        R-CALF USA ’s comments first discuss the provisions of the named trade negotiations concerning cattle and beef and the effects of these provisions on the U.S. cattle industry.  The comments next examine the overall effects of these agreements and demonstrate that, although U.S. producers have benefited from significant gains in U.S. beef exports on account of some of these agreements, the U.S. cattle sector is suffering historic lows.  The comments conclude with lessons that may be applied from these negotiations when concluding new trade agreements. 

I.          U.S.-Canada FTA and NAFTA

The USCFTA was implemented in 1989,[2] and this agreement was completely phased in on January 1, 1998 .[3]  NAFTA went into effect on January 1, 1994 , and incorporated the USCFTA.[4]  The terms of the USCFTA were folded into NAFTA.            

            A.        Live Cattle

                        1.         Significantly Increased Cattle Imports from Canada

Prior to the USCFTA, imports of Canadian cattle into the United States basically remained flat and averaged 368,000 head per year from 1978 to 1988.[5]  Following the implementation of the USCFTA, imports of Canadian live cattle into the United States increased substantially.  As noted by the U.S. Department of Agriculture (USDA), in 1989 U.S. imports of Canadian cattle began a “fluctuating, but generally strong upward trend” with imports that year totaling 585,000 head.[6]  During the past five years (but not including December 2002), imports of Canadian cattle have averaged over 1,160,000 head annually.[7] 

                        2.         Little Impact on Cattle Imports from Mexico

For the five years (1989-93) prior to the implementation of NAFTA, the United States imported an average of 1,089,379 from Mexico annually.[8]  Over the past five years for which complete data are available (1997-2001), U.S. imports of live cattle from Mexico have averaged 938,177 head.[9]  Therefore, it does not appear that the NAFTA significantly affected imports of Mexican cattle into the United States . 

                        3.         Cattle Exports from the United States

            Due to alleged sanitary threats, U.S. exports of live cattle to Canada are restricted.  But a post-NAFTA agreement, the Northwest Pilot Program, has led to increased exports of U.S. cattle to Canada when certain sanitary conditions are met.  U.S. shipments of live cattle to Canada grew from 40,000 head in 1996 to 349,536 head in 2000.[10]  With regard to Mexico , U.S. exports of live cattle (including cows for dairy purposes) have generally increased since the implementation of NAFTA, but somewhat erratically, from 62,683 head in 1994; to 8094 head in 1995; to 91,701 head in 1999; and to 363,887 head in 2001.[11]  Although U.S. exports of live cattle to both Canada and Mexico have risen following NAFTA, imports of live cattle into the United States from those countries greatly overshadow export gains by the United States . 

            B.        Beef

1.         Increased Imports of Canadian Beef into United States , Yet U.S. Beef Exports to Canada Remained Flat

            U.S. imports of beef from Canada increased markedly in the years following the implementation of the USCFTA, growing from 81,138 metric tons in 1990 to 335,163 metric tons in 2000.[12]  During this same period of time, U.S. exports of beef to Canada essentially remained flat with the United States shipping 87,480 metric tons in 2000 as compared to 90,892 in 1991.[13]

2.         U.S. Beef Exports to Mexico Increased, But Effects of NAFTA on Growth is Unclear, While Mexico Has Made Export Gains

            In the years following the implementation of NAFTA , U.S. exports of beef to Mexico have grown significantly.  Since 1995, U.S. exports have risen steadily with export volumes some 2.5 times as great as in the years prior to NAFTA.[14]  The United States exported 178,749 metric tons of beef to Mexico in 2000 worth some $531 million.[15]  It is somewhat complicated, however, to evaluate the impact of the NAFTA on U.S. exports of beef to Mexico .  NAFTA eliminated Mexico ’s tariff of 20 percent on beef imports.[16]  But this high tariff had been imposed only in 1992 and was a significant change in Mexico ’s beef program;[17] Mexico ’s beef tariff prior to 1992 had been zero.[18]  Thus, Mexico ’s tariff of 20 percent was an aberration, as were possibly depressed exports caused by it.  In fact, figures on imports of beef into Mexico during the first year of NAFTA were little different than those prior to the implementation of Mexico ’s 20 percent tariff in 1992.[19] 

Mexican exports to the United States have increased considerably since the implementation of NAFTA, growing from 591,340 kilograms in 1994 to 3,412,582 kilograms in 2001.[20]  U.S. beef imports from Mexico , however, are relatively small and totaled only $15 million in 2001.[21]

C.        Exemption of Canada and Mexico from U.S. Meat Import Act, and Subsequently, the WTO Beef TRQ

                        1.         Beef

Prior to the USCFTA and the NAFTA, U.S. tariffs on imports of Canadian and Mexican beef limited access into the U.S. market.  However, the U.S. Meat Import Law, which was replaced by a tariff rate quota (TRQ) during the Uruguay Round, was even more important in controlling the amount of imported beef entering the U.S. market.  Through the USCFTA and the NAFTA, the United States exempted Canada and Mexico from the Meat Import Law.[22] 

If the Meat Import Law had applied to Canada in 1994, USDA predicts that Canada would have been permitted to export 58,968 to 61,236 metric tons of beef to the United States that year.[23]  Instead, Canada exported 178,091 metric tons to the United States in 1994.[24]  If the TRQ established during the Uruguay Round applied to Canada , Canada would have been permitted to export approximately 65,772 metric tons to the United States per year starting in 1995.[25]  Without the TRQ, U.S. imports from Canada from 1995 to 2000 were approximately four times this amount.[26]        

            In contrast, the impact of the U.S. Meat Import Law on Mexico was limited as Mexico exports only small amounts of beef to the United States .[27]

2.         Live Cattle

            Prior to the conclusion of the USCFTA, the U.S. Meat Import Law limited imports of live cattle into the United States from Canada .  Under the Meat Import Law, the weight of cattle imported into the United States during a given year was included in the calculation of the next year’s quota for meat.[28]  Accordingly, the meat quota would be reduced if the previous year’s imports of cattle were high.[29]  Thus, if the United States had continued to apply its Meat Import Law to Canada absent the USCFTA, the quota imposed by this law would have further limited Canadian cattle imports to the United States . 

II.        Tokyo Round

            Prior to the completion of the Tokyo Round, Japan controlled imports of beef through quotas.[30]  During the Tokyo Round (1973-1979), the United States sought a larger allotment within Japan ’s quota for high quality grain-fed beef.[31]  An agreement was reached between the United States and Japan in 1978 that set defined annual and global quotas for the following four years.[32]  The growth in the quota over the four years was small (only 500 tons), but the agreement guaranteed that the Japanese market would remain open and that Japan would not unilaterally further restrict its market to imports of beef.[33]  Japan also agreed to import a higher percentage of high quality beef within its quota.[34]  This agreement lapsed in 1983.[35]            

            Following the lapse of the 1978 accord, the United States and Japan reached agreement in 1984 to increase Japan ’s quota by 6900 tons annually between 1984 and 1987 for high quality U.S. beef.[36]    

            Thus, the beef agreement reached by the United States and Japan during the Tokyo Round, as well as the second agreement that followed, increased access for U.S. beef to the Japanese market. 

III.       U.S.-Israel Free Trade Area Agreement

In 1985, the United States and Israel signed an FTA calling for the phasing out of tariffs by 1995.  In 1996, the United States and Israel signed the Agreement on Trade in Agricultural Products (ATAP), which is an adjunct agreement to the 1985 U.S.-Israel FTA. The ATAP was set to expire on December 31, 2001 , at which point both the United States and Israel would review its operation and seek to make additional improvements.  However, it was extended through 2002 with tariffs and tariff rate quotas (TRQs) being maintained at 2001 levels.[37] 

Despite having signed an FTA with Israel , exports of U.S. frozen beef to Israel were, as of 2001, subject to a TRQ of 8818 metric tons, and fresh and chilled U.S. beef was subject to a TRQ of 1217 metric tons.[38]  In-quota imports of these products, however, are assessed zero duties.[39]  U.S. beef exports to Israel are small, and according to U.S. Census data, U.S. beef exports to Israel only totaled $203,000 in 2001, most of which was frozen product.[40]  Live cattle imports from the United States are subject neither to tariffs nor to tariff rate quotas.[41]

A major impediment to the export of U.S. beef to Israel is the Israeli Kosher Meat Import Law of 1994, which bans the importation of any meat or meat product that is not certified as kosher by Israel 's chief rabbinate. [42]  Non-kosher meat, however, is produced and sold in Israel .[43]

IV.       Uruguay Round

            The Uruguay Round, which lasted from 1986-94, further increased U.S. exports of beef to Japan as well as Korea .  It did not, however, result in the growth of exports to another major market, the European Union. 

            A.        Japan

            In 1988 during the Uruguay Round, the United States and Japan signed an agreement, the Beef-Citrus Agreement, which phased out Japan ’s import quota and 25 percent tariff on beef.[44]  These were replaced with a 70 percent tariff in 1991, which was reduced to 60 percent in 1992, and subsequently reduced to 50 percent in 1993.[45]  The phasing out of Japan’s quota had a dramatic impact on U.S. exports of beef and offal to Japan, which rose by almost 90 percent by value from 1988 to 1990 (as compared with 1987).[46]  During this same period of time, exports by volume rose by 50 percent.[47]  The Beef-Citrus Agreement, while not necessarily part of the formal Uruguay Round negotiations, was negotiated after the Uruguay Round began and within the context of U.S. demands for more open trade of agricultural products.[48] 

            Through Uruguay Round negotiations, Japan lowered its tariffs on beef from 50 percent in 1994 to 38.5 percent in 2000 for imports from all countries.[49]  However, Japan maintains a safeguard that provides for a snapback to 50 percent duties to address import surges.[50]  This safeguard may be utilized if beef imports on a cumulative quarterly basis exceed 17 percent.[51]  It appears that Japan will use this safeguard in mid-2003.[52]

            Concessions made by Japan during Uruguay Round negotiations continue to benefit the U.S. beef industry.  U.S. exports to Japan remain high, and the United States is the world’s largest exporter to Japan with 48 percent of Japan ’s import market.[53] 

            B.        Korea

            The Beef-Citrus Agreement between the United States and Japan served as a model for opening the Korean market to imports of U.S. beef.[54]  During Uruguay Round negotiations in 1993, Korea and the United States reached agreement on global access to the Korean beef market.[55]  Under the Uruguay Round Agreement on Agriculture , Korea agreed to increase its minimum imports of beef two-fold to 225,000 metric tons by 2000.[56]  Imports of beef by Korea would be unrestricted as of 2001, but a tariff of 41.2 percent would be imposed on such imports, which would decrease to 40 percent in 2004.[57]  Korea ’s beef import policies are contained in a side agreement attached to Korea ’s Uruguay Round schedule.[58] 

            As is the case with Japan , the U.S. beef industry has benefited from concessions made by Korea during Uruguay Round negotiations.  The United States dominates Korea ’s import market.  In 2001, U.S. exports to Korea constituted 57 percent of Korea ’s beef imports.[59] 

            C.        European Union

            The outcome of Uruguay Round negotiations with regard to cattle and beef produced in the European Union has on the whole not been positive for U.S. producers.  First, despite a finding of the World Trade Organization (WTO) Appellate Body that the European Union’s ban on the importation of beef treated with growth promoting hormones violates the SPS Agreement, the European Union continues to block shipments of most U.S. beef.  Thus, the EU market is essentially shut off to U.S. exports.

            Second, while the European Union made cuts in subsidies for the cattle and beef industry as a result of the Uruguay Round, this sector retains strong government support.  The European Union’s cattle producers remain heavily subsidized, and the 2002 budget for the European Union’s beef sector was approximately $8.2 billion, which comprised 17 percent of the European Union’s agricultural budget.[60]  As part of its Uruguay Round commitments, the European Union agreed to limit export subsidies provided for beef.  Specifically, the European Union committed to reduce export subsidies from 2.5 billion pounds (worth 1.9 billion ECUs or $2.5 billion) in 1995 to 1.8 billion pounds (worth 1.3 billion ECUs) in 2000.[61]  This amounted to a 26 percent cut in export subsidies for beef by the European Union.[62]  While these reductions in export subsidies were rather significant, EU beef export subsidies remain high.  According to the USDA, export refunds provided by the European Union in 2000 for beef totaled $750 million.[63]

In comparison, the U.S. live cattle industry receives little in government support.  In fact, at the present time federal support for U.S. cattle producers is available only as emergency measures, such as for droughts, and for limited periods.[64]  With regard to export subsidies available to the United States , the United States committed to limit subsidized exports of beef to $22 million in 2000, but the United States in fact provided zero dollars for beef export subsidies.[65]

V.        Overall Effects of Trade Agreements

            A.        Improved Beef Exports

            The United States has been successful in some recent trade negotiations in opening markets to exports of U.S. beef.  In particular, negotiations during the Tokyo Round and the Uruguay Round expanded access to the Japanese market, and the Korean market opened following Uruguay Round negotiations.  Moreover, U.S. exports to Mexico have grown significantly although it is not entirely clear that NAFTA is responsible for this result. 

Overall, from the early 1980s through the late 1990s, U.S. exports of beef grew by ten times.[66]  During this same period, U.S. exports went from approximately 2 percent to 20 percent of world trade, and exports increased from 1 percent to almost 10 percent of U.S. production.[67] 

            B.        Yet United States Now a Net Importer of Beef by Value and Volume

            While the United States was able to expand markets abroad for U.S. beef as a result of trade negotiations, the United States has remained a net importer of beef by volume.  As demonstrated by the following chart, the United States since 2001 has also been a value net importer of beef.

            Recent trade agreements are at least partly responsible for this trade deficit.  Most notably, the USCFTA/NAFTA resulted in significantly higher beef imports from Canada .   

            C.        United States a Net Importer of Cattle

            Recent U.S. trade agreements have done little to expand markets abroad for exports of live cattle, the product actually sold by U.S. cattle producers.  The USCFTA/NAFTA has resulted in a dramatic increase in imports of cattle from Canada .  The United States is a net importer of cattle on both a volume and value basis. 

            D.        Major Market Distortions Remain

            While R-CALF USA is pleased that trade negotiations have resulted in increased exports of beef to some countries, R-CALF USA regrets that major distortions remain in the world’s beef market.  Japanese and Korean tariffs remain high.  The European Union continues to block the importation of U.S. beef for non-scientific reasons, and significant domestic support and export subsidies provide European producers with unfair advantages in the international market.  Although Israel entered into an FTA with the United States , an Israeli law impedes the importation of beef into that country.  The playing field for U.S. producers is far from level. 

VI.       Recent Trade Agreements Have Not Necessarily Resulted in Profits for U.S. Cattle Producers 

            R-CALF USA is pleased that trade agreements of the past three decades have resulted in expanded market access for U.S. beef.  It is important to note, however, that in the years following the implementation of the two largest trade agreements – NAFTA and the Agreements of the WTO – U.S. cattle producers have been experiencing major losses.

            A.        Unprecedented Contraction of U.S. Cattle Herd

USDA forecasts that the U.S. cattle herd will undergo its seventh consecutive year of contraction in 2003.[68]  This seven years of liquidation is unprecedented, and it extends the current cattle cycle to fourteen years, which is also unprecedented.[69]  Normal cattle cycles last approximately ten years from peak to peak, i.e., from herd contraction to herd rebuilding.[70]  As opposed to the current liquidation phase of seven years, the average liquidation phase of cattle cycles is to two to three years.[71]  USDA predicts that as of January 1, 2003 , the U.S. cattle population fell to 95.6 million, its lowest number since 1959.[72]  USDA estimates that this decline will continue in 2003.[73]  The U.S. calf crop in 2003 is predicted to be the smallest since the mid-1950s.[74] 

            B.        Ten Years of Negative Returns for U.S. Cattle Producers

Alarmingly, the average returns to U.S. cow/calf producers during the 1992-2001 decade fell to negative $30.40 per bred cow per year.[75]  Another sector of the cattle industry, cattle feeders, suffered markedly in 2002 with losses ranging from $50 to $75 per head and an estimated $2.5 billion loss in equity.[76]  According to the USDA, the weak state of the U.S. livestock sector has had “a dramatic impact on U.S. net farm income,” which was forecast as $36.2 billion for 2002, a decrease of approximately $10 billion from 2001.[77]

C.        Profits to Beef Packers, But Not to Cattle Producers

The U.S. beef sector has undergone significant changes in recent years.  The U.S. beef packing industry has become heavily concentrated with just four firms controlling a combined 80 percent of the market.[78]  Benefits to U.S. live cattle producers in the form of expanded markets for beef abroad have been heavily outweighed by the ability of packers to use imported cattle and beef to drive down prices received in the U.S. cattle market.  This situation is most notable with the dramatic increase in imports of live cattle and beef from Canada following the implementation of the USCFTA/NAFTA. 

1.         Concentrated Packer Sector Has Benefited from Increased Cattle and Beef Imports

Packers are able to capture benefits from increased imports and increased exports resulting from trade agreements such as the USCTA/NAFTA.  Packers add value to live cattle and/or beef carcasses through processing and sell the resulting boxed beef and other beef products on a margin basis.  To the extent that packers have access to an expanded supply of inventories, i.e., a new source of imported inventories created by a trade agreement, packers are afforded new alternatives for sourcing their inventories.  Lower inventory costs mean higher profits for margin operators like packers and, therefore, packers have an economic incentive to seek new sources of lower cost inventories.

In addition, packers benefit from oversupply conditions as oversupplies lower domestic live cattle prices, hence the cost of their inventories.  The live cattle industry is highly sensitive to changes in the available supply of both beef and live cattle, a function of the perishable nature of both beef and live cattle.  Even small increases in supply – as little as 2 to 3 percent – can have significant downward effects on price.[79]  Thus, the very factors that benefit packers -- lower prices for live cattle and increased availability of beef supplies -- result in harm to cattle producers as cattle producers receive lower prices for their cattle, and their live cattle markets respond negatively to increased supplies.  

This situation helps to explain how there is a negative correlation between profit margins at the packing and feeding stage, with the feeding stage representing the final phase of the live cattle industry, as was found in the recent study by Sparks Companies, Inc.[80]  Although the packer is the customer of the live cattle producer, the packer is in direct competition with the producer over the price paid for live cattle.  Unfortunately, the structural changes that have occurred within the U.S. cattle market, i.e., the unprecedented concentration of the packing industry,[81] have afforded packers the ability to distort the outcome of that competition, and imports are a significant contributor to this distortion.

            While packers use cattle and beef imports to leverage down prices, other practices  of packers also depress prices received by U.S. producers.  These practices include forward contracts, marketing agreements, possible refusals to deal with some producers, and possible gaming of the market.   

In their November 1999 final determination on Live Cattle from Canada, three of the six ITC commissioners found the impacts of beef industry concentration deserving of comment.  Commissioner Carol T. Crawford noted, “ . . .there is considerable concentration in the packing industry . . . which can and does exert significant influence over prices for cattle.”[82]  Commissioner Thelma J. Ashley noted, “ . . . the beef packing industry (the primary purchasers of live cattle fed for slaughter) is heavily concentrated . . . [which] leads to unequal bargaining positions between the two groups [packers versus feedlot operators].  This disparity in bargaining positions enables . . . beef packers to have a more significant influence on price levels . . .”[83]  Then Chairman Lynn M. Bragg noted, “[t]he concentration of packers increases the packers’ leverage relative to cattle producers.”[84] 

The potential for imports to restrain prices was addressed by the Republican Commissioners of the United States Trade Deficit Review Commission in their November 14, 2000 , report.  The Republican Commissioners stated, “[e]asy availability of imports can limit price increases either by expanding available supply or reducing the ability of businesses to raise prices in order to pass on increases in their costs.”[85]  In the case of live cattle producers, it is the “expanding available supply” resulting from trade agreements that limits price increases.

            2.         Declining Share of Retail Dollar

Despite strong demand in the U.S. market for beef, the share of the retail dollar passed on to producers has fallen in recent years.  The declining share of the retail dollar has resulted, at least in part, from increased concentration in the beef packing industry.  It is important to note that currently little connection exists between dollar returns to producers and prices paid by consumers for beef.  For example, in November 2001, average retail beef prices were 9 percent above those of the previous year.  In December 2001, however, fed cattle prices were $14.00 lower per hundredweight than the previous year.  Thus, changes in tariffs which may result in lower prices for cattle do not necessarily also reduce retail beef prices to consumers.  However, increased imports do exacerbate the precarious position of U.S. producers.

            3.         Beef Packer Profits High

On May 23, 2002, Data Transmission Network (DTN) Livestock reported that the gross margins earned by beef packers had increased well above $190 per head, which was higher than at anytime recorded since 1993.[86]  The ERS of USDA reported that the 5-market price for fed cattle in May 2002 was $65.60 per cwt, a full $9.50 per cwt less than the previous year’s May price (based on a 1250 pound fed steer, this represents a loss to producers of $118.75 per head).[87]  This favorable margin gain for packers and unfavorable price reduction for producers corresponds with a 23 percent increase in Canadian cattle imports during the period of January through May 2002 when compared to the same period in 2001.[88]  Obviously, imports have a significant, negative impact on live cattle prices which, consequently, leads to higher packer margins.  

VII.     Lessons for Future Agreements

            Trade agreements concluded by the United States in recent years have produced mixed results for U.S. producers, and these results provide lessons for future trade agreements.  First, R-CALF USA strongly urges that the United States maintain its right to apply its WTO TRQ on imported beef.  As demonstrated with the case of Canada, the continued application of the TRQ to that country would have resulted in increased stability in the market for U.S. producers. 

            Second, major distortions remain in the international market.  While the United States has succeeded in obtaining additional market access in other countries, tariffs abroad remain high.  The European Union continues to protect its cattle producers through scientifically invalid SPS measures, domestic support measures, and export subsidies.  Future negotiations must address these issues. 

Third, and perhaps most important, the recent opening of markets abroad to U.S. beef has not necessarily translated into profits for U.S. cattle producers.  While R-CALF USA has no doubt that increased exports can benefit U.S. producers, increased imports of live cattle and beef into the United States have contributed to a significantly depressed U.S. cattle sector.  Any new trade agreements that are implemented without first addressing the market concentration manifest in the U.S. beef packing industry will afford packers with additional economic benefits while further exacerbating the already stressed condition of the U.S. live cattle industry.  It is imperative that the ITC recognize the issue of market dominance and market power vis-à-vis the packers’ ongoing practice of using both beef and cattle imports to depress U.S. live cattle prices.  After all, liberalized trade with increased competition is desirable, but liberalized trade further contributing to market concentration and the further depression of the largest sector of U.S. agriculture is something else. 

VIII.    Conclusion

R-CALF USA appreciates the opportunity to submit these comments to the ITC.  If you have any questions regarding these comments, I may be reached at (406) 252-2516.

                                                                        Sincerely,

Leo R. McDonnell, Jr.
            President, R-CALF USA