U.S. Agricultural Exports: Strong Growth Likely But U.S. Export
Assistance Programs' Contribution Uncertain (Letter Report, 09/30/97,
GAO/NSIAD-97-260).
Pursuant to a congressional request, GAO assessed: (1) the way in which
the 1996 Federal Agriculture Improvement and Reform Act (FAIR) will
likely affect U.S. agricultural exports; and (2) the continued relevance
of U.S. agricultural export assistance programs.
GAO noted that: (1) agricultural experts generally expect that FAIR's
domestic policy reforms will modestly contribute to increased U.S.
agricultural exports; (2) the extent to which FAIR's domestic reforms
increase exports is dependent on the degree to which farmers add
additional land to production and use FAIR's planting flexibility to
respond to international and domestic market conditions; (3) much of the
forecasted growth in U.S. agricultural exports is expected to come from:
(a) the anticipated rise in income levels in East and Southeast Asian
nations and other regions; and (b) the liberalization of agricultural
markets brought about by the 1994 Uruguay Round trade agreements, which
brought agriculture under multilateral disciplines for the first time,
and by unilateral policy changes of other nations; (4) FAIR's domestic
policy reforms remove a primary benefit associated with most U.S. export
assistance programs--the exporting of surplus stocks generated by
domestic price supports; (5) nevertheless, program proponents maintain
that U.S. agricultural export assistance programs have continued
relevance because they benefit the overall U.S. economy, benefit the
U.S. agricultural sector, counter competitor nations' agricultural
export programs, and promote U.S. trade negotiating objectives; (6)
program performance under past conditions may not always be helpful in
predicting future program relevance because of changing conditions in
the global trading environment, such as Uruguay Round trade
liberalization, or the potential for commodity supply and price
volatility; and (7) nevertheless, using applicable economic research and
expert opinion, GAO's review provides an indication of these programs'
future contribution in four key areas: (a) with regard to the U.S.
economy, no conclusive evidence exists that these programs have
measurably expanded aggregate employment and output or reduced the trade
and budget deficits; (b) concerning the U.S. agricultural sector, while
U.S. agricultural export assistance programs may provide some income and
employment benefits to the sector, there is limited evidence of these
benefits; (c) regarding competitor nations' programs, the lack of
transparency in these nations' agricultural export assistance efforts
makes it difficult to conclusively determine how effectively U.S. export
programs counter these foreign practices; and (d) concerning U.S. trade
negotiating objectives, there are widely divergent views about the
amount of leverage these programs provided in the past.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-97-260
TITLE: U.S. Agricultural Exports: Strong Growth Likely But U.S.
Export Assistance Programs' Contribution Uncertain
DATE: 09/30/97
SUBJECT: Agricultural programs
Commodity marketing
Globalization
International trade
Agricultural policies
Price supports
Foreign trade agreements
International cooperation
Export regulation
IDENTIFIER: USDA Export Enhancement Program
CCC Export Credit Guarantee Program
CCC Intermediate Export Credit Guarantee Program
USDA Market Access Program
Uruguay Round Agreement
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Cover
================================================================ COVER
Report to the Chairman, Committee on the Budget, House of
Representatives
September 1997
U.S. AGRICULTURAL EXPORTS -
STRONG GROWTH LIKELY BUT U.S.
EXPORT ASSISTANCE PROGRAMS'
CONTRIBUTION UNCERTAIN
GAO/NSIAD-97-260
U.S. Agricultural Exports
(711256)
Abbreviations
=============================================================== ABBREV
ARP - Acreage Reduction Program
CGE - computable general equilibrium model
COAP - Cottonseed Oil Assistance Program
CRS - Congressional Research Service
DEIP - Dairy Export Incentive Program
EEP - Export Enhancement Program
ERS - Economic Research Service
EU - European Union
FAPRI - Food and Agricultural Policy Research Institute
FAS - Foreign Agricultural Service
FAIR - Federal Agriculture Improvement and Reform Act
FMDP - Foreign Market Development Program
FOR - Farmer Owned Reserve Program
GATT - General Agreement on Tariffs and Trade
GDP - gross domestic product
GSM - General Sales Manager
HVP - high-value product
MAP - Market Access Program
NTB - nontariff barrier
OMB - Office of Management and Budget
SOAP - Sunflowerseed Oil Assistance Program
SPS - sanitary and phytosanitary
STE - state trading enterprise
TPCC - Trade Promotion Coordinating Committee
TRQ - tariff-rate quota
USDA - U.S. Department of Agriculture
WTO - World Trade Organization
Letter
=============================================================== LETTER
B-277683
September 30, 1997
The Honorable John K. Kasich
Chairman, Committee on the Budget
House of Representatives
Dear Mr. Chairman:
Domestic agricultural policy in the United States was significantly
changed by the 1996 Federal Agriculture Improvement and Reform (FAIR)
Act
(P.L. 104-127, Apr. 4, 1996). Although it continues to provide
income support to farmers for the next 5 years, FAIR reduces the
government's role in regulating the production of bulk commodities
such as wheat and corn and provides the agricultural sector and
farmers enhanced flexibility to respond to domestic and international
market conditions.
In response to your request, we assessed (1) the way in which FAIR
will likely affect U.S. agricultural exports and (2) the continued
relevance of U.S. agricultural export assistance programs. To
address FAIR's potential impact on U.S. exports, we interviewed a
wide range of U.S. and competitor nation agricultural experts,
analyzed available studies and reports authored by some of these
experts, and reviewed and discussed the agricultural trade components
of various economic models. To evaluate the programs' relevance, we
reviewed both qualitative and quantitative evidence regarding the
extent to which the programs benefit the overall U.S. economy,
benefit the U.S. agricultural sector and specific U.S. commodities,
counter competitor nations' agricultural export programs, and promote
U.S. trade negotiating objectives.
BACKGROUND
------------------------------------------------------------ Letter :1
Agriculture is an important component of U.S. trade. Agricultural
exports accounted for $60 billion, or 7 percent, of all U.S. exports
(merchandise and service) in fiscal year 1996, while agricultural
imports accounted for $32.4 billion, or 3.4 percent, of all U.S.
imports. The agricultural sector consistently generates an annual
trade surplus, which in fiscal year 1996 was $27.4 billion, according
to the U.S. Department of Agriculture (USDA). In addition, the
financial well-being of the U.S. agricultural sector has become
increasingly linked to its export opportunities. Exports represent
about 20 percent, by value, of U.S. agricultural production and the
equivalent of one-third of total harvested U.S. acreage. For
example, in 1996, 57 percent of the U.S. wheat crop was shipped
overseas, as well as 47 percent of the rice and 43 percent of the
cotton crop. U.S. agricultural exports also contribute to U.S.
employment. According to the Economic Research Service (ERS) of
USDA, $55.8 billion in agricultural exports in 1995 supported about
950,000 jobs in the United States, with 365,300 of those jobs
occurring in the farm sector and 584,700 occurring in the nonfarm
sector. The total jobs supported represent less than 1 percent of
U.S. civilian employment, but the farm sector jobs supported by
exports represent about 15.5 percent of the sector's total
employment.
The U.S. government has actively sought to expand U.S. agricultural
exports through negotiations to reduce foreign trade barriers and
through subsidies, market promotion, food aid, and loan guarantees.
From 1985 to 1996, the U.S. government has spent $9 billion on
export subsidies, $2.3 billion on market promotion, and $7.8 billion
on food aid and has guaranteed $53.1 billion in export loans (all in
constant fiscal year 1996 dollars).\1 Between fiscal years 1980 and
1997, the U.S. government paid out approximately $2.1 billion in
export credit guarantee claims against these loans because of loan
repayments that were in default and have not been rescheduled.\2
Between 1989 and 1993, about 20 percent by value of U.S.
agricultural exports received some government assistance.
USDA has four types of agricultural export assistance programs. All
share the objective of increasing U.S. agricultural exports. And
two--export subsidies and market promotion programs--are intended to
directly counter competitor agricultural export assistance. Prior to
FAIR, most of these programs also helped the U.S. government in a
budgetary sense by (1) reducing government-held stocks of surplus
grain generated by U.S. domestic agricultural programs\3
and (2) helping to offset the cost of U.S. domestic agricultural
price supports.\4
Successive farm bills and market conditions have reduced expenditures
for U.S. agricultural export assistance programs. For example,
total funding for these programs has decreased from $2.1 billion in
fiscal year 1992 to $792 million in fiscal year 1996. The four types
of programs include the following:\5
(1)Export subsidy programs that lower the price of U.S. commodities
on the world market: the Export Enhancement Program (EEP) and the
Dairy Export Incentive Program (DEIP).\6 EEP expenditures for fiscal
year 1996 were $5 million. Due to high market prices in 1996, EEP's
authorized program level of $350 million was not fully utilized.
DEIP expenditures for fiscal year 1996 were $20 million.
(2)Export credit programs that offer short- and intermediate-term
loan guarantees to lower the cost of borrowing for importing
countries to purchase U.S. agricultural exports: the Export Credit
Guarantee program (the General Sales Manager (GSM)-102) and the
Intermediate Export Credit Guarantee program (GSM-103). These were
jointly authorized to expend not less than a total of $5.5 billion in
guarantees and, in fiscal year 1996, actually guaranteed exports
valued at $3.1 billion and $151 million, respectively.\7
(3)Export promotion programs that attempt to develop, maintain, and
expand foreign markets for U.S. agricultural products through
funding for advertising and other market promotion: the Foreign
Market Development Program (FMDP--also known as the Cooperator
Program) and the Market Access Program (MAP). A program level of up
to $34 million and $90 million, respectively, was approved for these
programs for fiscal year 1996.\8
(4)Food aid programs that provide U.S. agricultural commodities to
developing countries through either concessional loans that offer
long-term credit with below-market interest rates, such as the Public
Law 480\9
title I concessional sales program, or grants for market development
purposes, such as the Food for Progress grant program. These
programs had expenditures of $219 million and $107.7 million,
respectively, for fiscal year 1996.
Farm legislation of 1985 and 1990 brought about market-oriented
reforms in domestic agricultural policy. These reforms helped reduce
the market-distorting impact of government-established price supports
and diminished government holding of surplus stocks. The 1996 FAIR
Act expands on market-oriented provisions of previous legislation and
for many commodities ends the tying of direct farm income support to
production decisions. FAIR is also consistent with U.S. commitments
to the Uruguay Round Agreement on Agriculture,\10 which reduces
domestic and export agricultural assistance worldwide. While the act
provides government income support payments to farmers through 2002,
these payments are now largely independent from farmers' planting
decisions.\11 With the new flexibility, producers' planting decisions
are to be increasingly driven by market conditions (domestic and
international) rather than by government programs.
Concurrent with these changes, the 1996 FAIR act reauthorized all
four types of export assistance programs, with some operational
modifications aimed at making the programs more focused on market
development. Two changes that FAIR made to the export programs,
which USDA officials state will increase program flexibility, were to
authorize (1) the GSM program to provide credit to private importers
in qualified nations and (2) title I concessional loans to private
entities in addition to foreign governments. They believe these
provisions are responsive to changes in the global trading
environment. For example, a trend in some nations in Latin America,
Asia, and Europe is toward less government control of markets and a
greater reliance on the private sector.
Finally, the Uruguay Round Agreement on Agriculture permits the
continued use of export subsidies (though reduced from historical
levels) and other forms of agricultural export assistance, such as
market development and promotion efforts, export credit guarantees,
and concessional loans to developing countries. And, our competitors
continue to use Uruguay Round allowable agricultural export
assistance. For instance, in fiscal year 1996, USDA estimated that
the European Union (EU)\12 spent over $9 billion on agricultural
export subsidies,\13 as compared to the $792 million the United
States spent on all export assistance in that same year.\14 Thus,
world agricultural trade remains greatly influenced by government
policies and programs.
--------------------
\1 These figures exclude the operational cost of the USDA's Foreign
Agricultural Service (FAS). In fiscal year 1995, FAS had an
operating budget of about $118 million to manage its various
agricultural export assistance programs and carry out its overseas
functions (such as the gathering of information on competitor
nations' agricultural exporting efforts).
\2 See Addressing the Deficit: Budgetary Implications of Selected
GAO Work for Fiscal Year 1998 (GAO/OCG-97-2, Mar. 14, 1997).
\3 Prior to FAIR, as one way to maintain domestic prices (and thus
farmers' income) for government-supported crops, the U.S. government
acquired large amounts of these crops. Export programs, such as
export subsidies, helped reduce the need for the government to
acquire supported crops by increasing global demand for these
products (which in turn raised their domestic price). Because FAIR
decouples the link between domestic prices and farmers' income, the
U.S. government no longer acquires surplus agricultural commodities.
\4 Prior to FAIR, price support payments (also known as "deficiency
payments") were made when the market price for a government-supported
crop fell below the USDA target price. Export programs, such as
credit guarantees, helped reduce price support payments by increasing
global demand for some U.S. products. This, in turn, helped raise
the domestic prices of these products. With FAIR, this budgetary
offset no longer exists.
\5 See appendix I for further information on the programs' funding
levels.
\6 Two other export subsidy programs, the Sunflowerseed Oil
Assistance Program (SOAP) and the Cottonseed Oil Assistance Program
(COAP), were not reauthorized by FAIR.
\7 GSM-102 guarantees repayment of short-term financing (up to 3
years), while GSM-103 guarantees repayment of intermediate-term
financing (3 to 10 years) to eligible countries that purchase U.S.
farm products.
\8 MAP was preceded by two similar market promotion programs named
the Market Promotion Program and the Targeted Export Assistance
program.
\9 The Agricultural Trade Development and Assistance Act of 1954
(P.L. 83-480, July 10, 1954), commonly known as P.L. 480.
\10 With the completion of the Uruguay Round of multilateral trade
negotiations in 1994, member countries of the General Agreement on
Tariffs and Trade (GATT) agreed to a variety of measures to
liberalize global agricultural trade.
\11 One exception is that program beneficiaries are prohibited from
increasing fruit and vegetable planting on program acreage.
According to an agricultural expert, this exception is designed to
protect traditional U.S. fruit and vegetable growers, whose
products' prices could fall due to an increase in cultivation of only
a few hundred thousand acres.
\12 The EU, since January 1, 1995, includes Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom.
\13 According to USDA, broad EU support of its domestic producers
results in high internal prices, thus requiring high levels of export
subsidies to make EU agricultural products competitive in world
markets.
\14 Total U.S. expenditures in fiscal year 1996 include the monies
spent on EEP, DEIP, MAP, FMDP, and the subsidized component of the
GSM programs as computed to comply with the Federal Credit Reform Act
of 1990 (P.L. 93-344, July 12, 1974, as amended by title XIII, sec.
13201(a) of P.L. 101-508, Nov. 5, 1990).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Agricultural experts generally expect that FAIR's domestic policy
reforms will modestly contribute to increased U.S. agricultural
exports. The extent to which FAIR's domestic reforms increase
exports is dependent on the degree to which farmers add additional
land to production and use FAIR's planting flexibility to respond to
international and domestic market conditions. Independent of FAIR,
U.S. government and private forecasters are predicting strong growth
of U.S. exports driven largely by favorable international market
conditions and the general competitiveness of many U.S. agricultural
products. Much of the forecasted growth in U.S. agricultural
exports is expected to come from (1) the anticipated rise in income
levels in East and Southeast Asian nations and other regions and (2)
the liberalization of agricultural markets brought about by the 1994
Uruguay Round trade agreements, which brought agriculture under
multilateral disciplines (practices) for the first time, and by
unilateral policy changes of other nations.
FAIR's domestic policy reforms remove a primary benefit associated
with most U.S. export assistance programs--the exporting of surplus
stocks generated by domestic price supports. Nevertheless, program
proponents, including USDA and some industry groups, maintain that
U.S. agricultural export assistance programs have continued
relevance because they benefit the overall U.S. economy, benefit the
U.S. agricultural sector, counter competitor nations' agricultural
export programs, and promote U.S. trade negotiating objectives.
While the evidence is mixed regarding the continued relevance of U.S.
export assistance programs, such assessments are difficult. In
particular, assessing the benefits of these programs is necessarily
limited largely to research and program participants' past
experience. Program performance under past conditions may not always
be helpful in predicting future program relevance because of changing
conditions in the global trading environment, such as Uruguay Round
trade liberalization, or the potential for commodity supply and price
volatility. Nevertheless, using applicable economic research and
expert opinion, our review provides an indication of these programs'
future contribution in four key areas.
-- With regard to the U.S. economy, no conclusive evidence exists
that these programs have measurably expanded aggregate
employment and output or reduced the trade and budget deficits.
Export programs could potentially expand the economy in cases
where markets do not operate efficiently. However, economic
evidence suggests that the federal government's ability to
influence the overall U.S. economy in the short run comes
primarily through making changes in either fiscal policy, such
as the overall levels of government expenditures and taxation,
or Federal Reserve monetary policy. Moreover, government export
programs largely reallocate production, employment, and income
between sectors.
-- Concerning the U.S. agricultural sector, while U.S.
agricultural export assistance programs may provide some income
and employment benefits to the sector, there is limited evidence
of these benefits. Further, while there is some evidence that
these programs have increased exports to targeted markets, such
as China, the research also shows that the additional exports
that these programs have provided worldwide have been relatively
small.
-- Regarding competitor nations' programs, the lack of transparency
(openness) in these nations' agricultural export assistance
efforts makes it difficult to conclusively determine how
effectively U.S. export programs counter these foreign
practices. However, two U.S. export programs--EEP and MAP--are
no longer authorized only to counter specific competitor actions
but rather have been broadened to assist U.S. agricultural
exports in general. In addition, several economic studies (see
footnote 79) indicate that foreign competitors find U.S. export
subsidies relatively inexpensive to offset.
-- Concerning U.S. trade negotiating objectives, there are widely
divergent views about the amount of leverage these programs
provided in the past. Looking to the future, some private and
public officials say the programs could provide negotiating
leverage for the 1999 World Trade Organization (WTO)\15
agricultural talks, but others disagree and question their
continued relevance for future negotiations.
Given the mixed evidence concerning the continued relevance of U.S.
agricultural export assistance programs, their decreased funding
levels, and the trend toward increased liberalization of global
agricultural trade, the Congress may wish to reassess the continued
viability and/or focus of the programs the next time these programs
are reviewed.
--------------------
\15 The Uruguay Round created the WTO on January 1, 1995, as a formal
structure to replace the provisional GATT organizational structure.
As of May 7, 1997, WTO had 131 member countries.
WHILE FAIR MAY MODESTLY
INCREASE U.S. EXPORTS,
INTERNATIONAL FACTORS ARE MORE
IMPORTANT
------------------------------------------------------------ Letter :3
Agricultural experts predict that FAIR's domestic policy reforms will
likely help expand U.S. agricultural exports, though minimally.
Other factors, such as expanding worldwide markets and the appeal of
many U.S. agricultural products, are expected to increase U.S.
exports independent of FAIR.
FAIR MAY MODESTLY INCREASE
U.S. AGRICULTURAL EXPORTS
---------------------------------------------------------- Letter :3.1
The extent to which FAIR's domestic policy reforms\16 may modestly
increase exports is dependent on the degree to which farmers--who
were previously constrained by pre-FAIR policies that restricted
acreage and planting decisions--add additional land to production and
use FAIR's planting flexibility to respond to international and
domestic market conditions. For example, according to USDA, FAIR's
elimination of the Acreage Reduction Program (ARP)--that set aside or
allowed land to lie fallow--will permit more land to be available for
cultivation and thus more crops for export. In addition, FAIR's
suspension of the Farmer Owned Reserve Program (FOR) benefits the
price competitiveness of U.S. agricultural exports by no longer
limiting sales in times of large supply.\17
FAIR's reforms are a continuation of the market-oriented reforms of
domestic agricultural policy that have been underway since the 1985
and 1990 farm legislation.\18 These changes had already reduced the
market-distorting impact of a complex system of
government-established price supports. In addition, they diminished
the government's holding of stocks, which had limited the private
sector's ability to respond to changing market demand. For example,
prior to the 1985 and 1990 farm legislation, the U.S. government
held sizable stocks of grains, which made it a major player in the
supply management of these commodities.
According to USDA, FAIR's changes\19 to domestic agricultural
policy--such as the use of production flexibility payments, the
elimination of ARP, and the suspension of FOR--increase the ability
of farmers to choose which crops to plant and the amount of land to
be cultivated while still allowing them to receive income support.
Therefore, FAIR encourages farmers to react more quickly to market
signals with regard to planting decisions and the amount of land to
cultivate. Thus, FAIR should allow farmers to respond more rapidly
to price changes in the international and domestic markets.
Agricultural experts state that with this increased flexibility,
farmers should be able to export more of their production,
capitalizing on the considerable comparative advantages U.S.
agriculture derives from substantial land resources, advanced
transportation and information systems, and ongoing agricultural
research.\20
For example, currently there is strong domestic and international
demand for soybeans. Due to the flexibility FAIR provides, farmers
have been able to respond to this increased demand by switching from
planting other crops to cultivating soybeans. As a result, USDA
states that 1997 soybean plantings are the highest since 1982.
In the past, farmers would have had more difficulty in quickly
responding to this increase in demand. This is because prior to
FAIR, in order to receive government deficiency payments, farmers had
to contract with the U.S. government concerning the crops they would
plant; this, in turn, locked them into certain crop cultivation
patterns. However, also under FAIR, with increased production
flexibility by farmers and reduced supply management by government,
commodity price volatility is expected to increase. As a result,
according to USDA, farmers face greater risk of income volatility,
due to these fluctuations in commodity prices.
--------------------
\16 FAIR in general decouples the link between planting decisions and
income support. For example, FAIR production flexibility contract
payments replace "deficiency payments," which were available under
previous farm bills. Unlike the deficiency payments, which were made
when the market price for a given government-supported crop fell
below the USDA target price, production flexibility payments provide
income support separate from a crop's market price or generally from
farmers' planting decisions.
\17 See C. Edwin Young and Paul C. Westcott, The 1996 U.S. Farm
Act Increases Market Orientation (Washington, D.C.: ERS, USDA, Aug.
1996).
\18 See the Food Security Act of 1985 (P.L. 99-198, Dec. 23, 1985)
and the Food, Agriculture, Conservation, and Trade Act of 1990 (P.L.
101-624, Nov. 28, 1990).
\19 These changes to domestic agricultural policy affected bulk
products more than high-value products (HVP), which have not been the
primary recipient of most domestic support programs. HVPs represent
a complex and diverse range of agricultural products. Some of these
products are unprocessed and include fruits, nuts, and vegetables;
semiprocessed and include flour, oilseed meals, and vegetable oils;
or highly processed and include distilled beverages, meats, and other
processed foods.
\20 Exports of U.S. wheat, corn, soybeans, and cotton are expected
to modestly increase under FAIR. However, one exception to FAIR's
anticipated modest increase in exports, according to ERS, is rice.
Because of FAIR's elimination of planting requirements and other
changes, U.S. rice production is down, domestic rice prices are up,
and U.S. rice exports are down.
FAVORABLE INTERNATIONAL
MARKET CONDITIONS: PRIMARY
REASON U.S. EXPORTS ARE
EXPECTED TO INCREASE
---------------------------------------------------------- Letter :3.2
Notwithstanding unforeseen negative weather conditions or political
instability, future increases in U.S. agricultural exports are
expected to be largely driven by changes in worldwide supply and
demand as well as by the ongoing liberalization of global
agricultural trade. According to USDA's baseline projections,
between 1997 and 2005 U.S. agricultural exports will increase by 44
percent, from $55.5 billion to $79.7 billion.\21 This growth is
expected to be largely due to (1) increased demand in East and
Southeast Asian nations and in other regions and (2) market opening
brought about by Uruguay Round agreements and associated reforms of
other nations' agricultural programs. These changes in agricultural
markets represent opportunities to U.S. agricultural competitors as
well as to the United States. USDA baseline projections and other
forecasts take into account how competitor nations respond to these
opportunities.
Rising income levels in East and Southeast Asian nations, and in
Latin America, the Middle East, and North Africa, are anticipated to
result in improved diets and a greater demand for imports of grains,
fruits, vegetables, and meat. China could play a key role in this
increased demand for both bulk and high-value agricultural
commodities, particularly as its urban middle class expands and
incomes grow. Recent increases in U.S. agricultural exports have
been largely driven by Asian demand, and agricultural forecasters say
that this trend will likely continue. For example, agricultural
researchers expect the following to occur:
-- Between 1997 and 2005, East and Southeast Asian nations' gross
domestic product (GDP) is expected to expand at a robust 7
percent per year, with China leading at about 8.5 percent,
according to the USDA's ERS.\22 See
figure 1 for a comparison of forecasted average East and
Southeast Asian real GDP growth rates with other regions and
country categories, 1990-2005.
Figure 1: Forecasted Average
Annual Real GDP Growth Rates
for Selected Regions, 1990-2005
(See figure in printed
edition.)
Source: Agricultural Baseline Projections to 2005.
-- Between 1997 and 2005, strong growth in demand for feed grains
and food products in the East and Southeast Asian
nations--particularly in China--is predicted to fuel much of the
growth expected in U.S. agricultural exports, according to the
Food and Agricultural Policy Research Institute (FAPRI).\23
-- Demand for U.S. HVPs such as meat, fruits, vegetables, and
prepared foods will rise, according to ERS. While most U.S.
HVPs are exported to developed countries such as Canada, the EU,
and Japan, these goods are increasingly flowing into the rapidly
growing economies of East and Southeast Asia.
Further influences expected to increase U.S. exports and global
agricultural trade are (1) the market openings created by the Uruguay
Round's agricultural provisions and (2) other related reforms in
foreign countries' agricultural policies. The Uruguay Round
agreements contain commitments by WTO members countries to open
up--at least to some degree--their agricultural markets, many for the
first time. Countries are doing so by reducing several important
agricultural trade barriers, including import restrictions and
tariffs, export subsidies, and domestic support programs. The
Uruguay Round agreements also set forth rules on the use of sanitary
and phytosanitary (SPS) measures that directly or indirectly affect
international trade.\24 For example, SPS measures that restrict
imports must generally be based on scientific principles. Several
WTO members, including the United States, have invoked dispute
settlement procedures regarding four SPS measures that appear to lack
a scientific basis. These SPS rules are intended to make it more
difficult for countries to rely on unjustified SPS measures as a way
to protect their markets from imports. Other Uruguay Round
provisions mandate conversion of most nontariff barriers (NTB), such
as import licensing requirements, to tariffs. These measures were
aimed at making trade barriers more transparent and thus facilitating
world agricultural trade by encouraging a freer trade environment.\25
In addition to Uruguay Round and bilateral trade liberalization (such
as the U.S.-Japan beef and citrus agreement), unilateral policy
changes have also significantly liberalized the world trading
environment. Specifically, newly privatized markets are emerging
from the collapse of the socialist economies in the former Soviet
Union and Eastern Europe. Moreover, long-held policies of
self-sufficiency, protectionism, and government control of markets
are being challenged, reformed, or dismantled in Latin America, Asia,
and Europe. For example, Argentina has gone a long way toward
reforming its agricultural sector since the 1990s. These reforms
include the privatizing of export facilities (thus reducing port
handling costs) and the scrapping of major state-owned marketing
boards for grains, meats, and sugar. While difficult to quantify,
these unilateral policy changes in other nations are also expected to
increase world agricultural trade, according to USDA.
--------------------
\21 See Agricultural Baseline Projections to 2005, Reflecting the
1996 Farm Act, USDA/Interagency Agricultural Projections Committee
(Washington, D.C.: ERS, USDA, Feb. 1997).
\22 Agricultural Baseline Projections to 2005.
\23 FAPRI is an agricultural economic research organization that
performs analysis for the Congress and other clients, on the
potential impact of legislative changes on international trade in
agriculture. See FAPRI: 1996 U.S. Agricultural Outlook (Ames,
Iowa: Iowa State University, Aug. 1996).
\24 Sanitary measures pertain to human and animal health and safety.
Phytosanitary measures pertain to protecting plants from pests and
diseases.
\25 Uruguay Round-related increases in U.S. agricultural exports
have been forecasted by USDA to be between $4.7 billion and $8.7
billion annually by the year 2005.
EVIDENCE IS MIXED REGARDING THE
CONTINUED RELEVANCE OF U.S.
EXPORT ASSISTANCE PROGRAMS
------------------------------------------------------------ Letter :4
Overall, we found that the evidence is mixed regarding the continued
relevance of U.S. agricultural export assistance programs. While
FAIR's domestic policy reforms remove a primary benefit associated
with most U.S. export assistance programs--the exporting of surplus
stocks generated by domestic price supports--USDA and some industry
officials state that these programs continue to have relevance.
However, others disagree. To address this issue, we reviewed the
evidence regarding the extent to which the programs
-- benefit the overall U.S. economy,
-- benefit the U.S. agricultural sector and specific U.S.
commodities,
-- counter competitor nations' agricultural export programs, and
-- promote U.S. trade negotiating objectives.
One challenge in assessing these programs' continued relevance is
that the evidence, for example, on whether they benefit the U.S.
agricultural sector is limited largely to research on how these
programs have functioned in the past and to the past experiences of
program participants. Program performance under past conditions may
not always be helpful in predicting future program contributions.\26
For example, EEP was created in the mid-1980s during a period of
large grain stocks and low prices. According to ERS, the program is
less effective under changed market conditions of higher world prices
and tighter stocks. Another challenge is the difficulty in
generalizing across these export programs regarding their continued
relevance, as they each have multiple objectives and support various
commodities and export markets. Nevertheless, we identified
applicable economic research and principles as well as expert opinion
that provide an indication of the future contributions of these
programs in the four key areas previously outlined.
--------------------
\26 In addition, there is uncertainty regarding future agricultural
legislation, as FAIR is authorized through 2002. Subsequent farm
legislation could alter the potential future contributions of U.S.
agricultural export assistance programs.
NO CONCLUSIVE EVIDENCE THAT
USDA EXPORT PROGRAMS
MEASURABLY BENEFIT THE
OVERALL U.S. ECONOMY
---------------------------------------------------------- Letter :4.1
Program proponents, including many industry groups and USDA, say that
the United States receives macroeconomic\27 benefits from export
assistance programs. Program proponents state that agricultural
export assistance programs expand total U.S. output and employment
through additional exports, reduce the size of the U.S. trade and
federal budget deficits, and contribute to overall economic
efficiency. Some USDA officials state that these programs were not
necessarily intended to provide macroeconomic benefits, but rather
they are to redistribute resources to the rural economy. However, a
1995 USDA study concluded that MAP has macroeconomic benefits because
it increases the level of overall economic activity and employment
through expanded U.S. exports. The study states that this expansion
of new economic activity and employment is sufficient for MAP to more
than fully pay for itself through increased tax revenue, thus
contributing to reducing the budget deficit. \28
Our analysis and review of economic studies, however, found no
conclusive evidence that these programs have provided net benefits to
the aggregate economy.\29 Government export programs largely
reallocate production, employment, and income among sectors. The
potential for export programs to affect overall U.S. output,
employment, and the trade and budget balances is limited to
particular circumstances, such as in cases where markets do not
operate efficiently. Moreover, economic research suggests that the
federal government's ability to influence short-run U.S. output and
employment levels comes primarily through making changes in either
fiscal policy, such as overall levels of government expenditures and
taxation, or Federal Reserve monetary policy.\30
--------------------
\27 Macroeconomics refers to the performance of the economy as a
whole, including the general levels of output and income, rather than
the performance of individual sectors.
\28 For USDA views on MAP's impact, see Evaluating the Effectiveness
of the Market Promotion Program on U.S. High-Value Agricultural
Exports, Foreign Agricultural Service Staff Paper 1-95 (Washington,
D.C.: USDA, Feb. 1995).
\29 This conclusion is based on conventional mainstream economic
perspectives. Some economists and research organizations disagree
with these mainstream views.
\30 For a discussion, see Herbert Stein, Presidential Economics: The
Making of Economic Policy from Roosevelt to Reagan and Beyond, 2nd
rev. ed. (Washington, D.C.: American Enterprise Institute for
Public Policy Research, 1988) and Charles L. Schultze, Memos to the
President: A Guide Through Macroeconomics for the Busy Policymaker
(Washington, D.C.: The Brookings Institution, 1992). Changes in the
composition of government spending may have output effects. For
example, within a given fiscal policy, shifting from spending for
current purposes to spending for well-chosen public investments can
play an important role in increasing private sector output and
economic growth. See Federal Budget: Choosing Public Investment
Programs (GAO/AIMD-93-25, July 23, 1993).
EFFECT ON OUTPUT,
EMPLOYMENT, AND BUDGET
DEFICITS
-------------------------------------------------------- Letter :4.1.1
Government export subsidy, promotion, and loan guarantee programs
largely reallocate production, employment, and income between
sectors, a reallocation that occurs when an economy is near or at
full employment, but some of these reallocations may also occur when
resources are unemployed.\31
In general, subsidizing one sector is the equivalent of taxing other
sectors.\32
Export subsidies can raise prices for domestic consumption, change
the cost of domestic resources and the composition of resource usage,
alter the composition of trade, and may sometimes change the level of
total trade. Government support for a specific sector generally
implies reduced government spending in other areas. Agricultural
export assistance may also change the location of economic activity,
sustaining rural economic activity that would not occur in its
absence. Because these programs potentially reallocate resources,
changes in these programs, including reductions in funding or
elimination, may result in employment and business dislocation if the
subsidized sector contracts.
With respect to the argument that export programs can stimulate the
economy and raise output and employment, changes in government fiscal
policy may accomplish this in the short term, if the economy is
operating at less than full employment.\33 These policy changes have
historically included tax cuts or increased deficit-financed
government spending such as on employment or infrastructure
programs.\34 Even when agricultural resources are underemployed, if
the government chooses to promote exports to foreign consumers rather
than to increase domestic spending, U.S. producers may divert some
of their output from the domestic to the foreign market.\35 This
could, however, raise domestic prices, thus making domestic consumers
worse off. Even if the government could stimulate overall demand by
supporting export assistance programs, an increase in output and
employment would still not be assured, as the Federal Reserve could
choose to offset any expansion that it views as inflationary by
raising interest rates.\36
Because export programs are unlikely to expand the overall economy
when it is at or near full employment, they cannot generally increase
tax revenues or lower budget deficits. We, and others, have
concluded that a major reduction in the budget deficit would yield
long-term macroeconomic benefits for the U.S. economy.\37 Any
program analysis that assumes that the resources involved in a U.S.
government export program would otherwise be unemployed may show
employment expansion and hence tax revenue gains. For example,
USDA's 1995 MAP study\38 claims such impacts, by assuming the
resources would otherwise be unemployed. This assumption leads to a
conclusion that the program has resulted in increased tax revenues.
This methodology does not comply with Office of Management and Budget
cost-benefit guidance, which instructs agencies to treat resources as
if they were likely to be fully employed.\39
If export promotion programs impact economic efficiency, they can
potentially affect output, employment, and tax receipts over the
longer run. In principle, the right kind of government intervention
may improve economic efficiency if "market failures" exist. Examples
of market failures include cases where costs and benefits are not
"internalized" by firms and consumers, market participants have
asymmetric information, or a market participant has market or
monopoly power. For instance, some economists have argued that a
targeted government industrial policy of trade promotion (or
protection) could increase national income. The cases are quite
specific, however, and apply to industries with "external" economies
that involve the spillover of knowledge between firms or economies of
scale. While these intervention benefits have been recognized in
principle, economists are generally cautious about their policy
usefulness and application. Typically, these rationales have been
associated with high-tech industries such as aircraft and
semiconductors, not with food processing or agriculture.\40
Increasingly, USDA argues that the export assistance programs can
address market failures in agricultural or credit markets but
acknowledges it is difficult to quantify this in most cases. ERS
reports that, while claims of market failure must be carefully
scrutinized, agricultural commodity market failures could include
poorly developed credit markets in developing countries or the lack
of broadly available information on a new or emerging market. There
is no assurance, however, that export subsidy, promotion, or
guarantee programs correct these failures. On the other hand, if
government intervention creates distortions that reduce efficiency,
then output, employment, and tax revenue may fall. In summary, we
found no evidence that the export assistance programs enhanced
economic efficiency.
USDA is conducting an assessment of export program impacts at the
direction of the Trade Promotion Coordinating Committee (TPCC). \41
USDA reports that the results will show that U.S. agricultural
export assistance programs benefit national welfare by addressing
market failures, but USDA and OMB declined to share their current
draft report with us. Earlier we had received an ERS briefing on the
preliminary estimates of these programs' impacts.\42
USDA officials state that the final TPCC report will show different
conclusions concerning program impact than the preliminary estimates.
--------------------
\31 Macroeconomic Consequences of Farm Support Policies, Andrew B.
Stoeckel, David Vincent, and Sandy Cuthbertson, eds. (Durham, NC:
Duke University Press, 1989).
\32 See discussion by Gene M. Grossman, "Strategic Export Promotion:
A Critique," in Strategic Trade Policy and the New International
Economics, Paul R. Krugman, ed. (Cambridge, MA: The MIT Press,
1986).
\33 Recently, the macroeconomic principle that larger budget deficits
can increase output in the short run has been challenged, though not
yet supplanted. Some recent economic policy experience suggests that
contractionary fiscal policies may be expansionary, even in the short
run, because they can lower the long-term real interest rate. See
Alan S. Blinder, "Is There a Core of Practical Macroeconomics That
We Should All Believe?" and Oliver Blanchard, "Is There a Core of
Usable Macroeconomics?" in American Economic Review (May 1997).
\34 While the funding of export programs does not increase during
periods of unemployment, USDA officials note that they do account for
economic conditions in their administration of the programs. For
example, according to USDA, during periods of high commodity prices
and full deployment of agricultural resources, EEP is not utilized.
See discussion of the limitations of fiscal policy in Schultze, Memos
to the President.
\35 The ability of U.S. export promotion programs to create
additional exports of a subsidized commodity is controversial. Only
if new export demand is met with new production would there be no
diversion from the domestic market.
\36 Currently, members of the Federal Reserve Board are closely
monitoring U.S. labor market conditions to evaluate whether the
United States is approaching the maximum rate of noninflationary
employment growth. Additionally, even if aggregate demand expansion
does lead to short-run gains in output and employment, long-term
budget deficits can lower national saving and investment, thereby
reducing long-term output and employment prospects. See Schultze,
Memos to the President.
\37 These benefits include higher national saving, higher investment,
more rapid economic growth, and a lower foreign debt. The idea that
contractionary fiscal policies of deficit reduction may in fact be
expansionary is becoming part of the conventional policy wisdom,
although with limited empirical evidence (see Blinder, "Is There a
Core of Practical Macroeconomics"). For our analysis, see The
Deficit and the Economy: An Update of Long-Term Simulations
(GAO/AIMD/OCE-95-119, Apr. 26, 1995) and Budget Policy: Prompt
Action Necessary to Avert Long-Term Damage to the Economy
(GAO/OCG-92-2, June 5, 1992). The long-term benefits of fiscal
policy changes are difficult to appreciate, particularly compared
with the steep short-term costs necessary to achieve significant
deficit reduction. To clarify the consequences of significant change
in fiscal policy, we adapted the long-term economic growth model
developed by economists at the Federal Reserve Bank of New York. The
assumptions incorporated in this model are relatively conservative
with regard to the relationship between capital investment and growth
in national output.
\38 Evaluating the Effectiveness of the Market Promotion Program.
\39 See "Guidelines and Discount Rates for Benefit-Cost Analysis of
Federal Programs, OMB Circular No. A-94, sec. 6b(3) (Oct. 29,
1992)." OMB's approach has also been adopted by the interagency Trade
Promotion Coordinating Committee for constructing performance
measures that parallels work that trade agencies are undertaking
under the Government Performance and Results Act of 1993 (P.L.
103-62, Aug. 3, 1993).
\40 See the discussion of market failures in our May 1996 testimony,
Export Promotion: Rationales for and Against Government Programs and
Expenditures (GAO/T-GGD-95-169, May 23, 1995). Also, see discussion
in J. Bhagwati, The World Trading System at Risk (Princeton, NJ:
Princeton University Press, 1991); articles in Strategic Trade Policy
and the New International Economics, Paul R. Krugman, ed.
(Cambridge, MA: The MIT Press, 1986 ); Paul R. Krugman, Pop
Internationalism (Cambridge, MA: The MIT Press, 1996); and Laura
D'Andrea Tyson, Who's Bashing Whom?: Trade Conflict in
High-Technology Industries (Washington, D.C.: Institute for
International Economics, Nov. 1992).
\41 In an effort to coordinate and develop a U.S. trade strategy,
TPCC has directed USDA to assess the impact of U.S. agricultural
export assistance programs. An issuance date for the final TPCC
report has not been set.
\42 Economic Impact of U.S. Agricultural Trade Programs and Polices
(Commercial Agricultural Division, ERS, undated briefing slides).
ERS is undertaking the USDA program assessment using three different
modeling efforts. These include a multicountry partial equilibrium
model of world grain, oilseed, and livestock markets; a computable
general equilibrium (CGE) model of the U.S. economy; and an
input-output multiplier model to estimate program employment and
income impacts. We recognize that isolating the impact of program
spending is very difficult empirically. In North American Free Trade
Agreement: Assessment of Major Issues, Volume 2 (GAO/GGD-93-137,
Sept. 9, 1993), we reported on the strengths and limitations of the
CGE methodology. In Agricultural Trade: Significance of High-Value
Products as Agricultural Exports (GAO/GGD-93-120, Aug. 10, 1993), we
reported that input-output multiplier models should not be used to
predict the impact of government export assistance programs.
EFFECT ON TRADE DEFICIT
-------------------------------------------------------- Letter :4.1.2
Most research by economists has concluded that the overall U.S.
trade balance is determined largely by U.S. macroeconomic conditions
such as the amount of domestic savings and investment, exchange
rates, and the size of the government budget deficit, not by trade
policy.\43 No conclusive evidence exists to support the assertion
that U.S. agricultural export assistance programs influence the size
of the U.S. trade deficit. When the United States is spending more
on goods and services than its total income, the nation is borrowing
from the rest of the world. This net borrowing, or current account
deficit, is equal to the government budget deficit plus the
difference between private sector investment and savings.\44
According to the President's Council of Economic Advisers, the
government can contribute to reducing the current account and trade
deficits through macroeconomic policy measures such as eliminating
the federal budget deficit. These policy measures can narrow the gap
between U.S. savings and U.S. investment. However, U.S. trade
policies may not change the overall trade balance, but they can alter
the composition and the overall levels of U.S. trade. For example,
increases in agricultural exports could lead to a reduction in some
other export or to increased imports. Thus, successful export
promotion can benefit the targeted product but at the expense of
nontargeted exports or import-competing domestic producers.
--------------------
\43 See discussion of research in International Trade: The U.S.
Trade Deficit; Causes and Policy Options for Solutions
(GAO/NSIAD-87-135, Apr. 28, 1987) and International Trade:
Symposium on the Causes of the U.S. Trade Deficit
(GAO/NSIAD-87-135S, May 15, 1987). Similar views are held by the
President's Council of Economic Advisers. See the Economic Report of
the President (Washington, D.C.: Government Printing Office [GPO],
Feb. 1996) for a detailed discussion of the causes of the trade
deficit and its relation to trade policy.
\44 See Rudiger Dornbusch, Open Economy Macroeconomics (New York, NY:
Basic Books, 1980). Also see discussion in Competitiveness Issues:
The Business Environment in the United States, Japan, and Germany
(GAO/GGD-93-124, Aug. 9, 1993).
U.S. EXPORT PROGRAMS HAVE
PROVIDED SMALL GLOBAL
INCREASES IN U.S.
AGRICULTURAL EXPORTS
---------------------------------------------------------- Letter :4.2
USDA officials and others state that U.S. agricultural export
assistance programs increase the exports of specific U.S.
commodities and overall farm sector income and employment. However,
we found few studies that support the position that these programs
increase farm income and employment for the sector as a whole.\45
Regarding U.S. exports, we found that there have been some instances
of increased exports to specific markets from commodities supported
by these programs, but the additional exports that these programs
have provided worldwide have been relatively small. An adverse
effect of these programs has been that at times they have also caused
a small decrease in exports of other competing, unassisted, U.S.
commodities.
It must be noted that it is difficult to assess these programs'
impact on the U.S. agricultural sector. This is because (1) past
evaluations of these programs have narrowly focused on an individual
U.S. export program, commodity, or foreign market and not on the
overall impact of these programs on the agricultural sector as a
whole; and (2) these programs' impact on U.S. agricultural exports
worldwide cannot be easily isolated from other policies and economic
conditions that help increase U.S. agricultural exports. The latter
includes lower U.S. interest rates, other U.S. government
assistance, depreciation of the U.S. dollar against competitors'
currencies, agricultural commodity production shortfalls in major
markets overseas, the liberalization in agricultural markets brought
about by the Uruguay Round, and the growing trend in agricultural
market reforms around the world.
--------------------
\45 As mentioned previously, in March 1996 we received an ERS
briefing with preliminary estimates regarding U.S. agricultural
export assistance programs' impact on farm income and employment.
ERS officials requested that we not use these estimates in our report
because they were preliminary and had not been cleared by USDA.
EXPORT ASSISTANCE
PROGRAMS HAVE INCREASED
U.S. AGRICULTURAL
EXPORTS TO TARGETED
MARKETS BUT HAVE HAD
LIMITED IMPACT GLOBALLY
-------------------------------------------------------- Letter :4.2.1
USDA officials and others state that U.S. agricultural export
assistance programs have resulted in exports above and beyond what
would have occurred without the programs. However, demonstrating
that additional exports result from these programs is difficult to
prove because of the myriad factors that affect import decisions. We
found evidence that U.S. export programs have resulted in some
increased U.S. agricultural exports to targeted, specific markets,
but the additional exports that these programs have provided
worldwide have been relatively small. Another effect of these
programs, according to some private officials, has been that, at
times, they have also caused a small decrease in exports of
competing, unassisted, U.S. commodities.
EEP: Regarding EEP, prior studies\46 have concluded that only a
portion of EEP-supported wheat exports were exports above and beyond
the level that would have occurred without the subsidy. The
estimates of the value of U.S. wheat exports resulting from every
dollar of EEP assistance (1986-88) ranged from 2 to 30 cents of
additional wheat exports, depending on the assumptions made about
global export market conditions and other variables. More recently,
FAPRI estimates that if EEP is utilized, the value of additional U.S.
wheat exports resulting from every dollar of EEP assistance
(1997-2004) would range from 10 to 15 cents. ERS reports that its
estimates of EEP's trade impact depend on market conditions and the
program's scope (that is, how many foreign markets it is operating
in) but states that the program becomes less effective under
conditions when food stocks are tight and world prices are high.
Such conditions existed during 1996, and the program was not used.
And ERS forecasts that tight market conditions are likely to continue
through 2005.
Research has shown that EEP can increase wheat exports to specific
targeted markets.\47 Increased EEP wheat exports to the Soviet Union
and China are often cited by USDA as examples of the program's
effectiveness in bolstering U.S. exports. For instance, in January
1987, China was offered wheat for the first time under EEP. Sales
increased from less than 1 million metric tons in 1985 to about 7.2
million metric tons in 1988. As of May 1990, China had bought over
15 million metric tons of wheat, making it the second largest wheat
importer under the program, after the Soviet Union. However, while
EEP has increased U.S. exports to individual markets, it has not
historically increased U.S. world market share, particularly for
bulk commodities where the United States is a leading world exporter.
For example, with wheat--where the United States is the largest
exporter--EEP has not significantly increased U.S. export market
share but rather has only lowered the price available to foreign
consumers.
The primary reason cited by agricultural trade researchers for the
relatively small additional U.S. exports that these
programs--particularly EEP and GSM-102--provide worldwide is that
U.S. export programs' increased exports to specific markets are
often offset by lost U.S. sales in other nonassisted markets.
Specifically, competing suppliers may respond to U.S. competition in
countries that benefit from GSM-102 or EEP by concentrating their
efforts in other countries and displacing potential U.S. sales in
these other countries. Thus, while U.S. exports may increase in
particular markets targeted by U.S. export programs, the overall
effect on U.S. exports worldwide is small. If displacement occurs,
the programs may merely reroute trade flows and do not necessarily
increase U.S. agricultural exports.
Some studies have found,\48 and industry officials have argued, that
EEP at times has done more to displace unassisted U.S. agricultural
exports than it has to promote U.S. agricultural exports in general.
Specifically, industry officials state that the concentration of EEP
on wheat exports has at times had the effect of reducing the market
opportunities of other commodities such as corn and soybeans that are
broad substitutes for wheat in use and production.\49 But since the
impact of EEP globally is not dramatic, the displacement effect is
also limited.
Another concern expressed by some industry officials about EEP is
that in countries where soil and growing conditions allow flexible
production of commodities, reduced prices due to EEP wheat exports
can induce increased production of alternate crops to wheat (such as
corn, canola, and soybeans). This can, in turn, reduce the
competitive position of U.S. producers of these alternate crops.\50
MAP: Regarding MAP, USDA officials report that program spending has
resulted in additional agricultural exports.\51 They identified
numerous studies that conclude that in most cases, MAP subsidies
increase U.S. sales of a commodity in a targeted market. For
example, one study found that each dollar of MAP funds to promote
apples in Singapore and the United Kingdom resulted in over $20 of
additional apple exports.\52 Another study explored the long-term
impact of in-shell walnut promotion in Japan and found that a dollar
of MAP promotion would, over 40 years, increase U.S. walnut exports
by $5.30.\53 Worldwide walnut promotion was evaluated in another
study, which found that while each dollar spent on MAP promotion
increased walnut exports by $1.42 over the long-run, it actually
reduced the exports of eight other horticultural exports by $3.57
(thus reducing U.S. agricultural exports worldwide by $2.15).\54
In some instances, studies of MAP's impact on specific commodities
reach different conclusions. For example, a study of exports of U.S.
meat products to Japan concluded that USDA market promotion from
1973-91 only resulted in a statistically significant increase in U.S.
market share for beef offals\55 but not for beef or pork meat.\56 A
second study of Japan's meat markets, using a different methodology
and time period (1973-94), concluded that USDA-funded beef
advertising and promotion expenditures had a significant positive
influence on Japanese demand for U.S. beef but could not demonstrate
that U.S. pork or poultry advertising and promotion expenditures had
any effect on the demand for U.S. pork or poultry products.\57 These
inconsistent results for beef demonstrate the problem of verifying
whether U.S. export promotion programs expand exports. Similarly,
another study found that while almond exports increased in Japan,
Taiwan, and Hong Kong due to MAP spending, MAP subsidies for almonds
had no significant effect on exports in South Korea and Singapore.\58
The studies evaluating various MAP projects provide limited
information for assessing the program. While the studies do present
many cases where government-funded advertising may have increased
U.S. exports to targeted markets, they fail to show that MAP
expenditures were above and beyond private sector promotion that
might have occurred in the absence of MAP. Most of the studies
describe the exports resulting from promotion as the "returns" for
the subsidy, but these studies fail to deduct any of the costs
involved in the production or distribution of the additional
commodity being exported.\59 One study noted that this approach
assumes the cost of producing and exporting an additional unit of
output is zero and that thus, the calculated returns are "gross"
returns and not "net" returns to investment.\60 Additional cost
information is required to determine whether a specific MAP promotion
effort results in a net return to investment for the private or
public sectors. Further, the MAP studies generally exclude factors
that could permit program administrators to assure a positive net
impact from MAP expenditures. These factors include the levels of
private expenditures for promotion, government promotion by
competitor nations, changes in domestic and foreign supply
conditions, and trade liberalization brought about by reductions in
tariffs and other trade barriers. Evaluations of MAP projects that
ignore increased trade liberalization may overestimate MAP's
contribution to increased U.S. exports. Moreover, little of the
research considers whether an increase in producers' profits due to
MAP-supported exports is sustainable, since producers may increase
supply and thus reduce long-term profits. Nor does the research make
an assessment of MAP's benefits and costs to U.S. taxpayers,
including the impact of increased exports on U.S. domestic
prices.\61
Lastly, the available studies do not assess whether MAP expenditures
are justified due to a market failure or what the appropriate
government responsibility is regarding export promotion.
Title I: Concerning title I food aid,\62 the assistance it provides
can in theory contribute to market development if the program creates
preferences for U.S. products that remain after the concessional
sales have been discontinued and, thus, can result in a greater U.S.
share of a given country's commercial market (that is, increased U.S.
exports). However, it is difficult to develop product loyalty and
secure commercial market share when title I commodities, which are
typically bulk and semiprocessed agricultural goods, can easily be
replaced by or substituted with products from other nations. In the
short term, title I allows the United States to move commodities and
possibly keep a market presence that it otherwise might not have been
able to maintain. However, historically, the concessional sales made
possible by title I do not necessarily translate in the long term
into increased commercial market share or additional exports.
--------------------
\46 See, for example, A.H. Seitzinger and Philip Paarlberg, The
Export Enhancement Program: How Has it Affected Wheat Exports? ERS,
USDA (Washington, D.C.: GPO, 1989). Also, K.W. Bailey, Why Did
U.S. Wheat Exports Expand? ABI No. 564, ERS, USDA (Washington,
D.C.: May 1989); and International Trade: Export Enhancement
Program's Recent Changes and Future Role (GAO/NSIAD-90-204, June 14,
1990).
\47 See Stephen L. Haley, "The U.S. Export Enhancement Program:
Prospects under the Food, Agriculture, Conservation, and Trade Act of
1990," Food Policy (Apr. 1992).
\48 See Stephen L. Haley, "The U.S. Export Enhancement Program Over
1991-95 Crop Years" Report No. 690 (Baton Rouge, LA: Louisiana
State University, Dec. 1991). Robert L. Paarlberg, "The Mysterious
Popularity of EEP," Choices (second quarter 1990); and Haley, "The
U.S. Export Enhancement Program: Prospects."
\49 One displacement example, provided by a major U.S. exporter,
involves the impact of EEP-subsidized wheat to China (it should be
noted that while this is an accurate description of displacement, it
was a onetime occurrence in China). In 1994, EEP-subsidized wheat
was sold to China. This high-quality wheat was used in Chinese mills
for flour production, freeing up lower quality Chinese wheat as feed
grain for China's poultry industry. Since the poultry industry had
an adequate supply of feed grain, Chinese corn normally used as feed
grain by the industry was instead exported to South Korea, which is
traditionally an export market for U.S. corn. In addition, some
Chinese poultry was then exported to Hong Kong, where it was in
direct competition with U.S. poultry sold there. Thus,
EEP-subsidized wheat exports to China helped displace U.S. sales of
corn to both China and South Korea and provided increased competition
for U.S. poultry sales to Hong Kong.
\50 One U.S. oilseed exporter reported that it has lost export sales
to subsidized EEP wheat sales. It stated that in the late 1980s,
because of the EU/U.S. subsidy war over exported wheat, South
American countries (particularly Argentina) shifted their
concentration from wheat production to oilseed production.
Therefore, as a result of the subsidy war in wheat, the United States
bought itself increased competition for oilseeds from South America.
\51 See Evaluating the Effectiveness of the Market Promotion Program
on U.S. High-Value Agricultural Exports, USDA, FAS Staff Paper 1-95
(Feb. 1995).
\52 Timothy J. Richards, et al., "A Two-Stage Analysis of the
Effectiveness of Promotion Programs for U.S. Apples," Agricultural
Commodity Promotion Policies and Programs in the Global Agri-Food
System (Proceedings from the Research Committee on Commodity
Promotion [NEC-63] Conference, Cancun, Mexico, May 26-27, 1996).
\53 Kenneth R. Weiss, et al. "Walnuts in Japan: A Case Study of
Generic Promotion under the USDA's Market Promotion Program,"
Agricultural Commodity Promotion Policies and Programs in the Global
Agri-Food System (Proceedings from the Research Committee on
Commodity Promotion [NEC-63] Conference, Cancun, Mexico, May 26-27,
1996).
\54 "Market Access Program Evaluation: Fruits and Vegetables,"
National Food and Agricultural Policy Project Policy Paper Series,
NFAPP #97-2 (Tempe, Arizona: Arizona State University, Apr. 1997).
\55 Beef offals are the byproducts of butchered beef such as the
heart, liver, and intestines. The Japanese category for beef offal
imports also includes diaphragm or "skirt" beef.
\56 See Shida Rastegari Henneberry and Marco De Brito, "An Analysis
of the Effectiveness of U.S. Non-Price Promotion Programs: The Case
of Red Meats in Japan," in Promotion in the Marketing Mix: What
Works, Where and Why, study presented at a USDA cosponsored
conference, Regional Research Committee on Commodity Promotion
(Toronto, Canada: Apr. 28-29, 1994). The study applied annual data
for the 1973 through 1991 period for beef, and 1973 through 1988 for
beef offals and red meats. Between 1984 and 1991, USDA meat
promotion in Japan amounted to $54 million (in 1996 dollars).
According to FAS, MAP data for the period 1973-84 are no longer
available.
\57 Allison Comeau, Ron C. Mittelhammer, and Thomas I. Wahl,
"Assessing the Effectiveness of MPP Meat Advertising and Promotion in
the Japanese Market," National Institute for Commodity Promotion
Research & Evaluation, NICPRE 96-10 R.B. 96-20 (Ithaca, NY: Cornell
University, Dec. 1996).
\58 Karen Halliburton and Shida Rastegari Henneberry, "The
Effectiveness of U.S. Nonprice Promotion of Almonds in the Pacific
Rim," Journal of Agricultural and Resource Economics (July 1995).
\59 Including these costs would reduce the "returns" reported to MAP.
\60 See footnote 58.
\61 Some of these points are made by Karen Z. Ackerman and Shida
Rastegari Henneberry in "Economic Impacts of Export Market
Promotion," Commodity Promotion Policy in a Global Economy
(Arlington, VA: Proceedings of a Symposium, Oct. 22-3, 1992).
\62 See Food Aid: Competing Goals and Requirements Hinder Title I
Program Results (GAO/GGD-95-68, June 26, 1995). Our report states
that title I has five objectives: (1) to combat world hunger and
malnutrition and their causes; (2) to promote sustainable economic
development, including agricultural development; (3) to expand
international trade; (4) to develop and expand export markets for
U.S. agricultural commodities; and (5) to encourage the growth of
private enterprise and democratic participation in developing
countries. Regarding market development, our report found that title
I's importance in helping develop long-term U.S. agricultural
markets has not been demonstrated.
LIMITED EVIDENCE EXISTS
THAT U.S. EXPORT
PROGRAMS IMPACT
AGRICULTURAL SECTOR
OVERALL INCOME OR
EMPLOYMENT
-------------------------------------------------------- Letter :4.2.2
We found few studies that support the position that U.S.
agricultural export assistance programs increase income or employment
for the farm sector as a whole. The ability of export programs to
affect U.S. agricultural sector income and employment is constrained
by the limited and selective nature of these programs. That is,
export programs only affect a small portion of U.S. agricultural
exports. For example, the U.S. government spent approximately $792
million on these programs in fiscal year 1996,\63 while U.S.
agricultural exports for the same period were $60 billion. In
addition, 80 percent of U.S. agricultural exports, between fiscal
year 1989 and 1993, received no government assistance.
These export programs focus primarily on bulk commodities, rather
than HVPs, which represent the largest segment of forecasted
increases in world agricultural trade. Thus, some components of the
sector, such as bulk commodity producers, may receive some income and
employment benefits. USDA believes that if these programs were
reduced or eliminated, some bulk commodity producers--particularly
wheat farmers--would most likely experience some diminished income
and employment as a result. For example, an ERS study estimated that
if EEP expenditures of $938 million were eliminated in 1993, the U.S.
grain sector would lose $538 million in income and 3,100 jobs. The
analysis found that eliminating EEP would also have increased overall
domestic welfare (including benefits to both producers and consumers)
by $325 million and did so under all market conditions analyzed.
Moreover, the study stated that export subsidies amount to an income
transfer from U.S. households to producers and lead to a decline in
domestic welfare.\64
One reason U.S. agricultural export assistance programs' impact on
farmers' income is limited is because some farmers derive a majority
of their income from employment off the farm. And this off-farm
employment is increasingly determined by national economic growth
rates and nonfarm employment opportunities. According to USDA data,
over
85 percent of farm household income comes from off-farm employment
and income.\65 While there are currently about 2.1 million farms in
the United States, USDA classifies only about 550,000 as commercial
farms.\66 And it is these farms that are most affected by U.S.
agricultural export assistance programs. Some studies have concluded
that using U.S. agricultural export programs to transfer income to
the agricultural sector is not the most cost-effective method for
doing so.\67 In 1994, we reported that the income of wheat farmers
would have increased about 21 percent more if additional federal
dollars had been spent on higher commodity target prices rather than
on EEP.\68
--------------------
\63 The importance of title I as an export assistance program, for
example, has declined significantly since the program's inception in
1954. Today, title I represents less than 1 percent of the total
value of U.S. agricultural exports, whereas the program represented
about 19 percent in the late 1950s and mid-1960s.
\64 See Kenneth Hanson, Stephen Vogel, and Sherman Robinson, Sectoral
and Economywide Impacts of Eliminating the Export Enhancement
Program, ERS (Washington, D.C.: Nov. 1995).
\65 See Structural and Financial Characteristics of U.S. Farms,
1993, ERS (Washington D.C.: Oct. 1996).
\66 USDA defines "commercial farms" as those farms whose level of
gross sales is at least $50,000. Commercial farms range in size from
small (gross sales at or above $50,000), to super large (gross sales
at or above $1 million). About 90 percent of commercial farm
operators report that farming is their major occupation.
\67 See T.W. Hertel, R.L. Thompson, and M.E. Tsigas, "Economy-wide
Effects of Unilateral Trade and Policy Liberalization in U.S
Agriculture," in Macroeconomic Consequences of Farm Support Polices;
and K. Hanson, et al., Sectoral and Economywide Impacts.
\68 See Wheat Support: The Impact of Target Prices Versus Export
Subsidies (GAO/RCED-94-79, June 7, 1994).
UNCERTAINTY EXISTS WHETHER
U.S. EXPORT PROGRAMS
COUNTER COMPETITOR NATIONS'
PROGRAMS
---------------------------------------------------------- Letter :4.3
Some U.S. government officials and private sector representatives
state that U.S. agricultural export assistance programs are valuable
because they counter competitor nations' export programs and thus
"level the playing field" between our exporters and competitor
exporters who benefit from their own nation's programs. USDA
officials argue that U.S. programs (1) protect the income of the
agricultural sector from the impact of foreign export subsidies, (2)
level the playing field by helping U.S. companies compete against
specific foreign competitors' subsidized sales and other export
assistance, and (3) increase the cost of foreign competitors'
agricultural subsidies to their governments. We found that because
of the lack of transparency in other competitor nations' export
assistance efforts, it is difficult to verify how effectively U.S.
export programs counter these foreign practices. We also observed
that some U.S. export programs are no longer used only to counter
specific competitor actions but rather have been broadened to assist
U.S. agricultural exports in general. In addition, several economic
studies indicate that our competitors find U.S. export subsidies
relatively inexpensive to offset.
USDA states that EEP has provided some income protection to the U.S.
agricultural sector from foreign export subsidies. Specifically,
because foreign nations subsidize their sales, subsidies such as EEP
provide an income transfer to U.S. farmers that protects them from
absorbing the lower world sales price. Under previous farm
legislation, deficiency payments to farmers insulated farmers' income
from decreases in U.S. domestic market prices. So EEP had a limited
impact on the income of farmers participating in U.S. domestic
commodity support programs. For farmers not participating in these
commodity support programs, however, a slightly higher domestic price
due to modest increases in export demand for some EEP-supported U.S.
commodities may have countered the income reduction due to foreign
export subsidies.
We could not identify convincing evidence on the degree to which U.S.
export programs have effectively matched U.S. competitors'
agricultural export programs and, thus, have leveled the playing
field. By program design, GSM and title I are not specifically used
to counter competitor nations' efforts to assist exports. With
respect to EEP and MAP, the evidence is inconclusive. This is due in
part to changes in U.S. laws governing these programs and to limited
data on foreign governments' and private entities' export assistance
activities. For example, EEP previously was intended to discourage
unfair trade practices\69 such as competitor nations' use of
agricultural export subsidies. However, U.S. implementing
legislation for the Uruguay Round agreements\70 states that the
program's use is not limited solely to countering unfair trade
practices. MAP was previously required to counter unfair trade
practices, such as the use of subsidies,\71 but U.S. implementing
legislation for the Uruguay Round agreements removed this
requirement.\72 According to USDA officials, though changed in law,
operationally EEP is still used largely to counter unfair trade
practices.
USDA reports that U.S. competitors are willing to incur large
expenses to support their agricultural exports and, thus, reasons
that to remain competitive and to protect the incomes of U.S.
producers, the United States must do likewise. According to USDA,
the EU in fiscal year 1996 spent about $9 billion on export
subsidies.\73 Agricultural exporting nations, such as Australia,
Canada, and New Zealand, provide less government support for export
assistance.\74 However, they sell some of their agricultural exports,
including wheat and dairy products,\75 through state trading
enterprises (STE).\76 Some USDA and private sector officials believe
that STEs give these countries advantages over U.S. exporters
because of their ability to charge nontransparent and different
prices in different markets.\77 Thus, they state that U.S. programs
are needed to offset foreign government subsidies, these marketing
organizations, and other competitor nations' actions.\78 With the
lack of transparency in STEs and other export assistance efforts by
competitor nations, it is difficult to verify that USDA activities
directly target foreign practices. Specifically, without better data
on how competitor nations' agricultural export assistance programs
are funded, to what markets and commodities they are targeted, and
how effective they are in increasing agricultural exports, it is
uncertain how well U.S. export programs match and counter these
efforts.
Some studies have stated that competitors find U.S. export subsidies
relatively inexpensive to offset.\79 For example, one researcher
concluded that it is unlikely that EEP can cause the level of EU
export subsidies to rise by more than 4 percent. The researcher also
estimated that for every additional dollar the U.S. government spent
exporting wheat under EEP, the EU had to spend only about 23 cents
more on its own wheat and coarse grain export subsidies to offset
EEP's impact.\80 Further, the Australian Bureau of Agricultural and
Resources Economics similarly calculated that the cost to the EU of
offsetting EEP was equal to only about 1.5 percent of the total EU
agriculture budget for 1987 or 1988.\81 Another study noted that the
increased cost of EU export subsidies from U.S. export subsidies
appeared to be small.\82 Industry officials were divided in their
assessment of how significantly U.S. export assistance programs have
increased the cost of EU agricultural export assistance programs.
U.S. export assistance programs may in the short term increase
market share and, thus, may help U.S. companies compete when these
programs encourage importers to choose U.S. goods over those of
competitors. For example, the availability of credit under the
GSM-102 program or the market development effects of MAP and title I
may influence importers to choose U.S. commodities. However, these
programs are unlikely to have a sustained long-term impact, because
competitors' own agricultural export assistance programs may
counteract them (that is, offer better price or credit), and because
there is no assurance that markets developed with U.S. export
programs can be sustained without the continued use of these
programs.
Finally, some studies\83 of U.S. agricultural export assistance
programs have noted that countering foreign competitors'
market-distorting practices with subsidies leads to lower prices and
reduced market returns for producers in all countries. Several
industry officials concurred with this observation. Also, export
assistance programs such as EEP and credit guarantees may transfer
many of the programs' benefits to foreign consumers instead of to
U.S. producers by lowering the cost of importing U.S. agricultural
commodities. For example, a study on EEP\84 has estimated that
roughly 40 percent of the subsidy value has gone directly to foreign
consumers or governments.\85
--------------------
\69 See Food, Agriculture, Conservation and Trade Act of 1990 (P.L.
101-624, sec. 1531, Nov. 28, 1990).
\70 See Uruguay Round Agreements Act (P.L. 103-465, sec. 411, Dec.
8, 1994).
\71 See 7 U.S.C. 5623 (1988, Supp. II 1990).
\72 See footnote 71.
\73 The Competition in 1996: Expenditures for Export Subsidies and
Export Market Promotion Activities of Major U.S. Competitors in
Global Market for Agricultural and Food Products, FAS, USDA
(Washington, D.C.: Nov. 1996).
\74 We did not review studies of the effectiveness of EU or other
competitor nations' agricultural export assistance programs.
\75 See Canada, Australia, and New Zealand: Potential Ability of
Agricultural State Trading Enterprises to Distort Trade
(GAO/NSIAD-96-94, June 24, 1996).
\76 STEs are generally considered to be governmental or
nongovernmental enterprises that are authorized to engage in trade
and are owned, sanctioned, or otherwise supported by the government.
\77 See International Trade: Canada and Australia Rely Heavily on
Wheat Boards to Market Grain (GAO/NSIAD-92-129, June 10, 1990).
\78 According to USDA, the following example of the Australian Wheat
Board's paying for an Indonesian wheat importer's son's university
education illustrates why the United States must--in order to
compete--have its own export assistance programs. To gain favor and
access to the Indonesia's wheat market, the Australian Wheat Board
paid for a prominent Indonesian wheat miller's son's university
education in Australia. According to FAS, this wheat miller controls
two-thirds of Indonesia's wheat milling industry. USDA officials
state this example represents the type of competitive challenge that
U.S. exporters face. Further, U.S. exporters are subject to the
Foreign Corrupt Practices Act of 1977 (P.L. 95-213, Dec. 19, 1977).
Therefore, USDA officials believe that U.S. exporters must rely on
programs like MAP or FMDP to combat competitor nations' export
practices.
\79 See G. Anania, M. Bohman, and C. Carter, "United States Export
Subsidies in Wheat: Strategic Trade Policy or Expensive
Beggar-Thy-Neighbor Tactic?" American Agricultural Economics (1992);
Haley, "Evaluating The Export Enhancement Program Over 1991-95 Crop
Years"; Haley,"The U.S. Export Enhancement Program: Prospects";
and, I. Roberts, et al., U.S. Grain Policies and the World Market
(Canberra, Australia: Australian Bureau of Agricultural and
Resources Economics, 1989).
\80 See Haley, "Evaluating the Export Enhancement Program," and
Haley, "The U.S. Export Enhancement Program: Prospects."
\81 In 1987 and 1988, total EU export subsidies for grains were $3.6
billion and $3.5 billion, respectively, according to USDA. For those
same years, EU export subsidies for wheat were estimated to have
increased due to EEP by $400 million and $290 million, respectively.
In contrast, total EU agricultural support outlays were approximately
$26 billion for 1987 and $32 billion for 1988. See Roberts, et al.,
U.S. Grain Policies.
\82 Anania, Bohman, and Carter, "United States Export Subsidies in
Wheat."
\83 See I. Roberts, et al., U.S. Grain Policies, and Anania,
Bohman, and Carter, "United States Export Subsidies in Wheat."
\84 Robert L. Paarlberg, "Does the GATT Agreement Promote Export
Subsidies: A Case of Unintended Consequences," International
Agribusiness Management Association Meeting (May 1995).
\85 Some critics of U.S. agricultural export assistance programs
believe that a more potent approach for increasing U.S. agricultural
exports (than the use of these programs) would be to pursue broader
trade negotiations that can help lower trade barriers and promote
fairer trade.
DIVERGENT VIEWS EXIST ON
WHETHER U.S. EXPORT
PROGRAMS PROMOTE U.S. TRADE
NEGOTIATING OBJECTIVES
---------------------------------------------------------- Letter :4.4
U.S. government officials and some private sector representatives
argue that U.S. agricultural export assistance programs may provide
negotiating leverage for the 1999 WTO agricultural trade talks. U.S.
objectives for these negotiations will be to further liberalize
global agricultural trade (that is, to further reduce tariffs and
NTBs). The United States seeks further liberalization because global
agricultural trade remains one of the most protected areas of world
trade in terms of high tariffs and other trade barriers, such as
tariff-rate quotas (TRQ).\86 Many of these trade barriers remain
permissible under the WTO.\87 These officials state that the United
States should not unilaterally eliminate these programs before 1999
because doing so would force the United States to come to the
negotiating table with a much-reduced set of items for negotiation.
Some public and private sector officials, however, challenge the idea
that these programs provide leverage. They question the leverage
that these programs provided during the Uruguay Round agricultural
negotiations and believe that other factors, such as internal
pressure on the EU to further reform its agricultural policies,
rather than U.S. agricultural export assistance programs, will have
a greater impact on the success of the 1999 talks.
Program supporters state that the use or threatened use of these
export programs was helpful in achieving the Uruguay Round's goal of
agricultural liberalization. A former U.S. agricultural trade
negotiator states that EEP helped pressure subsidizing competitors,
particularly the EU, to come to the negotiating table and agree to
reduce the use of subsidies. Program supporters reason that these
programs could provide negotiating leverage for the 1999 WTO
agricultural negotiations and thus give the United States leverage in
negotiating reductions in tariffs, agricultural subsidies, and the
types of trade barriers that have grown in importance since the
Uruguay Round, such as STEs, SPS barriers, and TRQs. USDA states
that these assistance programs have also been valuable in
negotiations to open up specific foreign markets. For example, USDA
reports that in Japan, MAP efforts helped persuade consumers to
question quotas on imported U.S. beef. This contributed to the 1984
market-opening talks for foreign meat products that were being
negotiated between Japan and the United States.
USDA officials state that in order for U.S. agricultural export
assistance programs to provide leverage, they must be consistently
funded. For example, some U.S. food exporters cited EEP's peaks and
valleys of funding over the last 5 years, and the fact that it was
basically not used in fiscal year 1996, as weakening its potential
leverage in future trade negotiations. USDA officials and these
exporters believe that even though trade negotiations are very
complex, with many dynamic interacting factors and that it is hard to
quantify each program's potential negotiating contribution, the
United States should not unilaterally eliminate any of these programs
before the 1999 talks. They state that if we eliminate these
programs, we then come to the negotiating table with a much-reduced
set of items for negotiation. USDA reports its goal for the 1999 WTO
negotiations is to further liberalize global agricultural trade.
One difficulty in assessing arguments for retaining U.S.
agricultural export assistance programs based on the past negotiating
leverage they have provided is that while these arguments are
difficult to refute, they cannot be demonstrated empirically, much
less evaluated by comparing costs to benefits.\88 Instead, these
arguments rely heavily on anecdotal examples and personal experience.
Some public and private sector officials challenge the assertion that
these programs provide leverage and their achievements in
multilateral and bilateral negotiations. Specifically, they question
the notion that EEP subsidies were instrumental in bringing the EU to
the table in the Uruguay Round negotiations. For example, some of
these officials report that EEP caused problems for the United States
in gaining consensus with nonsubsidizing agricultural exporting
nations during the Uruguay Round negotiations. They state that this
may have limited the U.S. ability to negotiate further EU
concessions in agriculture.\89 Further, some public and private
sector officials believe that other U.S. efforts, such as the use or
threatened use of 301 trade sanctions,\90 rather than EEP, were key
in bringing competitor nations to the negotiations. Similarly, they
question the effectiveness of a MAP-financed advertising campaign in
creating domestic political pressure to open Japan's markets to
foreign beef products. Rather, they cite U.S. diplomatic
negotiating efforts; the threatened use of 301 trade sanctions; the
fact that the United States had requested a GATT investigation
regarding Japanese beef quotas;\91 and the efforts of other meat
exporting nations, such as Australia, as being keys to opening this
market.
Looking forward to the 1999 WTO negotiations, some private sector
officials note that many of the trade barriers currently of interest,
such as SPS measures, high tariffs, and TRQs, are problems in
importing nations. Consequently, they question whether U.S. export
assistance programs, which were not intended to address these types
of barriers, will be useful in the WTO talks in gaining access to
markets restricted by these barriers. For example, to the extent
that some of these programs' subsidies are transferred to consumers
in importing nations, these nations may not want to support the
United States in giving up the programs through trade negotiations.
Further, some public and private sector officials believe that the
EU--which in fiscal year 1996 spent over $9.1 billion on agricultural
export subsidies alone-- will probably be the biggest factor in
deciding whether or not the 1999 talks are a success. They believe
that EU budgetary pressures, not U.S. agricultural export assistance
programs, will provide the greatest incentive for the EU to continue
to reform its agricultural domestic and export policies and thus help
further liberalize global agricultural trade. Specifically, the cost
of extending these EU domestic and export policies to the upcoming
new EU members such as Poland, Hungary, and the Czech Republic (all
of whom have sizable and protected agricultural sectors) is
considerable. In fiscal year 1996, the EU spent about $52.3 billion,
or 47 percent of its budget, on domestic agricultural and export
assistance programs. These officials question whether the EU will be
able to extend this same level of support to the new members.
--------------------
\86 A tariff-rate quota system applies one tariff to imports up to a
particular amount and a different, higher tariff rate to imports in
excess of that amount.
\87 For a listing of agricultural trade barriers worldwide by
countries, see 1997 National Trade Estimate Report on Foreign Trade
Barriers, Office of the United States Trade Representative
(Washington D.C.: U.S. GPO, 1997).
\88 See Bruce Gardner, "The Political Economy of U.S. Export
Subsidies for Wheat," Working Paper No. 4747, National Bureau of
Economic Research (Cambridge, MA: May 1994), for a discussion of the
interaction of EU policy changes and EEP.
\89 For example, Robert Paarlberg argues that U.S. leverage over the
EU in the Uruguay Round negotiations was due to the threat that a
deadlock in agriculture could block progress in more important
negotiating areas such as trade in manufacturing and services. See
Paarlberg, "Does the GATT Agreement Promote Export Subsidies."
\90 Section 301 of the Trade Act of 1974, as amended (19 U.S.C.
2411), serves as the U.S. government's principal mechanism for
addressing unfair foreign trade practices. It gives the U.S. Trade
Representative broad authority to enforce U.S. rights under
bilateral and multilateral trade agreements and seeks to eliminate
certain acts, policies, or practices of foreign governments that
burden or restrict U.S. commerce.
\91 See International Trade Reporter, Vol. 5, #29 (July 20, 1988).
CONCLUSION
------------------------------------------------------------ Letter :5
The evidence suggests that while FAIR's domestic policy reforms will
modestly help boost U.S. agricultural exports, other factors such as
the ongoing liberalization of global agricultural trade and increased
world demand, are expected to increase U.S. exports independent of
FAIR. In fact, forecasts project growth in U.S. agricultural
exports well beyond the record $60 billion in 1996.
While FAIR's domestic policy reforms removed a primary benefit
associated with most U.S. export assistance programs--the exporting
of surplus stocks generated by domestic price supports--program
proponents state that U.S. agricultural export assistance programs
continue to have relevance because they
-- benefit the overall U.S. economy,
-- benefit the agriculture sector and/or specific commodities,
-- counter competitor nations' agricultural export assistance
programs, and/or
-- provide leverage to support U.S. trade negotiating objectives.
The evidence we found is mixed regarding the contributions of U.S.
agriculture export programs in these four areas. We found no
conclusive support that the programs benefit the U.S. economy as a
whole, through either expanded aggregate employment or output, or
reduced trade or budget deficits. Regarding benefits to the U.S.
agriculture sector, there is substantial research that concludes that
these programs only modestly increase exports above and beyond what
is likely to occur in their absence. More substantial benefits to
the U.S. agricultural sector may come from these programs'
contributions to countering foreign competitor export assistance and
providing leverage for trade negotiations.
While we recognize substantial barriers continue to confront U.S.
agricultural exporters around the globe, the effectiveness of
existing programs to "level the playing field" by targeting trade
barriers and competitor programs or by providing negotiating leverage
remains uncertain. Without better data on the size, nature, and
effectiveness of competitors' export assistance programs and unfair
trade barriers, it remains unclear how much the U.S. agricultural
export programs contribute to countering these competitors' efforts
or provide negotiating leverage.
MATTER FOR CONGRESSIONAL
CONSIDERATION
------------------------------------------------------------ Letter :6
Given the mixed evidence concerning the continued relevance of U.S.
agricultural export assistance programs, their decreased funding
levels, and the trend toward increased liberalization of global
agricultural trade from which the U.S. agricultural sector is likely
to benefit with or without further government support, the Congress
may wish to reassess the continued viability and/or focus of the
programs the next time these programs are reviewed.
To support such an assessment, the Congress may wish to direct USDA
to develop more systematic information on the potential strategic
value of U.S. export assistance programs--for example, in countering
competitor nations' agricultural export programs or in providing
negotiating leverage. Specifically, the Congress may direct USDA to
develop more systematic information on (1) competitors' programs and
negotiating objectives and (2) how effective each U.S. agricultural
export assistance program is in furthering U.S. interests. Once
this information is in hand, the Congress may wish to refocus the
thrust of the programs.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7
To assess how FAIR may affect U.S. competitiveness in world
agricultural markets, we analyzed and synthesized the results of
three tasks. First, to gain an understanding of the act's impact, we
conducted interviews with a wide range of U.S. and competitor nation
agricultural experts.\92 Second, to corroborate these opinions and to
obtain data on FAIR's impact, we analyzed available studies and
reports authored by some of these experts. Third, to obtain insights
into the assumptions and variables that affect global agricultural
trade, we reviewed and discussed the economic modeling results of
USDA's ERS and FAPRI in Ames, Iowa.
To examine the continued relevance of U.S. agricultural export
assistance programs, we performed three tasks. First, to understand
the history, mission, and effectiveness of these programs,\93 we drew
upon our prior work in this area.\94 Second, to develop a method for
organizing the evidence regarding these programs' relevance, we took
the benefits proponents state these programs provide and, in
consultation with agricultural experts, constructed a framework that
consists of four basic categories of potential program impact (for
example, do these programs benefit the U.S. economy?). Third, to
obtain evidence on the continued relevance of these programs,\95 we
interviewed government officials, agricultural trade experts, and
officials of the organizations previously mentioned and gathered
applicable research, empirical evidence, and other information on the
impact of these programs. Finally, we synthesized all the
information to present the best evidence available on the continued
relevance of U.S. export programs in furthering the four categories
of impact. While we have worked to provide the best evidence
available, we acknowledge that determining program relevance is
difficult because many of the domestic and international conditions
under which past observations of and research on these programs have
been based have changed; thus, any assessment of the future relevance
of these programs needs to be tempered with this understanding.
Lastly, we had a draft of this report peer reviewed for accuracy and
objectivity by several public and private sector economists and
agricultural experts.
We performed our review from June 1996 to May 1997 in accordance with
generally accepted government auditing standards.
--------------------
\92 Specifically,we interviewed officials from USDA (including FAS
and ERS), the Department of State, the Office of the U.S. Trade
Representative, the Congressional Budget Office, the Congressional
Research Service, and OMB, as well as from the embassies of Canada,
Australia, New Zealand, and the Delegation of the European
Commission. We also interviewed agriculture experts from
universities such as Harvard, Texas A&M, and Iowa State, and think
tanks such as the Cato Institute, the Heritage Foundation, World
Perspectives, and Sparks Inc. In addition, we interviewed
representatives from agricultural trade associations such as the
North American Export Grain Association and the American Farm Bureau
Federation and agricultural businesses such as Cargill, Inc., and
ConAgra, Inc.
\93 For the purpose of this review, we focused on USDA's four types
of agricultural export assistance programs. We did not examine other
aspects of USDA efforts to increase U.S. agricultural exports, such
as FAS' overseas offices which, according to USDA, provide a global
strategic network to alert the U.S. private sector to export
opportunities and market expectations, identfy trade and marketing
barriers, and gather information on U.S. competitors. In fiscal
year 1995, FAS had an operating budget of about $118 million to carry
out its overseas functions and manage its various agricultural export
assistance programs.
\94 See Related GAO Products.
\95 Regarding USDA market promotion efforts, for the purposes of this
review, we focused more on MAP than on FMDP because FMDP was not
significantly affected by or addressed in the FAIR legislation.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :8
We provided a draft of this report to USDA for review and comment.
We met with officials of the Department, including FAS' Associate
Administrator and ERS' Deputy Director, and other senior management
officials representing FAS' various export assistance programs.
These officials agreed in principle to the report's conclusions and
matter for congressional consideration. They also stated that the
report provided insights into the complexity of isolating the impact
of U.S. agricultural export assistance programs on U.S.
agricultural exports, separate from the wide range of other variables
that affect these exports.
They acknowledged that market forces, not these federal programs,
were the greatest factor in increasing U.S. agricultural exports.
However, FAS officials felt that the report was too negative about
the programs and that the assumptions used preordained the outcome of
our analysis. In particular, FAS officials stated that our focus on
the macroeconomic impact of U.S. agricultural export assistance
programs--including the assumption of full employment--imposed an
unreasonably high standard that these programs should have a positive
impact on the overall U.S. economy. They questioned whether this
standard could be met by any federally funded program. Several
senior FAS program managers added that U.S. agricultural export
assistance programs were in fact designed to redistribute economic
resources from other sectors of the U.S. economy to agriculture.
FAS officials also felt that our presentation of studies regarding
MAP's impact was selective and unbalanced.
In response to USDA's comments, we have expanded our discussion of
MAP's impact to include five additional studies of the program.
Though this expanded the number of countries and commodities targeted
by MAP that we discuss, it did not alter our conclusions. In
addition, while demonstrating a macroeconomic benefit is a high
standard for any federal program, the requester was specifically
interested in whether U.S. agriculture export assistance programs
benefit the national economy, a claim that USDA has made in the past.
Moreover, beyond the review of these programs' potential
macroeconomic effects, we also reviewed their impact on the
agricultural sector and specific commodities, on countering
competitor export assistance programs, and on providing negotiating
leverage. Regarding our use of the full employment assumption, our
analysis of USDA programs' macroeconomic impact did consider the
programs' effectiveness under conditions of less than full
employment, as well as full employment. However, under either
condition there was no evidence that these programs provide
macroeconomic benefits. In addition, it should be noted that (1) our
analysis of macroeconomic impact under conditions of full employment
is consistent with OMB guidance and (2) comments on our draft report
from several public and private sector economists and agricultural
experts indicated no disagreement with our methodology or analysis.
Moreover, the consensus of these reviewers was that the report was
accurate and balanced.
USDA officials suggested a number of technical revisions to our
draft. We have incorporated them into the report where appropriate.
---------------------------------------------------------- Letter :8.1
As arranged with your office, we will send copies of this report to
the Senate and House Agriculture Committees, other interested
congressional committees, the Secretary of Agriculture, and other
interested parties. We will also make copies available to others on
request. Major contributors to this report are listed in appendix
II.
Please call me on (202) 512-8984, if you or your staff have any
questions about this report.
Sincerely yours,
JayEtta Z. Hecker, Associate Director,
International Relations and Trade Issues
FUNDING FOR U.S. AGRICULTURAL
EXPORT ASSISTANCE PROGRAMS
=========================================================== Appendix I
This appendix presents detailed information about the U.S.
Department of Agriculture's (USDA) four export assistance programs.
These include export subsidy programs, export credit guarantee
programs, market development and promotion programs, and food aid
programs.
EXPORT SUBSIDY PROGRAMS
--------------------------------------------------------- Appendix I:1
These programs are intended to help U.S. commodities become more
price competitive on the world market. In the past, these programs
have included the Export Enhancement Program (EEP), the Dairy Export
Incentive Program (DEIP), the Sunflowerseed Oil Assistance Program
(SOAP), and the Cottonseed Oil Assistance Program (COAP). EEP has
been the largest of these programs in terms of government funding
and, according to USDA, has been used to pressure foreign nations to
reduce trade barriers and eliminate trade-distorting practices.
During 1996, EEP was not fully utilized due to market
conditions--tight supply and high international demand--that did not
warrant its use. The Federal Agriculture Improvement and Reform
(FAIR) Act of 1996 did not reauthorize the SOAP and COAP programs.
See figure I.1 for expenditures on all export subsidy programs in
fiscal years 1985-98.
Figure I.1: Export Subsidy
Programs' Expenditures, Fiscal
Year 1985-98
(See figure in printed
edition.)
\a Estimated fiscal year 1997-98 program levels.
Source: Foreign Agricultural Service (FAS), USDA.
EXPORT CREDIT GUARANTEE
PROGRAMS
--------------------------------------------------------- Appendix I:2
The export credit guarantee programs are intended to develop, expand,
or maintain U.S. agricultural markets overseas by facilitating
access to export credit for countries that do not have adequate
commercial credit available. These programs encourage U.S. lenders
to extend credit to foreign importers to purchase U.S. agricultural
commodities. USDA has two types of export credit guarantee programs,
also known as the General Sales Manager (GSM) programs. The GSM-102
program offers short-term commercial credit guarantees for periods of
up to 3 years. The second program, known as GSM-103, offers
intermediate-term loan guarantees and repayment periods of 3 to 10
years. The GSM export credit guarantee programs are funded under the
auspices of USDA's Commodity Credit Corporation. In fiscal year
1996, these programs provided credit guarantees on agricultural
exports valued at $3.2 billion.\1 The FAIR Act established that not
less than $5.5 billion was to be made available annually for credit
guarantees through 2002. The act allows greater flexibility in terms
of how much is made available for each program. The act also allows
credit guarantees on high-value products (HVP) with at least 90
percent U.S. content by weight. See figure I.2 for assisted sales
amounts for fiscal year 1985-98 export credit guarantees.
Figure I.2: Export Credit
Guarantee Program Assisted
Sales, Fiscal Year 1985-98
(See figure in printed
edition.)
Note: The Export Credit Guarantee Program was established in 1980
and, as of January 1997, the government has paid out approximately
$2.1 billion in claims because of loan repayment defaults and
reschedulings by foreign buyers.
\a Estimated fiscal year 1997-98 program levels.
Source: FAS, USDA.
--------------------
\1 According to the Commodity Credit Corporation, the export subsidy
amount in fiscal year 1996 was $327.4 million.
MARKET DEVELOPMENT AND
PROMOTION PROGRAMS
--------------------------------------------------------- Appendix I:3
These programs are intended to develop, maintain, and expand foreign
markets for U.S. agricultural products through subsidies for
advertising and market promotion. In the 1950s, the federal
government created several market development and export promotion
programs. Today, FAS is responsible for (1) the Foreign Market
Development Program (FMDP) and (2) the Market Access Program (MAP).
These programs provide funds to commercial firms and not-for-profit
organizations to promote U.S. agricultural commodities in foreign
markets. FMDP (also known as the Cooperator Program) is intended to
help develop export markets and promote U.S. agricultural
commodities--typically for bulk, or generic, products. MAP, on the
other hand, is used primarily to assist in developing markets for
high-value or processed products. In 1996, FMDP contributions by the
U.S. government were capped at $34 million. The FAIR Act capped
funding authority for MAP at $90 million for each fiscal year from
1996 to 2002. See figure I.3 for expenditures on market development
and promotion programs in Fiscal Year 1985-98.
Figure I.3: Market Development
and Promotion Program
Expenditures, Fiscal Year
1985-98
(See figure in printed
edition.)
\a Estimated fiscal year 1997-98 program levels.
Source: FAS, USDA.
PUBLIC LAW 480 TITLE I-FOOD AID
--------------------------------------------------------- Appendix I:4
The Public Law 480 food aid program is intended to enhance the food
security of developing countries through the use of agricultural
commodities and local currencies to (1) combat world hunger and
malnutrition and their causes; (2) promote sustainable economic
development, including agricultural development; (3) expand
international trade; (4) develop and expand export markets for U.S.
agricultural commodities; and (5) encourage the growth of private
enterprise and democratic participation in developing countries. In
fiscal year 1996, USDA reported that this program resulted in the
export of approximately $370 million, or 1.2 million metric tons, of
U.S. commodities. The FAIR Act extends the authority of the United
States to enter into new Public
Law 480 agreements through 2002. Further, it authorizes, for the
first time, Public Law 480 title I agreements with private entities.
The act also modifies repayment terms for title I credit, including
elimination of the 10-year minimum repayment period and reduction of
the maximum grace period from 7 to 5 years.\2 See figure I.4 for
Public Law 480 expenditures for fiscal year 1985-98.
Figure I.4: Public Law 480
Title I-Food Aid Expenditures,
Fiscal Year 1985-98
(See figure in printed
edition.)
Note: fiscal year 1988-96 based on registered sales. Transportation
costs are not included.
\a Estimated fiscal year 1997-98 program levels.
Source: FAS, USDA.
--------------------
\2 USDA also administers the donation program under section 416(b) of
the Agricultural Act of 1949, as amended by section 302 of P.L.
83-480, (July 10, 1954) (7 U.S.C. 1431(b)), which provides
agricultural commodities held in U.S. government inventories to
needy countries. There were no commodities available for programming
in fiscal years 1996 and 1997 due to low inventories. In addition to
USDA food aid programs, there are two food aid programs administered
by the Agency for International Development (the title II emergency
and private assistance programs and the title III food for
development program).
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
Phillip J. Thomas
Kurt W. Kershow
Kurt A. Burgeson
Gezahegne Bekele
Emil E. Friberg Jr.
Rona H. Mendelsohn
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Richard P. Burkard
Herbert I. Dunn
OFFICE OF THE CHIEF ECONOMIST,
WASHINGTON, D.C.
Loren Yager
Daniel E. Coates
SAN FRANCISCO FIELD OFFICE
Christine M. Broderick
RELATED GAO PRODUCTS
============================================================ Chapter 0
Addressing the Deficit: Budgetary Implications of Selected GAO Work
for Fiscal Year 1998 (GAO/OCG-97-2, Mar. 14, 1997).
Export-Import Bank: Reauthorization Issues (GAO/T-NSIAD-97-147, Apr.
29, 1997).
Canada, Australia, and New Zealand: Potential Ability of
Agricultural State Trading Enterprises to Distort Trade
(GAO/NSIAD-96-94, June 24, 1996).
Farm Bill Export Options (GAO/GGD-96-39R, Dec. 15, 1995).
U.S. Department of Agriculture: Foreign Agricultural Service Could
Benefit From Better Strategic Planning (GAO/GGD-95-225, Sept. 28,
1995).
State Trading Enterprises: Compliance with the General Agreement on
Tariffs and Trade (GAO/GGD-95-208, Aug. 30, 1995).
Food Aid: Competing Goals and Requirements Hinder Title I Program
Results (GAO/GGD-95-68, June 26, 1995).
Agricultural Trade: Competitor Countries' Foreign Market Development
Programs (GAO/T-GGD-95-184, June 14, 1995).
Export Promotion: Rationales for and Against Government Programs and
Expenditures (GAO/T-GGD-95-169, May 23, 1995).
Former Soviet Union: Creditworthiness of Successor States and U.S.
Export Credit Guarantees (GAO/GGD-95-60, Feb. 24, 1995).
Agricultural Trade: Five Countries' Foreign Market Development for
High-Value Products (GAO/GGD-95-12, Dec. 14, 1994).
Cargo Preference Requirements: Objectives Not Significantly Advanced
When Used in U.S. Food Aid Programs (GAO/GGD-94-215, Sept. 29,
1994).
International Trade: Impact of the Uruguay Round Agreement on the
Export Enhancement Program (GAO/GGD-94-180BR, Aug. 5, 1994).
Public Law 480 Title I: Economic and Market Development Objectives
Not Met (GAO/T-GGD-94-191, Aug. 3, 1994).
General Agreement on Tariffs and Trade: Uruguay Round Final Act
Should Produce Overall U.S. Economic Gains (GAO/GGD-94-83A&B, July
29, 1994).
High-Value Product Exports: Good Potential Exists for More Trade
With Taiwan, Malaysia, and Indonesia (GAO/GGD-94-52, Nov. 19, 1993).
U.S. Department of Agriculture: Issues Related to the Export Credit
Guarantee Programs (GAO/T-GGD-93-28, May 6, 1993).
Loan Guarantees: Export Credit Guarantee Programs' Costs Are High
(GAO/GGD-93-45, Dec. 22, 1992).
*** End of document. ***