Pork Industry: Trade Barriers and Other Factors Limit Federal Programs'
Potential to Increase Exports (Letter Report, 01/01/2000,
GAO/RCED-00-41).

Pursuant to a congressional request, GAO reviewed the effects that the
U.S. cargo preference law and federal export assistance programs have on
the pork export industry, focusing on the: (1) extent to which other
countries' trade practices and the U.S. cargo preference law are
impediments to exporting more pork products; (2) extent to which
existing federal programs could be used to increase the export of pork
products; and (3) potential for increased exports to strengthen the the
U.S. agricultural trade balance and improve producer prices.

GAO noted that: (1) other countries' trade practices are important
factors that impede increased U.S. pork exports; (2) among the trade
practices constraining U.S. pork exports are various types of import
tariffs, which raise the price of imported products, and nontariff
barriers, such as import quotas, which prevent or limit imports; (3)
export subsidies paid by other countries to their pork exporters also
make U.S. pork less price-competitive in world markets; (4) however,
some reduction in these trade barriers and export subsidies have
occurred, which helps to increase U.S. pork exports; (5) the Office of
the U.S. Trade Representative and the Department of Agriculture continue
to work for further reductions during ongoing international trade
negotiations within the World Trade Organization; (6) the U.S. cargo
preference law has generally not been an impediment to exporting pork
because pork has seldom been used as a food aid; (7) the four principal
types of federal export programs offer limited potential for increasing
pork exports; (8) $3 billion in unused export credit guarantees could
have been used for pork exports, however, the use of credit guarantees
are limited by certain factors, which reduce pork exporters' profit
margins, according to officials in the meat-exporting industry; (9)
humanitarian food aid programs could be used to export pork, but these
programs' potential usefulness for pork is limited by insufficient
infrastructure for countries to safely handle and efficiently distribute
meat products; (10) export subsidy programs offer even less potential
for pork exports because of limits imposed by the Agreement on
Agriculture, which bases allowable export subsidies on 1986-1990 levels,
thereby limiting the United States' and other qualified countries'
current pork export subsidies; (11) while export promotion programs
could be used to promote U.S. pork, ascertaining the potential benefits
from these programs would be problematic because producers, exporters,
and others often conduct promotion activities without government
assistance, making it difficult to isolate the program's influence; (12)
large increases in pork exports would not have a major impact on the
overall agricultural trade balance because the pork export trade surplus
averaged less than 1 percent of the value of the overall agricultural
trade surplus from 1995-1998; (13) even if pork trade tripled, the
effect on the agricultural trade balance would be small; and (14)
research indicates that large, sudden 1-year increases in pork exports
would be needed to significantly increase domestic pork prices.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-00-41
     TITLE:  Pork Industry: Trade Barriers and Other Factors Limit
	     Federal Programs' Potential to Increase Exports
      DATE:  01/01/2000
   SUBJECT:  Swine
	     Agricultural industry
	     Livestock products
	     Federal aid programs
	     International trade regulation
	     Exporting
	     International trade restriction
	     Prices and pricing
IDENTIFIER:  USDA Export Credit Guarantee Program
	     USDA Export Subsidy Program
	     USDA Humanitarian Food Aid Programs
	     USDA Export Promotion Program
	     USDA GSM-102 Program
	     USDA GSM-103 Program
	     USDA Supplier Credit Guarantee Program
	     USDA Facility Guarantee Program
	     USDA Export Enhancement Program
	     USDA Foreign Market Development Program
	     USDA Market Access Program
	     USDA Emerging Markets Program
	     USDA Cooperator Program
	     General Agreement on Tariffs and Trade
	     Russia
	     Japan
	     Korea

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Report to Congressional Requesters

February 2000

PORK INDUSTRY

Trade Barriers and Other Factors Limit Federal Programs' Potential to
Increase Exports
*****************

*****************

GAO/RCED-00-41

Letter                                                                     3

Appendixes

Appendix I:  Illustrations of Other Countries' Trade Practices That Are
Impediments to Increasing U.S. Pork Exports

                                                                         25

Appendix II:  Description of Federal Food Assistance Programs

                                                                         27

Appendix III:  Comments From the U.S. Department of Agriculture

                                                                         29

Related GAO Products

                                                                         46

Table 1:  Types of Barriers to Market Access Affecting U.S. Pork Exports
and Related WTO Requirements10

Table 2:  Comparison of Export Credit Guarantee Programs13

Table 3:  Purposes and Means of Delivering Assistance Under P.L. 480
Programs27

Figure 1:  The Value of U.S. Pork Exports, Calendar Years 1994-986

Figure 2:  The Value of U.S. Exports by Country, 19987

AID     U.S. Agency for International Development

EMP     Emerging Markets Program

GSM     General Sales Manager

PRRS    Porcine Respiratory and Reproductive Syndrome

USDA    U.S. Department of Agriculture

USTR    U.S. Trade Representative

WTO     World Trade Organization

Prior to Nov. 1999, the exporter's fee for the first 90 days of financing
was $.45 per 
                                                 Resources, Community, and 
                                              Economic Development Division

B-284236

February 1, 2000

The Honorable Blanche L. Lincoln
United States Senate

The Honorable Marion Berry
House of Representatives

The Honorable David Minge
House of Representatives

By the end of 1998, hog producers had increased production by over 700,000
metric tons over the prior year, resulting in a surplus of pork products.
As a result, the prices they received for their hogs sold in the open
market declined 36 percent, from an average of $54 per hundredweight in
1997 to an average of $35 per hundredweight./Footnote1/ At the same time,
the overall value of pork products declined from about 
$13 billion in 1997 to $9 billion in 1998. In response, the U.S.
Department of Agriculture (USDA) instituted several programs designed to
provide assistance to pork producers, especially those with small
operations. For the most part, these efforts have centered on some form of
direct federal payment to producers. 

According to USDA, current federal export assistance programs are
principally designed to increase exports over the long term or to respond
to humanitarian needs; nonetheless, industry trade officials and others
have suggested that these programs might have the potential to increase
exports and thus improve producer prices and strengthen the agricultural
trade balance. There are four types of federal export programs that could
be used to help increase agricultural exports, including pork: (1) export
credit guarantee programs, which offer loan guarantees to buyers in
certain countries where credit markets are not fully developed; (2)
humanitarian food aid programs, which ship U.S. agricultural products to
countries where hunger is a major problem; (3) export subsidy programs,
which are used to make U.S. agricultural products more competitive in
world markets; and (4) export promotion programs, which are intended to
develop, maintain, and improve access to foreign markets for U.S.
agricultural products through activities such as agricultural trade
shows./Footnote2/ Concerns have been raised that the U.S. cargo preference
laws--which require that 75 percent of humanitarian food aid be shipped
under 
U.S.-flagged carriers--may increase the cost of exporting pork through
food aid programs, thereby limiting the volume of pork exports through
these programs.

In this context, you asked us to review the (1) extent to which other
countries' trade practices and the U.S. cargo preference laws are
impediments to exporting more pork products;/Footnote3/ (2) extent to
which existing federal programs could be used to increase the export of
pork products; and (3) potential for increased pork exports to strengthen
the U.S. agricultural trade balance and improve producer prices.

Results in Brief 

Other countries' trade practices are among several important factors that
impede increased U.S. pork exports. Among the trade practices constraining
U.S. pork exports are various types of import tariffs, which raise the
price of imported products, and nontariff barriers, such as import quotas,
which prevent or limit imports. Export subsidies paid by other countries
to their pork exporters also make U.S. pork less price-competitive in
world markets. As a result of the Uruguay Round of negotiations on the
General Agreement on Tariffs and Trade, completed in 1994, some reductions
in these trade barriers and export subsidies have occurred, which helps to
increase U.S. pork exports. The Office of the U.S. Trade Representative
and USDA strongly supported these reductions in trade barriers and export
subsidies and continue to work for further reductions during ongoing
international trade negotiations within the World Trade Organization. The
U.S. cargo preference laws, while affecting agricultural commodities used
in food aid programs and representing a potential obstacle to trade, have
generally not been an impediment to exporting pork because pork has seldom
been used as food aid. 

The four principal types of federal export programs offer limited
potential for increasing pork exports. Specifically, the $3 billion in
export credit guarantees that were not used in fiscal year 1999 could have
been used, at least in part, for pork exports. However, a number of
factors limit the use of credit guarantees, including the program's
administrative fees, which reduce pork exporters' profit margins,
according to officials in the 
meat-exporting industry. Similarly, humanitarian food aid programs could
be used to export pork, but these programs' potential usefulness for pork
is limited by, among other things, insufficient infrastructure in
receiving countries to safely handle and efficiently distribute meat
products. Export subsidy programs offer even less potential for pork
exports because of limits imposed by the Agreement on Agriculture, an
international trade agreement administered by the World Trade
Organization. The Agreement on Agriculture bases allowable export
subsidies on 1986 through 1990 levels, thereby limiting the United States'
and other qualified countries' current pork export subsidies. As a result,
in the July to June 2000 year of the agreement, the United States is
limited to subsidizing only 413 metric tons, less than 0.1 percent of
total U.S. pork exports. According to USDA, pork exporters in the United
States did not use any of this subsidy allowance. Finally, evidence is
mixed regarding the impact of federal export promotion programs on U.S.
pork exports. While these programs are currently used to promote U.S. pork
products in other countries, it is difficult to estimate the effects of
these programs on pork exports.

Even large increases in pork exports, while perhaps beneficial to the pork
industry, would not have a major impact on the overall agricultural trade
balance because the pork export trade surplus (the excess of exports over
imports) averaged less than 1 percent of the value of the overall
agricultural trade surplus from 1995 through 1998. For example, even if
pork trade tripled--which is unlikely--the effect on the agricultural
trade balance would be small. Furthermore, increases in pork exports may
result in some reductions in exports for other agricultural commodities,
such as poultry or beef. Such substitution could offset to some extent
increases in the agricultural trade balance from pork exports. Finally,
while increases in pork exports would increase the demand for U.S. pork,
which could benefit the pork industry, research indicates that large,
sudden 1-year increases in pork exports would be needed to significantly
increase domestic pork prices. 

Background

The United States is one of the world's leading pork-producing countries
and the second largest exporter of pork products--only Denmark exports
more. The value of pork exports has increased steadily in the last 5
years, from $696 million in 1994 to $1.15 billion in 1998.

Figure****Helvetica:x11****1:    The Value of U.S. Pork Exports, Calendar
                                 Years 1994-98
*****************

*****************

1998 dollars in millions

Source: GAO's analysis of USDA's data.

In 1998, U.S. pork production was 8.6 million tons. The quantity of pork
and variety meat being exported each year increased from about 248,000
tons in 1994 to about 557,000 tons in 1998. Although the quantity of pork
exports increased, as figure 1 indicates, the value of U.S. pork exports
leveled off from 1996 to 1997 and declined slightly in 1998. USDA, pork
industry, and other analysts have suggested that economic problems in
Russia and Asia, as well as an overall decrease in pork prices in 1998,
account for this decline in value. While Asian economies have recovered to
some extent--Japanese and Korean imports of U.S. pork have begun to climb
again--the Russian economy continues to falter. For example, in 1998,
Russia imported about $74 million in U.S. pork; as of August 1999, this
total had dropped to almost zero. In response to Russia's economic
problems, the United States was to donate 50,000 metric tons of pork,
valued at about $88 million, as part of a food aid package to Russia that
was scheduled for delivery in the fourth quarter of 1999. According to
USDA, pork shipments began arriving in Russia during November 1999. As of
January 2000, the majority of the donated pork had arrived or was en-route.

Figure 2 shows the countries to which the United States exports pork. As
shown in the figure, in terms of export value, more than half of U.S.
exports go to Japan; these exports consist mainly of high-value cuts of
meat such as pork loins. 

Figure****Helvetica:x11****2:    The Value of U.S. Exports by Country,
                                 1998
*****************

*****************

Source: GAO's analysis of USDA's data.

The United States also imports pork. The value of imports has increased
from $857 million in 1994 to $981 million in 1998, an average annual
increase of about 3 percent. Imports came primarily from Canada--live hogs
and pork--and from Denmark--specialty pork. 

The U.S. net pork trade balance is the difference between the value of
U.S. pork exports and imports. In 1995, the value of pork exports exceeded
the value of pork imports, and the United States became a net exporter of
pork with a pork trade surplus. That same year, the quantity of exports
exceeded imports for the first time since 1953. Since then, the value of
net pork exports has increased at an average annual rate of 20 percent. 

The Agreement on Agriculture sets out disciplines for international trade
in pork and all other agricultural products. The World Trade Organization
(WTO) administers member countries' compliance with the multiple WTO
agreements that govern trade between WTO member countries, including the
Agreement on Agriculture./Footnote4/ The WTO also provides a dispute
settlement process to resolve trade disputes between member countries. The
Agreement on Agriculture requires member countries to make specific
reductions in three types of trade barriers: (1) market access
restrictions, (2) export subsidies, and (3) domestic support programs.
Developed members are committed to "phasing in" these reductions over a 6-
year period, while developing members are committed to an 11-year phase-in
period. 

The Agreement on Agriculture commits WTO members to enter into
negotiations by 2000. The U.S. goals for upcoming agricultural trade
negotiations include cutting the tariffs facing U.S. agricultural exports,
totally eliminating export subsidies, and decreasing trade-distorting
agricultural programs. 

Other Countries' Trade Practices Are Impediments to Increasing Pork Exports

Other countries' trade practices are among several important factors
impeding increases in U.S. pork exports./Footnote5/ These trade practices
include various types of import tariffs (tariffs), which raise the price
of imported products; nontariff barriers, which prevent or limit imports;
and other trade countries' export subsidies, which make U.S. pork less
price-competitive in world markets. The Agreement on Agriculture produced
many reductions in these trade barriers and export subsidies, helping to
increase U.S. pork exports. The Office of the U.S. Trade Representative
and USDA strongly supported these reductions in trade barriers and export
subsidies and continue to work for further reductions. For example, they
plan to propose reducing trade barriers and eliminating export subsidies
in future WTO negotiations. Unlike trade barriers and export subsidies,
the U.S. cargo preference laws have generally not been an impediment to
exporting pork, although they affect some agricultural commodities used as
food aid and represent a potential obstacle to pork exports.

Trade Barriers and Export Subsidies Impede Additional U.S. Pork Exports
-----------------------------------------------------------------------

According to USDA officials and pork industry representatives, U.S. pork
exports could increase significantly beyond the current level if other
countries' trade barriers to market access, such as Japan's restrictions
on pork imports, and export subsidies, such as the European Union's pork
export subsidies, were reduced or removed. A market access barrier
generally has the effect of protecting domestic producers from foreign
competition by making foreign products more expensive for potential
importers or restricting the quantity of the product imported. As a
result, less of the protected product is imported than would be without
the barrier. For example, according to USDA representatives, Japan's pork
import rules can increase the price of imported pork substantially, making
it less competitive with Japanese-produced pork. Although Japan is
currently the leading importer of U.S. pork, according to industry
analysts, it has the potential to import an even more significant amount.
During future WTO negotiations, the United States plans to propose that
import restrictions, such as Japan's, be reduced.

USDA officials noted, however, that the Uruguay Round helped to reduce
many trade barriers, which, according to a pork industry analysis,
resulted in an 80-percent increase in the value of U.S. pork exports from
1994 through 1998. The types of barriers to market access that affect U.S.
pork exports and related WTO requirements are described in table 1.

Table****Helvetica:x11****1:    Types of Barriers to Market Access
                                Affecting U.S. Pork Exports and Related
                                WTO Requirements

-------------------------------------------------------------------------
| Barrier          : Definition             : WTO member requirements   |
|-----------------------------------------------------------------------|
| Tariff           : Tax on the imported    : The Agreement on          |
|                  : product that           : Agriculture requires      |
|                  : increases its price    : tariff reductions from    |
|                  : so that the product    : 1995 through 2000 for     |
|                  : costs the same as or   : developed countries and   |
|                  : more than a similar    : from 1995 through 2005    |
|                  : domestically produced  : for developing            |
|                  : product.               : countries, using 1986     |
|                  :                        : through1988 as a base     |
|                  :                        : period. For developed     |
|                  :                        : countries, the average    |
|                  :                        : reduction is to be 36%,   |
|                  :                        : with a minimum per        |
|                  :                        : product reduction of      |
|                  :                        : 15%; for developing       |
|                  :                        : countries, these          |
|                  :                        : requirements are 24%      |
|                  :                        : and 10%, respectively.    |
|-----------------------------------------------------------------------|
| Nontariff barrier: According to USDA's    : The Agreement on          |
|                  : definition, a border   : Agriculture prohibits     |
|                  : measure, regulation,   : countries from using      |
|                  : or other government    : nontariff barriers and    |
|                  : action other than a    : generally required the    |
|                  : tariff used by a       : conversion of nontariff   |
|                  : government to          : barriers to tariff        |
|                  : restrict imports from  : equivalents by January    |
|                  : other countries.       : 1, 1995. Furthermore,     |
|                  : Examples include       : the Agreement prevents    |
|                  : import quotas (that    : countries from using      |
|                  : is, quantitative       : arbitrary and             |
|                  : limits on imports),    : unjustifiable food        |
|                  : licensing              : safety and animal         |
|                  : restrictions, and      : health standards to       |
|                  : restrictions based on  : prevent trade in          |
|                  : nonscientific food     : agricultural products.    |
|                  : safety and animal      : Sanitary and              |
|                  : health standards.      : phytosanitary standards   |
|                  :                        : are to be based on        |
|                  :                        : scientifically based      |
|                  :                        : assessments of risk.      |
|-----------------------------------------------------------------------|
| Tariff-rate quota: A two-level tariff     : The tariff-rate           |
|                  : that uses a quota to   : reductions required by    |
|                  : limit the amount of a  : the Uruguay Round--       |
|                  : product that can be    : described above--also     |
|                  : imported at the lower  : apply to both the lower   |
|                  : tariff rate. Imports   : and higher tariff rates   |
|                  : above this limit are   : used in tariff-rate       |
|                  : assessed the higher    : quotas.                   |
|                  : tariff rate, which     :                           |
|                  : can make them          :                           |
|                  : prohibitively          :                           |
|                  : expensive.             :                           |
-------------------------------------------------------------------------

Unlike barriers to market access, which prevent exporters from competing
in other countries, export subsidies make a country's products more 
price-competitive in world markets. Generally, an export subsidy is a
government payment that confers a benefit on the production, manufacture,
or distribution of an exported product. Government export subsidies
include direct cash payments. The Uruguay Round committed countries to
lowering the value and volume of their subsidies./Footnote6/ During the
1995-2000 implementation period, developed countries are to reduce their
budgetary expenditures for export subsidies by at least 36 percent and
their volume of subsidized exports by at least 21 percent, using 1986 to
1990 as the base period. For developing countries, these reductions are to
be 
24 percent of the budgetary expenditures and 14 percent of the volume of
subsidized exports during the 1995-2005 implementation period. According
to USDA research and pork industry representatives, the European Union's
use of export subsidies for pork has made U.S. pork less price-competitive
in world markets and made the volume of U.S. pork exports lower than it
would have been in the absence of these subsidies. 

Appendix I describes in more detail trade practices affecting U. S. pork
exports. 

U.S. Cargo Preference Laws Have Had a Small Effect on Pork Exports
------------------------------------------------------------------

Cargo preference laws/Footnote7/--intended to promote a strong U.S.
merchant marine industry--require that at least 75 percent of U.S. food
aid, as measured by tonnage, be shipped on U.S.-flagged ships rather than
on generally less expensive foreign-flagged vessels. Thus, to the extent
additional funds are not appropriated to cover higher transportation
costs, cargo preference requirements may adversely affect food aid
programs./Footnote8/ Because the funds not spent on transportation may, in
some instances, be used to purchase food, using U.S.-flagged ships may
reduce the funds available to purchase commodities. 

Despite their potential as an obstacle to trade, cargo preference laws
have had little impact on pork exports because the United States has
seldom used pork as food aid. However, in 1999, the United States donated
50,000 metric tons of pork to Russia as part of the 1998-99 Russian food
aid package. Cargo preference requirements did not affect the amount of
pork USDA purchased for this donation because, under an agreement with
Russia, USDA was to purchase a fixed quantity--50,000 metric tons--of pork
at the best possible price.

Existing Federal Programs Have Limited Potential to Increase Pork Exports
-------------------------------------------------------------------------

Of the four principal types of federal export programs, export credit
guarantee and food aid programs appear to have limited potential for
increasing pork exports in the near future. Export subsidy programs have
even less potential. However, evidence is mixed regarding the impact of
federal export promotion programs on U.S. pork exports.

Export Credit Guarantee Programs Have Limited Potential for Increasing
Pork Exports
---------------------------------------------------------------------------

Four export credit programs--GSM-102, GSM-103, Supplier Credit, and
Facility Guarantee--offer loan guarantees to foreign buyers in countries
where credit is necessary to maintain or increase U.S. agricultural sales,
including sales of pork products, but where financing might not be
available without USDA guarantees./Footnote9/ Generally, loan guarantee
programs enable U.S. banks or exporters to extend credit to foreign banks
or importers and have USDA guarantee repayment to the U.S. bank or
exporter in the event of default by the foreign borrower. In fiscal year
1999, these programs offered guarantees for the sale of agricultural
products and facilities to 97 countries, including nations such as Korea,
Mexico, and Turkey. In fiscal year 1999, USDA's allocations to these
programs totaled about $6 billion for loan guarantees and actual
guaranteed exports were valued at about $3 billion. Roughly $164 million
of this amount was used to guarantee loans for the purchase of meat, with
about $32 million of the meat total used for pork. Although about $3
billion in credit guarantees were not used in fiscal year 1999, industry
officials believe that the potential of these programs to increase pork
exports over the short term is limited because, among other things, the
programs' administrative fees are a disincentive to many pork exporters.

Table 2 shows the different terms under which these four programs operate
and their potential for increased support for pork exports.

Table****Helvetica:x11****2:    Comparison of Export Credit Guarantee
                                Programs

------------------------------------------------------------------------
|                   Export credit guarantee program                    |
|----------------------------------------------------------------------|
|             : GSM-102     : GSM-103     : Supplier    : Facility     |
|             :             :             : Credit      : Guarantee    |
|----------------------------------------------------------------------|
| Borrower    : Foreign bank: Foreign bank: Importer    : Foreign bank |
|----------------------------------------------------------------------|
| Financial   : Letter of   : Letter of   : Promissory  : Letter of    |
| instrument  : credit      : credit      : note        : credit       |
|----------------------------------------------------------------------|
| Length of   : Maximum of  : 3 to 10     : Maximum of  : 1 to 10      |
| loan        : 3 years     : years       : 180 days    : years        |
| guarantee   :             :             :             :              |
|----------------------------------------------------------------------|
| Coverage    : 98% of      : 98% of      : Prior to    : 95% of       |
| of guarantee: principal   : principal   : Nov. 1999,  : principal    |
|             : and a       : and a       : 50% of      : and a        |
|             : portion of  : portion of  : principal   : portion of   |
|             : interest    : interest    : and no      : interest     |
|             :             :             : interest.   :              |
|             :             :             : Since       :              |
|             :             :             : then, 65%   :              |
|             :             :             : of          :              |
|             :             :             : principal   :              |
|             :             :             : and no      :              |
|             :             :             : interest.   :              |
|----------------------------------------------------------------------|
| Administrat : Varies.     : Varies.     : Prior to    : $200         |
| ive fee     : Based on    : Based on    : Nov. 1999,  : application  |
| charged to  : dollar      : dollar      : $0.45 to    :  fee and a   |
| exporter    : amount      : amount      : $0.90 per   : variable     |
|             : guaranteed  : guaranteed  : hundred     : fee based    |
|             : and length  : and length  : dollars of  : on USDA's    |
|             : of credit   : of credit   : coverage.   : assessment   |
|             : period.     : period.     : Since       : of           |
|             :             :             : then,       : transaction  |
|             :             :             : $0.40 per   : 's risk      |
|             :             :             : hundred     :              |
|             :             :             : dollars of  :              |
|             :             :             : coverage.   :              |
|----------------------------------------------------------------------|
| Credit      : $5.1 billion: $377 million: $361 million: $190 million |
| guarantees  :             :             :             :              |
| available   :             :             :             :              |
| (fy 1999)   :             :             :             :              |
|----------------------------------------------------------------------|
| Credit      : $3.0        : $44 million : $46 million : 0            |
| guarantees  : billion     :             :             :              |
| used (fy    :             :             :             :              |
| 1999)       :             :             :             :              |
|----------------------------------------------------------------------|
| Potential to: Small       : Almost none : Small       : Small        |
|             :             :             :             :              |
| increase    :             :             :             :              |
| pork        :             :             :             :              |
|             :             :             :             :              |
| exports     :             :             :             :              |
------------------------------------------------------------------------

Source: GAO's analysis of USDA's data.

As the table shows, each of these programs had credit guarantees available
at the end of fiscal year 1999. According to USDA officials, in theory,
these unused credit guarantees could have been used to help increase pork
exports. However, these officials said that several constraints limit the
use of credit guarantees to increase pork exports over the short term.
These constraints include the following:

o Credit guarantees work only in limited circumstances. According to USDA
  officials, GSM programs are designed to assist "mid-tier" countries,
  such as Bolivia, Egypt, and South Korea, where a demand exists but the
  credit to finance commodity purchases may not be readily available.
  These officials emphasized that USDA evaluates the ability of each
  country to service USDA-guaranteed debt prior to making loan
  guarantees. Critical factors in this evaluation include the risk of
  default on the debt by the importing country's banks or importers as
  well as changes in the exchange rates. Thus, using credit guarantees to
  increase pork exports makes sense only if the importing country has a 
  (1) shortage of available credit and therefore needs USDA's
  guarantee, (2) reasonably strong credit history, and (3) demand for
  pork products. According to GSM program managers, only a handful of
  countries meet these criteria, and only the Republic of South Korea
  has used GSM-102 to finance pork imports. Overwhelmingly, foreign
  countries that have used credit guarantees have used them to support
  grain purchases, in large part because their demand for grain is
  much greater than their demand for pork.

o Programs' administrative fees hinder U.S. pork exporters'
  participation. Pork exporters, who contend that they operate with
  narrow profit margins, have noted that the GSM programs' administrative
  fees further limit their profits. Thus, they prefer to market their
  products in countries that do not need credit guarantees.

o Foreign banks' participation is limited. According to GSM program
  officials, foreign banks' limited participation in credit guarantee
  programs represents a large hurdle in using these programs to increase
  pork exports. Participation in some countries is limited because of a
  number of factors, including: (1) the lack of approved (creditworthy)
  foreign banks, (2) a sometimes greater cost to foreign banks of 
  GSM-guaranteed financing than the cost of unguaranteed lines of
  credit for trade, and/or (3) the inability of importers to establish
  lines of credit with foreign banks. In other cases, according to
  USDA, even when foreign banks are approved for participation in GSM
  programs, importers do not use the programs because the banks do not
  pass on enough of the programs' benefits to make the GSM programs
  advantageous. 

Relative to the size of the loan guarantee programs, none of these
programs has been used to any great extent for pork products. For example,
GSM-102 has been used mainly to guarantee the purchase of bulk grains. In
fiscal year 1999, only 5 percent of all GSM-102 guarantees ($152 million of 
$3 billion) was used for meat purchases. Of the amount used for meat
purchases, about $32 million, 1 percent of all GSM-102 guarantees, was
used for pork products. According to program managers, GSM-103 is not
designed to assist in the sale of perishable commodities because it does
not make sense to finance such items for up to 10 years. As a result, GSM-
103 is not used for perishable food products, such as meat, and is not a
viable option for increasing pork exports.

Similarly, according to USDA officials, the Supplier Credit Guarantee
Program has not been used for pork products. However, it offers limited
potential for increasing pork exports. Over the past 3 years the use of
this program has increased. In fiscal year 1997, $3.74 million in credit
guarantees was made available to exports in the program; $18.2 million was
made available in fiscal year 1998; and $46.0 million was made available
in fiscal year 1999.

In fiscal year 1999, U.S. exporters used the program for about $12 million
in meat exports, but none of this total was for pork. However, the fact
that exporters of other meat products have had limited success in the
program suggests that pork exporters might also have limited success.
Several factors constrain this program's ability to achieve even this
limited potential to increase meat exports. For example, according to a
USDA official, supplier credit fees are nearly triple the fees in the GSM-
102 program./Footnote10/ In addition, according to USDA, some exporters
are not aware of the program, and many that are aware believe that the
rules for participation are too complicated.

Finally, no sales were guaranteed through the Facility Guarantee Program
in fiscal year 1999. This program provides payment guarantees intended to
help finance the construction or improvement of agriculture-related
infrastructure facilities in emerging markets. The intent of the program
is to enhance sales of U.S. agricultural commodities and products to
emerging markets where the demand for such commodities and products may be
limited by inadequate storage, processing, or handling capabilities.
According to USDA officials, this program may offer potential to improve
infrastructure in some emerging markets, but it has not been used for meat
products.

Food Aid Programs Have Little Potential for Increasing Pork Exports
-------------------------------------------------------------------

Generally, food assistance programs provide little potential to increase
pork exports. Three food assistance programs--P.L. 480,/Footnote11/
section 416(b) of the Agricultural Act of 1949, and Food for Progress--
provide U.S. agricultural commodities to countries needing food assistance
through long-term credit arrangements with favorable terms or through food
donations for humanitarian assistance or market development. Typically,
these programs have provided grain and other bulk commodities, rather than
meat. In fiscal year 1998, these programs together provided a total of
$1.21 billion in assistance--none of it for meat. However, in fiscal year
1999, the Russian food aid effort, funded by Food for Progress, donated
50,000 metric tons of pork, valued at $88 million.

According to program managers at USDA and the U.S. Agency for
International Development (AID), as well as representatives of private
voluntary organizations, these programs offer little potential to increase
pork exports; in addition, there are significant constraints that could
ultimately outweigh the potential. For example: 

o Cost-efficiency/nutrition issues. According to officials at USDA, AID,
  and private voluntary organizations, it is more cost-effective to use
  grain as a food source than meat. The executive director of one private
  voluntary organization stated that his organization attempts to provide
  the highest nutritional value and the most calories for the lowest
  possible cost. According to this official, grain better maximizes his
  resources because, for a given number of dollars, many more people can
  be fed with grain than with meat. For example, P.L. 480 program
  managers estimated that commodities such as beans, corn, and wheat cost
  hundreds of dollars per ton, while the cost of meat could easily be
  thousands of dollars per ton.

o Religious prohibitions. In some countries, particularly Islamic
  nations, pork is generally not consumed because of religious
  prohibitions. Obviously, pork is not likely to be heavily imported into
  these countries as food aid. Of the 67 countries receiving U.S. food
  assistance in fiscal year 1998, about one-third were predominantly
  Islamic.

o Infrastructure limits. Fresh or frozen pork exports require
  refrigeration throughout the distribution chain. In many countries,
  refrigerated warehouses, trucks, and local distribution centers are not
  available. According to officials in two private voluntary
  organizations, although many of the poorer countries that their
  organizations service lack adequate refrigeration facilities for fresh
  or frozen pork, canned pork would overcome this shortcoming. These
  officials said that there is limited potential to use canned pork in
  feeding programs; more likely, they noted, canned pork could be sold on
  the open market and the proceeds used to help pay for feeding programs.

Appendix II describes in more detail the purposes and means of delivering
food assistance programs.

Export Subsidy Program's Potential for Increasing Pork Exports Is Limited 
--------------------------------------------------------------------------

The Export Enhancement Program is designed to help expand U.S.
agricultural exports and to challenge other nations' subsidies for
agricultural exports. Under this program, USDA determines which U.S.
commodities at a competitive disadvantage when other countries use
subsidies or pay bonuses to exporters of these same commodities. These
bonuses allow the exporters to sell agricultural products at prices below
the prices they paid to acquire the commodities. In fiscal year 1999, the
program had a maximum funding level of $550 million, but none was used for
pork products.

Even if the subsidies had been used for pork, they would have had little
effect on pork exports because of the terms established in the Agreement
on Agriculture. The Agreement established subsidy ceilings for its member
nations using 1986 through 1990 as the base period, a time when the United
States rarely subsidized pork exports while the European Union heavily
subsidized its pork exports. Thus, between July 1, 1999, and June 30,
2000, because of these subsidy ceilings, the United States is limited to
413 metric tons of subsidized pork exports. In contrast, for the same
period, the European Union is authorized to subsidize over 900,000 metric
tons of pork. Pork industry officials and other analysts agree that as
long as such a great disparity in authorized subsidy levels exists, it
effectively precludes the U.S. subsidy program from having a strong role
in increasing pork exports.

Export Promotion Programs' Potential for Increasing Pork Exports Is Unclear
---------------------------------------------------------------------------

Three export promotion programs--the Foreign Market Development Program,
the Market Access Program, and the Emerging Markets Program--attempt to
develop, maintain, and expand foreign markets for U.S. agricultural
products by funding advertising and other market promotions. However,
according to USDA and pork industry officials, only a small portion of
these programs' funding levels--$550,000 of $33.6 million, of the Foreign
Market Development Program; $2.7 million, of $90 million, in the Market
Access Program; and none of $10 million in the Emerging Markets Program--
were used to promote pork exports in fiscal year 1999. USDA and industry
officials believe strongly that these three programs help develop and
maintain export markets, thereby increasing agricultural and pork exports.
However, existing research is unable to demonstrate the programs' specific
impact. For example, the Market Access Program requires producers,
exporters, and others to fund some of the program's activities. Thus, the
program's direct influence on increasing exports is difficult to
isolate./Footnote12/

The Foreign Market Development Cooperator Program--also known as the
Cooperator program--attempts to promote trade by fostering long-term
partnerships between USDA and U.S. agricultural producers and processors
through their nonprofit associations. USDA and these "cooperators" pool
their technical and financial resources to conduct market development
activities outside the United States. Generally, these activities fall
into one of three categories: (1) market research, (2) trade servicing--
activities such as advertising or trade conferences--to develop or improve
relationships with foreign importers, distributors, and government
officials; and (3) technical assistance--activities such as food
processing or storage--to expand the foreign country's capability for
using U.S. commodities. In established markets, such as in Western Europe
and Japan, the Cooperator program often emphasizes the quality of U.S.
products. In newer markets, greater emphasis may be placed on market
research, educational activities aimed at potential importers, and
meetings with government and trade officials to improve market access.
However, according to USDA officials, the Cooperator program's main
mission is to assist in exporting bulk commodities.

In the Market Access Program, which emphasizes value-added products, USDA
helps U.S. agricultural producers, exporters, private companies, and other
trade organizations finance promotional activities for U.S. agricultural
products. Typical activities include market research, technical
assistance, consumer promotions, and trade servicing. These activities are
designed to achieve long-term access in foreign markets. Participants in
the Market Access Program promote a variety of U.S. agricultural
commodities, including apples, cherries, dairy products, eggs, feed
grains, meat, poultry, and soybeans. In fiscal year 1999, the U.S. Meat
Export Federation received $8.3 million through the Market Access Program,
of which about $2.7 million was used for pork promotions. Because the
Market Access Program requires producers, exporters, and others to fund
similar types of promotion activities, it is difficult to isolate the
program's direct influence. 

The Emerging Markets Program provides technical assistance in worldwide
"emerging markets" as a way to promote U.S. agricultural products over the
long term. According to the Food, Agriculture, Improvement and Reform Act
of 1996, an emerging market is any country that is taking steps toward
becoming a market-oriented economy and has the potential to provide a
viable and significant market for U.S. commodities or the products of U.S.
commodities. The overall goals of the program are to develop, maintain, or
expand markets for U.S. agricultural exports; to improve the effectiveness
of food and agribusiness systems in these countries, which includes
reducing trade barriers; and to increase prospects for U.S. trade and
investment in these markets. According to a program manager, this program
awards grants on a competitive, project-by-project basis to conduct
activities such as market research and feasibility studies and food safety
workshops. Furthermore, the U.S. Meat Federation received several grants
through the Emerging Markets Program in fiscal year 1999 to provide
assistance to exports, but did not receive any applications specifically
for pork export assistance. As with the other export promotion programs,
it is difficult to isolate this program's specific impact. Additionally,
according to a senior USDA official, the program is limited in its
usefulness for increasing pork exports because it (1) has a small budget--
$10 million--so individual awards are small; and (2) is limited to
emerging markets that have a high demand for pork, of which there are
currently few outside China. 

Increased Pork Trade Would Not Have a Large Impact on the U.S.
Agricultural Trade Balance or Lead to Significantly Higher Producer Prices

Even large increases in pork exports, while perhaps beneficial to the pork
industry, would not have a major impact on the overall agricultural trade
balance and would not lead to significantly higher producer prices. From
1995 through 1998, the U.S. agricultural trade balance had an average
surplus of $23 billion (the excess of exports over imports). The average
pork trade surplus-$119 million--accounted for less than 1 percent of this
total. Therefore, for example, if the pork trade surplus increased
substantially--even a hypothetical tripling--which is unlikely, the effect
on the overall agricultural trade balance would be small./Footnote13/ From
1985 through 1998-the average annual rate of increase in the pork trade
surplus was 
20 percent. Other factors and variables outside the agricultural sector,
such as U.S. and foreign policies affecting inflation, interest rates,
exchange rates, and economic growth are more likely to have important
effects. 

Furthermore, increases in pork exports may come at the expense of other
agricultural commodities. For example, pork exports could be substituted
to some extent for exports of other meat products, such as beef and
poultry. In addition, increased pork exports could negatively impact grain
exports, if importing nations chose to import U.S. pork instead of
producing their own hogs with imported U.S. grain. Such substitution could
partially offset the effect of increases in pork exports on the overall
U.S. agricultural trade balance.

Finally, likely increases in the pork trade surplus would not result in
significantly higher producer prices for two reasons: (1) pork trade
accounts for only a small portion of the total demand for U.S. 
pork-averaging about 1 percent of sales from 1995 through 1998 and 
(2) increases in pork prices in the United States resulting from greater
export demand could be dampened by potential increases in pork imports.
Therefore, according to research, large increases in pork exports would be
needed in order to have a significant impact on domestic prices for
hogs./Footnote14/ For example, according to a study by the Food and
Agricultural Policy Research Institute, a 75-percent increase in the
quantity of pork exports in the short term would be needed to raise hog
prices by 10 percent./Footnote15/ Given the recent history of pork
exports, this type of short-term increase is not likely. In addition,
according to USDA officials, this price increase could be offset by a
decline in the quantity of pork demanded domestically and increased
imports of hogs and pork products. Nonetheless, in the short term,
increased exports would be beneficial to the U.S. pork industry to the
extent that they increased demand for U.S. pork. 

Agency Comments

We provided a draft copy of this report to the U.S. Agency for
International Development, USDA, and the Office of the U.S. Trade
Representative for their review and comment. We met with officials from
the U.S. Agency for International Development, including the Chief of
Program Operations, and from the Office of the U.S. Trade Representative,
including the Director of Agricultural Affairs and Technical Barriers to
Trade. These officials generally agreed with the draft report and provided
technical comments, which we incorporated as appropriate.

USDA agreed that credit guarantee and market development programs offer
limited potential to alleviate the price impacts of short-term domestic
surpluses through increased exports. However, the Department expressed
major concerns over what it considered to be limitations in the scope of
our analysis--focusing on 4 to 5 years of program and industry data
instead of 10 to 15 years of data. In particular, USDA stated that the
report failed to give appropriate credit for the positive role its market
development programs have had in increasing pork exports over the long
term. Furthermore, USDA noted that this longer view would show that
increases in pork exports (1) have had a major impact on the overall
agricultural trade balance and (2) resulted in significantly higher
producer prices.

We continue to believe that the scope of our analysis was appropriate. We
were requested to examine the extent to which federal programs offer
potential for enhancing pork exports and to identify barriers to fully
using these programs. Consequently, we focused on the current industry and
trade environments, which are substantially different than they were 10 to
15 years ago. However, on the basis of USDA's concerns, we revised the
report to better highlight the fact that (1) USDA's programs are designed
for achieving long-term market improvements and (2) we did not evaluate
the long-term effectiveness of USDA's export assistance programs. 

Appendix III presents USDA's comments on the report and our detailed
response.

Scope and Methodology

To evaluate the extent to which other countries' trade policies and
extenuating U.S. federal laws, such as the cargo preference laws, are
impediments to exporting more pork products, we interviewed officials from
the Office of the U.S. Trade Representative and USDA. We also discussed
the issue with U.S. pork industry officials, meat exporters, farm groups,
and academic experts. We also reviewed various studies and analyses
regarding pork exports and the factors that could assist or hinder such
exports.

To evaluate the extent to which existing federal programs could be used to
increase pork exports, we interviewed USDA officials, including the
program managers for the Department's export assistance and food
assistance programs, as well as other officials responsible for the 
day-to-day implementation of these programs. We also reviewed departmental
documentation of these programs, such as program descriptions,
evaluations, budgets, and legislative authority. We also contacted AID
officials to discuss the potential of food assistance programs to help
increase pork exports. We also discussed the efficacy of federal export
assistance programs with representatives of the U.S. pork industry, pork
producers, meat exporters, an official of the Japanese Embassy's
agricultural economics division, and the Russian Embassy's chief
agricultural counsel. While recognizing that federal export assistance
programs are principally designed to increase exports over the long term,
we nevertheless, consistent with our requesters' concerns, evaluated the
extent to which these programs could be used to help alleviate short-term
problems such as those occurring during late 1998. We did not attempt to
evaluate the historical effectiveness of USDA's export assistance
programs, nor did we address the general long-term potential of federal
export assistance programs to increase exports.

To evaluate the potential for increased pork exports to further strengthen
the U.S. agricultural trade balance and to improve producer prices, we
obtained data from USDA on pork and hog imports and exports, and the
overall agricultural trade balance. We interviewed USDA officials, Food
and Agriculture Policy Research Institute officials, and representatives
of pork producers for information on studies conducted examining the
impact of pork trade on pork prices. We also interviewed pork industry
experts at Iowa State University and the University of Missouri regarding
the market for pork. We adjusted trade data in this report to 1998 dollars
to more accurately compare prices and costs over time. Unless otherwise
indicated, trade data are for the calendar year.

We conducted our review from June 1999 through January 2000 in accordance
with generally accepted government auditing standards.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this letter. At that time, we will send copies to
congressional committees with jurisdiction over agricultural trade issues;
the Honorable Dan Glickman, Secretary of Agriculture; Ambassador Charlene
Barshevsky, the U.S. Trade Representative; the Honorable J. Brian Atwood,
Administrator, U.S. Agency for International Development; the Honorable
Jacob J. Lew, Director, Office of Management and Budget; and other
interested parties. We will also make copies available upon request. 

If you or your staff have any questions about this report, please contact
me at (202) 512-5138. Key contributors to this report were Robert C.
Summers, Carol Bray, Gary Brown, and Eugene Wisnoski. 

Robert E. Robertson
*****************

*****************

Associate Director, Food and 
Agriculture Issues

--------------------------------------
/Footnote1/-^The reasons for the decrease in hog prices in 1998 are
  discussed in Pork Industry: USDA's Reported Prices Have Not Reflected
  Actual Sales (GAO/RCED-00-26, Dec. 14, 1999).
/Footnote2/-^See U.S. Agricultural Exports: Strong Growth Likely but U.S.
  Export Assistance Programs' Contribution Uncertain (GAO/NSIAD-97-260,
  Apr. 5, 1999) and Commitments by the European Union and the United
  States to Reduce Agricultural Export Subsidies (GAO/NSIAD-99-198R, June
  18, 1999).
/Footnote3/-^For the purposes of this report, pork products include live
  hogs.
/Footnote4/-^The WTO was formed during the Uruguay Round of the General
  Agreement on Tariffs and Trade-from 1986 through 1994. The WTO
  officially replaced the General Agreement on Tariffs and Trade, which
  was also a multilateral framework agreement to govern trade practices.
  The Agreement on Agriculture is a WTO agreement. 
/Footnote5/-^Other important factors include exchange rates, income,
  cultural issues, and the prices of competing products in pork-importing
  countries.
/Footnote6/-^Article 16 of the General Agreement on Tariffs and Trade
  generally prohibits the use of export subsidies. However, this article
  has allowed export subsidies on agricultural products, provided such
  subsidies do not allow a country to acquire more than an equitable share
  of world export trade in the subsidized product.
/Footnote7/-^Provisions of the Merchant Marine Act of 1936 (ch. 858, 49
  Stat. 1985, June 29, 1936), as amended by the Cargo Preference Act of
  1954 (ch. 936, 68 Stat. 832, Aug. 26, 1954) and the Food Security Act of
  1985 (P.L. 99-198, Dec. 23, 1985).
/Footnote8/-^See Maritime Industry: Cargo Preference Laws--Estimated Costs
  and Effects (GAO/RCED-95-34, Nov. 30, 1994), which found that cargo
  preference laws increased the federal government's cost of transporting
  food aid provided through USDA and the U.S. Agency for International
  Development programs by an estimated $200 million per year for fiscal
  years 1989 through 1993.
/Footnote9/-^The main differences between these programs are in the length
  of time borrowers have to repay the loan and in the agricultural
  products financed. For example, in GSM-102, which borrowers use
  primarily to finance consumables, loans are guaranteed for up to 3
  years. In GSM-103, which is used mostly for livestock, borrowers have
  from 3 to 10 years to repay their loan.
/Footnote10/-^$100 guaranteed, and $.90 per $100 for days 91 through 180.
  In Nov. 1999, USDA reduced the fee to $.40 per $100 guaranteed.
/Footnote11/-^The Agricultural Trade Development and Assistance Act of
  1954 (P.L. 83-480, July 10, 1954), commonly known as P.L. 480.
/Footnote12/-^GAO found USDA's claims of the Market Access Program's
  economic impact are generally overstated and studies of the impact on
  specific products revealed mixed results. See Agricultural Trade:
  Changes Made to Market Access Program, but Questions Remain on Economic
  Impact (GAO/NSIAD-99-38, Apr. 5, 1999) and International Trade:
  Effectiveness of Market Promotion Program Remains Unclear (GAO/GGD-93-
  103, June 4, 1993).
/Footnote13/-^This assumes that net trade in pork triples while trade in
  other agricultural products remains constant at 1985 through 1998
  average levels. 
/Footnote14/-^Several other studies we reviewed attempted to measure the
  effect of pork exports on producer prices. In reviewing the econometric
  models on which these studies were based, however, we found among other
  things, that the variable measuring the effect of pork exports on hog
  prices was not statistically significant and therefore did not include
  them in our analysis. 
/Footnote15/-^This assumes that import and domestic demand are held
  constant so all change is due to changes in exports. 

ILLUSTRATIONS OF OTHER COUNTRIES' TRADE PRACTICES THAT ARE IMPEDIMENTS TO
INCREASING U.S. PORK EXPORTS
===========================================================================

Examples of country-specific trade barriers that are impediments to U.S.
pork exports include the following:

o China's tariff. China imposes a 20-percent tariff on imported pork
  products, raising the prices of these imports and generally making them
  noncompetitive with its domestically produced pork, according to the
  U.S. Meat Export Federation. However, the United States and China have
  negotiated an agreement--contingent on China's joining the World Trade
  Organization (WTO)--whereby China will reduce its tariff on pork to 12
  percent by 2004. According to USDA, such a reduction in China's tariff
  on U.S. pork could result in a substantial increase in U.S. pork
  exports to China, the world's leading nation in pork consumption. In
  fact, the U.S. Meat Export Federation forecasts U.S. pork exports to
  China and Hong Kong will increase to over 120,000 metric tons by 2004,
  almost tripling the 1998 level.

o The European Union's tariff-rate quota. According to the Meat Export
  Federation, the European Union has a tariff-rate quota for pork that
  reduces U.S. pork's competitiveness in European Union countries. The
  European Union's tariffs range from about 7 percent to about 
  10 percent on the first 75,000 metric tons of pork imported per
  year. The tariff rate on pork imports beyond this 75,000-ton limit
  is 31 percent. During future WTO negotiations, the United States
  plans to propose that tariff rates on agricultural products,
  including pork, be reduced.

o   Japan's minimum import price and tariff rules. Japan has import rules
  that apply minimum import prices and tariffs to its pork imports. Under
  these rules, minimum import prices and tariffs increase if import
  volume exceeds certain levels within specified periods. According to
  USDA representatives, these rules can increase the price of pork
  imported to Japan substantially, making it less competitive with
  domestically produced pork. While Japan is currently the leading
  importer of U.S. pork, according to industry analysts, it has the
  potential for being an even more significant importer of U.S. pork. The
  United States plans to propose that Japan's barriers be reduced during
  future WTO negotiations.

o Argentina's animal health standards. Argentina does not allow U.S. pork
  imports because it asserts that a disease present in some of the U.S.
  hog population, Porcine Respiratory and Reproductive Syndrome (PRRS),
  could be spread to hogs in Argentina by pork imported from the United
  States. According to USDA, there are no documented cases of PRRS
  transmission by meat. Thus, USDA considers this reason for barring U.S.
  pork exports be nonscientific. Discussions regarding this matter are
  ongoing between USDA and Argentina's agriculture department. 

The European Union's export subsidies for pork are also a deterrent to
U.S. pork exports. According to USDA, in 1998 and 1999, European Union
export subsidies for pork were partially responsible for U.S. pork
producers' and exporters' losses in price competitiveness, market share,
and potential market growth. For example, in Russia, a country in which
the European Union has used export subsidies for pork, the U.S. share of
the pork import market decreased from 11 percent during the 12 months from
July 1997 to June 1998 to 3 percent during the following 12 months, from
July 1998 to June 1999. Meanwhile, during the same 2 years, the European
Union's market share in Russia increased from 72 percent to 
85 percent. 

Although the WTO Agreement on Agriculture requires members to reduce the
amount of export subsidies paid and the quantity of products subsidized,
the European Union is allowed to subsidize its pork exports to a much
larger extent than the United States. This is because WTO members agreed
to cut their export subsidies from the average level that existed in each
country during a base period--between 1986 and 1990. During this base
period, the European Union subsidized a larger quantity of pork exports
than did the United States. Therefore, the volume of pork exports the
United States is allowed to subsidize between July 1, 1999, and June 30,
2000--413 metric tons--is much smaller than the volume of pork exports the
European Union is allowed to subsidize in the same period--over 900,000
metric tons. Additional WTO negotiations on agriculture are scheduled to
begin in early 2000. While the U.S. aim is to eliminate export subsidies,
the European Union thus far has opposed totally eliminating these export
subsidies.

DESCRIPTION OF FEDERAL FOOD ASSISTANCE PROGRAMS
===============================================

Three federal programs--P.L. 480; section 416(b) of the Agricultural Act
of 1949; and Food for Progress--provide U.S. agricultural commodities to
countries needing food assistance. 

P.L. 480 is designed to, among other things, combat hunger and
malnutrition and develop and expand export markets for U.S. agricultural
commodities. The program has three separate titles--each with different
objectives and target countries. Table 3 shows the purpose and means of
delivering assistance provided for each title. 

Table****Helvetica:x11****3:    Purposes and Means of Delivering
                                Assistance Under P.L. 480 Programs

-----------------------------------------------------------------------
| Program title        : Purpose              : How assistance is     |
| (administrating      :                      : delivered             |
| agency)              :                      :                       |
|---------------------------------------------------------------------|
| Title I (U.S.        : Provides long-term,  : Importing country     |
| Department of        : extension of credit  : contracts with U.S.   |
| Agriculture-USDA)    : to developing        : exporters to          |
|                      : countries to         : deliver specified     |
|                      : purchase U.S.        : commodity; USDA       |
|                      : commodities          : pays suppliers upon   |
|                      :                      : proof of delivery.a   |
|---------------------------------------------------------------------|
| Title II (U.S.       : Donates U.S.         : In emergencies,       |
| Agency for           : commodities to meet  : foreign governments   |
| International        : humanitarian food    : may request food      |
| Development--AID)    : needs; used for      : aid directly. In      |
|                      : U.S. responses to    : all situations,       |
|                      : emergencies and      : including             |
|                      : disasters worldwide  : emergencies,          |
|                      :                      : private relief        |
|                      :                      : organizations and     |
|                      :                      : international         |
|                      :                      : organizations may     |
|                      :                      : request food aid.     |
|                      :                      : AID purchases         |
|                      :                      : commodities on the    |
|                      :                      : open market for       |
|                      :                      : title II              |
|                      :                      : assistance. AID       |
|                      :                      : pays ocean            |
|                      :                      : transportation and    |
|                      :                      : some other            |
|                      :                      : transportation costs. |
|---------------------------------------------------------------------|
| Title III (AID)      : Provides grants of   : Recipient country     |
|                      : agricultural         : requests assistance   |
|                      : commodities to the   : through AID. USDA     |
|                      : poorest, most food-  : purchases the food,   |
|                      : deficient nations    : and AID facilitates   |
|                      : to improve their     : the transportation.   |
|                      : food security and    : Donated commodities   |
|                      : to promote           : are sold              |
|                      : agricultural policy  : domestically, and     |
|                      : reforms that         : sales revenues are    |
|                      : encourage food       : used to support       |
|                      : production           : economic development  |
-----------------------------------------------------------------------

aContract may also require importing country to maintain agricultural
imports from commercial sources in order to not unduly disrupt world
agricultural trade. 

In addition to the P.L. 480 programs, the Agricultural Act of 1949--
commonly referred to as the section 416(b) program--allows USDA to donate
surplus commodities acquired through price-support operations to foreign
governments, private voluntary organizations, and the World Food Program.
However, such donations may be made only if (1) the commodities cannot be
sold at competitive world prices or (2) their disposal does not disrupt
existing price support programs. USDA also cannot make section 416(b)
donations if these donations reduce the amount of commodities that is
traditionally donated to domestic feeding programs, prevent the
fulfillment of any agreement entered into under a payment-in-kind program,
or disrupt normal commercial sales. For fiscal year 1999, section 416(b)
exports consisted mostly of wheat, wheat flour, corn, and nonfat dry milk.
According to USDA officials, no pork has been exported under the section
416(b) program.

Finally, Food for Progress authorizes USDA to finance the sale and export
of U.S. agricultural commodities through loans or grants to countries in
the process of developing free-market economies. By providing food to
these countries, the program is designed to create a more stable political
climate and produce economic activity through the purchase and
distribution of commodities. This activity, in turn, is expected to help
these nations expand private enterprise so that the resulting stronger
economies may become markets for U.S. agricultural commodities. USDA can
implement Food for Progress through agreements with governments, private
voluntary organizations, agricultural organizations, cooperatives,
intergovernmental organizations, or other private entities. USDA offers a
variety of commodities under the program, including wheat, wheat flour,
rice, soybeans, dry beans, and yellow peas. However, according to USDA
officials, high-valued items such as frozen meat have not usually been
provided because of its relatively high cost. One notable exception,
however, occurred in 1998-99 when USDA used the Food for Progress program
to donate 50,000 metric tons of pork and 122,000 metric tons of other meat
to Russia.

According to a USDA official, USDA was able to add meat--including pork--
to Russia's food assistance package because of several conditions that are
not usually present in countries needing food assistance. First, Russia
had a strong preexisting demand for pork. According to Russian
agricultural officials, pork sausage is an important component of the
Russian diet, and its manufacture and distribution fuels other economic
activity in Russia. Second, Russia has an adequate infrastructure to
accommodate refrigeration needs, and finally, the inclusion of pork in a
food assistance package was not likely to disrupt commercial sales in
Russia. According to the USDA official, food assistance to other countries
with similar characteristics could also offer potential to include pork,
however, this official noted that few nations meet these criteria.

COMMENTS FROM THE U.S. DEPARTMENT OF AGRICULTURE
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GAO's Comments

1. We agree that the pork trade balance has improved dramatically over the
past 10 to 15 years, even in the face of many international and domestic
challenges. 

2. We believe that the context of the review is clearly and appropriately
stated. However, in recognition of USDA's comments, we added language to
the report clarify the fact that USDA's export assistance programs are
designed to achieve long-term effectiveness, rather than to realize short-
term gain. In addition, we revised the scope, and methodology section of
our report to further clarify that we did not attempt to evaluate the
historical effectiveness of USDA's export assistance programs, nor did we
address the long-term potential of federal export assistance programs to
increase exports.

3. We agree that USDA's export credit guarantee and food aid programs can
help to bring pork into countries such as Korea and Russia, and we noted
the assistance provided by the GSM-102 program in maintaining commercial
sales in Korea. In contrast, the Food Aid program, which supplied pork to
in Russia, may have been counterproductive in maintaining commercial
markets. For example, the value of U.S. commercial sales of pork to Russia
dropped from about $74 million in 1998 to nearly zero in 1999. According
to meat-packing industry representatives, the donated pork may have
supplanted some commercial sales that could have otherwise occurred.

4. We agree that programs such as the Market Access Program and Foreign
Market Development Program may well be important in developing and
maintaining such partnerships over the long term. However, USDA's comments
provide an incomplete portrayal of the Deloitte & Touche study. For
example, according to the study, market share--which Deloitte and Touche
used as a proxy for exports--increased for 46 percent of the agricultural
products analyzed. We do not believe this represents sufficient evidence
of the program's efficacy. The study also states that it was "not able to
determine the total dollar value of exports resulting directly from MAP
expenditures." This view is consistent with the available research we
reviewed for our report. Without adequate research findings that isolate
the impacts of these programs' efforts, we remain reluctant to ascribe
specific beneficial aspects to them.

5. We disagree. We were asked to focus on the future, not the past--for
enhancing present and future exports and for identifying current
impediments to increasing pork exports. Even after taking into account
recent economic problems in international pork markets, we believe that
the recent past (1994 through 1999) offers a valid window through which to
view present and future opportunities for export growth. In this context,
we believe that the scope of our work is appropriate and leads to accurate
conclusions. Thus, we still maintain that increases in pork exports would
not have a major impact on the overall agriculture trade balance.
According to USDA data, the pork trade balance is still a very small
portion of the total agricultural trade balance--$175 million of a $15
billion surplus, or about 
1 percent. Thus, even a tripling of pork exports would not significantly
affect the overall agriculture trade balance. 

6. We agree that pork exports are clearly a major contributor to the pork
industry's cash receipts. However, as we noted in the report, according to
a study by the Farm and Agriculture Policy Research Institute, pork
exports would have to experience a 1-year increase of 75 percent in order
to result in a 10-percent increase in producer prices. We did not examine
what would happen to producer prices in the absence of all exports.

7. We agree that many factors contribute to trade success in the pork
industry. 

8. See comment 1.

9. See comment 2. 

10. See comment 3.

11. See comment 4.

12. See comments 5 and 6.

13. See comments 4, 5, and 6.

14. We disagree. We focused on net pork trade because a focus solely on
pork exports represents only one side of the overall trade picture. That
is, while increased pork exports increase demand and ultimately pork
prices, imports, including live hogs, have the opposite effect--increasing
supply and reducing prices. Because the United States imports a
significant amount of pork, an assessment of the impact of trade on the
domestic market requires us to consider the effect of imports as well as
exports. When imports are taken into consideration, as they are in our
report, pork trade accounts for a small proportion of the agricultural
trade balance. 

15. We remain convinced that opening export markets by reducing trade
barriers offers the greatest opportunity for raising pork exports. With
more open markets, these programs could better assist in increasing pork
exports. Under current conditions however, they offer limited potential to
increase pork exports. 

16. The assessment of the usefulness of the export guarantee programs,
including the administrative fees, was provided by pork exporters. We
revised our report to clarify that they viewed these fees as a deterrent. 

17. We modified our report to reflect additional factors that limit the
use of export credit guarantees, including the risk of default by foreign
countries' banks and importers as well as changes in the exchange rates. 

18. We revised the report to reflect this technical correction.

19. The report already includes this information. 

20. See comments 3 and 16.

21. See comment 4.

22. We revised our report to further clarify our position.

23. We revised the report to reflect the fact that the quantity to be
supplied did take cost into account.

24. See comments 16 and 17. 

25. We agree that use of the export credit guarantee programs depends on
market forces, but we believe our draft report recognizes the overriding
role of market forces in determining the use of these programs. For
example, we state that that demand for pork products is a prerequisite for
the use of export credit guarantees.

26. We revised the report to reflect this change.

27. See comment 26.

28. We agree and note that the report has been revised to reflect this
change.

29. We revised the report to include additional factors limiting foreign
banks' participation in the GSM programs.

30. We deleted the footnote.

31. We agree and note that the report already reflects these ideas. 

32. We agree and note that the report already includes this information.

33. We revised the report to include this information.

34. We agree. But as noted in our report, under WTO rules, the European
Union is allowed a much greater level of subsidized pork exports, placing
the United States at a competitive disadvantage. 

35. We disagree that the sentence is misleading. The report includes
information on consumer promotions, market research, technical assistance,
and trade servicing.

36. Funding for pork promotion in fiscal year 1999 was small relative to
total funding for market development--1.7 percent for the Foreign Market
Development Program, 3 percent for the Market Access Program, and no
funding for the Emerging Markets Program (EMP). Furthermore, as we have
previously stated, we were not able to determine the total value of pork
exports resulting directly from these programs.

37. The report does not state that "none of the $10 million of EMP funding
assists the pork industry." We noted that the U.S. Meat Exporters
Federation received several EMP grants, but none of these grants was
specifically for pork. We do not necessarily dispute the assertion that
Meat Exporters Federation's activities may indirectly help the pork
industry. However, our focus is to assess the potential of EMP to further
increase pork exports. That potential is likely to be limited if pork is
not receiving direct assistance. We agree that some general benefits may
result over the long term.

38. Our report does not conclude that market development/access programs
are ineffective. We did not attempt to determine these programs' overall
effectiveness. Instead, we concluded that these programs' potential to
increase pork exports is mostly unknown because it is impossible to
isolate their effects from other factors. While a public-private
partnership may improve market prospects, such a phenomenon has not been
adequately documented.

39. The report clearly noted that the discussion on high-value and low-
value pork products are the views of representatives of the Meat Export
Federation. However, we can neither prove nor disprove the assertions.
Because the information is not critical to our conclusion, we have deleted
it.

40. We have modified our report to state that U.S. exports have more
difficulty competing in countries where European Union-subsidized pork
products are also being sold.

41. See comments 5 and 6. In addition, USDA seems to obtain its $1 billion
turnaround by looking at the sum of the $900 million deficit in pork trade
in the late 1980s and the $100 million surplus in 1998 and comparing the
resulting sum to the overall agricultural trade surplus for 1998. This is
like comparing apples and oranges. While the trade in pork has changed
from a deficit to a surplus, the impact of that pork surplus on overall
agricultural trade requires a comparison of the two surpluses over the
same time period. When this is done (as we did in our report), the pork
surplus is a small proportion of the overall trade surplus--about $175
million of a 
$15 billion surplus or about 1 percent. Furthermore, we were not asked to
look at the importance of exports to the pork industry; as requested, we
looked at the impact of pork trade on the overall agricultural trade
balance.

42. Fundamental economic principles state that products are substitutes if
they at least partly satisfy the same needs of consumers. Beef and poultry
as well as pork satisfy consumers' need for meat. Therefore, they can be
considered substitutes. Given these conditions, we state that increases in
pork exports may come at the expense of reductions in exports for other
agricultural commodities such as beef or poultry, as foreign consumers
make choices between meat products on the basis of their relative prices.

43. See comment 42. In addition, we agree that "when the United States
exports pork it is essentially exporting feed grains, via meat, as well as
capturing the value added." When that happens, however, grain exports are
reduced (the product has been consumed domestically). In that sense pork
exports are substituting for grain exports.

44. See comments 1, 6, and 14. 

45. The report already includes this information.

46. We revised the report to include this information.

47. See comment 46.

RELATED GAO PRODUCTS
====================

Pork Industry: USDA's Reported Prices Have Not Reflected Actual Sales
(GAO/RCED-00-26, Dec. 14, 1999).

Commitments by the European Union and the United States to Reduce
Agricultural Export Subsidies (GAO/NSIAD-99-198R, June18, 1999).

U.S. Agricultural Exports: Strong Growth Likely but U.S. Export Assistance
Programs' Contribution Uncertain (GAO/NSIAD-97-260, Sept. 30, 1997) 

Agricultural Trade: Changes Made to Market Access Program, but Questions
Remain on Economic Impact (GAO/NSIAD-99-38, Apr. 5, 1999) 

International Trade: Effectiveness of Market Promotion Program Remains
Unclear (GAO/GGD-93-103, June 4, 1993).

(150141)

Table 1:  Types of Barriers to Market Access Affecting U.S. Pork Exports
and Related WTO Requirements10

Table 2:  Comparison of Export Credit Guarantee Programs13

Table 3:  Purposes and Means of Delivering Assistance Under P.L. 480
Programs27

Figure 1:  The Value of U.S. Pork Exports, Calendar Years 1994-986

Figure 2:  The Value of U.S. Exports by Country, 19987

*** End of document. ***