Statement of James V.
Deputy Administrator for Commodity and Marketing Program
Foreign Agricultural Service, U.S. Department of Agriculture
Before the House Committee on Agriculture's
Subcommittee on Livestock, Dairy, and Poultry
June 25, 1997
Mr. Chairman, members of the subcommittee, I am pleased to come before you today to discuss the status of livestock products trade with Asia.
Asian Markets Driving Growth for Livestock Products Exports
When Special Trade Advisor Paul Drazek addressed this Subcommittee in April, he discussed the export performance of livestock products in great detail. Today, I will devote my time to examining exports, market opportunities and trade policy issues with countries in Asia. But before I begin, let me summarize by saying that overall poultry and livestock exports continue to show remarkable growth. Last year, the value of poultry, pork, beef and variety meat exports increased 8 percent to $6.6 billion--twice the 1990 level. If you include hides and skins and rendered products, that total rises to $8.5 billion (see Chart 1).
These figures illustrate a real reversal of fortune for the U.S. meat and poultry industry. In this decade, we've seen a $4 billion shift in our animal products trade balance. In 1990, the United States imported nearly $279 million more meat and poultry than we exported. Today, those numbers are dramatically reversed--with exports exceeding imports by $3.8 billion (see Chart 2).
These record exports did not just happen by accident. We believe that market development is a long-term activity. True, sometimes success can happen overnight, and products may have their 15 minutes of fame. But real long-term market success is built through a series of steps with a long-term commitment to market development. This is the kind of commitment that the livestock industry has made in Asia.
Increased market access, reduced trade barriers, rising world incomes, population growth, high-quality U.S. products, and our market development activities are some of the factors fueling this growth. Nowhere is this more true than Asia. Asian markets account for 61 percent of our animal product exports (see Chart 3). No other market even comes close.
We are extremely bullish on U.S. agriculture's future in Asia. Why?
In 1995, 15 cities worldwide had populations of 10 million people or more; nine of those were in Asia. By the year 2015, 27 cities with have populations of 10 million plus; 17 will be in Asia.
In addition, if you look at real gross domestic product/gross national product growth forecasts for 1998, developing countries in Asia lead the pack. Nine of the top 10 are in Asia--Vietnam, China, Malaysia, Indonesia, Singapore, Thailand, Korea, Philippines, and Taiwan.
Three Case Studies
To illustrate how USDA and the livestock industry have worked together to develop these markets, I'd like to spend a few moments highlighting the activities and success in three key Asian markets--Japan, Korea, and China. These three countries are at different stages of market development. In Japan, the U.S. beef industry has been at work for 30 years, with visible success. In Korea, trade restrictions have limited the market potential, but 10 years of market development work are beginning to bear fruit. China, a market of enormous potential, remains an unknown, with numerous political and economic issues still to be resolved.
For nearly 30 years, USDA has worked with the U.S. beef industry to open the Japanese market. We have used our commodity analysis, trade policy, and export program tools to identify the potential of the Japanese market, negotiate access, and fund promotions to develop consumer demand for U.S. red meat. The United States now exports about $2 billion worth of red meat annually to Japan.
In the late 1960s, the Foreign Agricultural Service (FAS) of USDA emphasized to the U.S. red meat industry to the market potential in Japan. In the early 1970s, the National Cattlemen's Association sent a delegation to visit with FAS staff in Japan. The delegation concluded that the rapidly growing Japanese economy and rising living standards warranted a concerted effort by the U.S. meat industry to take advantage of what was believed then to be a $100 million opportunity. In 1973, as a result of the combined efforts of the National Cattlemen's Association, the American Meat Institute, and the National Pork Producers Council, with strong support from FAS, the U.S. Meat Export Federation (USMEF) was formed and joined the FAS Foreign Market Development (Cooperator) Program.
Through years of activity, USMEF was successful in generating interest in U.S. beef in Japan. However, it faced enormous import restrictions, including quotas, tariffs, and non-tariff barriers. To protect domestic beef producers, the Japanese government restricted imports, which generally kept domestic beef prices at 2 to 5 times the world price.
The 1988 U.S./Japan Beef and Citrus Agreement was instrumental in increasing market access for U.S. high-quality beef. Following that agreement, FAS and USMEF worked hand-in-hand to increase U.S. beef exports, with the U.S. government taking the lead in negotiating improved market access, and USMEF conducting promotional efforts to take advantage of market liberalization as it occurred using FAS market development program resources. Today, the United States supplies nearly half of all the beef imported by Japan, and Japan accounts for over half of all U.S. beef exports.
The U.S. meat industry faced enormous import restrictions in Korea in 1988 when USMEF began to target the market with limited trade activities funded by the Targeted Export Program and Foreign Market Development Programs. Prior to 1987, U.S. beef exports to Korea were minimal, limited by the Korean government's efforts to protect domestic beef producers by severely restricting imports. In 1988, FAS and USMEF began to work to increase market access for U.S. beef. FAS took the lead in government-to-government negotiations, while the private sector, funded by the FAS market development programs, began to educate the trade about the benefits of market liberalization, and served as technical advisors to the negotiations.
The first breakthrough came in 1989, when a panel under the General Agreement on Tariffs and Trade (GATT) required that Korea liberalize its beef market by July 1997. An initial U.S.-Korea beef agreement for 1990-92 established minimum access quotas to begin the liberalization process. These quotas resulted in government tenders, but did not allow the Korean private sector to import.
Further negotiations in 1992 resulted in a second interim agreement for 1993-95 that secured a small but growing share of increasing quotas for the Korean private sector. Under Uruguay Round commitments reached in 1993, major beef supplying countries agreed to delay full liberalization, and to accept a higher tariff rate. In return, South Korea agreed to allow a larger portion of the quota to be sold directly by foreign suppliers to private sector end users through the Simultaneous-Buy-Sell system (SBS), and to substantially expand import quotas each year through the year 2000, after which they are to be eliminated entirely. Full liberalization of the Korean beef market is scheduled for 2001. Until then, imports are possible under government tenders, controlled by Korean government specifications and, increasingly, under the SBS system. The 1997 quota is 167,000 metric tons, of which 50 percent is scheduled to be purchased under SBS.
Despite various agreements governing access to the Korean market, a number of Korean practices, such as arbitrary, government-mandated shelf-life limits, have continued to impede U.S. meat imports. In the spring of 1995, the United States initiated consultations under the World Trade Organization (WTO) dispute settlement process regarding these barriers. As a result, Korea agreed to phase-out its non-scientific, government-imposed shelf life limits by July 1996, and to allow manufacturers to set their own "use-by" dates.
Since 1993, the U.S. beef industry has contributed over $1.6 million to USMEF efforts to promote red meats in Korea. U.S. companies have designed packaging, portions and products to meet Korean needs. As a result of these efforts, Korea is the fourth largest export market for U.S. beef, trailing only Japan, Canada, and Mexico. Over 8 percent of U.S. beef and beef variety meat exports with a wholesale value of $254 million were shipped to Korea in 1996. This is an increase of over 40 times the value, and 65 times the volume of 1985 export levels.
China's future role in the world marketplace will be the key factor in the outlook for global trade in many agricultural commodities, including livestock and meat products. Specifically, the outlook for meat trade to China depends on broadening market access for meats. The future growth in import demand for meats by China centers on the status of China's accession to the WTO and prospects for institutionalizing market access commitment and lower tariffs. The potential importance of China to the U.S. meat industry can be illustrated by the resounding success experienced by the U.S. poultry industry in that market.
Over the past decade China's rapid economic growth, commitment to economic reforms, and market development activities by the USA Poultry and Egg Export Council (USAPEEC) have rapidly propelled China into one of the fastest growing markets for poultry meat with U.S. exports in 1996 valued at nearly $500 million. China's massive population base, economic growth, and market liberalization are likely to extend the favorable market prospects beyond poultry meat to encompass both beef and pork. In addition to the activities of USAPEEC, USMEF opened an office in Shanghai this year to expand trade servicing efforts.
One of the barriers facing U.S. meat product exports to China has been having access limited to hotel and restaurant markets. Just last month, however, the Chinese government authorized a one-year trial period during which specified quantities of meat will be permitted to be imported for sale in retail markets. The overall impact of this policy change is minimal as measured by the significant restrictions on quantity and plant origin. Only products imported through one company and produced in 5 specific U.S. plants are eligible to move into Chinese retail markets. While this slow and cautious approach to opening market access is frustrating to the U.S. industry, it paves the way for discussions on more technical issues, such as plant approval inspection process and other quarantine issues. As long as China remains outside the world trading system, such ad hoc arrangements will likely characterize trade negotiations. The United States is committed to adoption of the FSIS system approach and will continue to urge China to embrace this approach.
The United States has recently intensified discussions over China's accession to the WTO. While recognizing that the WTO is an important tool to reinforce past steps taken by the Chinese government to liberalize its economy and support further economic reforms, it is critical that China's commitment to negotiate be combined with meaningful concessions. Key agricultural issues presently being discussed include:
China's accession to the WTO depends upon it accepting WTO rules and providing improved access to its market. It is critical that China subscribe to the same rules as other countries who are in the WTO and open its market.
While meat imports, specifically poultry meat, are expected to maintain a steady growth in the future, Chinese accession to the WTO holds the potential for lower tariffs and increased market access for all meat imports. A more transparent import regime will provide for more price stability and less risk for both exporters and importers, portending more trade.
Market Opportunities by Product
Let me now provide a brief overview of the market potential of the specific products of interest to the Committee.
Total U.S. beef exports for 1997 are projected to increase 2 percent to about 624,000 tons. About 60 percent of these exports go to Asia, with over 50 percent to Japan alone. Beef consumption in Japan has slowed over the past year because of food safety concerns including the recent outbreaks of E.coli. However, the United States continues to maintain the majority share in this market, with exports in the first three months of 1997 mirroring 1996 levels. In 1997, the United States is expected to show significant gains in other Asian markets, including Hong Kong, South Korea, and Taiwan. First quarter exports to these countries are already up, 60 percent, 32 percent, and 3 percent, respectively. Increasing U.S. share relative to those of our competitors is the main reason for the gains.
Albeit small export markets for U.S. beef relative to the countries mentioned above, U.S. beef exports are increasing to China, Indonesia, the Philippines and Thailand. Exports so far in 1997 have increased in these four countries by 181 percent. Strong economic growth and increased beef consumption can explain most of the gains realized by the United States in these countries. Overall, U.S. exports to Asia, less Japan and South Korea, are up 41 percent over the 1996 January -March period.
Allaying consumer concerns over food safety issues is critical to increasing foreign beef consumption. USMEF has played a critical role in informing the Japanese of the safety of U.S. meat and products and on the U.S. inspection system, Hazard Analysis and Critical Control Points (HACCP). This assurance will also be crucial to increased consumption in our other major Asian markets, Korea, Hong Kong and Taiwan.
The March 20 outbreak of foot-and-mouth disease (FMD) in Taiwan has introduced a great deal of uncertainty into the pork trade picture. For Taiwan, the impact has been devastating. In order to control the spread of the disease, all hogs in herds that have been affected are being destroyed. As of May 29, this amounts to 4.7 million head, over one-third of the entire herd prior to the outbreak.
As a result, U.S. export prospects for pork to Japan, already bright, received a substantial boost. Prior to the FMD outbreak, Taiwan was the single largest supplier of pork to Japan, exporting almost 266,000 metric tons of pork, roughly 41 percent of Japan's total imports for the year. And although Japanese pork consumption is expected to decline slightly as a result of consumer concerns, most of Taiwan's share of the Japanese market is forecast to be divided between Taiwan's two largest competitors, the United States and Denmark.
The Japanese pork market is divided into two distinct segments: high-value fresh/chilled pork, which accounts for about 1/3 of total imports, and lower value frozen pork, which constitutes about 2/3 of imports. The United States is forecast to gain up to 85 percent of Taiwan's share of the fresh/chilled market, since it is the only country in a position to supply such large quantities of fresh pork. (Denmark is only able to supply frozen pork, due to the shipping times involved). Canada and Korea are also expected to make substantial gains, but are unable to expand production to fill more than a small share of the total demand. In the frozen market, the United States is expected to face fierce competition from Denmark, which is in a stronger position to provide the specific cuts the Japanese demand. As a result, the United States is forecast to take a smaller share of the frozen pork market than Denmark, while Canada and Korea are also likely to benefit.
Increased U.S. exports of fresh/chilled pork have already begun, while exports of frozen pork have continued to lag. This is due to the large stocks of frozen pork accumulated by Japan during late 1996. These stocks will allow Japanese importers to avoid increasing their purchases until after the gate price is reduced on July 1. Once the gate price is reduced, low-priced frozen pork will be able to move more freely into Japan, and U.S. exports should begin to rise.
The overall impact of the FMD crisis on U.S. exports to Japan can be seen in the U.S. export forecast for pork. Prior to the outbreak, USDA forecast total exports for 1997 at 493,000 tons--a gain of 14.4 percent over 1996. Since then, the export forecast has been revised up 567,000 tons--a gain of nearly 32 percent over 1996.
A second factor boosting the export outlook is the July 1, 1997, liberalization of Korea's import market for frozen pork. As a result of these events, U.S. exports are improved substantially over last year, when the United States lost market share to Denmark and Canada. In anticipation of increased trade opportunities, U.S. producers have begun making the adaptations required to supply the cuts desired in these markets. This bodes particularly well for sales to Korea, where demand is focused on single-rib bellies. As a result of liberalization alone, Korean imports of pork are forecast to jump by 48 percent in 1997. During the first quarter U.S. exports of pork to Korea have jumped from 637 tons in 1996 to 3,358 tons in 1997.
The FMD outbreak is also playing a role in the outlook for U.S. exports to Korea. For the long term, the FMD outbreak could result in a substantial shift in Taiwan's production, and in U.S. export prospects to Taiwan. Over the past two years, the United States has gained increased access for pork exports to Taiwan, rising from 162 tons in 1994 to 9,824 tons in 1996. However, the FMD outbreak has lent strength to a movement favoring reduction of Taiwan's industry to a level sufficient to supply only domestic needs. If this does take place, the U.S. pork industry will continue to benefit from the reduced competition in the Japanese market. At the same time however, Taiwan is likely to become more aggressive in protecting its domestic market, and the recent gains made by the U.S. industry may be lost.
Hides and Skins
Asia continues to be the largest market for U.S. bovine hides and skins, accounting for approximately three quarters of all hide exports. Korea absorbs almost 40 percent of U.S. exports, Taiwan approximately 13 percent, and Japan follows with about 10 percent. Hong Kong and China combined, accounted for another 13 percent. In 1996, total bovine hides and skins exports amounted to about $1.3 billion. This year, sales are expected to reach $1.5 billion as prices are running notably higher than a year ago and export volume remains strong.
U.S. hide exports benefit from the growing demand for leather apparel and furniture from a burgeoning middle class in Thailand, Korea, Indonesia, India, and China. None of these countries has the cattle industry to supply this demand for hides and must thus rely on imports. In addition, approximately 40 percent of the exported hides is used for automobile upholstery. This market keeps growing as auto makers include leather upholstery in medium priced vehicles as well as in luxury cars.
The outlook for exports of hides and skins to Asia looks very bright. More tanneries are establishing operations in Asia to take advantage of the region's relatively skilled, low cost labor. Tanning capacity is shifting from Korea to China, but remains in Asia.
China offers the greatest opportunity for future growth. China's domestic market and leather export industry are expected to expand and become one of the largest importers of U.S. hides and skins in the near future. In the past five years, U.S. hides exports to China have averaged 70 percent growth per year.
China continues to dominate the stage as one of the fastest growing markets for U.S. poultry, with U.S. exports in 1996 valued at nearly $500 million. The U.S. industry has benefitted from China's preferences for many products not appreciated by U.S. consumers--chicken leg quarters, paws, backs, and wing tips. Opportunities for future growth are bright as a result of China's large population and forecasts of strong economic growth.
Some of the other best opportunities for growth in poultry exports are also to be found in Asia. As a result of the Uruguay Round Agreement, the Korean government began allowing frozen chicken imports in 1995 under a quota system. On July 1, 1997, all quotas on frozen chicken imports are to be removed. In addition to improved market access, Korea's rapidly expanding economy is expected to generate rising demand for U.S. poultry meat. Frozen turkey parts, used to make sausages and further-processed poultry products, are currently the most heavily demanded U.S. poultry product in Korea.
Although Indonesia's per capita poultry consumption is relatively low for the region, it is growing by 8 to 10 percent a year. Demand for processed poultry products, including deli meats and all kinds of turkey, exceeds supply.
In Malaysia, Halal slaughter issues presently constrain U.S. exports of frozen chicken, but imports of U.S. turkey and duck have proven competitive in terms of price and quality against products from Thailand, Brazil and the European Union (EU).
For the U.S. poultry industry, Asian countries also provide some of the fiercest competition. Not only is China a large market for U.S. poultry, it is also the fastest-growing poultry meat exporter as well. Since 1992, the total export volume of China's poultry meat has more than tripled, reaching about 450,000 tons in 1996, valued at $730 million.
The destination of this unprecedented export growth is mainly Asia, specifically Japan, as China moves into position as Japan's largest broiler-meat supplier. Thailand is also another major competitor of the United States and supplier to Japan. While Thai exports are forecast to drop slightly in 1997, the domestic industry continues to expand to meet rising consumption at home. In addition, continuing a decade-long trend of foreign investment overseas by Asian poultry industries, the Thais are building a large broiler complex in eastern Alabama. When complete, this $88-million complex will process more than one million birds per week at two processing plants. One of the plants will be dedicated to producing product for export.
For U.S. dairy products, the Asian markets as a group look especially promising. Consumers in countries such as Japan, Taiwan, Hong Kong, and South Korea are rapidly developing a taste for a variety of dairy products. In Asian markets, U.S. products face stiff competition from New Zealand, Australia, and the EU.
The Dairy Export Incentive Program (DEIP) is a useful tool to help the U.S. dairy industry to introduce quality U.S. dairy products to Asian consumers. As of mid-June, 1997, total DEIP awards were made involving nearly 80,000 tons of dairy products. Over 80 percent of this total has been awarded since January. Asian markets have become increasingly important buyers of nonfat dry milk under this year's DEIP. Together, Indonesia, the Philippines, Singapore, Thailand, and Vietnam have purchased nearly 30 percent of our nonfat dry milk awards under this year's program.
In addition to the DEIP, the U.S. Dairy Export Council has
active market development efforts underway in Japan and Korea. In
Japan, the Council is working to increase the awareness of
Japanese consumers of U.S. ice cream and cheese. South Korea has
begun to liberalize its market for dairy products as required
under the Uruguay Round Agreements. It has quickly become an
important overseas market for U.S. cheeses and a rapidly growing
market for whey.
Barriers To Growth
Despite the remarkable success of our livestock industry in Asia, barriers continue to hinder these industries from reaching their full export potential. These barriers include food safety concerns, trade policy issues, and the competition.
Food Safety Concerns
Concerns about bovine spongiform encephalopathy (BSE) and reports of its possible link to a newly identified variant of Creuzfeldt-Jakob disease loom over world beef markets. When BSE became a household word in early 1996, Japanese beef consumption reversed its more than decade-long trend upward and fell 5 percent. Since then, E.coli outbreaks in Japan and Hong Kong, and incidents of animal diseases have persuaded consumers to avoid eating meat.
Allaying consumer concerns over food safety issues is critical to increasing foreign consumption. The U.S. government must constantly emphasize the importance that we in the United States place in providing a safe food supply for all consumers--whether U.S. or foreign. We have long been a leader in government food safety programs and our new inspection program, HACCP, once again puts us firmly in a leadership position, along with New Zealand. The U.S. government, most especially USDA overseas staff, is actively working with the livestock industry to inform foreign consumers and buyers about the safety of U.S. products. USMEF is playing a critical role in Japan in this effort, and this assurance will also be crucial to increased consumption in our other major Asian markets, Korea, Hong Kong, and Taiwan.
Trade Policy Issues
Since the conclusion of the Uruguay Round negotiations, our primary trade policy focus has been on ensuring compliance with the terms of the agreement by our trading partners. We believe monitoring other countries' compliance with this and other agreements is vital if the United States is to realize the full benefits of these agreements.
For example, access to the Philippines market is very important to the U.S. pork and poultry industries. After two years of unsatisfactory implementation of WTO obligations, the Philippine government finally appears to be taking steps towards opening the market. Specifically, a review is being conducted of the present system of administering tariff-rate quotas (TRQs) that at present is not in WTO compliance and minimizes market access opportunities for U.S. exporters. Although skeptical, the U.S. Administration, in conjunction with the U.S. pork and poultry industries, will continue to monitor this carefully.
A recent visit led by Agriculture Committee Chairman Smith was instrumental in prompting the Philippine government to announce the 1997 pork allocation, which included 10,000 tons to processors. Furthermore, the government included a cover letter requiring license holders to declare their intent to use import allocations by June 15 with penalties for failure, and initiated a review of the administrative order that governs the licensing system for quotas.
We continue to press the Philippines to conform with its Uruguay Round commitments. The U.S. Trade Representative's Office has initiated a review of the Philippines Generalized System of Preferences (GSP) eligibility, and in parallel, we have also held dispute settlement consultations with the Philippines in the WTO to resolve our concerns about their pork commitments. We are optimistic that the Philippines will abide by its Uruguay Round commitments.
We also have placed special emphasis on monitoring and aggressively challenging other countries' use of non-scientifically based sanitary and phytosanitary (SPS) standards that unfairly restrict U.S. access to foreign markets. I'm sure you all recall China's suspension of imports of poultry products from the United States because of the alleged presence of the avian influenza virus.
Through the efforts of our scientists and trade negotiators, we were able to keep our poultry exports to China moving. We will continue to bring to bear the full weight and resources of USDA to resolve SPS trade barriers.
Just as we have targeted Asia for export growth, so have our competitors. And the competition is fierce. Let me cite just a few examples.
USDA and the livestock industry will continue our aggressive efforts to expand our livestock exports to Asia despite our well-financed competition.
Mr. Chairman, as you can see, the livestock industry and USDA have worked hard to develop export markets in Asia. We have succeeded greatly in some sectors and countries, and in others we are just approaching the starting line. We are using all of our available tools--market intelligence, market development programs, and trade negotiations--at our disposal, and will work relentlessly to ensure the continued opportunities for growth for the American livestock sector.
That concludes my statement, Mr. Chairman. I will be pleased to answer any questions.