Domestic Industry Protection

Policy Tool: Cargo Preference

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: Cargo preference refers to the provision of the Merchant Marine Act of 1936 which requires that a portion of cargoes procured, furnished, or financed by the United States be transported in U.S. ships. Under previous law, 75 percent of government-sponsored exports had to be shipped on U.S. flag vessels. The 1990 farm bill requires that 50 percent of P.L.-480 commodities be shipped on a lowest-landed cost basis, regardless of country of registry of the vessels. Other provisions allow shipments on specifically designated American Great Lakes Vessels to be counted toward cargo preference requirements. Further, Great Lakes ports may be allocated a maximum of P.L.-480 shipments made in 1984. If shipments to Great Lakes ports must be shifted to non-Great Lakes ports to comply with cargo preference, the CCC must compensate the Great Lakes ports for the loss of business.

Objective: To assure a minimum volume of business to the U.S. maritime industry.

When Used: Cargo preference requirements have been an important factor in U.S. agricultural exports since the enactment of P.L.-480 in 1954.

Experience: Cargo preference has had a major impact on agricultural food aid programs of P.L.-480. Transporting commodities aboard U.S. vessels costs between 1.5 to 2.5 times more than for foreign vessels. This increased cost is paid for out of USDA funding for P.L.-480. In 1985, a federal court ruling that cargo preference also applied to USDA blended credit programs resulted in suspension of the program because the increased transport cost made the program no longer cost effective.


Policy Tool: Import License

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: A government-issued right to import a specified quantity of a product or commodity.

Objective: Since import quotas limit the amount of a good imported, licenses may be used to allocate the limited supply of imports among domestic importers, as well as to limit the total quantity that can be imported.

When Used: Even though tariffs have been lowered through GATT, quantitative restrictions such as quotas have become more prevalent methods of limiting agricultural trade. Import licenses are used by some countries to allocate the rights to import certain goods and to limit the quantity imported.

Experience: The United States has issued import licenses for a stipulated quantity of imports to domestic importers of dairy products, sugar, and beef based on their historical share of the market. Mexico, for example, has implemented licensing systems for corn, barley, milk powder, and cheese. Import licenses were utilized for approximately 25 percent of all U.S. agricultural exports to Mexico in 1991. If a North American Free Trade Agreement is implemented, import licenses would be converted to tariff-rate quotas (see Tariff-Rate Quotas).


Policy Tool: Import Quotas

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: Import quotas limit the quantity of a specific commodity that has been imported. Limits are generally allocated among potential exporting countries. Specific limits are frequently negotiated to avoid more restrictive voluntary or mandatory limits. The specific size of quotas may be either legislated, negotiated, or determined by executive action. Those determined by executive action under Section 22, which imposes quotas or fees on imports that interfere with operation of a price support program, are recommended by the International Trade Commission and imposed by the President. (See Section 22.)

Objective: To protect U.S. producers and/or price support programs from foreign competition by establishing a maximum quantity of specific commodities that can be imported.

When Used: Beef import quotas have been mandated by the Congress. Cheese import quotas, which were imposed to protect the price support program, have been the subject of negotiation and agreement under GATT. Import quotas are also imposed on sugar and related products. Quotas exist on textile imports as a means of avoiding harm to the domestic textile industry.

Experience: The imposition of import quotas is highly political. Even though the International Trade Commission recommendations to the President are based on objective criteria, the ultimate Presidential decision is highly political. The existence of U.S. import quotas has made it difficult to get other countries to reduce trade barriers. Japan argues that its rice import quotas are no different from the import quotas imposed by the United States.


Policy Tool: Import Tariffs, Countervailing Duties

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: Import tariffs are a tax or duty on commodities entering the United States. A countervailing duty is a tariff that offsets an export subsidy of another country. A tariff may be either a fixed charge per unit of product imported (specific tariff) or a percentage of the value of the product imported (ad valorem tariff). The specific size of the tariff may be legislated, negotiated, or determined by executive action. The size of the countervailing duty is designed to offset exactly the size of the export subsidy of a competing country.

Objective: To restrict imports of certain commodities.

When Used: Because of the emphasis of GATT on reducing tariff trade barriers, the importance of tariffs has gradually decreased. Substantial tariffs still exist, however, on a number of specialty commodities. The authority exists for the imposition of countervailing duties equal to the amount of export subsidies provided by other countries. Such countervailing duties are generally limited to those instances in which there is a reasonable indication that an industry in the United States is being materially injured or threatened with injury because of subsidized imports. Antidumping duties may also be imposed if a commodity is sold in the United States at less than fair value in the event of a finding of material injury. Countervailing duty and antidumping duty actions involve determinations by both the lnternational Trade Commission and the Department of Commerce. While tariffs were often used in the past to generate revenue, this is no longer the case.

Experience: The visibility of tariffs and GATT emphasis on reducing tariff trade barriers have fostered the use of nontariff barriers to trade. Tariff barriers are less effective in reducing trade because they do not constitute an absolute limit on quantities that can be imported. That is, while efficiency plays no role in import quotas, tariffs potentially continue to reward efficiency. There has been a hesitancy to utilize countervailing duties because of the potential for precipitating trade wars.


Policy Tool: Nontariff Trade Barrier

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: Nontariff trade barriers, strictly speaking, cover all restrictions on imports other than tariffs. Thus, quotas are nontariff trade barriers. Likewise, the variable levy (tariff) employed by the EC in CAP is a nontariff trade barrier. (For a discussion of these policy tools, see Import Quotas and Variable Levy.) The nontariff barriers discussed here include a wide array of devices such as health and sanitation, packaging, and labeling regulations, as well as foreign exchange restrictions.

Objective: To restrict imports of individual commodities.

When Used: The use of nontariff trade barriers has increased, in part, because of the GATT emphasis on reducing tariff trade barriers. Common U.S. nontariff restrictions relate to health and sanitation restrictions on animal and plant products such as the prohibition of meat imports from countries having foot and mouth disease. Sometimes such restrictions are justified while, at other times, they are purely protectionist.

Experience: Nontariff trade barriers are generally more restrictive than tariff barriers because they may constitute absolute barriers to trade. Nontariff barriers have had a tendency to proliferate in recent years. Nontariff barriers have been used to reduce the competitiveness of foreign producers who are able to use pesticides and other products that are banned in the United States.


Policy Tool: Section 22

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: Section 22 of the Agricultural Adjustment Act of 1933 authorizes the President of the United States to impose import quotas or fees if it is determined that imports will interfere with federal price support programs or substantially reduce U.S. production of products processed from farm commodities (see Import Quotas).

Objective: To protect the integrity of domestic price support programs and domestic markets for farm commodities.

When Used: Section 22 requires the International Trade Commission, on direction by the President, to investigate the potential for imports to render ineffective or interfere with the operation of U.S. farm support programs. The President may impose import fees not to exceed 5 percent ad valorem or implement an import quota to reduce imports of a particular commodity to no less than 50 percent that of a representative time period. Special emergency authority allows the President to take immediate action to restrict imports of perishable commodities without waiting for a ruling by the International Trade Commission.

Experience: Action under Section 22 is initiated by the Foreign Agricultural Service-USDA. Since 1951, 51 investigations have been conducted by the International Trade Commission. Most of these were related to cotton and wheat, ice cream and cheese, and cotton-comber waste. The U.S. was granted a waiver of the GATT prohibition against import restrictions in 1955. Since first used in 1935, Section 22 has been imposed on 12 commodity groups: wheat and flour; rye, rye flour and meal; barley; oats; cotton; dairy products; almonds; filberts; peanuts and oil; tung nuts and oil; flaxseed and linseed oil; sugars and syrups. Section 22 is currently used to restrict imports of cotton, peanuts, dairy, and sugars and syrups. The first three commodities are restricted by import quota, while sugar imports are controlled by a combination of tariff and quota. In the current GATT round, the United States has offered to suspend and terminate Section 22 protection as part of its effort to eliminate trade distortions in agriculture.


Policy Tool: Tariff-Rate Quota (TRQ)

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: Tariff-rate quotas apply a higher tariff rate to imported goods after a certain quantitative limit has been achieved during a specified period. A negotiated rate is applied to imports up to a quota limit. Subsequently, a much higher duty is applied. The TRQ is the "tariffication" method used in GATT and NAFTA to convert nontariff barriers, such as quotas or licenses, to tariffs.

Objective: To protect domestic producers and U.S. farm program integrity from import competition during transition periods from a protected market to more open market conditions. TRQs do not limit the quantity of goods that may be imported.

When Used: When converting a restrictive quota to a tariff for purposes of transition to freer trade.

Experience: The U.S. sugar quota system was replaced by a TRQ in 1990. The previous quota was found in violation of GATT rules after a complaint by Australia. The TRQ imposes a zero or nominal duty on raw sugar imports up to a given amount and a higher duty on imports above the quota, 1.4 million metric tons in Fiscal Year 1992. TRQs are the primary means of converting U.S. quotas imposed under Section 22 to tariffs as a transition mechanism in GATT and NAFTA negotiations.


Policy Tool: Variable Levy

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: A minimum price is set at which a commodity can be imported. If the import price falls below that minimum price, a levy or import tax is imposed equal to the difference between the world price and the import price. A variable levy is classified as a nontariff trade barrier because the size of the levy (or tariff) is not fixed in either absolute or percentage terms.

Objective: To limit importation of specific commodities.

When Used: The variable levy is the principal mechanism used by the EC to restrict agricultural imports. Under CAP, the EC farmers are guaranteed grain prices greater than the world price. An import levy equal to the difference between the EC producer price and the price of grain landed in Rotterdam must be paid on imported grain. The variable levy on grains changes daily.

Experience: The variable levy is an effective barrier to trade because it eliminates the economic (price) advantage of the imported commodity. Efforts to negotiate a less restrictive EC agricultural policy have failed because the variable levy is the very basis of CAP. Getting rid of the variable levy would mean that the EC would have to develop a whole new agricultural policy approach.


Policy Tool: Voluntary Export Restraint

Policy Area: International Trade Programs, Domestic Industry Protection

What It Is: An agreement whereby foreign governments are asked to limit exports of specific commodities to a given quantity. The agreements are often negotiated under duress because of the potential enactment of formal import restrictions.

Objective: To control the importation of certain commodities and thereby protect domestic producers.

When Used: In the United States, voluntary export restraints are used in conjunction with the Meat Import Act of 1979. Whenever USDA estimates of meat imports appear likely to exceed 110 percent of the adjusted base quantity, the U.S. government has negotiated voluntary restraints rather than impose and administer formal import quotas.

Experience: The voluntary export restraint mechanism has served as a useful adjunct to formal import quotas authorized by the Meat Import Act.


Trade Agreements

Policy Tool: Barter/Counter Trade

Policy Area: International Trade Programs, Trade Agreements

What It Is: Barter is trade among two or more countries or firms involving the exchange of goods and/or services of equal value instead of currency or credit transactions as payment for a commodity.

Objective: To facilitate trade with developing countries experiencing short-run financial difficulties and to obtain sources of strategic raw materials that might not otherwise be available.

When Used: The exchange of powdered milk to Jamaica for bauxite in l982 was the first U.S. barter negotiation in 15 years. The 1985 farm bill required the Secretary of Agriculture to establish and carry out at least two pilot barter programs by 1987. Agricultural commodities were bartered for designated strategic materials. The 1990 farm bill specifies certain CCC commodities eligible for barter transactions.

Experience: Barter has a limited ability to expand exports. Rather, it is more of a temporary measure to maintain an existing market during periods of adverse economic conditions. Its greatest potential appears to be as a market development tool for developing countries with mineral or strategic metals of importance to the U.S. defense and industrial sectors. The biggest problem in barter is matching needs with products.


Policy Tool: International Commodity Agreements

Policy Area: International Trade Programs, Trade Agreements

What It Is: An international commodity agreement is a multilateral agreement among countries to affect the terms of trade. The terms of trade affected by an international commodity agreement may include the price level, quantity sold, quantity produced, or quantity held in reserve. Legally, commodity agreements are treaties among the participating nations.

Objective: To raise the world price above equilibrium levels, to stabilize price, and to provide increased supply assurance.

When Used: Commodity agreements, which were first established in 1949, have been used most extensively on wheat, cocoa, coffee, tea, and sugar. Currently, they are used extensively among developing countries. OPEC might also be looked upon as an international commodity agreement. The International Coffee Agreement expired in 1991 and has not been renewed.

Experience: Commodity agreements have had a reasonably good history of stabilizing prices as long as burdensome surpluses or shortages do not exist. Commodity agreements designed to raise prices have a tendency to fall apart because of a lack of control over production. Recent years have witnessed the demise of agreements in tin and coffee, due mainly to oversupply and low prices. To be effective, commodity agreements require close coordination of domestic farm programs to coordinate closely with the activities of international commodity agreements.


Policy Tool: Long-Term Bilateral Trade Agreements

Policy Area: International Trade Programs, Trade Agreements

What It Is: A long-term bilateral trade agreement is a contract between two countries specifying the quantity of a commodity to be traded over a certain time period. Bilateral trade agreements normally run for a period of three to five years, although they may be simple one-year agreements that are renewed annually. The agreements normally specify the minimum quantity to be purchased and the maximum quantity to be supplied. Generally, no provisions exist with regard to the price to be paid.

Objective: To assure the importing country a minimum supply and the exporting country a market for its production; and to normalize trade, develop markets, and retain markets for farm products.

When Used: Trade agreements have become increasingly common since a world food shortage was experienced in the early 1970s. The most publicized agreement was the five-year contract negotiated with the Soviets in 1975. It contained provisions that the Soviets would purchase a minimum of 6 million metric tons of grain, with the option for an additional 2 million tons. In the early 1980s, the United States became cool to the trade agreement concept while Australia and Canada signed agreements with several countries including the Soviet Union and China. In 1991, the U.S. and the Soviet Union entered a new five-year agreement specifying that a minimum of 8 million metric tons and a maximum of 14 million metric tons would be purchased each year for five years. The U.S. also has had agreements with China, Egypt, and Taiwan.

Experience: Trade agreements are a means of opening a new market and maintaining a competitive position. The quantities specified in the agreement have generally been less than the normal trading levels. With recent developments in the former Soviet Union, it is doubtful that agreed-to minimums will be met in some years. Enforcement of minimum purchases also has been a problem under previous agreements due to increased production, high world supplies, and retaliation for non-agricultural trade related disputes.


Policy Tool: Contract Sanctity

Policy Area: International Trade Programs, Embargoes

What It Is: Sanctity of contracts provides that exporters will be able to fulfill their contract obligations for a period of 270 days after the imposition of any embargo. Sanctity of contract provisions was included as an amendment to the Commodity Futures Trading Commission Bill in 1983.

Objective: To assure importing countries the United States is a dependable supplier and to reduce the impact of export embargoes on exporting firms and producers.

When Used: After lifting the Soviet grain embargo in April 1981, producer organizations and exporting firms applied increasing pressure on the Reagan administration for sanctity of contracts. In 1982, President Reagan provided assurance that he would allow increased purchases by the Soviets with sanctity of contracts. This principle was written into law in early 1983 and applies to all agricultural export sales. This assurance is continued in the 1985 and 1990 farm bills.

Experience: The abrupt imposition of the Russian grain embargo in January 1980 left U.S. producers and exporters with delivery commitments that were disallowed. While the U.S. government provided compensation to exporters for losses incurred, long-term injury ensued to the reputation of the United States as a reliable agricultural exporter. This was one of several factors leading to a decline in the U.S. share of total world trade in the early 1980s.


Policy Tool: Export Embargoes

Policy Area: International Trade Programs, Embargoes

What It Is: Export embargoes set absolute limits on quantities that can be exported. Partial embargoes may allow only a certain quantity to be exported after which permission must be obtained from the exporting country.

Objective: To hold down commodity prices in the exporting country prevent domestic shortages of commodities, and achieve a foreign policy objective.

When Used: Export embargoes have been imposed three times since 1970: (1) In 1973 an embargo was placed on the export of soybeans to provide assurance that poultry and hog producers would have a sufficient lower cost supply of soybean meal. (2) In 1975 an embargo was placed on exports of grain sales to the Soviet Union after concern about increasing food prices. (3) In January 1980 an embargo was placed on all exports to the Soviet Union after the Soviet invasion of Afghanistan and the subsequent tensions in Poland. This embargo was not lifted until April 1981. Provisions of the 1990 farm bill continue protection for agricultural producers against the imposition of export embargoes by assuring the sanctity of export contracts negotiated prior to any embargo.

Experience: Embargoes, or the threat of embargoes, have been a major factor in reduced confidence in the United States as a dependable supplier. Therefore, embargoes may have contributed to the decline in the U.S. share of world agricultural trade. Serious questions also exist concerning the effectiveness of embargoes as a policy tool.


Export Subsidies

Policy Tool: Blended Credit

Policy Area: International Trade Programs, Export Subsidies

What It Is: Blended credit is a non-price form of export subsidy that combines direct government export credit and credit guarantees in a single package to reduce the effective interest rate. Government export credit is provided in a program known as GSM-5. The credit guarantee program is known as GSM-102.

Objective: To make U.S. credit terms competitive with those offered by other exporting countries.

When Used: Blended credit is available only when appropriations are provided by the Congress. Tight budgets have made blended credit available only to a limited number of countries and commodities. Countries were selected based on magnitude of surpluses and competitive need, as well as diplomatic and domestic political considerations. The blended credit program was most recently initiated in October 1982 but has not been used since 1985 because of budget considerations and complaints in GATT.

Experience: During the period used, blended credit facilitated the opening of markets for U.S. commodities in competition with other countries. It is particularly useful for markets in developing countries where credit and credit guarantees are critical.


Policy Tool: Direct Export Credit

Policy Area: International Trade Programs, Export Subsidies

What It Is: Direct export credit refers to the CCC GSM-5 program that provides financing for U.S. agricultural exports with terms up to 36 months.

Objective: To provide financing to countries and/or foreign buyers who would otherwise be unable to secure the necessary credit to purchase U.S. agricultural commodities.

When Used: The GSM-5 program was used extensively through the period 1956- 1979. Since the beginning of the GSM-102 credit guarantee program in 1980, less focus has been placed on the direct credit program. In the 1985 farm bill, no funds were authorized for the GSM-5 program.

Experience: Since 1956, the GSM-5 program has been responsible for the export sales of between $1.4 billion to $1.6 billion annually of U.S. agricultural commodities. Beginning with the GSM-102 credit guarantee program in 1980, the GSM-5 program declined in importance. In 1985, $325 million was authorized for GSM-5 while $5 billion went to GSM-102. For 1986 and beyond, no funding was allocated for GSM-5 in the 1985 or 1990 farm bills. As a result, those sales that would have been made as a result of GSM-5 will be lost.


Policy Tool: Export Credit Guarantees

Policy Area: International Trade Programs, Export Subsidies

What lt Is: Export credit guarantees are U.S. government assurances for U.S. banks that provide financing for foreign buyers to purchase U.S. agricultural products. The CCC insures up to 98 percent of the free on board (f.o.b.) value of an export sale in the event that a foreign bank or government fails, for any reason, to make payment under a letter of credit agreement.

Objective: To assist U.S. exporters in making sales they would not make otherwise and to compete with export enhancement programs provided by other exporters.

When Used: Export credit guarantees were introduced in 1979 and have been an integral part of U.S. agricultural trade policy ever since. The 1990 farm bill continues authorization for the GSM-102 program with credit terms up to 3 years. It further provides funding for an intermediate credit program, GSM-301, which offers credit terms of 3 to 10 years and includes financing for infrastructure development.

Experience: Both GSM-102 and GSM-103 credit guarantee programs are currently in operation. They have been successful in maintaining U.S. sales to countries with severe debt problems. This success has occurred only through continued increase in federal appropriations, from $671 million in 1980 to authorization for up to $5 billion annually through 1995. Defaults under either program have been minimal, with Iraq being the most recent example. Over $2 billion in export credit guaranteed loans have been made to former USSR republics.


Policy Tool: Export PIK, Bonus Incentive Commodity Export Program (BICEP)

Policy Area: International Trade Programs, Export Subsidies

What It Is: Under export PIK, the government provides an in-kind export commodity bonus for each regular commercial purchase of a specified amount. For example, if a country purchases 1 million metric tons of wheat, it might receive an additional 100,000 metric tons of PIK wheat from CCC stocks. The 100,000 metric ton bonus is the export PIK.

Objective: To make the United States commodity price competitive in the world market and thus expand export markets.

When Used: Export PIK was first used in a 1983 flour sale to Egypt. The 1985 farm bill contained provisions for export PIK to support both targeted export assistance programs and export market enhancement programs. In general, the use of export PIK has been limited to surplus commodities held in CCC inventories.

Experience: Export PIK was used to capture the 1983 Egyptian flour market for the United States. Other flour exporting countries, such as France, were upset, although no overt retaliatory steps were taken against the United States. The 1990 farm bill created the Export Enhancement Program (EEP) that replaced BICEP. EEP continues to use export bonuses, in cash or in- kind, to regain and maintain U.S. markets lost to unfair export competition, primarily from the European Community (see Export Enhancement Program).


Policy Tool: Monetary Export Subsidies

Policy Area: International Trade Programs, Export Subsidies

What It Is: Monetary subsidies to exporters in dollars per unit of commodity sold.

Objective: To make the U.S. commodity price competitive in the world market and thus expand markets.

When Used: Export subsidies can be used to export agricultural commodities when U.S. price supports are above world prices. Overt monetary subsidies of exports are seldom made because they clearly violate the provisions of GATT. Under those provisions, the United States could be required to pay damages to the countries injured by such subsidies. EC subsidies do not violate GATT because they were in place as a part of CAP at the time GATT was negotiated. The last major U.S. direct monetary export subsidy was in the 1972 Russian grain deal when a subsidy of approximately $0.60 per bushel of wheat was provided. The marketing loan program authorized for cotton and rice in the 1990 farm bill is similar to an export subsidy (see Marketing Loan in Domestic Policy section). Political considerations are obviously involved in the use of export subsidies.

Experience: Export subsidies are overt methods of subsidizing exports. As such, they are readily determined to be in violation of GATT and invite retaliation from competitors if they increase U.S. market share.


Policy Tool: Public Law (P.L.) 480, Food for Peace

Policy Area: International Trade Programs, Export Subsidies

What It Is: P.L.-480 provides for concessional sales of commodities that contain substantial U.S. subsidies. Exports are made under three P.L.-480 programs:

  • Title I involves sales for dollars under low interest rates from 10-30 years repayment.

  • Title II involves emergency food relief directed to nutritionally vulnerable nations.

  • Title III involves commodity aid as part of a development package.

    Multiyear commitments are tied to specific development actions.

    Objective: To dispose of surplus commodities, develop markets, provide emergency food aid, and assist friendly nations in development.

    When Used: Authorized by the Agricultural Trade Development Act of 1954, P.L.-480 was used to export as much as one-third of the export sales during the 1950s and 1960s when loan rates were maintained above world prices. Since then, P.L.-480 sales have generally been in the $1 to $2 billion range. Countries are selected for assistance based on diplomatic and political considerations as well as need. Commodities selected are influenced by the magnitude of surplus stocks. The Secretary of State makes the final decision regarding who gets P.L.-480 aid.

    Experience: P.L.-480 is credited with having built such important commercial markets for farm products as Japan, South Korea, Taiwan, Brazil, and Spain. The need to get commodities moving through P.L.-480 is frequently frustrated by foreign policy considerations.


    Policy Tool: Two-Price Plan

    Policy Area: International Trade Programs, Export Subsidies

    What It Is: A two-price plan discriminates between the domestic and the foreign market by supporting a higher price for domestic sales than for foreign sales. Exports are, therefore, indirectly subsidized because domestic marketing is reduced with the residual sold for exports.

    Objective: To raise the level of producer returns while preventing the accumulation of large surplus commodity stocks.

    When Used: Before World War II and the negotiation of GATT, two-price plans were used extensively to support farm income. Since the negotiation of GATT, the operation of two-price plans in the United States has been restricted largely to marketing orders and peanuts.

    Experience: Two-price plans, in essence, make the world market a residual and less profitable market. Advocating reduced trade barriers and operating two- price plans are obviously inconsistent.


    Trade Barrier Reduction

    Policy Tool: Export Enhancement Program (EEP)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: EEP is an export incentive program created by the 1985 farm bill and extended by the 1990 farm bill to permit USDA to use surplus commodities or cash as export bonuses to make U.S. products more competitive on the world market or to offset the effects of unfair trade practices and subsidies used by other countries. In the 1990 farm bill, EEP was authorized at $500 million each year through 1995.

    Objective: To make U.S. farm products price competitive on the world market, reduce commodity surpluses and counter unfair trading practices.

    When Used: EEP was first used in 1985 to regain North African wheat markets lost to unfair EC competition. Since then, EEP has been used to ship 139 million tons of agricultural products valued at $13.9 billion. Although wheat sales have represented over 70 percent of total EEP shipments in most years, EEP has been used to sell poultry, flour, barley, sorghum, rice, cattle, animal feeds, vegetable oil, and eggs.

    Experience: The authority to implement EEP sales is granted to the Secretary of Agriculture. EEP was established to counter the high export subsidies used by the EC to capture wheat markets in Algeria and Egypt. Use of EEP has expanded to include countries in Eastern Europe, China, Norway, Venezuela, Israel, Poland, Philippines, Finland, and Dominican Republic. EEP as a share of all wheat exports has increased since 1989, reaching over 60 percent in 1992. Although EEP bonuses ($/bushel) have declined as U.S. prices have increased, U.S. action to force the EC to negotiate away such practices has resulted in higher bonuses in recent years.


    Policy Tool: Free Trade Agreement (FTA)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: An agreement among an association of member nations to overcome impediments to trade by reducing or eliminating both tariff and nontariff barriers to trade in goods and services. Free trade agreements do not provide for a common external tariff for other nonmember countries or the free movement of labor and capital among members (see Preferential Trading Arrangements).

    Objective: To facilitate the free movement of goods and services among member nations of the agreement. A free trade agreement is the least complete form of economic integration, followed by a customs union, common market, and economic union.

    When Used: Unsuccessful attempts to reduce or eliminate nontariff trade barriers in GATT have led to pursuit of mutual interests among nations by forming FTAs or more complete forms of economic or political integration, such as the EC. GATT rules apply to the negotiation of FTAs, and FTAs must operate within the provisions of GATT and other international treaties.

    Experience: The United States has negotiated free trade agreements with Israel and Canada. The Canada-United States Free Trade Agreement became effective January 1, 1989, while the trade agreement with Israel was signed in 1985. The most recent undertaking is the negotiation of an FTA among the United States, Canada, and Mexico. Under the North American Free Trade Agreement (NAFTA), three separate agreements will exist. For most goods and services, a trilateral agreement will be used. For agriculture, however, two bilateral agreements -- one between the United States and Mexico and another between Canada and Mexico -- will be required. NAFTA must first be approved by the U.S. Congress and similar legislative bodies in Mexico and Canada. It appears likely Chile will accede to NAFTA and other Latin American countries will consider joining.


    Policy Tool: GATT Trigger

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: GATT triggers are trade policy mechanisms authorized by the Omnibus Budget Reconciliation Act of 1990 which requires commodity and export program adjustments to be used or considered by the Secretary of Agriculture if trade reform is not achieved in the Uruguay Round of GATT. Implementation of marketing loans for wheat and feed grains, export promotion, and waiver of acreage limitations are the major components. The triggers are linked to specific dates and actions taken to maintain the international competitiveness of U.S. program crops. GATT triggers were necessary because of concerns about the reluctance of the EC to agree to meaningful agricultural policy reform and insistence on schemes to place import duties on U.S. oilseed and corn gluten.

    Objective: To strengthen the U.S. arm in trade negotiations.

    When Used: If implementing legislation for a GATT agreement was not enacted on or before June 30, 1992, the first trigger required a $1 billion increase in export promotion programs and implementation of marketing loans for wheat and feed grains. It allowed the Secretary to consider waiving any minimum level of acreage limitation for the 1993-95 program crop years. If no GATT agreement becomes effective by June 30, 1993, the Secretary is required to consider: (a) waiving all or part of the reductions in program spending required by the Budget Reconciliation Act; (b) raising the level of funding available for export programs; and (c) instituting a marketing loan for wheat and feed grains. If this authority is used, action must be taken under (a) and either or both of (b) or (c). If Congressional "fast track" procedures are unavailable for consideration of a GATT agreement in agriculture, then (a) and (b) no longer apply.

    Experience: In announcing the 1993 wheat and feed grain programs, the Secretary chose to implement the provision to void the acreage reduction limitation defined by the 1990 Omnibus Budget Reconciliation. In addition, it appears a marketing loan in wheat and feed grains will be implemented for the 1993 crop year. On September 1, 1992, the President announced a $1 billion funding initiative under export enhancement for 28 countries and covering over 13 million tons of grain. Major recipients of the initiative, which will remain in effect through June 30, 1993, are China, the former Soviet Union, Egypt, Algeria, Philippines, India, and Morocco.


    Policy Tool:
    General Agreement on Tariffs and Trade (GATT)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: GATT is a multilateral United Nations treaty among 102 governments, including the United States. GATT contains a code of principles and provides a forum for consultation and dispute settlement. Five principles govern GATT:

    1. Trade must be nondiscriminatory.

    2. Domestic industries should be protected by tariffs as opposed to nontariff barriers (quotas).

    3. Tariffs agreed upon are binding, with provision for compensation if violated.

    4. Consultations are provided to settle disputes.

    5. GATT procedures may be waived on agreement of the members with provision for compensation. Barriers in existence when GATT was established (1947) are legal until negotiated away.

    Objective: To increase international trade among nations through negotiated reductions in tariffs and other trade barriers. These actions are designed to prevent the development of rounds of retaliatory trade barriers.

    When Used: GATT came into existence October 30, 1947. Trade barrier reductions have been accomplished in three rounds of negotiation -- the Dillon Round (1960-61), which provided for European Economic Community (EEC) duty-free entrance for soybeans and cotton; the Kennedy Round (1963-67), which results in tariff reductions on a wide range of farm products; and the Tokyo Round (1973-79), which reduced nontariff barriers on a limited number of commodities. The Uruguay round of negotiations began in September 1986 with agriculture as the central focus of trade negotiations. The U.S. position in the Uruguay Round has been to call for the multilateral elimination of trade-distorting agricultural policies.

    Experience: While experiencing success in the first seven rounds, difficult problems with reducing support to agriculture have emerged in the Uruguay Round. The reduction of agricultural trade barriers has proven difficult because the EC has been unwilling to agree to proposals offered by the U.S. and other nations for the phased reduction of border barriers to trade and domestic policy that distorts trade. Classic examples include the EC Common Agricultural Policy (CAP) and the aggressive export policies in both the 1985 and 1990 farm bills.


    Policy Tool: Generalized System of Preferences (GSP)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: The GSP is a program permitting duty-free entry of certain imports from designated developing countries.

    Objective: To assist in economic development, encourage diversification, and expand production of certain developing countries.

    When Used: Title V of the Trade Act of 1974 sets forth criteria for country and product eligibility as well as for limitations on preferential treatment. Developing countries not eligible for GSP include communist countries, a developing country that extends preferential treatment to the products of a competing developed country, most OPEC countries, countries that nationalize U.S. property without compensation, countries that do not cooperate in narcotic control, or countries that have aided international terrorism. Import-sensitive articles or commodities such as textiles are excluded from GSP.

    Experience: Developing countries purchase over one-third of all agricultural exports and have been the fastest growing market for farm products. GSP has helped developing countries to buy U.S. products, although U.S. producers of some commodities have been adversely affected.


    Policy Tool: Market Promotion Program (MPP)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: MPP provides assistance in cash or commodities to trade promotion organizations to partially fund foreign market development activities, especially in those countries where the U.S. encounters unfair trade practices by importers or exporters. MPP replaced TEA (Targeted Export Assistance) but is not limited to funding of activities only in markets where the United States faces unfair trade practices. Authorized by the 1990 farm bill, MPP was funded at $200 million in FY 91 and FY 92. Funding for FY 93-95 has been reduced to $148 million annually.

    Objective: MPP was created to encourage the development, maintenance, and expansion of commercial export markets for U.S. agricultural products through cost-share assistance, with priority given to those markets facing unfair trade practices.

    When Used: Priority funding assistance is provided to organizations whose commodity or product has experienced unfair trade practices, such as export subsidies or the use of health regulations to restrict trade. MPP is administered by the Foreign Agricultural Service, USDA. Under MPP, surplus stocks of funds are used to partially reimburse agricultural organizations conducting specific foreign market development activities in specified countries. Commodity and country coverage is much broader than under TEA. Funds are allocated to organizations on a matching basis.

    Experience: MPP has been used in every country of the world to promote a wide variety of commodities and products, including apples, pears, canned peaches, poultry, wood products, almonds, red meat, ginseng, dates, processed tomato products, mink pelts, confectionery and other processed food products. Activities partially financed by MPP range from market research, consumer promotion, and trade promotion to construction of a model feed mill and a three-story wood demonstration building. In the early 1990s, these programs created substantial political heat because they were interpreted as being subsidies to agribusiness firms that were perceived as not really needing such subsidies.


    Policy Tool: Most Favored Nation (MFN)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: Preferential trade terms granted to a nation to have customs duties levied on its products at the lowest rate offered to any other nation and making the nation eligible for export credit. MFN is a foundation of the GATT.

    Objective: To assure fair and equitable treatment for all GATT members.

    When Used: MFN status has been used by the U.S. in recent years as an incentive to force political and economic reform in the former Soviet Union and China.

    Experience: Access to the vast U.S. market has been used to entice other countries to comply with certain human rights beliefs, political goals, and economic principles acceptable to the government of the United States. The Jackson-Vanik amendment to the 1974 Trade Act requires that MFN status be granted only on the basis of compliance with basic human rights considerations.


    Policy Tool: Preferential Trading Arrangements (PTA)

    Policy Area: International Trade Programs, Trade Barrier Reduction

    What It Is: Formal arrangements between two or more nations to eliminate restrictions on international trade, payments, and factor mobility for the purposes of more complete economic integration. The major types of preferential trading arrangements include free trade area, customs union, common market, and economic union.

    Objective: To stimulate economic growth by allowing the free movement of goods, services, labor, and capital and by providing for the coordination of member-nation monetary and fiscal policies.

    When Used: PTAs often represent an acceptable alternative to the slow and ineffective efforts to achieve increased market access and trade liberalization in GATT. Although PTAs open markets within the member-nation group, they are often structured to discriminate against nonmembers, while in full compliance with GATT rules.

    Experience: Economic union represents the most complete form of economic integration whereby nations agree to the unification of all national social, agricultural, taxation, fiscal, and monetary policies, along with the acceptance of a common currency. Belgium and Luxembourg completed an economic union in the 1920s under which social, taxation, and fiscal policies were coordinated by supranational authority. A common market is a group of trading nations that allow free movement of goods and services, common external trade restrictions against nonmembers, and the free movement of factors of production. The EC represents one of the most important attempts to form a common market, a process which began in 1957 and is to be completed by December 31, 1992, under the Single European Act. The Netherlands, Belgium, and Luxembourg formed a customs union in 1948 to remove all tariff and nontariff barriers to trade among members, but impose identical trade restrictions against nonmembers. The United States, Mexico, and Canada are negotiating to implement the least complete form of economic integration, a free trade area (see Free Trade Agreement).