INTERNATIONAL TRADE PROGRAMS

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.

Consequences:

• U.S. food aid programs will likely increase volumes delivered due to the lowest- landed cost provisions of the 1990 farm bill.

• U.S. agricultural exports have been less competitive in some markets due to curtailment of certain credit programs as a result of increased transport costs.

• U.S. maritime industry and selected U.S. ports receive subsidies and compensation, thereby increasing the costs of administering food aid programs.

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).

Consequences:

• Can limit the quantity available within the import market, raising consumer and producer prices.

• Creates additional market instability because of the often arbitrary nature of issuing licenses.

• Discriminates at times against new importers since no historical basis for importing exists, making access to markets difficult or virtually impossible.

• Eliminates imported supplies if the importing government fails to allocate licenses.

• Invites possible retaliation by foreign trading partners wishing to export larger volumes to the protected import market.

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.

Consequences:

• Import quotas restrict available supplies and raise domestic prices.

• Textile import restrictions reduce export demand for U.S. cotton lint but may increase sales to domestic mills. Less overall demand is likely because of higher ultimate consumer product prices.

• Without import quotas on price-supported commodities, the CCC would acquire a larger quantity of commodities under the price support program.

• Import quotas result in windfall profits to licensed importers.

• Supply control aspects of import quotas result in greater price fluctuations than might occur in a free market.

• Efficiency of production plays no role in determining competitiveness under a system of quotas.

• Retaliation for non-agricultural commodity quotas can lead to reduction in agricultural exports from the United States.

• Import quotas established by large importing countries (European Community, United States, Japan) tend to depress world prices.

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.

Consequences:

• Tariffs raise the effective price of goods entering the United States and thereby reduce the comparative advantage of foreign-produced goods.

• Tariffs reduce the volume of commodities imported at all price levels.

• Economists regard tariffs as a lesser evil than quotas or other nontariff barriers because efficient producers may still be able to obtain access to the market with a tariff.

• Countervailing or antidumping duties offset export subsidy practices of other countries and thereby protect U.S. producers.

• The U.S. Treasury receives the revenue from a tariff.

• The absolute level of price fluctuation is the same, or nearly the same, with a tariff as in the free market. Price changes are reflected to consumers.

• Import tariffs may result in retaliation by trading partners.

• On tariff regulated commodities, consumers in the importing country pay higher prices than in the absence of tariffs.

• Import tariffs established by large importing countries (European Community, United States, Japan) tend to depress world prices.

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.

Consequences:

• Nontariff trade barriers restrict available supplies and raise domestic prices.

• Nontariff trade barriers may be an absolute barrier to trade with efficiency playing no role in determining competitiveness.

• The imposition of a nontariff barrier may increase the degree of price variability.

• Nontariff trade barriers increase the risk faced by importing firms.

• Nontariff trade barriers may result in retaliation by trading partners.

• Nontariff trade barriers may assure standardization and product quality of imported goods.

• Nontariff trade barriers tend to depress world prices when used by large importing countries.

• Nontariff trade barriers like health regulators restrict trade as a side effect of the major objective of protecting public health (e.g., ban on imports of beef from countries with hoof and mouth disease). However, such health regulations can be used to explicitly restrict trade (e.g., EC ban on beef with hormones.)

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.

Consequences:

• Import restrictions reduce available supplies on the market and raise domestic prices of protected commodities.

• Consumer prices for some food and fiber products are higher because of import controls imposed under Section 22. Recent estimates indicate that U.S. consumers pay $1 to $2 billion annually in higher sugar costs due to import quotas.

• Without Section 22 protection, CCC commodity acquisition costs would be much greater in some years.

• Import quotas invite GATT complaints and trade retaliation by other countries.

• World prices for protected commodities are lower than they would be without Section 22.

• Resource allocation and use are distorted due to import controls.

• Price instability is increased due to the imposition of import quotas and tariff restrictions.

• Large profits accrue to holders of import quotas.

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.

Consequences:

• Raises domestic prices over free trade but does not restrict available supplies.

• Reduces export demand and lowers world prices if the importing country is large.

• Allows market forces to more efficiently allocate resources since TRQs are less restrictive than a quota.

• Requires lower CCC costs of acquisition and storage than under free market since imports are somewhat lower.

• Provides more market stability than arbitrarily imposed import quotas or licenses.

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.

Consequences:

• A variable levy effectively reduces imports and thus raises domestic prices to a predetermined level.

• Efficiency plays no role in determining competitiveness under a variable levy policy.

• When the world price is below the predetermined minimum price, the variable levy constitutes a source of revenue to the importing country.

• The variable levy ensures a stable internal price while increasing instability in world markets.

• The variable levy, along with high internal support prices, transformed the EC from a net grain importer into a net grain exporter.

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.

Consequences:

• Voluntary export restraints restrict available supplies and raise domestic prices.

• As a result of voluntary export restraints, price fluctuations are greater in world markets than they would be in a free market environment.

• Voluntary export restraints erode the importance of efficiency of production in determining competitiveness.

• Income derived from holding import license or quota is transferred to the exporting country.

• Some countries may be left out of the market because they refuse to limit their imports.

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.

Consequences:

• Barter helps maintain export levels.

• Barter provides increased potential for developing commercial markets for agricultural products.

• Barter has limited applicability because of the required coincidence of needs.

• Barter may displace commercial sales.

• Barter value generally approximates relative world market value of the commodities being traded.

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.

Consequences:

• Commodity agreements provide increased price stability.

• Domestic prices are raised by commodity agreements.

• Exchange of information among countries on market conditions is increased.

• When prices are raised, excess supplies frequently accumulate unless effective supply control mechanisms are included.

• Unless commodity agreements are well coordinated with the domestic farm programs of the participating countries, they tend to break down.

• As with any international trade agreement, enforcement is virtually impossible.

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.

Consequences:
• The total annual volume of trade tends to be increased and stabilized between the parties to the agreement.

• Importing countries outside the agreement may be denied a source of the commodity if supplies become short.

• Exporting countries outside the agreement may be denied market outlets when supplies are plentiful.

• Trade agreements are, in essence, barriers to trade in that they tie up markets over long time periods.

• Trade agreements cause greater fluctuations in world prices because they effectively reduce the world supply that can be traded competitively.

• Trade agreements are difficult, if not impossible, to enforce and may lead tofalse market expectations.

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.

Consequences:

• The United States is viewed as a more reliable supplier of agricultural exports.

• lmporters know that when they sign a contract for delivery of U.S. agricultural products, there will not be governmental interference with performance on it.

• Exporters are assured their sales will be allowed.

• Producers are shielded from the immediate effects of embargoes.

• Producers should receive higher prices because exporters do not have to discount for the uncertainty posed by a potential embargo.

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.

Consequences:

• Embargoes reduce U.S. export sales and lower prices.

• Embargoes reduce confidence in the United States as a dependable supplier, thus encouraging foreign buyers to cultivate other sources of supply.

• Embargoes encourage other countries to increase production as a means of achieving self-sufficiency.

• Embargoes encourage competing exporting countries to increase production.

• It is difficult to prevent the intended embargoed country from importing the commodity from another source.

• The mere potential for embargoes is reflected in the market place as exporters and importers adjust for this uncertainty.

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.

Consequences:

• The United States is made more competitive in the face of other countries' subsidized export credit programs.

• A basis is provided for penetrating new export markets, particularly in developing country markets.

• Compared to other forms of export subsidies, blended credit runs less risk of creating retaliatory trade war conditions.

• Expansion of subsidized credit encourages other countries to expand their export subsidy programs, thus creating the potential for increased treasury cost over time.

• If successful in expanding exports, blended credit raises prices in the United States, thus raising domestic food costs and production costs for livestock producers.

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.

Consequences:

• U.S. markets in countries with severe debt problems have been maintained.

• Government costs are higher than they would be without program funding.

• Direct credit programs are needed to compete with similar programs offered by other exporting countries.

• Direct credit programs provide a basis for expanding markets in developing countries.

• If credit sales expand total exports, domestic food costs and livestock production costs are greater than they would be without the programs.

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.

Consequences:

• U.S. agricultural exports declined less than they would have in the absence of such programs.

• Export credit guarantees promote long-term development of markets.

• U.S. exporters are more competitive with programs of other exporters.

• Export credit guarantees are less obvious than other export subsidies and less likely to produce retaliation from other exporters.

• Export credit guarantees decrease government direct credit budget exposure.

• Export credit guarantees allow U.S. banks to make loans that would not be financially prudent under ordinary circumstances.

• Export credit guarantees may expose the U.S. government to large liabilities in the event of major defaults by foreign purchasers.

• Extensive use of export credit invites retaliation by other major exporters.

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).

Consequences:

• Improved the United States competitive position in the world market, despite reduced demand and loan rates that were above world market clearing levels.

• In-kind export PIK was less overt than direct monetary export subsidies and thus not as likely to invite either retaliation or GATT sanction.

• Government stocks of commodities can be lowered.

• An export alternative is provided by export PIK as long as the CCC owns sufficient stocks.

• Export PIK may be a violation of at least the spirit of GATT.

• Widespread use of export PIK has invited public scrutiny of many export promotion programs and may threaten to undermine U.S. efforts for trade reform in the GATT negotiations.

• Commercial sales may be offset by bonus commodities.

• Increased demand for export PIK subsidized commodities places upward price pressure on domestic consumers.

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.

Consequences:

• The effective export price is lowered to make U.S. commodity prices competitive in the world market. The result is to expand exports.

• Domestic farm prices may be increased.

• Monetary subsidies run a high risk of inviting retaliation.

• Monetary subsidies violate GATT.

• Stocks are reduced as a result of increased exports and price variability increases.

• Long-run price relief is provided for U.S. producers in the face of low world prices.

• Monetary subsidies can be expensive in terms of both money and image.

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: