SPEAKERS CONTENTS INSERTS
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ASIAN FINANCIAL CRISES
GENERAL FARM COMMODITIES
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FEBRUARY 4, 1998
Serial No. 10541
Printed for the use of the Committee on Agriculture
Page 2 PREV PAGE TOP OF DOCCOMMITTEE ON AGRICULTURE
ROBERT F. (BOB) SMITH, Oregon, Chairman
LARRY COMBEST, Texas,
BILL BARRETT, Nebraska
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
JOHN T. DOOLITTLE, California
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
RON LEWIS, Kentucky
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
ED BRYANT, Tennessee
MARK FOLEY, Florida
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JO ANN EMERSON, Missouri
JERRY MORAN, Kansas
ROY BLOUNT, Missouri
Page 3 PREV PAGE TOP OF DOCCHARLES W. (CHIP) PICKERING, Mississippi
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SCOTTY BAESLER, Kentucky
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
SAM FARR, California
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
Page 4 PREV PAGE TOP OF DOCMIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
JAY W. JOHNSON, Wisconsin
LEONARD L. BOSWELL, Iowa
PAUL UNGER, Majority Staff Director
DAVID G. DYE, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
VERNIE HUBERT, Minority Counsel
SUBCOMMITTEE ON GENERAL FARM COMMODITIES
BILL BARRETT, Nebraska, Chairman
LARRY COMBEST, Texas
JOHN A. BOEHNER, Ohio
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JO ANN EMERSON, Missouri
JERRY MORAN, Kansas
JOHN R. THUNE, South Dakota
JOHN COOKSEY, Louisiana
Page 5 PREV PAGE TOP OF DOCDAVID MINGE, Minnesota
BENNIE G. THOMPSON, Mississippi
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
JAY W. JOHNSON, Wisconsin
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, opening statement
Minge, Hon. David, a Representative in Congress from the State of Minnesota, opening statement
Smith, Hon. Robert F. (Bob), a Representative in Congress from the State of Oregon, prepared statement
Stenholm, Hon. Charles W., a Representative Congress from the State of Texas, prepared statement
Thune, Hon. John, a Representative in Congress from the State of South Dakota, prepared statement
Schumacher, August Jr., Under Secretary, Farm and Foreign Agricultural Services, U.S. Department of Agriculture
Page 6 PREV PAGE TOP OF DOCSubmitted Material
Hilger, Donald A., statement
National Cattlemen's Beef Association, statement
Roberts, Hon. Pat, a Senator from the State of Kansas, letter of January 27, 1998 to Secretary Rubin submitted by Mr. Moran
Shearer, P. Scott, and Giordano, Nick, statement
ASIAN FINANCIAL CRISIS
THURSDAY, FEBRUARY 4, 1998
U.S. House of Representatives,
Subcommittee on General Farm Commodities,
Committee on Agriculture,
The subcommittee met, pursuant to notice, at 2:05 p.m. in room 1300, Longworth House Office Building, Hon. Bill Barrett (chairman of subcommittee) presiding.
Present: Representatives Lucas, Moran, Cooksey, Minge, McIntyre, John, Johnson, and Stenholm [ex officio].
Also present: Representatives Berry and Pomeroy.
Staff present: Lynn Gallagher, senior professional staff; Mike Neruda, subcommittee staff director; Brian Hard, Jason Vaillancourt, Heidi Scheffler, Callista Bisek, Andrew Baker, Anne Simmons, and Wanda Worsham, clerk.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. BARRETT. The hearing will come to order. We are here today to receive testimony concerning the current Asian financial crisis and its impact on agriculture. There has been a tremendous amount of media attention devoted to the Asian market situationeverything from Wall Street's concerns to the long-term political effect on those Pacific Rim nations undergoing stress. Our focus today, however, will be on agriculture.
Page 7 PREV PAGE TOP OF DOC I want to thank the members of the subcommittee for being here. I want to thank the members of the full committee for their attention also to this very important issue. I also want to thank the chairman of the committee, Bob Smith, for his continuing efforts to promote U.S. agricultural trade in many of these nations that we will be discussing today.
East Asian countries make up about 40 percent of U.S. agricultural exports, at least they did in 1997, or about $23 billion of our total $56.5 billion in worldwide exports. The Asian countries most directly affected by the crisisThailand, Indonesia, Malaysia, the Philippines, and South Koreaaccount for about 12 percent of our U.S. agricultural exports. That was the case in 1997. The total Asian market grew about 7.3 percent in the 10-year period, 1986 to 1996; but significantly the Asian countries with the current financial problems grew about 9 percent in that same time-frame. This is a big market, a very big market. We do not want to lose it, so let us get GSM moving.
I continue to have concerns regarding the impact on U.S. agriculture exports to these Asian countries. Estimates are that U.S. agricultural exports worldwide will decline 3 to 6 percent, mainly due to the downturn in our exports to Asia. Further, predictions are that the red meat and poultry sectors will suffer the worst decline by 5 to 6 percent. Early indicators are that U.S. grain exports will decline perhaps 2 percent. Our USDA export programs are critical buffers for our farmers and ranchers and will certainly determine how deeply our producers will be affected by the Asian economic situation.
To assist the subcommittee, we have as our sole witness today Under Secretary Gus Schumacher, who is a guest of this committee quite frequently. We are glad to have you back again, Gus, and also his entourage, his experts from USDA. Thanks, Gus, for taking your time sharing with us today. We are looking forward to the comments.
Incidentally, this hearing is not specifically about funding for the International Monetary Fund, ''IMF.'' Should we or should we not fund IMF? That is not the purpose of this hearing. That said, however, we all realize that the key to a successful GSM102 program for Asia is the availability of IMF funding to the banks over in that region. Simply stated: without IMF, these countries are not creditworthy.
Page 8 PREV PAGE TOP OF DOC However, this subcommittee today has a golden opportunity to more clearly focus on the agricultural response to the crisis in Asia. IMF funding will be debated in a number of committee rooms in this Congress this session. As important as the economic and political issues of the IMF funding are to the ultimate solutions to the Asian crisis, IMF funding per se at this time should be left to those other committees.
America's farmers and ranchers are interested in the critical issue of credit for agricultural exports. Many feel that the credits offered so far to Asian nations should be adequate to keep U.S. agricultural exports moving in that region. But are they?
One of the things we will need to address this year will be our credit requirements. After the fiasco with certain former Soviet Union, Eastern European and Latin American countries, the 1990 farm bill corrected the perceived difficulties and tightened our credit guidelines and regulations. But are they now too tight? Have we made our programs too inflexible? Have we made them overly difficult so that we are hurting the very American producers that we are trying to help? Do we have sufficient credits when an entire region is now suffering?
Initially, our credit package structure caused some of the other exporters to Southeast Asia and Korea to forego some of their sales. I believe that that has changed and that other nations are in the race to provide credits to Asian nations which are now under stress. Aggressive use of USDA's GSM credit makes us competitive with Australia and Canada who are both offering their own credit terms to these same Asian markets.
We also have an opportunity, I believe, to press hard for agricultural trading access reforms. These reforms should include substantial changes that require the Asian countries to provide greater access to foreign agricultural products as part of their reform measures. For example, proposed agricultural reforms in Indonesia could benefit U.S. wheat and soybean exporters. Ending monopolistic trading on imports of bulk commodities from one country to another would be of great benefit to Indonesians and to American exporters of wheat and soybeans. Without the reforms, American producers will continue to be frozen out of those markets.
Page 9 PREV PAGE TOP OF DOC Again, my appreciation to Mr. Schumacher. I now yield to the ranking member of the subcommittee, Mr. Minge.
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MINGE. Thank you, Mr. Chairman. I would like to express my appreciation to you for scheduling this hearing and join in welcoming the representatives from the U.S. Department of Agriculture. You have certainly identified the importance of the Southeast Asian market to the American agricultural economy. I will not repeat those statistics; although, I do have note of them.
I, too, am interested to hear more about what the Department is doing to help our farmers minimize losses due to reduced demand in Asia. I recognize that we are offering about $2 billion in credit guarantees to facilitate sales to Korea and to Southeast Asia. We do not yet know the full effect of these efforts. Some argue that export credit guarantees will increase liquidity and encourage Asian importers to honor existing contracts for the purchase of commodities instead of refusing delivery on those contracts in favor of purchases at lower prices elsewhere.
I am concerned about the benefits from our export credit programs. I think that certainly as I understand the operation in the past several weeks they have been effective in moving American products. I understand that we are selling, then, U.S. agricultural commodities in a global market, and that clears part of our product from the domestic market. If it can be done at advantageous, it is a win-win situationor at least appears to be.
I also understand that particular firms that handle the sales may benefit based on their business volume. But we are in a global market in terms of most of our agricultural products and their instantaneous reactions from the marketplace changes in the economy. If we sell our product overseas and other countries which have parallel stocks are not making sales, their stocks then hang over the marketplace. So I have one question that I would just like to pose to the group, and that is: How does the average American farmer, the modern size farmer, benefit from this credit guarantee program?
Page 10 PREV PAGE TOP OF DOC I am also concerned that we have acted very promptly and apparently in an adroit fashion to garner additional market opportunities. I understand that you will address some of the concerns as to the risks that are involved in making such credit guarantees. Were the Australians too timid in not offering credit as quickly as we did, or were the Australians prudent and are we incurring risks for the American Government or the U.S. taxpayer that we may come to regret? What is the track history or the record of the program.
Again, I would like to thank you, Mr. Chairman, for holding the hearing.
Gus, I would like to thank you for coming. You certainly have maintained a very close working relationship with this committee and members of Congress and we have deep respect for your work at USDA. I understand that you and key staff members that have come with you spent most of your holiday season 6 weeks ago on the road in Asia. That effort, although it may not have been popular with your families, certainly has done wonders to indicate the nimbleness and effectiveness of our department in garnering sales for American products overseas. I look forward to your remarks.
Mr. BARRETT. Thank you, Mr. Minge.
Other opening statements may be submitted for the record.
[The prepared statements of Chairman Smith, Mr. Stenholm, and Mr. Thune follow:]
STATEMENT OF HON. ROBERT F. (BOB) SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON
Thank you Mr. Barrett. I congratulate you on holding this hearing on the effect of the Asian financial crises on U.S. Agriculture exports. This is a critical issue and one that has serious ramifications for U.S. agriculture exports.
The USDA tells us that U.S. agriculture exports will fall because of the Asian financial crises and may return to the lowers levels of 1995. South Korea, the Philippines, Malaysia, Thailand, and Indonesia are the countries where these major trade reductions can occur. These countries account for 12 percent of U.S. agriculture exports. Taiwan and Japan, where the financial problems are somewhat different, account for another 25 percent of our agriculture exports. So one can see that this is a serious matter.
Page 11 PREV PAGE TOP OF DOC I welcome Under Secretary Gus Schumacher and look forward to hearing what the USDA is doing to assure, at a minimum, retention of the U.S. share of the Asian market for agriculture. I am interested to know the extent of the USDA efforts and the specific effect of the Asian financial crises on U.S. agriculture exports to that region, both in the short and long terms.
I realize that USDA has recently provided $2 billion in GSM credit guarantees for that region. I will be interested in knowing whether there is a need for more GSM in 1998 or succeeding years.
Additionally, I will be interested to know if the GSM credit guarantees are available to all of the countries in that region and, if not, what other action can be taken to make sure that U.S. agriculture exports do not fall. Indonesia appears to be a particular problem. If GSM is not available to that country, because of its financial problems, what will USDA be able to offer?
Thank you, Mr. Barrett, and I look forward to hearing the testimony of the Under Secretary on this vitally important matter.
STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Thank you Chairman Barrett for calling this hearing, and thank you Gus, Chris, and Lon, for all of your hard work in Asia on behalf of our farmers and ranchers. Congress made a promise to agriculture when it passed Freedom to Farm. That promise was to help farmers cope with the removal of the safety net by expanding market opportunities abroad.
So far Congress has failed to keep its promise. The President still doesn't have the fast track authority he requested last year that would enable us to fully participate in the 1999 WTO negotiations on agriculture.
Today we will discuss another important opportunity for our producers. The opportunity to promote stability in Asian agricultural markets. As you know, Asia accounts for about 40 percent of our agricultural exports. USDA has forecast a 3 to 6 percent drop in those exports for fiscal year 1998 and 1999. Meanwhile, our currency is stronger than ever, measured both against Asian currencies, and against the Canadian and Australian dollars, putting us at a distinct disadvantage when it comes to competing for the Asian markets.
Page 12 PREV PAGE TOP OF DOC In this atmosphere, it is absolutely essential that we take steps to maintain the agricultural markets we have worked so hard to build in Asia. I commend you for your prompt action with the General Sales Manager's export credit guarantee programs. You have beat our competitors to the punch by making $2 billion in GSM102 export credits available for the region. Your quick response has kept us in the game, despite our strong currency, which has made our products more expensive.
Moreover, we are proving to our customers that we are a reliable supplier of food and fiber. And being a reliable supplier is an essential element in competing against other suppliers who have State Trading Enterprises, which have single desk buying and selling authority. Reliability of supply is a big factor in growing our long term market share.
The financial crisis facing Asia presents us with challenges and opportunities. So far you have met the challenge. And I encourage you to follow up on you work by taking a good hard look at the other tools we have available to keep our market share in Asia. Specifically, I would ask you to reexamine the EEP and cotton step 2 program and report back to me on how those programs might be used as the crisis situation in Asia plays out. As you can imagine, I have strong reservations about the decision in the President's budget to cut those programs. In fact, I think your recent success using the GSM program, which has been dormant in Asia in recent years, underscores the need to keep all of our export tools ready for use at a moment's notice.
I also encourage you to continue to look for opportunities to achieve long term reforms in Asia that will improve our market access there.
I will close by pointing out that without the IMF, USDA could not, nor would any of us want them to use the GSM program in Korea and Southeast Asia because, without it, we would not have a reasonable expectation of repayment. Without the IMF, agriculture would most certainly, and unnecessarily, have lost major market shares in the fastest growing markets in the world. Instead, we are in a position to make significant long term gains in those markets.
Page 13 PREV PAGE TOP OF DOC Let's keep our promise to America's farmers and ranchers by doing everything in our power to retain our Asian markets. Again, I thank you Chairman Barrett for holding this timely hearing, and congratulate you, Gus, on your agency's prompt response to the Asian financial crisis.
STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr. Chairman, I commend you for calling this very important hearing. Mr. Secretary, I thank you for your willingness to testify before the committee today.
In a very real way, the economic crisis in Asia has shown us the truly global nature of our economy. For agriculture, the status of economies around the world has a very important impact. American agriculture relies more on foreign trade than on domestic trade. The domestic market for U.S. farm products is relatively mature and slow growing. Export markets, however, are growing at more than three times the rate of domestic markets and are therefore a key to the future health and expansion of United States agriculture. In South Dakota, agriculture is our number one industry. Therefore, any negative national impact resulting from the financial crisis in Asia could negatively impact my state.
Production from more than one-third of harvested acreage is exported, including an estimated 55 percent of wheat, 35 percent of soybeans, and 18 percent of corn. All of these exports generate economic activity in the non-farm economy as well. It has been estimated that for each dollar received from agricultural exports in 1996, $1.38 was generated in supporting activities to produce those exports. Agricultural exports generated an estimated 895,000 full-time civilian jobs, including 562,000 jobs in the non-farm sector. While the United States generally has a negative trade balance, the agriculture sector consistently registers a large export surplus.
There are roughly 5.7 billion people in the world and by 2005, there will be more than 6.5 billion. Today, 95 percent of the population lives outside of the United States; in the future, this figure will be even greater. Fifty-eight percent of this projected growth will occur in Asia, 31 percent in Africa, and 9 percent in South America. Growing populations will require an increasing amount of food. Clearly, foreign markets represent the future of American agriculture.
Page 14 PREV PAGE TOP OF DOC To this end, the United States must strive to expand free and open trade with other countries. On the way to expanding markets, it is essential that we reduce or eliminate tariffs and subsidies that decrease market opportunities for United States exports or unfairly distort agriculture markets. Additionally, the U.S. must develop, strengthen, and clarify rules and dispute settlement mechanisms in order to eliminate unfair or trade-distorting activities of foreign governments and unjustified trade restrictions.
USDA has forecasted that U.S. agriculture exports will reach $58.5 billion in fiscal year 1998. This level takes into account a downturn of $500 million in the Asian region. Despite the financial crisis in Asia, this forecast represents a slight increase in exports over last year as a result of increases in trade activity expected with nations such as Mexico and Canada, and certain countries of the European Union.
As United States agricultural foreign trade goes, so goes agricultural foreign trade in South Dakota. Seven of South Dakota's top 20 export markets are Asian nations. These nations, which include Japan, Hong Kong, Taiwan, Malaysia, Thailand, The Republic of Korea, and Singapore, represent over 20 percent of South Dakota's total foreign trade in agriculture. Furthermore, South Dakota is the country's 19th largest agricultural exporting state, shipping over $1 billion in agriculture products abroad.
Aside from the direct impacts foreign trade has on the agriculture industry, agricultural trade also directly impacts the whole of South Dakota's economy. In 1995, agriculture contributed an estimated $15.1 billion to South Dakota's economy, providing tens of thousands of jobs. It has been estimated that one of every four jobs in South Dakota depends upon agriculture.
I therefore look forward to the testimony of Mr. Schumacher. Thanks again, Mr. Chairman, for your attention to this issue.
Mr. BARRETT. The Chair is pleased to acknowledge the Honorable August Schumacher, Under Secretary for Farm and Foreign Agricultural Services at the U.S. Department of Agriculture.
Page 15 PREV PAGE TOP OF DOC I would like to also add to Mr. Minge's statement how well you folks have worked with this subcommittee and with the full committee. We appreciate your efforts very, very much.
Gus, you may begin, but please introduce your staff members.
STATEMENT OF AUGUST SCHUMACHER, JR., UNDER SECRETARY, FARM AND FOREIGN AGRICULTURAL SERVICES, U.S. DEPARTMENT OF AGRICULTURE
Mr. SCHUMACHER. Thank you, Mr. Chairman and the members of the subcommittee. Lon Hatamiya, who is on my left, is the Administrator of the Foreign Agricultural Service, and Christopher Goldthwait on my right is the General Sales Manager and also is part of our team.
Mr. Chairman, I have a full set of testimony. I would like to enter that for the record and maybe I can make a short, brief statement.
Mr. BARRETT. Without objection, so ordered.
Mr. SCHUMACHER. Mr. Chairman and members of the subcommittee, I am pleased to be here with Lon and Chris to discuss our work the last few weeks in Asia and the work that we did over the Christmas holidays on the GSM allocations to Asia.
Secretary Glickman asked us to make the trip first and foremost to find out, as you have articulated in your opening statement, what is the effect of Asia's financial situation on the American family farmer and on agricultural trade. During the period January 12 to 24, Chris, Lon and I met with over 600 importers, bankers, private sector representatives, government officials and U.S. cooperators in Thailand, Malaysia, Indonesia, Singapore, Hong Kong, South Korea and Japan. As Lon said, it was sort of a ''Sleepless in Seoul'' effort, but it was a lot of hard work.
Second, we wanted to evaluate these countries' use of the $2 billion Commodity Credit Corporation, ''CCC,'' export credit guarantees. These were made, one being to Korea, and we increased the allocation to the other countries during the same time period.
Page 16 PREV PAGE TOP OF DOC Our third objective was to analyze the effect of the currency problems on the domestic food situation in the most heavily impacted countries, especially South Korea and Indonesia.
We wanted also to send a very strong signal to all of these countries. As Secretary Glickman has stated over and over and over again, the United States is committed to being a reliable supplier of food. Again, I want to repeat that. The United States is committed to being a reliable supplier of food. At times like these, that mandate means doing whatever it takes to keep exports moving such as providing the aforementioned export credit guarantees.
As Mr. Minge said, the Asian financial crisis certainly taught us that ours is certainly a global economy. East Asia, as John Barrett said, is a very important market, $23 billion, 40 percent; 45 percent American agricultural export growth.
I would like to take a minute to articulateit needs to be segmented a little bit. Maybe, Chuck, you could put up that first chart. This market really is in three parts. It is a $23 billion market. Seventeen billion dollars, however, goes to what we consider basically broadly stable countries of Japan, Taiwan, Greater China, Hong Kong, and Singapore. Now, that represents $17 billion of the $23 billion on the chart that Chuck is now putting up.
So you call that least affected; although, there will be some softening of that large market. More affected will be Malaysia, Thailand, the Philippines, and South Korea. That accounts for 9 percent of our overall exports. Frankly, we expect a softening in these markets.
That is what Chris and Lon have targeted with the $2 billion GSM102: $1 billion is for Korea and $1 billion is divided among the other four affected countries. Then, as you see in the chart, most affectedroughly, about $700 million in tradeis Indonesia. We expect little use of GSM programming there until the effects of the IMF stabilization-supported program begins to take a little firmer hold.
Page 17 PREV PAGE TOP OF DOC Despite these financial problems, as you have articulated, this remains an important market with considerable future potential. The factors that made Asia strong economically in the past will fuel its recovery in the future. Ultimately, the IMF-led reforms in these countries will lead to more transparent freer markets in which agricultural exports, as you pointed out Mr. Chairman, will find it easier to compete.
I think you did mention the IMF, and I wanted to mention that in passing here. I think it is crucial that we work to support this international effort lead by the IMF. This is very much in the interest of American family farmers and the American people. The IMFwhose mission is basically to promote financial stability, trade and economic growthis the right institution to lead the effort to help the impacted Asian economies.
Only if these countries have stable, liquid financially growth-oriented commerce will we see global trade including this important agricultural trade recover and reach new heights. In the short term, the IMF trade and investment funds are helping to steady the uncertain financial environment and provide the key liquidity to keep letters of credit open. That is critical to our commercial trade.
In the long term, you have pointed out the IMF supported trade liberalizing measures will benefit U.S. agriculture by ensuring that the structural reforms that we can articulate during a hearing will allow our products greater access to these markets. Many of these reforms and trade policy and import regimes will benefit the American family farmer, such as you have pointed out, the elimination of the monopolistic import practices in Indonesia and the reduction of tariffs in that country mandated by the IMF, and a requirement that Korea accelerate its efforts to open its economy to imports, eliminate trade barriers and to be more coherent to the WTO mandate on phytosanitary CODEX.
We are not, as Mr. Minge said, exporting in a vacuum. Our competitorsAustralia, Canada, New Zealand, and othersare expected to protect and support their trade interests. As we heard this morning, Australia has approved an additional $200 million for Korea in export guarantee insurance and the Australian Wheat Board has arranged a $20 million 90-day letter of credit to Korea for wheat. Canada has approved $24 million in export sales, again, for the Canadian Wheat Board to Korea. More equally importantly, the Australian, Canadian and New Zealand currencies have all fallen against the U.S. dollar, giving their exporters an obvious edge in competition.
Page 18 PREV PAGE TOP OF DOC We are exploring several options to keep the flow going to Southeast Asia, and I will conclude with that. One, we have provided the additional GSM to Korea. Just on Friday, Chris and Lon increased allocation within the unallocated for meat. We are going to increase and promote the use of supplier credits for higher value exports. We are considering the possible extension of P.L. 480 title I to Indonesia.
Lon is returning in March. We are sending a technical team out this month to do further technical work on how to operate GSM for bankers, importers in those affected countries. As Lon has mentioned, he and Chris basically met with 600 tradespeople to start that process going, and we are going to work with our cooperators to intensify market development efforts.
We met the cotton people out there, and they were doing a superb job of working with us underground in January in many of these countries. On GSM we are continually revising the changing creditworthiness of these overseas buyers. We are extremely prudent in the use. We follow this very, very carefully. Without the IMF, we would be very reluctant to operate and allocate these GSM programs as required by the Agriculture Trade Act of 1978.
Actual credit packages are subject to interagency review. Overall, we will continue to achieve balance between our twin objectives of promoting U.S. agricultural exports and operating Federal programs such as the GSM with fiduciary responsibility to the taxpayers and to you in Congress. Because agricultural exports are so important in terms of producer prices and farm income we will work to do everything possible to keep trade flowing to these very, very important markets.
Mr. Chairman, that concludes my statement. I will be very pleased to take questions.
[The prepared statement of Mr. Schumacher appears at the conclusion of the hearing.]
Page 19 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you very much, Gus. Given the current situation in the Asian markets, I was a little surprised that the administration's budget did not focus in that particular area. I believe as I looked at the budget very quickly yesterday the agriculture budget has been reduced from last year, the overall agriculture budget. I would appreciate your comments. I notice the GSM apparently has been reduced a little bit in terms of the 199899 expenditures. Can you speak to that?
Mr. SCHUMACHER. In the budget, the estimate was done. Often, these budgets are prepared far in advance, and the estimate for the GSM was put in at $4.6 billion. That was an estimate of what would possibly be registered. This was done well before, under the way it operates. Of course, we are able to operate that under the no less than $5.7 billion.
I think, Chris, we are now looking at allocations of, roughly, about $5.5 billion at this current time?
Mr. GOLDTHWAIT. For fiscal year 1998, we have so far allocated $5.3 billion.
Mr. SCHUMACHER. For that purpose, so that was a rough estimate and the GSM will be operated.
Mr. BARRETT. For 1999, the figure is what, Chris?
Mr. GOLDTHWAIT. The estimate prepared before the full impact of the Asian financial crisis was known was $4.6 billion, which is the figure in the budget. That is, however, not limiting. We have the full $5.7 billion authority.
Mr. SCHUMACHER. The President's budget certainly does not limit the use of the GSM as authorized and appropriated by Congress.
Mr. BARRETT. Your total GSM credits over the years have been somewhere around $55 billion or $60 billion? Is that, roughly, correct?
Page 20 PREV PAGE TOP OF DOC Mr. SCHUMACHER. I think, yes, about $58 billion is what is allocated, I believe, over the 18 years that the GSM has been operating.
Mr. BARRETT. Eighteen years. Can you give us the default rate?
Mr. SCHUMACHER. Yes. I am going to ask Chris who has been operating this for a lot longer than I have been here. Roughly, we have lost in the Iraq problem about $2 billion. As you recall, Congress asked to waive $2 billion to help Poland get its feet on the ground some years ago; so, roughly, $4 billion on $58 billion, about 6 percent over the 18 years. We have had very little or no default on any of the programs operated under GSM.
Mr. GOLDTHWAIT. That is correct, those were the only two significant losses or defaults.
Mr. SCHUMACHER. We were asked to do it by Congress to help Poland, and that has worked out, of course, quite well. Poland is back on its feet. Then Iraq, as you are well aware, was quite difficult.
Mr. BARRETT. Six percent default over 18 years?
Mr. SCHUMACHER. That is correct, sir.
Mr. BARRETT. Most bankers could live with that.
Mr. SCHUMACHER. As I said, we are careful fiduciarily in operating this program.
Mr. BARRETT. I believe USDA has said you are not going to be using any APE money?
Mr. SCHUMACHER. Well, we continue to have that under review and are watching the Europeans very, very carefully, especially recently. Right now, the GSM102 is much more of a laser operation and we were able to target that very aggressively in these markets.
Page 21 PREV PAGE TOP OF DOC Chris, do you want to expand on that a bit?
Mr. GOLDTHWAIT. Yes. We believe that in the Asian markets, in particular, the problem is a liquidity problem right now.
Mr. SCHUMACHER. Right.
Mr. GOLDTHWAIT. The GSM102 is the appropriate tool for addressing that issue. It is not a price problem, and we have even seen in Korea where a couple of corn shipments that were to have been sourced with cheaper corn out of China have now been switched to U.S. origin using the credit program.
Mr. BARRETT. Then, is the MAP program appropriate for this situation or not?
Mr. GOLDTHWAIT. Absolutely. I think we mentioned earlier in my remarks that the cotton cooperators were very aggressively operating while we were there and other cooperators working with the MAP program and the FMD program have been active and will continue to be even more active.
It is a very important issue, Mr. Chairman, that even though exports may have softened a little bit in certain countries, that we are keenly working with our cooperators for market presence that, again as I mentioned, we are a reliable supplier. We will continue to be a reliable supplier, and I think we need to have our private sector resonate that as well, that we are there even in difficult times.
Mr. BARRETT. A few weeks ago several, probably 20, exporters, agribusiness people, got together in my district and talked about the Asian crisis and how it had affected them, and almost to the person they said that they saw this coming. They saw it coming in the form of fewer orders and canceled orders and so forth. I guess my question to you is, Did the USDA see this coming; and if not, why not; and if you did, what did you do about it back then?
Mr. SCHUMACHER. Well, certainly in the fall as things softened a bit Chris was looking hard at that time in anticipation of a possible use of increased GSM. So when the actual applications came in, in a formal sense in mid-December, we were able to with expeditious treatment be able to deal with it very, very quickly.
Page 22 PREV PAGE TOP OF DOC Chris, do you have any further thoughts on that?
Mr. GOLDTHWAIT. Yes. We had anticipated that there would be some problems in Asia, particularly we saw what had happened with the devaluation of the Thai baht last July. So we had done some initial analysis. We were planning to increase the program allocations and to expand the use of the program to cover Malaysia. Some of that analysis had already been done, and so we were able to do the additional work we needed to do during the month of December quite quickly.
Mr. BARRETT. But you saw this starting in July?
Mr. GOLDTHWAIT. We saw this. I do not believe we saw the full weight of the financial crisis by any means, but we had anticipated that there would be some demand certainly for the expanded use of the GSM program.
Mr. SCHUMACHER. I think that one of the things that we certainly learned when we were in Korea was the severity of the suddenness in the stoppage of letters of credit. That is where the Korean private trade and the government expressed considerable interest in the GSM to get trade started again on such critical issues as feed grains, wheat, cotton, and some of the other key commodities to get trade back on track. For a period of time, there was a difficulty opening LCs. So that severity certainly, Mr. Chairman, you are correct, was not anticipated that they could not open LCs for a short period of time.
Mr. BARRETT. Thank you, sir. My time has expired.
Mr. MINGE. I would like to ask first if you could explain to us why you feel that this program is one that will not expose the American taxpayer or the U.S. Treasury to a loss, particularly if private sector lenders are competing with the Federal Government for repayment of their loans and these countries in Southeast Asia find their financial condition further deteriorates? Is this a risk that we are creating for the U.S. Treasurer, or is this something you feel we are adequately protected on?
Page 23 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Well, as we said earlier, our losses have been extremely small, 6 percent in response to Mr. Barrett's, Mr. Chairman's, comments. We are very, very prudent. I am going to ask Chris to walk through one minute how we assess risk.
I think equally importantly the fiduciary issue, we asked in the case of Korea for a government guarantee, and that puts us in a senior position to other more commercial trade banks if there were to be a problem. Also, that is the same thing we will be looking for in Indonesia as well. But we have been very, very careful. The Korean Government did ask for $1.6 billion. We were prudent, we felt, in allocating, committing, just $1 billion. We are monitoring that situation very, very carefully.
Chris, could you just take 1-minute on the fiduciary risk exposure?
Mr. GOLDTHWAIT. The GSM102 legislation basically tells us to take a measured degree of extra risk beyond what the private sector would do by itself without our participation or intervention. We developed our program allocations by beginning with a country risk analysis. It is very much the same sort of analysis that a private bank will do in setting its, a U.S. private bank in setting its, confirmation line for transactions with a particular foreign country.
We have in place a measured system to go a little beyond that limit when the market demand warrants, and we evaluate very carefully the financial situation of the country and the banks involved and the letters of credit that we will eventually guarantee in determining exactly how far further we can go and still remain prudent with the taxpayers' money.
Mr. MINGE. So you do not expect any greater exposure to loss here than you have had historically in the operation of the program?
Mr. GOLDTHWAIT. We do not.
Mr. SCHUMACHER. Korea is a veryyou know, once it bounces back, they have been very prudent in the way they have worked their recovery in a very short period of time. It is the eleventh largest economy before this happened in the world, a strong trading partner with some trade issues we had with them, and also it is difficult issues with North Korea there. We felt on balance that this was a prudent exposure to an economy that will bounce back, is bouncing back, and we are pleased to make that credit available in a timely fashion.
Page 24 PREV PAGE TOP OF DOC Mr. MINGE. Second, I understand that you are trying to emphasize in the extension of this credit a guaranteed program the sale of value added products, whether it be meat or poultry, things that have a higher value to our agricultural economy as opposed to straight raw products that do not have value added to them yet?
Mr. SCHUMACHER. That is correct, Congressman. During our discussion with our Korean colleagues, which were very productive discussions over the holidays, we agreed to add soybean meal to the corn in that category. We also agreed to add meat and also horticultural products. We agreed mutually to do that for the benefit of both sides. I am very pleased that the meat allocation was one that was taken up with alacrity. Lon announced an extra $50 million within the allocation on Friday.
I understand, Lon, that has been already committed?
Mr. HATAMIYA. As of yesterday evening, that additional $50 million has been registered, so $100 million of meat sales to Korea have already been registered.
Mr. MINGE. Well, I note that the price of hogs is depressed. The extent to which you can extend even more of that credit, I know that hog producers and farmers generally perhaps would be very pleased.
Mr. SCHUMACHER. Well, we made, I think, $11 million available on pork, and we will continue to work closely with the [National] Pork Producers on the GSM and with pork producers generally on some of these issues.
Mr. MINGE. Could you explain for the benefit of the committee and any others that may read this testimony how this program benefits John Q. Farmer as opposed to the large grain company or someone that is actually involved in merchandising? How does this benefit the small producer?
Mr. SCHUMACHER. I will start, and maybe my two colleagues can also support us. I think as you also earlier articulated, that let us take cotton, for example, when we were working with the cotton producers and cooperators they indicated to us that this was very helpful to them so the contracts which were higher priced before the problems hit were honored through the GSM.
Page 25 PREV PAGE TOP OF DOC Chris has mentioned the diversion of Korea to American corn when they were going to buy from China. The number of boatloads were diverted, and of course certain groups were not too happy with me or with Chris and I and Lon of the alacrity of the GSM. They did not anticipate it would move so fast. We gained market share and maintained market share. I think we cannot really say that prices have gone up purely because, but I think the little firming in prices we have seen in some of the commodities has been reflected a little bit in the markets because of the way this is operated in a timely fashion.
Lon and Chris, do you want to expand?
Mr. GOLDTHWAIT. I think the program has several different advantages that it conveys. But I think what is most important for the family farmer in this country is that the program actually expands the liquidity in the trade finance system. It expands the importer's buying power beyond what it otherwise would be. So that importer can buy more in a particular year because the banks that are involved in the process pass some of the risk back to us that would otherwise be to the importer. We are actually expanding the volume of trade. We are saying because this can only be done if the products are sourced in the United States. But that expansion in flow of trade has to come back to the United States.
Mr. SCHUMACHER. That, in fact, is occurring, Congressman, in a number of commodities. Because we are hearing from our competitors very strongly that they have made some interesting comments about this operation of GSM perfectly legal. In fact, we were there in a timely fashion. In fact, we worked closely in a partnership with our trading partners in Korea and in other countries to reassure them that we will continue to use all of the tools that you in Congress provide us to make sure American family farmers benefit and the workers that handle these products.
Mr. MINGE. Thank you.
Mr. BARRETT. The gentleman from Oklahoma, Mr. Lucas.
Page 26 PREV PAGE TOP OF DOC Mr. LUCAS. Thank you, Mr. Chairman.
Mr. Under Secretary, could you expand for just a moment on your discussion about credit financing programs that some of our fellow exporters who export into that region have? Of course, when I think of that, I think of the Canadians the Australians, and the New Zealanders. Could you expand for just a moment on what kind of efforts they participate in, in this area?
Mr. SCHUMACHER. Well, one of the things I think that in the past some of our competitors who have wheat boards have had a little advantage over the American wheat farmers in exporting, especially Indonesia and some other countries in that regard. I think that the GSM, frankly, has leveled the playing field a little bit.
I also should mention that we were very pleased to see the IMF take a very strong view on the activities of the importing of food to Indonesia, which in the long termeven in the short term, I think, would be of great benefit to the United States. Because that market, frankly, we were locked out of because of the activities of an exporter and state-traded importer who had a pretty good lock on that market.
With the IMG not only assisting in reducing the tariffs from 20 percent to 40 percent to 5 percent on the food to Indonesia, but also breaking the monopoly, I think over time the GSM has, frankly, leveled the playing field and to some extent given us a little competitive advantage in the short-term.
Mr. LUCAS. It would also appear that this liquidity problem they may have in some ways was tailored made so that the GSM program gave us a certain advantage at the right time in December and January?
Mr. SCHUMACHER. It was very important, the timeliness of this. The letters of credit, there was some difficulty in being opened. I think what Chris and Lonthe timely operation of that program during the Christmas holidays, working closely with our Korean counterparts through the partnership we worked very closely with Korea and Seoul to make that timely certainly helped to stabilize the food importing situation. Now some commercial letters of creditconfidence, Congressman, in the trading system, and that is what that program that you have given us was designed to do.
Page 27 PREV PAGE TOP OF DOC Mr. LUCAS. In fact, there may be a little bit of a bright side in this difficult situation from the perspective of my producers and that with this enhanced confidence and being able to move in ways perhaps that our competitors are not quite able to do in these difficult times we might actually have a net positive long-term effect from this?
Mr. SCHUMACHER. Well, again, as I have stated several times, it is very important to let people know ''We will use all the tools you provide us to assure our trading partners, especially in Asia, Korea and Japanwell, not Japan but Korea and other countries thatwell, first, all countries that we are a reliable supplier. I think this has sent a good, strong signal to our friends in Asia that we will continue always to be available to them, even with this liquidity and other problems, for their food needs.
Mr. LUCAS. Is it fair to say that some of our fellow exporters in the region now are trying to play catch up along these lines?
Mr. SCHUMACHER. I have seen some press reports recently that indicate that is the case.
Mr. LUCAS. Thank you, Mr. Under Secretary.
Thank you, Mr. Chairman.
Mr. BARRETT. We yield to the ranking member of the full committee, Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. I have a statement that I would like to have inserted at the proper place following yours and Mr. Minge's opening comments.
There are just a couple of overall observations and then one question. Mr. Chairman, I commend you for holding this hearing and focusing the attention of the problems in Southeast Asia and how it affects agriculture of all of our states and all of our commodities in a very meaningful way.
Page 28 PREV PAGE TOP OF DOC Regarding the questions and your opening statement surrounding IMF, I think it might be very, very positive for you to consider perhaps working with Chairman Smith who has also been very instrumental in a positive way for agriculture and trade measures to consider having Secretary Rubin and perhaps Alan Greenspan come before us and answer the questions that all in farm country have concerning the IMF bailouts, and the questions particularly Mr. Minge was asking. I make that as a suggestion for your consideration.
One thing we need to keep in mind on the Agriculture Committee is Congress made a promise to agriculture when we passed Freedom to Farm, and that promise was to help farmers cope with the removal of the safety net by expanding market opportunities.
Now, Congress has not kept our share of the bargain as yet. We have not passed fast-track authority, which the President asked us for so that we can be a meaningful participant in the 1999 WTO negotiations in agriculture. Now, some are already talking that we are not going to provide the IMF funding.
You have already heard Under Secretary Schumacher strongly state without IMF backing the activities that you and Chris and Lon have done in a very timely way could not have been done for the reasons of which you, Mr. Minge, were asking the question regarding solvency and making sure that we protect our taxpayers' interest in any kind of loans that we make from the GSM102.
I think that it is very important that we continue to focus on those and to recognize that just as, Under Secretary Schumacher, you have used in a timely way the tools you had available to you, using the GSM102 program, doing it in a timely way in which we were there when we needed to be there and have gained somewhat of an advantage for many of our producers because we were there and other countries were not.
Now they are crying about it, but in the past we have been the ones because we have not had all the tools available. In this case, we did have one. Now, my question and I want you to keep looking at EEP and step 2 in cotton and beef and other programs as we continue to move into this to see how those tools can be utilized, those that we have provided for you.
Page 29 PREV PAGE TOP OF DOC Also, under the GSM102 program, $100 million has been allocated for the financing of certain facilities in foreign countries to enhance export sales. The committee is informed that agricultural attaches in Asia and other regions have referred a number of potential users of this program to CoBank, which has provided $22 billion in agricultural export financing since 1982, about 40 percent plus of the total GSM funding. Unfortunately, CoBank currently lacks the clear authority to provide GSM financing for such facilities in many cases.
Do you agree that it would help to maximize the benefits of the facilities financing program if a greater number of financial institutions with expertise in agricultural export financing such as CoBank had the clear authority to participate in the facilities financing program?
Mr. SCHUMACHER. Mr. Chairman, that is a very good question. We worked hard on that. CoBank is the leading partner with us in GSM102 overall. Chris Goldthwait has worked very hard on the facilities and the suppliers' credits in terms of their new authorization.
Chris, do you need further thoughts on whether we need further legislation on that facilities credit?
Mr. GOLDTHWAIT. Yes. I would agree that we do need to work very closely with CoBank. I believe it is really up to them whether they want to seek some changes in the charter that would enable them to participate in the facilities program, but we plan to meet with them in the next few days to discuss this issue and to be helpful to them in any way we can.
Mr. STENHOLM. By that it would not require legislation?
Mr. GOLDTHWAIT. I am not sure whether it would require legislation. We need to have that meeting with them before I can answer that, I am afraid.
Mr. STENHOLM. Well, that answers my question. You are going to have the meetings and whatever action required, I am sure you will report to the chairman.
Page 30 PREV PAGE TOP OF DOC Mr. Chairman, I would certainly be interested in working with you, if that proves to be a new tool or an additional tool to help us with some of these financing opportunities that we have.
Again, I commend you, Mr. Chairman, for your leadership on these trade matters, and I appreciate it.
Mr. BARRETT. Thank you, Mr. Stenholm, and I appreciate your suggestion about inviting Mr. Rubin and others to share with us as well. I think that is a very good suggestion. I am sure it can be done in the near future.
The gentleman from Kansas, Mr. Moran.
Mr. MORAN. Thank you. Mr. Chairman, first of all, I would like to submit for the record the letter that my predecessor, Senator Pat Roberts, has circulated and sent to the Secretary of the Treasury concerning the desirability of increasing trade with the Asian community, particularly as we look at this substantial role that we may have in trying to bail out the economies of Asia.
[The letter from Senator Roberts appears at the conclusion of the hearing.]
Mr. MORAN. I want to make certain that trade barriers come down. I think Senator Roberts has written a very useful letter in that regard, and I would like to have it submitted for the record along with my statement.
Mr. Under Secretary, I was glad to see that your written testimony talks about trade barriers. You talk about Korea and Indonesia. What else is going on? What else can we expect to pursue in regard to reducing those trade barriers if we are going to get involved with the International Monetary Fund in assisting these economies?
Mr. SCHUMACHER. Yes. This is a very important issue. We were very pleased the IMF package in Indonesia, as I said earlier, has basically called on the elimination of any statement on importing of wheat and soybeans. They had tariffs on food 20 to 40 percent. IMF has basically said that must be dropped to 5 percent February 1, and that is now effective. They have also called for the elimination of subsidies on grains, which will gradually take place over time. I think also improvement in the banking system so we do not get these problems again, so that letters of credit will again be open.
Page 31 PREV PAGE TOP OF DOC In the case of Korea, a number of steps were taken, again by the IMF, to benefit the American family farmer and benefit all farmers, and that is: eliminating trade-related subsidies on food; phasing out the import diversification program; dealing with the number of items subject to a variable adjustment tariffs; harmonizing is very important for meat and horticulture, harmonizing the import certification procedures for the WTO, especially under CODEX alimentarius; and then, finally, trying to expedite their port clearances when they would take 4 to 6 weeks to clear a container or two. That was ridiculous. The normal port clearances are 5 days. So a very strong package by the fund, and we are going to work with them very closely.
Mr. MORAN. Mr. Under Secretary, you talk in your testimony about Indonesia and about Korea. Are we having the same impetus on trade barriers coming down in other countries that we are dealing with? In Korea, your testimony says that the agreement specifically requires, ''...create a move towards trade liberalization.'' I assume it is something more specific than simply asking for trade liberalization.
Mr. SCHUMACHER. Yes. That is why, for example, one of the issues on meat, now they had some less than fully scientifically based areas based on E. coli, and I think that we are going to get more by going with the CODEX alimentariusI have worked with the Korean Government on that as wellthat we can get some further progress so we have science-based standards as the port clearance procedures take place.
Chris, you had a couple of comments on Thailand, I think?
Mr. GOLDTHWAIT. Yes. Basically, the IMF packages are calling for reforms across the board in four areas in all of the countries that have IMF programs: reforming the banking system, reforming the investment system, reforming internal trade; all products, including agricultural, commodities; and tariff reduction. Obviously, the tariff reductions are the ones with the most immediate interest to us. But some of the other reforms that are required are also going to be helpful to us in the longer-term.
Page 32 PREV PAGE TOP OF DOC For example, in Thailand they had an export credit system, not a whole lot different from GSM, except they have used subsidized interest rates, which we do not consider to be fair trade. Ours are all commercial interest rates. Now, in response to the IMF guidance, Thailand is going to have to eliminate the subsidy on those interests, and our rice would be more competitive in world markets as a result. So these are just some of the kinds of things that they are doing.
Mr. MORAN. Reform in those four areas is required before the IMF assistance?
Mr. GOLDTHWAIT. It is required to be implemented over time. What IMF often does is trench the provision of the funds that they are making available to these countries. They have benchmarks, they have discussions about whether those benchmarks are achieved or whether there is lagging.
Mr. MORAN. I want to make sure I understood correctly. I think in response to an earlier question you indicated the additional $50 million in beef products was approved in regard to Korea?
Mr. SCHUMACHER. Yes. On Friday afternoon, Lon Hatamiya approved that and now they are being approved that and now they are being set to $100 million beef products and pork.
Mr. MORAN. Mr. Under Secretary, I could not have somebody of your stature and knowledge without asking the question that I ask USDA on almost every occasion. EEP, are we making any progress, any movement toward this administration finally making a determination whether or not we are going to use EEP for wheat and flour?
Mr. SCHUMACHER. Well, I think the key one here is that the GSM102 was the tool of target, the tool of opportunity that was particularly suited for these markets, and we are picking up market share. EEP has a wider, broader impact, and we are certainly looking heavily at flour. Chris is working hard on that issue.
Page 33 PREV PAGE TOP OF DOC Mr. MORAN. My question was broader than Asia as well. I want to again encourage USDA every time this question is raised it is some interagency group that is meeting to determine these issues, and I would like to see a quicker resolution of the issue of the use of EEP and the Department taking a lead in promoting its utilization.
Thank you. Thank you, Mr. Chairman.
Mr. SCHUMACHER. Thank you, Mr. Moran.
Let me advise the members of the subcommittee that we apparently have two 15-minute votes, one in progress now followed by another 15-minute vote. So I think we will try to continue the hearing as we can move back and forth. I would like to have everybody have an opportunity to ask questions, if you wish.
Mr. Johnson, would you care to ask questions?
Mr. JOHNSON. No.
Mr. BARRETT. All right. Mr. Cooksey?
Dr. COOKSEY. Mr. Under Secretary and staff, I first went to Southeast Asia in 1969 on a Government-paid trip, but I have since been back as a visiting professor of surgery. I have done surgery lectures over there. One of my concerns about IMF funding, and IMF funding is fundamental to accomplishing some of the sales of our agriculture products, is that we are basically going in and propping up countries that have been guilty of crony capitalism.
The worst example of that is Indonesia. The Suharto family skims some portion off of every business deal that goes through that country. I think that a lot of people in my district, and I have a largely agricultural district, but even though I have a lot of people that would like to see our products exported there, there are a lot of people that would rather see the Suharto family live under the same rules, economic rules, of capitalism, market forces and bankruptcy than to be propped up by the IMF, by the American taxpayers. I think that is something that you are going to have to address and deal with.
Page 34 PREV PAGE TOP OF DOC You know, I get two different points of view in my area. My farmers want to export their products, but there are a lot of people who do not feel that the American taxpayer should bail out our bankers in New York or wherever that have participated in these loans or that the American taxpayers should bail out or continue to subsidize the crony capitalism that some of these countries have been guilty of.
Mr. SCHUMACHER. Well, I will reply on two parts. One, what was so fascinating to me about our visit to Indonesia was how rigorous the IMF package was precisely, Congressman, on this point. Twelve of the ''cronyist'' deals, they were eliminated by the IMF package including one to particularly benefit agriculture in the wheat importing area. Clothes, the monopoly of exports on clothes, many others in agriculture were mandated to be eliminated and returned for IMF support.
On the wider issue of support of the IMF, as I mentioned earlier, without the IMF we would not operate these programs. Particularly if we look at what happened in Mexico when we worked together in getting that stabilized, that has come back very strongly and we have now moved now record exports of food and other agricultural commodities, $5.8 billion. There was a very solid bounce back compared to what happened in 1982 when there was not a package and there was a 7 or 8-year bounce back.
I think it is difficult, but I think the benefit to the American family farmer of a strong financial package, getting liquidity started again and reducing and eliminating crony capitalism, that is already underway.
Dr. COOKSEY. Thank you, Mr. Chairman.
Mr. BARRETT. Thank you, Mr. Cooksey.
Dr. COOKSEY. Incidentally, I heard your other discussion earlier, and it was good. It was very informative. I was impressed that some of you over there spent your Christmas holidays trying to represent our farmers and our agricultural interests while the rest of us were back here celebrating Christmas.
Page 35 PREV PAGE TOP OF DOC Mr. SCHUMACHER. I should clarify. We were here working with our friends and colleagues. We were negotiating during the Christmas holidays, and then went out right after that to have these detailed discussions.
Mr. BARRETT. Mr. Minge is on his way back, hopefully, and then I will vacate the premises, but in the meantime there a couple of questions. Does the European Union provide any credit guarantees to any of these nations that are in difficulty?
Mr. SCHUMACHER. I think, Chris, there is COFAS in France. But could you expand on that a little bit?
Mr. GOLDTHWAIT. The European countries have credit guarantee programs that are very similar to ours. They are not EU programs. They are national programs: COFAS in France, HERMIS in Germany and several others, the British have one. They are not the heaviest traders in the East Asian region. Geography confines their activity to a few of the higher value areas. They have some ongoing credit activities with these countries, but they have undertaken no major new initiatives in contrast, for example, to Australia which has followed our lead in that.
Mr. BARRETT. I believe it was Mr. Stenholm who mentioned the DEIP program. As I recall, dairy exports did increase a bit, was it the last part of maybe of last year? But it is also my understanding those allocations are about ready to run out. What is the Department going to do, if anything, in that area?
Mr. SCHUMACHER. Secretary Glickman has encouraged us to use DEIP at the absolute maximum level, and I think we have been achieving that in recent months. Because we are running up against our ceilings on that a little bit as well, I believe.
Mr. GOLDTHWAIT. Yes. We expect to use the full GATT limited authority that we have for DEIP in the current accounting period. The accounting period runs from July 1 through June 30, and so far in that time we have used, roughly, 80 percent of the percentage we are allowed to use, and that includes all of the tonnage we anticipated using in Asia. As I say, we expect to use the full tonnage this time around.
Page 36 PREV PAGE TOP OF DOC Mr. BARRETT. That time period again is what?
Mr. GOLDTHWAIT. It runs from July 1 through June 30.
Mr. BARRETT. Thank you. I wonder for the record if you could not explain to me and for the record supplier credit guarantees and facilities financing guarantees?
Mr. SCHUMACHER. Please do that.
Chris has worked very hard on this doing the farm bill workup. He has been working hard to make these more effective in operation.
Mr. SCHUMACHER. The suppliers credit guarantee program is basically one that supports exporters who are willing to make credit available to their foreign buyers on an open account basis. Say, an exporter of horticultural products is willing to make available $50,000 of credit to a Mexican buyer, what we will do is say ''We will give you a credit guarantee for half of the credit you make available, so that you can expand that $50,000 to $100,000. Again, it is an effort on our part to increase the volume of trade financing in the system.
The facilities program operates a little differently. It is an authority which allows us to provide financing for the American component portion of a facility that is being constructed in a foreign country. It could be a grain discharge facility or it could be cold storage in some foreign destination, and the idea here is that we will do this only where the product that will be moved through that facility on an import basis is likely to be a U.S. agricultural product. So that is the concept behind the facilities program. We operated in a way that is similar to the financing programs of Export-Import Bank offers for similar programs.
Mr. BARRETT. Thank you.
Mr. MINGE [presiding]. Thank you. I see I do not have a lot of colleagues here, but I understand that several of them are coming back. I have a couple of questions that I would like to ask in this next round.
Page 37 PREV PAGE TOP OF DOC First, I would like to know how you would handle a situation if you have $100 million of credit authority that you have decided to commit to a certain country and for a certain category of agricultural products, and you have customers or private sector parties that would like to utilize $200 million of your credit authority, so they all submit proposals, how do you decide which ones you will guarantee the sale price and which ones you do not?
Mr. SCHUMACHER. That is an excellent question and Chris you just go over a little bitit is not easy. We have so many competing from the importing countries, and we get lots and lots of letters from our exports as well, so it is a very carefully worked through allocation process. Lon and Chris are responsible for doing the major allocations, and I want to ask Chris to outline typically as we look at this on a more regular basis and when we have some liquidity problems I would do it on an expedited basis.
Mr. MINGE. Yes. The ultimate limit, in this case the $100 million you are citing, is derived through our creditworthiness analysis and contrasting that with what we think the market gets. We set the country limit for the program that way. The initial commodity mix depends on whether or not we ask the foreign country for a sovereign guarantee. If we do, we basically negotiate the commodity mix with that country as is the case with our Korean program. If not, we survey those American exporters and trade associations that we know of who have interest in exporting to that country, and we simply list all of their products on the commodity allocation. We then put out a press release which announces the eligible products and announces the total limit for that country. At that point, it is basically a first come, first served basis. The exporters are provided with the information on how by telephone to register for coverage, and it is allocated on a first come, first served basis.
Mr. MINGE. So if you receive the request for your guarantees on the same day, are all requests received on the same day on a parallel basis, or is it as they come into your office on a minute-by-minute basis?
Page 38 PREV PAGE TOP OF DOC Mr. GOLDTHWAIT. It is as they come into the office on a minute-by-minute basis. They can either phone or they can fax. In either case, we know the time. We know the order in which we receive the requests, and we simply allocate them on first come, first served until we run out.
Mr. MINGE. Do you have smaller producers, even farmers that participate in this program, or is it exclusively large cooperatives or multinational firms that are participating?
Mr. SCHUMACHER. Mr. Minge, we have hundreds of prequalified farm groups, cooperatives, companies and others that are eligible. Last year, I believe 170 entities were able to operate in the GSM program.
Would you care to clarify that Chris for the congressman?
Mr. GOLDTHWAIT. Yes. We had 170 firms that actually participated in fiscal year 1997, and we made a particular effort to get out and to contract small and medium-sized businesses, taking some of the smaller commodity groups that perhaps in the past we have not focused on so much. So we really do try to get the word out to people about the program, about how easy it is to participate, and we have an increasing number of participants. I would like to give you just one example. Last year, we had one cooperative which did over $130 million dollars worth of business under the program.
Mr. MINGE. With respect to the Southeast Asia situation, if the IMF had not extended its financial resources to assist the countries involved, would you have used the GMS102 program?
Mr. SCHUMACHER. Most unlikely. We needed the IMF in terms of what we said earlier. The fiduciary protection of the CCC Multicredit Corporation in the reconciliation both within our department and within the interagency really mandated that we have an IMF stabilization package in place, otherwise they would not have met the creditworthy tests that would have allowed the $1.5 billion increase to be allocated in a timely fashion.
Page 39 PREV PAGE TOP OF DOC Chris, do you care to expand on that?
Mr. GOLDTHWAIT. No, I think that is it.
Mr. SCHUMACHER. It was crucial the IMF was in place, otherwise we would not have had it in such a timely aspect. We simply would not have been creditworthy. We did not have IMF working very hard not only to ensure the liquidity and get the currency somewhat stabilized or stabilized in some countries now, but also the more structural side.
You know, we talked about the ''crony capitalism,'' the elimination of export and import monopolies, the improvement of the CODEX and many other areas that they have gone beyond the liquidity to get into some of the structural side as well. It really was a two-for, and we were able then to make it a much smoother operation. It was quite critical that we have that done.
Mr. MINGE. If we had not had the programthat is, the GMS102what do you expect would have been the difference for American agriculture?
Mr. SCHUMACHER. It is very hard to predict, but certainly we would not have been ablein the case of Korea we had a really excellent relationship with Korea during these negotiations. It would have been very difficult. They might have opened LCs, but it would have taken a lot longer. There were some pretty crucial times there that we needed to get LCs open and the
Mr. MINGE. Excuse me. By LCs, you mean letters of credit?
Mr. SCHUMACHER. Letters of credit, right.
It was a liquidity problem in several of these countries. Without the IMF, we could not have opened the GSM. But it would have been very difficult I think, and the GSM played a major role in certain countries in increasing confidence in a timely way of getting trade back moving again so that the commercial sector once the IMF stabilization could begin to also open.
Page 40 PREV PAGE TOP OF DOC We exported $4.5 billion worth of food, and our GSM is only $1 billion, so it is really only 22 percent of our overall trade in Korea. It is important that stabilization takes place so that normal commercial trade can take place and can keep moving products into that very important market.
Mr. MINGE. Do you think it has any impact on our future sales of agricultural products to those countries?
Mr. SCHUMACHER. Well, I think when Lon and I and Chris were there we were warmly welcomed by both private and public members and government members of Korea. We have excellent working relationships with the embassy staff here, and work smoothly through these negotiations. Hopefully, when they continue in more and more private sector, they will look to us as a reliable supplier of quality, safe food. Hopefully, we have been there for them, and, hopefully, they will be there for us.
Mr. MINGE. Is this program operated at essentially no net costs to the U.S. Government? By that what I mean putting to one side the Iraq and the Poland experiences which you outlined earlier in your response to questions, do we charge fees that reflect the cost of administering the program and the risk that is involved, the default, things such as that, or is this a program which is subsidized at a fairly significant level by the Federal Government?
Mr. SCHUMACHER. Yes, there are fees charged, and I am going to ask Chris to articulate, to outline those fees.
Mr. GOLDTHWAIT. Yes. The program is from the administrative standpoint at least pretty much self-financing. We do collect fees. The fee structure is relatively modest. We keep the fees low because the legislation has limited us to no more than 1 percent. But, nonetheless, we collect several million dollars a year in fees, and that enables us to say that effectively the administrative cost of running the program are more than covered. Now, that money does not come directly to us at the USDA, it goes to the general Treasury account, but the amount of the money is more than enough to cover the administrative costs of the program.
Page 41 PREV PAGE TOP OF DOC Mr. MINGE. At this point, I would like to call on my colleague Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. I would just like the record to reflect that for the first time this Congress we have a Democrat majority on this committee, and it feels so good. [Laughter.]
To the matter at hand, actually I thought Congressman Cooksey made a very important point being discussed in my district and virtually every rural district is this for the New York bankers or is this for the farmers and their markets? Certainly, the quick take on this might be that it is for the bankers. Yet, Korea alone represents, to my knowledge, the fourth largest export market for U.S. agriculture. I believe that without question agriculture is a primary stakeholder in this issue and would like you to speak to that.
Another thing that the congressman stated regards Suharto. Unfortunately, in wrestling with an issue of this complexity, often the personalities of the actors involved does become important. I think it would be particularly unfortunate if Suharto in Indonesia somehow was a milestone around the newly elected Kim Du Jong in Korea, particularly in terms of the respective equities involved as well as the respective impact to our market. I would like to leave aside Suharto, who we know a lot about, and have you also speak to the President-elect, Kim Du Jong and what his prospects for reform, significant reform, in the Korean governance and economy might be.
Mr. SCHUMACHER. Thank you for the two good questions, Congressman. First, on the bankers versus the family farmers question. I have read the financial press pretty carefully and I noted some of the major bankers are taking some pretty heavy hits on their balance sheets. As we said, we have been very prudent in the use of GSM, and the congressman, the chairman, has mentioned we have not taken that type of loss. But I think that the bankers are getting a cold shower in some of the lending that is going on, and I think that the IMF has mandated a number of these countries and the additional thinking that is going on in the financial circles in the future will be very salutary. I think Mr. Suharto has also gotten a cold shower. As I mentioned earlier, a variety of the crony capitalism has been eliminated now if that works out.
Page 42 PREV PAGE TOP OF DOC I must confess in Korea, I must be very commendatory of the way we have worked with Korea during a presidential election and the succession. The government has worked with us smoothly, both the incoming and outgoing government. I think even during a succession this democratic process in an unstable part of the world, they have to be commended as to how they got on top of this during a democratic process.
I think we just have to be very proud of the way that democratic system has worked, the way the food situation was taken care of or being stabilized and how the succession is being carried on, how the negotiations, firm negotiations between officials in New York have taken place so that it has been fair and stabilized. I think most important is the family farmers here that are benefiting, especially some of the big commodity ones.
Mr. POMEROY. Countries are far from homogenous units. I mean, Korea represents, to my understanding, 200 percent of the combined market of Indonesia, Thailand and Malaysia, the other three principal countries involved. In looking at the Asian crisis, is it fair to say at least for agricultural purposes it is disproportionately a Korean crisis that must command our attention?
Mr. SCHUMACHER. Well, that is why I think Lon and Chris are to be commended for when we did the GSM during the Christmas transition it was $1 billion that was put out. Secretary Glickman was extremely supportive when we met with him and he counseled us to not only do that in an expeditious fashion, but then, as I said in my testimony, asked us to go immediately to the states to reassure them that we are going to be a reliable supplier. The Secretary, I want to keep repeating this, constantly said we will be a reliable supplier to all customers, especially to Asia. I think the Secretary's support, we worked hard to achieve that commitment.
Mr. POMEROY. In addition to the GSM program and the impact it will have for market expansion, for which you are to be commended, you have indicated the IMF itself has driven home some reforms that will be significant in this area. That includes the phony phytosanitary standards?
Page 43 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Yes. In Korea, there was the importance of moving forward consistent with the WTO and consistent with the CODEX alimentarius, which is part of the WTO, so we are beginning to move a little faster on the port clearances and be a little more consistent on the E. coli, for example, that in the past has I think unfairly impeded our meat exports to that big market.
Mr. POMEROY. Is it also fair to conclude that the IMF requirements are transparency in the structure of their financial services industries, allowing the capital to be allocated on an economic basis as opposed to government directive or ''crony'' capitalism will as a long-term matter be something that perhaps does more to ensure open market and fair trade as any other component the IMF is driving?
Mr. SCHUMACHER. That is correct, Congressman.
Mr. POMEROY. I see my time is up, Mr. Chairman. I appreciate the opportunity to ask questions.
Mr. BARRETT [presiding]. Thank you.
One of the scenarios, Gus, that I have seen recently predicted that the currency devaluations in Asia will hurt the U.S. in rural competition and pressure imports. Is there not a disparity in that statement? Isn't that almost a dichotomy? I am not following it.
Mr. SCHUMACHER. Well, for example, you know, if you would, put up the chart, Chuck, here on the currency devaluation chart on the ''Depreciations of Selected.''
You can see some of the major Philippines, Malaysia, Thailand, Korea, and of course Indonesia. But also, the Japanese and the Singapore. That has softened a bit as well. Now, some of these countries are major competitors of ours in, for example, poultry. Thailand is certainly much more competitive now than Singapore, Japan and Hong Kong on poultry on the poultry/meat. I think we are still quite competitive on things like chicken feed and other things that there is a big demand for, $340 million in China.
Page 44 PREV PAGE TOP OF DOC But market share is going to be an important issue. I think Australia is going to have to value it a little bit as well, and they are going to be as this works through a little more competitive. We have a strong dollar. I think that is part of the success that we have moved forward the last 82 months, and the stock market certainly has reflected that.
I think on the currency we are going to have to watch this very carefully. That is why I think the GSM the way Lon and Chris have operated it has been very helpful in indicating how reliable we are, and we are going to continue to be as competitive as we can.
The other big issue of the GSM is that it reopens the whole issue of state trading. I think that we still are quite grouchy about the Australian Wheat Board and the Canadian Wheat Board as somewhat unfair in the way that they have been able to capture market share. I think this sends a clear signal that we are going to continue to pressure them with the tools that you in Congress have provided us.
Mr. BARRETT. That aggressiveness is rather nice to see. As somebody suggested earlier, it seems like we have been wagging the tail of the dog too many times.
Indonesia, you put in your third tier, did you not?
Mr. SCHUMACHER. Yes, sir.
Mr. BARRETT. Are they creditworthy enough right now?
Mr. SCHUMACHER. Well, I thinkand, Chris, you may want to come in on this and, Lonthat as the continued work of the IMF and now the World Bank is very active as well in looking to get the government to look more to working with the private sector it is beginning a little bit to stabilize. There is a little light there.
We are being very, very careful on the operation of the GSM at the moment in Indonesia, watching it very carefully. We have excellent staff here. Ambassador Stapleton Roy is doing a super, fine job. But it is $700 million, and we are just going to have to work through that very, very carefully.
Page 45 PREV PAGE TOP OF DOC Mr. BARRETT. Chris?
Mr. GOLDTHWAIT. I will add just one word, if I may. We were beginning to get very concerned about our program for Indonesia about 10 days ago when we saw the continued problems that they were having. At that point in time, many of the IMF guided reforms gave us renewed confidence that we could leave our program for Indonesia in place. Now, as Under Secretary Schumacher said earlier, we do not expect for you to see a lot of use of the program in Indonesia until things further stabilize, but I suspect that perhaps a month or a few months from now particularly for key commodities things will change.
Mr. BARRETT. You are looking at a financial crisis, a market crisis in Indonesia. You are also looking at a political crisis, are you not? Isn't that impacting?
Mr. SCHUMACHER. Yes. There are elections I think coming up in March. There is another factor as well in Indonesia that we have not articulated, and that is, there was quite an impact of El Nino, that certainly the drought has compounded a financial economic issue. We are watching that very, very carefully. It has particularly impacted on rice and the importance of letters of credit. We are going to keep you informed very closely, Chairman and Mr. Minge, on how that works itself out. Two hundred million people in a very important country, our exports are growing faster, and, more importantly, is the stabilization politically and socially well. But I think over the years we have shown generosity, and we have also shown reliability. We are going to continue to work very closely with you to make sure that the large population keeps stabilized.
Mr. BARRETT. Thank you. Finally, I was interested in Federal Reserve Board Chairman Greenspan's comments the other day. It was prior to a 201 point increase in the Dow Jones, I guess. But anyway, and I am quoting, ''We have as yet experienced only the peripheral winds of the Asian crisis.'' He further predicted that ''The full effect of slowing growth from the fallout in exports to Asia and intense competition from cheap Asian imports will be felt before spring is over.'' Any comments?
Page 46 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Well, I think that my statement, there is no question that our overall exports in agriculture are softening not only because of the Asian crisis, but because of some strong dollar in other markets as well. But I think without the way the Secretary has asked us to be aggressive in the use of the GSM, that has given us a little stability certainly on the higher value issues. We are going to work with you closely on supplier credit and other to see if we cannot maintain some market share in these very important countries. For example, Australia now cannot ship, they were shipping 400,000 feeder cattle into Indonesia. That market has ceased. Well, there are 400,000 cattle that will have to find a home somewhere and that could come into this country. These are issues we are going to monitor very carefully and keep you closely informed on.
Mr. BARRETT. Are you in general agreement with that statement, that they full impact will be felt before spring is over?
Mr. SCHUMACHER. Well, we also look at the commodity markets. They have firmed up a bit. We are going to watch this pretty carefully. But cotton firmed up, corn seems to be a little stronger, and we are going to have to watch soybeans. Argentina has a very large crop coming down. So we are going to keep watching this very, very closely and we will see how these winds work through our own economy. As we say in Spanish, let us wait and see.
Mr. BARRETT. Thank you.
Mr. MINGE. Thank you, Mr. Chairman. I do not have further questions, but I do have a series of five questions that were submitted by another member of the subcommittee and I would like to have those included in the record and furnish those for the witnesses.
Thank you very much.
Mr. BARRETT. With that, I fully expected two or three of our members to return, but inasmuch as they have not. This hearing is concluded. We thank you very much again. Also, I would seek unanimous consent to keep the record of today's hearing open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a member of the panel. Without objection so ordered.
Page 47 PREV PAGE TOP OF DOC This hearing of the Subcommittee on General Farm Commodities is adjourned.
[Whereupon, at 3:25 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of August Schumacher, Jr.
Mr. Chairman, members of the subcommittee, I am pleased to appear before you today with Lon Hatamiya, Administrator of the Foreign Agricultural Service, and Christopher Goldthwait, General Sales Manager, to discuss our recent fact finding mission to Asia.
Secretary Dan Glickman asked us to make the trip to first and foremost, find out what the effect of Asia's financial situation will be for American agricultural trade. During January 1224, we met with over 600 importers, bankers, private sector representatives, government officials, and U.S. commodity representatives in Thailand, Malaysia, Indonesia, Singapore, Hong Kong, South Korea, and Japan. We also met with our agricultural attaches in these countries as well as those assigned to the Philippines, Taiwan, China, and Vietnam. Second, we wanted to evaluate these countries' use of the $2 billion in Commodity Credit Corporation (CCC) export credit guarantees. Our third objective was to analyze the effect of the currency problems on the domestic food situation of the most heavily affected countries, especially South Korea and Indonesia.
Global Impact on U.S. Agricultural Exports
The Asian financial crisis has taught us that ours is indeed a global economy. East Asia is an important market for America's farmers. Overall, it accounts for 40 percent of our agricultural exports, or $23 billion annually. During 199197, Asia accounted for 45 percent of our export growth.
In our analysis, the current Asian market can be divided into three tiers based on financial stability:
Page 48 PREV PAGE TOP OF DOC Countries in the first tier, Taiwan, Japan, China, and Singapore, will continue to show stability in most products with some softness in higher value consumer products and limited impact of the strong dollar. These countries accounted for 30 percent of our agricultural exports in fiscal year 1997.
The second tier countries, Malaysia, Thailand, the Philippines, and South Korea, account for 9 percent of our exports. We expect a softening in exports to these markets and we have targeted them through export credit guarantee initiatives totaling $2 billion . Of this, $1 billion is for Korea and $1 billion is divided among the other countries.
Indonesia, which we put into the third tier, imported $767 million of U.S. agricultural products in fiscal 1997. It will be the most seriously affected in the short term. We expect little use of GSM programming here until the effects of the stabilization program begin to take hold.
With respect to agricultural trade in Malaysia, Thailand, the Philippines, South Korea, and Indonesia, the most immediate affect has been a dramatic across-the-board slowdown in the willingness of importers and their banks to enter into new import commitments during December and early January. This is understandable, since currency fluctuations made it virtually impossible for importers to price imports in local currencies.
U.S. agricultural exports will be lower in fiscal years 1998 and 1999 compared with what they would have been without the Asian problems. The effect will be greater than the Department's initial estimate of $500 million, but it is difficult to say how much more. The effect will depend on many things, including the use of our GSM programs, the progress in stabilization of Asian economies, and the degree to which these countries implement structural reforms and liberalize their import regimes as called for by the IMF and World Bank reform packages. USDA will release its next forecast for fiscal year 1998 agricultural exports on February 23.
Page 49 PREV PAGE TOP OF DOC It is important to keep in mind that despite financial problems, Asia remains an important market with much potential. The factors that made Asia strong economically in the past will fuel its recovery in the future. These include a high rate of savings, low inflation, a well-educated population, and economies that, for the most part, are still growing. The medium-term fundamentals will become sound with the elimination of financial restrictions, reductions in government directed investment, and elimination of monopolistic trade agencies. Ultimately, the IMF-led reforms in these countries will lead to more transparent, freer markets in which U.S. agricultural products will find it easier to compete.
This relatively optimistic outlook depends on these governments taking some tough medicine and making some difficult changes on how the business of government and the private sector is conducted. Most of the Asian officials with whom we met seem ready to grapple with this challenge. But only a few of the difficult steps have been taken. In most cases, the short-term negative economic effect of these measures has yet to be felt.
Supporting the International Effort
Before I go into more detail on how the Asian financial crisis will affect our exports by country and commodity, I would like to take a minute to make the extremely important point of how crucial it is that we work to support the international effort, led by the International Monetary Fund, to help countries in the region help themselves. That is very much in the interest of America's farmers and the American people in general.
The IMF, whose mission is to promote financial stability, trade, and economic growth, is the right institution to lead the effort to help the affected Asian economies. Only if these countries have stable, growth-oriented economies will we see global trade, including agricultural trade, recover and reach new heights.
The stakes are too high for inaction. USDA is working with the Department of the Treasury, the IMF, and the World Bank to maintain the flow of U.S. agricultural products to Southeast Asia and to help our Asian customers weather their financial storms. The IMF-led financial assistance plans in Thailand, Indonesia, and South Korea are critical to our efforts. The recovery of U.S. agricultural exports will depend on the success of IMF-led efforts to stabilize the Asian economies and bring about structural reforms and trade liberalization.
Page 50 PREV PAGE TOP OF DOC In the short term, the IMF-supported trade and investment reforms are helping to steady the uncertain financial environment, which is critical to commercial trade.
In the long term, IMF-supported trade liberalizing measures will benefit U.S. agriculture by ensuring that structural reforms will allow our products greater access to these markets. Together, the IMF plans and the GSM export credit guarantees will help ensure that the United States remains a reliable supplier of agricultural products to the region. Without IMF support and reforms, we would not feel comfortable in making our large GSM102 allocations and our GSM credit guarantees will not be used, thus reducing our exports.
I would now like to provide you with more details on how the Asian financial crisis is expected to affect agricultural trade.
Asia is expected to account for most of the decline in exports we anticipate for the current fiscal year. South Korea, Malaysia, Thailand, the Philippines, and Indonesia are the countries where we expect to see the major part of the reduction with only limited reductions in Japan, China, Taiwan, and Singapore.
Based on observations during this trip, high-value products, such as horticultural products, red meats, poultry, and processed foods, will be the hardest hit sector. Grain and soybean exports will be less affected.
Demand for basic food commodities and inputs for export industries will rebound more quickly since these products are critical to the healthy recovery of the economies in the most affected countries. Banks and governments will favor imports of these products over consumer-ready items for both economic and policy reasons, to ensure the basic availability of food stuffs. Therefore, U.S. exports of these products, such as wheat, corn, and cotton, will hold up better and will recover faster. Another key factor in how U.S. trade with the region preforms will be the strength of our dollar compared to the Canadian and Australian dollars.
Page 51 PREV PAGE TOP OF DOC The countries we visited can moderate the affect of currency devaluations and deal with the credit crunch by using GSM export credit guarantees. In these circumstances, export credit guarantees can be very effective in fostering and maintaining normal trade links.
In general, we found a high level of interest in using the GSM programs, particularly in South Korea. However, some countries are unfamiliar with how the program works, so while we were in Asia, our General Sales Manager, Chris Goldthwait, conducted three seminars with importers and bankers in Malaysia, Thailand, and Korea. We will send a technical team back to the region very soon. When banks and importers understand the program better, we think use of it will pick up.
Trade Policy Impacts
The imposition of IMF-supported economic reforms are resulting in strides in trade policy and import regimes benefiting U.S. agriculture. For example, Indonesia, effective February 1, reduced tariffs on imported food products from the 20- to 40-percent range to a top rate of only 5 percent. More than 500 tariff line items have been lowered. As a result, U.S. producers are more competitive.
The IMF structural adjustment package calls for BULOG (Indonesia's sole importer of wheat, wheat flour, rice, sugar, garlic, and soybeans) to relinquish monopoly control of imports of wheat, wheat flour, soybeans, sugar, and garlic. Rice will remain under BULOG's control. Lifting of BULOG's monopoly of wheat imports and wheat flour distribution could increase exports of U.S. wheat. In recent years, the U.S. share of Indonesia's wheat imports has normally not exceeded 10 percent due to competition from Australia, which has proximity and freight advantages and a monopolistic wheat board. However, two new, smaller Indonesian mills are likely to aim toward quality and specialty markets that require higher protein wheat, potentially boosting U.S. wheat sales to this growing, 4.5-million-ton market.
In addition, the Indonesian government has agreed to dissolve APKINDO, its Hardwood Plywood Marketing Board, effective February 1. This could offer increased opportunities to U.S. exporters of wood panel products over the long term. However, these opportunities may be difficult to seize in the short term, since the sharp devaluation of the Indonesian rupiah has made Indonesian wood products very competitive.
Page 52 PREV PAGE TOP OF DOC In Korea, the IMF agreement specifically requires Korea to move toward trade liberalizationa move that would resolve several longstanding problems for the United States.
In January, Korea began to harmonize its standards with international codes, which will increase access for U.S. exporters. Korea is also moving to revise pesticide tolerance levels in harmonization with CODEX, which will allow U.S. orange shipments to enter Korea unimpeded. Korea agreed to eliminate restrictive licensing which provide Korean food industries with needed inputs at lower prices and could lead to the solution of a number of longstanding access problems for U.S. exporters of such items as corn grits, soyflakes, and peanuts.
We can expect our competitors in Australia, Canada, and New Zealand to protect their trade interests in the region. Australia has approved an additional US$300 million in export credit insurance for Korea. Beef and wool are expected to be the primary Australian agricultural products to benefit from their program. In addition, the Australian Wheat Board arranged for a U.S. $20-million 90-day line of credit for wheat sales to Korea. Canada recently approved U.S. $24 million in export credits for Canadian Wheat Board (CWB) sales of wheat to Korea and is exploring similar options for Indonesia and Thailand. The New Zealand Government is encouraging firms to remain involved in Southeast Asia and work to maintain their relationships.
Adding to the competitive pressure is the fact that the Australian, Canadian, and New Zealand dollars have all fallen against the U.S. dollar, which gives their exporters an obvious edge in competition with U.S. exports.
In response to our fact finding trip, USDA is exploring several options to keep the flow of U.S. agricultural products to Asia. These options include:
Page 53 PREV PAGE TOP OF DOC Additional GSM102 export credits for South Korea. Korean government officials and Korean importers asked us to increase the $1-billion allocation for GSM102. Depending on the pace of utilization of the initial allocation and the stabilization of the Korean economy, we indicated that we would consider a modest increase later this fiscal year, such that might cover additional commodities.
Increased promotion and use of the Supplier Credit Guarantee Program to support exports of high-value products. Governments and banks in the most seriously affected countries are reluctant to finance imports of non-essential products, including high-value products. Thus we are promoting use of the Supplier Credit Guarantee Program for high-value products. This program puts buyers and sellers directly together to make sales; it may be particularly helpful in mitigating the cuts that high-value product exporters are expected to face in the Asia.
Possible extension of P.L. 480 title I to Indonesia. Because Indonesia is the hardest hit of the economies, we are looking closely at a Public Law 480 title I sales agreement with Indonesia. P.L. 480 resources are tight in fiscal year 1998, but we are reviewing a possible reserve allocation that might provide wheat for sale in local currency to Indonesia's two new flour mills.
Technical seminars on the GSM102 program for bankers and importers in the affected countries. We intend to do more work to educate importers and banks in Thailand, Malaysia, Indonesia, and the Philippines about the workings of our GSM102 program. FAS staff will travel to Asia to conduct additional technical briefings for bankers and importers to explain in detail how the program works to create more interest in participating in the program, and to make the program more accessible to a wider variety of users.
Intensify market development efforts. We plan to intensify our market development efforts through the expertise of our market development cooperators and Market Access Program participants. It is particularly important that we maintain a presence in these markets, even for commodities and products that may see a downturn in sales in the short term.
Page 54 PREV PAGE TOP OF DOC As we discuss options to boost U.S. agricultural exports to these troubled markets, it is important to state USDA's commitment to sound financial management of our programs. USDA analysts continually revise the changing creditworthiness of these overseas buyers, determine the appropriate amount of debt each can handle, and in general apply commercial standards in the GSM programs, as required by the Agricultural Trade Act of 1978, as amended. Actual credit packages are subject to inter-agency review. Overall, we will continue to achieve balance between our twin objectives of promoting U.S. agricultural exports and operating Federal programs with fiduciary responsibility to taxpayers and the Congress.
The outlook for American agriculture is closely linked to our export efforts and the overall recovery of these economies with the benefit of IMF support. Because agricultural exports are so important in terms of producer prices and, ultimately, farm income, we at USDA will be working to do everything possible to keep America's farm trade flowing to these critical markets.
Statement of the National Cattlemen's Beef Association
NCBA commends Chairman Barrett and the subcommittee for holding hearings to address the status of beef trade and projections for trade in light of the recent financial crisis in Asia, and for your continuing efforts to improve the export outlook for U.S. agricultural products. Expanded access to international markets is critical to the economic growth of U.S. agriculture. During 1996, beef exports accounted for approximately 8 percent of total U.S. production and more than 12 percent of beef's wholesale value.
Only 4 percent of the world's population lives within U.S. borders. Population demographics suggest that the U.S. generally, and agriculture specifically, need to aggressively prepare to seize opportunities to market products in countries with younger, fast-growing populations with increasingly disposable incomes. In spite of the current cris is, expansion of marketing opportunities continue to exist in many Asian countries. During 1996, beef and beef variety meat exports totaled $3.05 billion and generated a trade surplus of $1.27 billion. When cattle and by-product values are includedtallow and untanned hides (not leather and manufactured goods)the value of beef-related exports totaled $4.8 billion during 1996 with a trade surplus of more than $1.8 billion.
Page 55 PREV PAGE TOP OF DOC During 1996, approximately 76 percent of all U.S. beef exports were sold into the Asian markets that are now in various stages of currency devaluation, economic reforms and recession. The price of U.S. beef has more than doubled to many Asian consumers due to currency devaluation. The Asian crisis will likely impact the already struggling economy in Japan. In the absence of expanded economic reforms and tax cuts, the continued strength of the U.S. dollar versus the yen and increasing unemployment increase the likelihood of recession in Japan. As the Asian economies slow and the devaluation of Asian currencies reduces the purchasing power of consumers in those countries, demand for U.S. agricultural products will falter. In the case of beef, this reduced demand will be further compounded by the fact that the Australian dollar and the Canadian dollar have also devaluated relative to the U.S. dollar, adding to the price advantage for beef from U.S. competitors.
The value of beef by-products (approximately $100/head of cattle) will also be affected by currency devaluation. During 1996, the total value of U.S. cattle hide exports totaled more than $1.125 billion. Korea purchased 40.2 percent of all 1996 U.S. cattle hide exports. Japan, Taiwan, China/Hong Kong, and Thailand combined to purchase another 39 percent. The cost of hides to processors throughout Asia has approximately doubled due to the devaluation of various currencies. In recent weeks, the decreased demand for hides and variety meats has contributed to a $30/head decline in value.
Increase GSM Funding: Before the main impact of the financial crisis became evident, Korea was the fourth largest export market for beef and beef variety meats. Through November 1997, exports of these products to Korea totaled nearly $287 million, an increase of more than 23.5 percent compared to the same time in 1996. NCBA is confident that Korea remains a long-term growth market for beef that is being disrupted by short-term currency fluctuations and financial circumstances.
Page 56 PREV PAGE TOP OF DOC Swift, decisive and bi-partisan action will be required to minimize effects of the Asian financial crisis on the U.S. beef industry and the broader U.S. agricultural economy. NCBA and other meat industry representatives met with USDA officials early in the crisis to request that GSM funds be made available for credit guarantees to Asian customers. The industry original request was for $500 million in credit for exports of beef and pork to Korea. USDA subsequently allocated $100 million to beef, pork, poultry and horticultural products out of a total $1 billion GSM funding for Korea. Another $1 billion of GSM funding was made available to other Asian countries.
Nearly all of the $50 million GSM credit guarantees made available a few weeks ago for meat and certain horticultural products was immediately exhausted. It is NCBA's understanding that the Korean Government requested most of that allocation for beef and other value-added meat products. NCBA has urged USDA to make the additional $50 million of the original GSM allocation for meat and horticultural products immediately available for Korean customers and to allocate additional GSM credit guarantee resources targeted for export of beef and other value-added meat products. Australia recently announced a credit guarantee program for Korea, and other competitors are sure to follow. Increasing the allocation for GSM credit guarantees now will build additional loyalty among Korean customers and increase future U.S. market share.
IMF Funding Package
IMF-led financial assistance plans in Thailand, Indonesia and Korea are critical to the success of GSM credit guarantee packages. The impact of the Asian financial crisis on U.S. agricultural exports will depend on the success of IMF efforts to stabilize the Asian economies and bring about structural reforms and trade liberalization as called for by the IMF and World Bank reform packages. In the short term, the IMF-mandated trade and investment reforms will help stabilize the Asian markets and help ensure the financial stability and, in the long term, IMF-mandated structural reforms will help ensure greater access to those markets through liberalized trade measures and policies.
Page 57 PREV PAGE TOP OF DOC The IMF plans to improve financial stability should help make it possible for importers from Asian countries to utilize the GSM export guarantee program. The IMF plan, combined with the GSM export credit guarantees, will enable to keep servicing those markets thereby ensuring that the U.S. is seen as a reliable supplier of agricultural products, including beef. Without the IMF package, the GSM credit program would be of little use in helping resolve the Asian economic crisis.
NCBA urges the administration to continue pressuring the Asian countries to improve access for U.S. products into markets in countries receiving IMF and GSM assistance. We have provided a list of access issues and tariff rates in each of the affected countries to USDA and Treasury officials and to Congressional Agriculture Committee staff. Some will likely question and criticize U.S. assistance to Asian businesses. It is important that Congressional leaders and U.S. business interests work to educate the public that this assistancei.e., these long-term loansis designed to alleviate short-term credit shortages. Experience suggests these type of loans have an excellent record of being repaid with interest. It is also important for the public to understand that, by including in these plans efforts to eliminate restrictive trade barriers for U.S. agricultural products, we not only increase demand for our goods, but we also can benefit consumers in the affected countries by providing a greater supply of food at a lower price.
Reinstate Fast Track Negotiation Authority.
IMF stabilization packages and GSM credit guarantees will help reduce the impacts from the Asian financial crisis on U.S. agriculture. But even with these measures fully funded and in place, it is likely that U.S. agricultural exports to the Asian region during the next several years will decline. USDA is now projecting a 5 percent decrease in the value of total U.S. beef exports during 1998. Declines of 10 percent and 25 percent are projected for Japan and Korea, respectively. USDA now projects 1998 fed-cattle prices to increase only 3 percent above the 1997 average of $66.10/cwt.down from earlier projections of a 10 percent price increase.
Page 58 PREV PAGE TOP OF DOC Realistically, it will take 2 to 5 years for the Asian economies to recover. In the case of Mexico, U.S. beef exports declined by approximately 60 percent during 1995, the first year after devaluation of the peso (approximately 50 percent decline in purchasing power). Beef exports to Mexico recovered part of that loss during 1996 and, during 1997, U.S. beef exports to Mexico were on target to reach record levels. Recovery in Asia will depend on the willingness and political ability of the various governments to implement economic reformsclosely associated with the willingness of international lenders to extend creditand the extent to which competitive devaluation of international currencies continues.
An additional key to sustaining export market growth is gaining and maintaining access to emerging international markets in Europe and Latin America. Access to these markets will be increasingly critical to help off-set expected declines in historically important Asian export markets. The U.S. must continue to be aggressive in gaining access to new markets around the world. Fast track authority is a critical element of that strategy.
The U.S. must also hold its trading partners to commitments agreed to in previous trade agreements. NCBA appreciates the initiatives that have been undertaken to gain access to international markets and to resolve lingering issues that restrict the ability of the U.S. beef industry to offer its products to international consumers. Without fast track authority, the U.S. will lose the initiative in gaining access to emerging markets and enforcing existing trade agreements.
The National Cattlemen's Beef Association is prepared to participate in the process of evaluating critical trade issues within the beef industry. NCBA looks forward to providing additional input as the U.S. addresses other trade issues, including accession of China to the WTO, resolving a host of access issues with the European Union and passing fast-track legislation to provide authority to negotiate additional trade agreements. Thank you for the opportunity to present this information.
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Statement of P. Scott Shearer and Nick Giordano
Thank you for scheduling hearings to consider issues related to the Asian financial crisis. This is a serious situation in which the United States needs to act expeditiously to help stabilize Asian economies. It should be matched with Congressional approval of fast track negotiating authority which holds the potential for greater long term economic stability and opportunity for American industries.
The AG for Fast Track coalition came together last year to underscore the importance of trade to U.S. agriculture. Our coalition of agricultural producer and farm groups, trade associations and companies today has 71 members, representing American agriculture's diverse interests in all 50 States.
Very simply, for American agriculture, it is ''export or die.'' One third of U.S. agricultural production must go into export markets just to maintain farm income. To increase income, we have to increase exports. In order for U.S. agriculture to grow and prosper, we must be able to serve growing markets overseas. Trade for U.S. agriculture is not a luxury; it is a necessity.
In the aggregate, Asia is American agriculture's largest market. Sales to Asia account for 40 percent of total U.S. farm exports, valued at $23 billion. Asia also has been the fastest growing market for American agriculture, buying a range of products, from basic agricultural commodities to processed products to high-value foods and food products. This relationship is important for it bestows upon Asian customers the benefits of improved diets while resources are freed up from inefficient or inadequate food production systems. For American agriculture, this trade relationship provides the opportunity for the sector to do what it does bestproduce and market a wide range of high quality, sought-after foods and food products. That, in turn, provides American agriculture with economic growth and creates U.S. jobs in rural, suburban and urban communities.
Page 60 PREV PAGE TOP OF DOC The impacts of financial instability and currency devaluations in a number of Asian countries are significant to our sector. USDA estimates the short term impacts may be a 3 to 6 percent decline in total U.S. farm exports this year. USDA has stepped into the crisis, extending some $2 billion in credit guarantees to the most seriously affected nations, in an effort to keep the flow of vital food and fiber continuing through most difficult months ahead. These efforts are appropriate for humanitarian, political and strategic reasons, and they may leave American agriculture more competitive in Asian markets once the current crisis has passed.
In the long term however, American agriculture's overall competitiveness will be determined by a number of factors. Most important among them is whether there is continued progress in opening markets and lowering trade barriers, basing health and safety regulations on sound science, ending market distortions and applying the principles of fair commercial trade around the globe. These are the stakes of upcoming regional and multilateral trade negotiations. They will determine long-term economic stability and growth in Asia and around the world. They will determine how American products and services compete in markets here and overseas.
Attached to this letter is an editorial that appeared in the January issue of the Farm Journal underscoring the urgency of Congress approving fast track in 1998. We ask that along with this letter, it be made a part of the hearing record.
In the long term, trade liberalization will prove to be the key to continued economic growth and political stability around the globe. No initiative is more important to this process than the passage of broad, clean trade negotiating authority like those contained in the House and Senate fast track bills. Authorities limited to sectors or regions will not yield the same opportunities for U.S. negotiators to address and resolve existing trade frictions, or to negotiate successful trade agreements on our behalf.
Farm Journal, Guest Opinion by Jerry King, January, 1998
Page 61 PREV PAGE TOP OF DOCExport or Die
American agriculture got a lump in its stocking this holiday season.
It came in the form of a key lesson about trade, one of the most contentious issues in Washington today. From the Canada-U.S. trade agreement to NAFTA to the Uruguay Round, trade pacts are under attack. Use of trade sanctions for foreign policy reasons is on the upswing. For some, trade is a tool to advance foreign policy, labor and environmental goals. As a result, fast track negotiating authorities didn't come up for a vote in 1997.
Fast track laid out a process for a series of trade initiatives to move ahead in a concerted fashion. Without that process, American agriculture is unable to open up trade and market opportunities for U.S. products around the globe.
The lack of negotiating authorities has enormous implications for our agricultural producers and the infrastructure that serves them. Unilateral economic sanctions lock us out of more than 10 percent of the world's wheat markets.
Several trade disputes remain unresolved because we don't have the authority to sit at the negotiating table.
Our competitors are making free trade agreements among themselves. As long as we sit on the sidelines, U.S. goods and services become less competitive in those markets.
To the extent that we exclude ourselves from formulating new trade agreements, U.S. priorities are frequently lost and forgotten. Gone are our efforts to lower trade barriers, to rely on sound science to guide health and safety regulations, to end market distortions and apply the principles of fair commercial trade.
Ironically, this situation occurs at a time when U.S. farmers and ranchers are adjusting to a new farm policy that requires them to earn more of their income from overseas markets.
Page 62 PREV PAGE TOP OF DOC It is hard to believe that American agriculture is in this predicament. We supposedly learned in the 1970's and 1980's it is ''export or die'' in American agriculture. The lesson wasn't free. Because of a series of agricultural export embargoes and a downturn in exports, agriculture experienced the largest financial crisis since the Great Depression just a dozen or more years ago. The seeds of that crisis were sown with our unrealistic expectation that world markets were ours for the taking. When U.S. agricultural exports stalled and then collapsed, farm income dived. Farmers couldn't repay banks' interest charges. Bankruptcies soared. Property values plummeted. It took more than $100 billion from the Federal Government between 1986 and 1990 to stabilize the farm economy and get U.S. agriculture competitive again.
Yet, we are flirting with a similar disaster today. We risk turning our backs on a world wanting for our exports. The quantities of agricultural sales put at risk without fast track negotiating authority dwarfs the quantities involved in the embargoes of the 1970's and 1980's. The potential opportunity loss is many times that! Yet, the U.S. agricultural community failed to convey the importance of trade agreements to Washington, even though our most recent trade pacts, NAFTA and GATT, have led to a sustained $20-billion increase in farm exports and the best economic times in many years. Action on Fast Track was deferred, in part because fewer than half of the members of the House Agriculture Committee agreed to support it!
The rest of the world seems to understand the urgency for action. They are choosing not to be on the sidelines as governments around the world are actively seeking liberalized trade and proceeding with negotiations to win it. Canada is negotiating with Chile. France and China are exploring their own free trade agreements with Western hemisphere nations. Mercosur, the free trade arrangement among South American countries, is growing because nations recognize the benefits of trade liberalization.
American agriculture needs to be leading that process. We know that people around the globe want what we take for granted herean abundant, safe, wholesome and nutritious food supply. They want to participate in the global economy, earn a living, care for their families, educate their children and extend to them greater opportunities than they themselves have had.
Page 63 PREV PAGE TOP OF DOC U.S. agriculture can serve global demand as efficiently and economically as any system. We can do this while setting new standards in protecting our environment. If we're successful, all of us in this food chain and in our communities are likely to reap substantial economic benefits.
Washington appears to need some direction from those of us American agriculture. We need to tell Congress that we must move ahead with our trade agenda, or surely we will fall behind.
Editor's Note: Jerry King, a Victoria, Ill., hog producer, is president of the National Pork Producers Council. He is also a member of the AG for Fast Track is a coalition of more than 70 agricultural trade associations and firms committed to U.S. leadership in trade liberalization efforts.
Statement of Donald A. Hilger
Mr. Chairman and members of the committee, I am pleased to submit this statement on behalf of the North American Export Grain Association to outline the significance of trade with Asia for American agriculture. My name is Don Hilger. I am an assistant vice president of Cargill, Inc., based in Minneapolis. The perspective I offer has been gained from my position as senior economist for Cargill's grain division.
NAEGA was established in 1912. It represents the companies and cooperatives that are the leading exporters of U.S. grains and oilseeds to customers around the world.
NAEGA supports authorizing $3.5 billion for the new account for New Arrangements to Borrow and $14.5 billion to cover the U.S. share of the international quota increase to replenish funding for the International Monetary Fund. Both are necessary to meet the demands of the current financial crisis in Asia. We urge the Congress to approve both tranches of funding promptly, without U.S. conditions, to deal with the immediate situation Asia and the world economies face from the current financial crisis. For the long term, Asian, and indeed global, economic growth and stability will come from the commercial ties and competitive disciplines emanating from trade liberalization. There is no getting around the absolute need for the United States to be fully engaged and providing leadership in regional and multilateral trade negotiations. That requires the approval of fast track negotiating authorities by this Congress. NAEGA urges the passage of fast track as soon as possible.
Page 64 PREV PAGE TOP OF DOC Financial panic and currency devaluations have cast a heavy shadow over Asia and clouded the economic and political outlook for a number of countries. At the minimum, the stalling of the tremendous Asian economic engine will slow Asia's growth and affect the global economy for the immediate future. Just how much and how long this uncertain period will last will be shaped to a large degree by the package of financial carrots and sticks extended by the IMF, and affected by the speed and level at which the IMF program is implemented.
The members of NAEGA provide many of the linkages between Asian consumers and American agriculture. As traders of grains and oilseeds to Asia and the rest of the world, we believe in the market system. We understand the concerns that arise from the appearance that IMF funding would bail out foreign creditors and banks that repeatedly refused to take well-founded advice to open markets and correct economic systems. It is difficult to accept that the assistance we are advocating may help foreign competitors get back on their feet. If the market is truly to work, these businesses ought to be closed and banks ought to fail and eventually, everything will sort itself out. As James Glassman quoted economist Allan Meltzer recently. ''Capitalism without failure is like religion without sin.''
But that is not the approach that the United States took here at home a few years ago. The same causes said to be behind the Asian crisisunwise investment, bad debts, cozy arrangements between borrowers and banks, and the lack of transparency without diligent financial regulation and oversightwere used to explain our own massive savings and loan crisis. In that case, the choice was made to stop the spread of the crisis, just as the IMF is seeking to restore order in the Asia region and stem any further upheaval. We recognized then that there may be other ways to effect needed change that do not require millions of innocent people to suffer wrenching unemployment, dislocation and hunger.
Acting affirmatively and expeditiously to contribute to this effort also is in our own interest. Asia is a major customer for U.S. food, fiber and forestry products. In fact, it is the largest single market for American farm goods, accounting for 40 percent of total U.S. agricultural exports. The Asian market has been the fastest growing for U.S. agriculture.
Page 65 PREV PAGE TOP OF DOC Behind that rate of growth are a number of factors. Asia is more densely populated than other continents, and its population is growing faster. Asia has experienced tremendous economic growth in recent years, and its people have followed the same path followed by hundreds of millions of others acquiring income: they improve their diets. Asia must rely to a larger degree on trade to supply more and better quality foods; land, water and other resources needed to produce additional food aren't readily available in many Asian countries.
With currency instability and devaluation, American agricultural exports to Asia have slowed in recent months. When currencies are in a free-fall, it is impossible for buyers to open the letters of credit that sustain regular commerce. Once currencies are stabilized, but with buying power reduced by as much as 40 to 70 percent in devaluation, buyers generally must reduce their reliance on imports.
Just what does that mean for U.S. agricultural exports to the hardest-hit Asian countries? We already are feeling a slow-down in exports, but the effects in agriculture may not be as great as other exporting sectors will face. In the countries where financial problems are concentrated, we are likely to see a reduction in higher value agricultural exportsin other words, we may export less processed foods, meats, fruits and vegetables. However, reliance on basic U.S. agricultural products is strong in these countries where grains, oilseeds, cotton and hides are staples or inputs to manufactured goods. Despite the financial crisis, there will continue to be imports of vital goods to maintain food supplies and to keep industries running. Trade, facilitated by the extension of USDA GSM credit guarantees, is resuming as IMF programs take hold.
That fact raises an important point about food trade and its role in developing secure and long-lasting relations with many Asian nations. Efficient food trade is a key to the advancement of developing countries in Asia and elsewhere in the world. In the developing world, people must spend the majority of their incomes for food. When they can obtain food more efficiently, more income is freed up for other purposeseducating children, acquiring medical care, raising standards of living, protecting resources and generating wealth. In other words, agriculture is a primary building block of an economy.
Page 66 PREV PAGE TOP OF DOC In recognition of that, the U.S. National Center for APEC has launched an initiative called the ''Open APEC Food System.'' If realized, this system may ''achieve the most efficient, cooperative, reliable safe, secure and sustainable food supply to all of APEC.'' I ask that a copy of the National Center's proposal be included in the record.
Prompt IMF funding is strategic to a broad initiative that can build and maintain long-lasting relations between the United States and Asia. No other institution can play the role that the IMF must in this crisis to end the downward economic spiral and to achieve the reforms that will strengthen the economies of affected Asian countries. The agreements the IMF has achieved in recent weeks appear to address cronyism, to open economies for competition, and to meet a number of liberalization goals that U.S. companies have been seeking for years. We believe that progress should not be encumbered with conditional funding from United States.
But IMF funding is only the first step. Unless it is followed with the more important initiative of trade reform, the United States will not reap as many of the benefits accruing from the IMF program as will our competitors who are committed and active in trade negotiations. Let us be clear about this: as other nations conclude free trade agreements among themselves, U.S. products become less competitive in those markets. To the extent that we exclude ourselves from participating in the formulation of new trade agreements, U.S. prioritiessuch as our efforts to lower trade barriers, rely on sound science to guide health and safety regulations, end market distortions and apply the principles of fair commercial tradeare placed at risk.
NAEGA members strongly urge you to match IMF funding with prompt approval for the United States to enter and provide leadership in specific trade liberalization efforts. Like our colleagues at the witness table today, we support broad, clean fast track authorities. Very simply, U.S. leadership at the negotiating tables where the rules of trade are to be defined is critical to American agriculture being able to compete and prosper in the years ahead.
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