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House of Representatives,
Subcommittee on Livestock,
Dairy and Poultry,
Committee on Agriculture,
Washington, DC.
    The subcommittee met, pursuant to call, at 1:10 p.m., in room 1300, Longworth House Office Building, Hon. Richard W. Pombo, (chairman of the subcommittee) presiding.
    Present: Representatives Goodlatte, Smith, Lucas, Blunt, Peterson, Johnson, Dooley, Farr, and Boswell.
    Also present: Representative Kind.
    Staff present: Lynn Gallagher, senior professional staff; Christopher D'Arcy, subcommittee staff director; John Goldberg, professional staff; Brent Gattis, Keith Menchey, Callista Bisek, Wanda Worsham, clerk; and Andrew Baker, minority associate counsel.
    Mr. POMBO. Good afternoon. Today's hearing is the third in a series of hearings planned for this subcommittee to examine trade issues affecting the commodities under our jurisdiction. Specifically, our purpose this afternoon is to inquire as to the status and prospects for U.S. trade between Australia and New Zealand in the area of livestock, dairy and poultry products.
    As Members of Congress address the increasingly important policy matters dealing with international trade such as the World Trade Organization's talks on agriculture scheduled for next year, hearings like this are designed to detail where we stand today, and to highlight paths for progress tomorrow in both the reduction of trade barriers and the expansion of market opportunities.
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    This hearing today is especially timed for another reason. Recently, I was glad to have had the opportunity to join Chairman Smith and eight of my other colleagues on a trade expansion delegation to Australia and New Zealand. The report of the delegation's visit will be entered into the record of today's hearing.
    [The information appears at the conclusion of the hearing.]
    Mr. POMBO. The trip brought into sharp focus many of the important trade issues between the United States, Australia and New Zealand, from the policies of the APEC nations to the importance of improving market access for American salmon and poultry.
    We also discussed ongoing changes to Australia's export meat inspection system, more commonly known as Project 2, and the Food Safety and Inspection Service's review of it. Currently, Tom Billy of FSIS is in Australia consulting on this important matter, and this subcommittee will look forward to hearing from him concerning this on his return.
    Also of considerable interest to this subcommittee is the matter of state trading enterprises. Countries with STEs can act as both government regulator as well as market participant. Therefore, they can behave in such a way as to protect their domestic producers, possibly to the disadvantage of American farmers.
    I believe that it is important to ensure that all STEs abide by GATT and WTO rules, ensuring that they act in accord with the commercial considerations and allow competition from other countries and not as a monopoly.
    Lastly, I would like to add that the delegation's visit to Australia and New Zealand provide us with an up-close view of two culturally rich and vibrant nations with dynamic agricultural sectors. They share much of the spirit of pioneerism familiar to those of us from the American west.
    It was an opportunity to listen, learn, share and cooperate. I want to continue in that spirit today.
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    I welcome all of our witnesses and guests, and look forward to their testimony, and would like to especially welcome Chairman Bob Smith who is supposed to join us in a few moments.
     At this time, I will recognize our ranking member, Mr. Peterson, for any remarks he cares to make.
    Mr. PETERSON. Thank you, Mr. Chairman.
    During the Agriculture Committee's recent visit to Australia and New Zealand, we learned a great deal more about many of the unique characteristics of their agriculture systems. We learned from our friends in Australia and New Zealand that, while we are certainly competitors in many areas, we also share common goals of breaking down agricultural trade barriers throughout the world.
    It is my hope that we will soon be able to concentrate on enhancing our alliances by addressing the more difficult questions that we share between us. We continue to have questions, however, over such issues as the rules applicable to state trading enterprises and sanitary and phytosanitary requirements.
    These differences have in some cases eroded the confidence of some of our farmers in deals that have been struck in the past, international agreements such as NAFTA and the Uruguay Round.
    I can tell you with certainty that farmers in Minnesota are watching any future agriculture trade negotiations with caution. It is essential that we resolve our differences before turning to new WTO negotiations in 1999.
    At the same time, we should certainly continue working together on issues of common interest such as Europe's circumvention of Uruguay Round commitments on cheese export subsidies, and Canada's domestic dairy structure and restrictive market, as well as the need to ensure and open an economically sound Asian market.
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    I believe that we share a commitment to fair and open trade in the world, and hope that we can build toward that goal.
    Thank you, Mr. Chairman, for the opportunity to speak, and I look forward to today's discussion.
    Mr. POMBO. Thank you.
    I have received a request from Mr. Kind that he be allowed to sit with the subcommittee and participate as a full member of the subcommittee in this hearing. I would like to ask unanimous consent that he be allowed to sit in on the hearing. Seeing no objection, welcome.
    Do any other members have opening statements that they would like to make at this time?
    [The prepared statement of Chairman Smith and Mr. Kind follow:]
    Thank you Mr. Chairman. I congratulate you for holding this hearing. Chairman Pombo accompanied me and eight other Members of the committee on our recent trip to New Zealand and Australia. One of our goals was to learn how agriculture, especially the sheep and dairy industries, operates in those two countries, and what lessons can be learned for the United States and its trading goals.
    We traveled to New Zealand and Australia to review agriculture trade relations with those two countries. United States agriculture exports, and expansion of those exports, are on the top of the agenda for this committee. Opportunities and challenges for agriculture trade are abundant around the world and in New Zealand and Australia. Some of that will be discussed in today's hearing.
    The agriculture trade delegation to New Zealand and Australia discussed with government officials and agriculture leaders issues of mutual interest aimed at expansion of the world wide agriculture trade. These issues include:
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     World Trade Organization agriculture negotiations;
     reductions of subsidies, elimination of trade barriers, and expanded markets for agriculture;
     future trade agreements and fast track negotiating; and,
     Asia Pacific Economic Cooperation (APEC) policies.
    With the WTO talks on agriculture scheduled for 1999, and since agriculture constitutes the largest positive sector in the U.S. balance of trade, members of the committee reaffirmed the importance of reducing trade barriers and encouraging U.S. agricultural exports in trade talks with officials in those countries.
    Officials in New Zealand and Australia recognized and agreed with the desire to reduce barriers to trade. Members also discussed the need for transparency in New Zealand and Australian state trading enterprises; the role of other countries' state trading enterprises that govern agriculture imports and may distort trade; and, the importance of biotechnology in increasing the world's food supply at a lower cost.
     In New Zealand, Members stressed the need for access to that market for U.S. salmon, as well as steps to improve access for U.S. poultry, pears, tangerines, and avocados. New Zealand officials have taken steps to review access for U.S. poultry and salmon.
    In Australia, Members asked for assurances that U.S. requests for access to that market for U.S. fruits, nuts, pork, and poultry will not be subject to undue procedures under the new Australian risk assessment system.
    We also discussed the proposed changes to Australia's Export Meat Inspection System, better known as Project 2.
    The Food Safety and Inspection Service (FSIS) is responsible for review of Australia's proposed changes to its export meat inspection system. This issue was discussed extensively during meetings with Australian Government officials. Based on information provided to the committee by FSIS, the Australian proposal incorporates provisions of a HACCP system, similar to the system adopted by the USDA. The principles of HACCP are generally recognized as a major advance in modernizing meat inspection and a key to providing improved safety for the public.
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    Members expressed concern that the actions of FSIS may have serious repercussions for the USDA meat inspection system. We stressed the importance of basing trade and market access decisions on sound science and wrote to the U.S. Secretary of Agriculture upon our return to request a review of the decision rendered by FSIS.
    We had a very productive trip and I am pleased that Chairman Pombo is continuing our review of current and potential trade in livestock, dairy, and poultry with New Zealand and Australia.
     I welcome the witnesses, including the new Administrator of USDA's Foreign Agricultural Service, Lon Hatamiya. Thank you Mr. Chairman.
    Thank you for allowing me to attend this important subcommittee hearing.
    My predecessor, former Rep. Steve Gunderson, chaired this subcommittee. I am honored to continue his good work by being here today to discuss fair global competition.
    Wisconsin's Third Congressional District is one of the largest dairy producing districts in the country. Our farmers and cooperatives want to participate in foreign market opportunities promised under the Uruguay Round of GATT.
    I want them to have this opportunities. I am a strong supporter of free trade, but I want greater sophistication in negotiating our international trade agreements. Our trade agreements need to provide American dairy farmers with a fair shot at opening and maintaining foreign markets. This cannot happen when we have to contend with elements that distort the trade balance such as State Trading Enterprises. STEs are prevalent throughout all of agriculture and are often statutory import or export monopolies.
    I am very glad that this panel is discussing this issue and I have a few questions to ask of Mr. Hatamiya.
    I may not be able to stay here for the entire hearing. If I have to leave before I am able to ask the questions, I will leave them with Chairman Pombo. Thank you again for allowing my participation today.
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    Mr. POMBO. Our first panel today is Mr. Lon Hatamiya, who is the Administrator of the Foreign Agricultural Service, U.S. Department of Agriculture. He is accompanied by Ms. Margaret Glavin who is the Deputy Administrator for Policy, Food Safety and Inspection Service.
    Mr. Hatamiya, welcome to the hearing today. We look forward to your testimony.
    Mr. HATAMIYA. Mr. Chairman, thank you very much, and let me tell you and the members of this subcommittee that it's a pleasure to appear before you once again, especially now in my first appearance in my new role as Administrator of the Foreign Agricultural Service.
    I'm also pleased to come before you today at this timely hearing to discuss the status of livestock products trade with Australia and New Zealand. Given the importance of Australia and New Zealand as trading partners, Secretary Glickman plans to visit both countries later this year, and I hope to join him for that important trip.
    Let me begin by thanking you, Mr. Chairman, and other members for undertaking your trip to Australia and New Zealand last year. Your presence helped underscore how our legislative and executive branches work together to increase trade opportunities for the U.S. livestock products industry.
    This is just one example of the bipartisan support that makes agriculture so unique among U.S. industries and a key factor in U.S. agricultural export success. That trend of success will continue in 1998. Despite the economic turmoil in Asia, our largest market for livestock products, our latest export forecast for fiscal year 1998, released just 3 days ago, shows beef, pork, variety meats, poultry and dairy products off only slightly in value from last year's levels.
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    U.S. livestock and poultry have been the engine for much of the growth in U.S. agricultural exports. In 1990, we exported about $18 million more meat and poultry than we imported. Today, those numbers are dramatically higher. Exports exceed imports by $4.1 billion.
    These record sales did not just happen by accident. They are the result of long term market development work with our partners in the livestock industry.
    Let me now turn to the subject of today's hearing.
     Mr. Chairman, the United States, Australia, and New Zealand are respectful competitors. We share many similarities, and our agricultural industries are more alike than different.
    In all three countries, agriculture is an important contributor to each nation's balance of trade, and agricultural exports are extremely important to the economic wellbeing of each country's farmers and ranchers. We compete in many of the same markets with many of the same products.
    Competition between the United States, Australia, and New Zealand in livestock trade is evident around the world, but nowhere is it more fierce than in Asia. USDA is working diligently to protect our exporters and producers in the wake of the unsettling Asian economic situation.
    We recently announced an additional $100 million in export credit guarantees to assist U.S. red meat exports to South Korea. Earlier this month, we allocated $100 million in export credit guarantees to assist hides and skins exports to South Korea.
    Of course, Australia and New Zealand are protecting their trade interests as well. Australia has recently approved an additional $300 million in export credit insurance for Korea. We expect beef and wool to be the primary products to benefit from this program.
    Contrary to the head to head competition we face in foreign markets, our trading relationship in livestock products with Australia and New Zealand is largely one-sided. The bilateral trade issues that we are currently confronting reflect the fact that we export very little to either of these markets, while importing significant amounts.
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    Mr. Chairman, my statement which I have entered for the record provides more details of the trade issues we face with these two countries. I would like to briefly summarize the issues by sector.
    For dairy the issues focus on fair versus unfair competition. We are concerned about New Zealand's state trading enterprise, the New Zealand Dairy Board. We have identified the disciplining of state trading enterprises as a key issue for future WTO negotiations.
    Australia strongly opposes our Dairy Export Incentive Program, our DEIP, as it's known. However, we have administered the DEIP in accordance with the Uruguay Round and carefully review prices accepted under the DEIP to ensure DEIP sales do not undercut world prices.
    Australia limits our access to its poultry and pork markets, and New Zealand limits our access to its poultry market for sanitary reasons. We are working to resolve these issues bilaterally at the technical level.
    We are continuing our dialogue with Australia to resolve U.S. concerns over the Australia Project 2 meat inspection pilot program, which you mentioned in your opening statement. My colleague, Tom Billy, the Administrator of USDA's Food Safety and Inspection Service, has been in Australia during the past few weeks and has had productive discussions with Australian officials on this very issue.
    Mr. Chairman, the livestock industry and USDA have worked hard to develop export markets. We have succeeded greatly in some sectors and countries, but others we are still pursuing additional successes.
    The competition is fierce, but we are using all available tools which you in Congress have provided us, market intelligence, market development programs, and trade negotiations, and we will work to ensure continued opportunities for the American livestock sector around the world.
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    Just last week, we announced two trade agreements that should significantly help our livestock industry. Taiwan committed to opening its market at significantly reduced tariff rates to a broad range of U.S. products, including pork, beef, and poultry meat, upon that country's accession to the WTO.
    Taiwan also agreed to intermediate market access for a number of U.S. products, including lifting the import ban on pork bellies and variety meats. In 1997, Taiwan was the seventh largest export market for U.S. red meats.
    After 2 years of negotiations additionally, the United States successfully concluded an agreement with the Philippines under which that government agreed to reform tariff rate quota administrative regimes that had severely restricted access for U.S. pork and poultry meat.
    So you can see, Mr. Chairman, that we are working hard to improve prospects for the U.S. livestock producers. Our friends in Australia and New Zealand are worthy competitors. We have our work cut out for us, but we are optimistic about the future for U.S. livestock product exports, and we believe U.S. producers are up to that challenge.
    We look forward to continuing our work with them to meet this challenge.
    This concludes my statement, Mr. Chairman, and I'll be pleased to answer any questions you might have.
    [The prepared statement of Mr. Hatamiya appears at the conclusion of the hearing.]
    Mr. POMBO. Well, thank you, Mr. Hatamiya, for your testimony. I neglected to mention at the beginning that it's very important to me and, I think, something that every member of this subcommittee and the Agriculture Committee can look forward to, to have someone that has your background as a farmer in that position. I think it's going to do all of us a lot of good to have somebody that has your experience and your background doing that particular job.
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    For me, personally, having you from California doesn't hurt at all either, but——
    Mr. HATAMIYA. Let's just hope we don't have to use rowboats to get to our farms in the next few weeks.
    Mr. POMBO. It is a concern.
    Both the United States and Australia and New Zealand are members of the Cairns Group. They have been very effective in negotiating open markets, very forthright in that effort over the past several years.
    What is the current status in terms of the cooperation between the United States, New Zealand and Australia in pushing for those open markets under that organization?
    Mr. HATAMIYA. Well, as I think I've said in my opening statement, as well as in submitted statement, there are a number of different issues and sectors, not only in the livestock and dairy sector but also in the fruit and vegetable sector, which are important to our home State of California, where we're working with Australia and New Zealand to continue to open those markets.
    We've had a varied level of success for many of those different products. For example, I mentioned that we still are having access problems for pork and poultry products. We've had some difficulties with various other horticultural products, but for the most part, we're working closely together.
    We're working to try to achieve some understanding of our various systems and recognition of those systems. I will mention, too, that Secretary Glickman is departing next week for an OECD meeting where he'll be meeting his counterparts from both of those countries to continue to raise these issues at the highest levels.
    Mr. POMBO. One of the things that came up in the numerous meetings and discussions that we had with both these countries when we were over there was that the major difficulties, the major problems, that we had in trade were not necessarily with each other, but with other countries, with activities that other countries had taken on.
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    That relationship that we have with them, I think, is very important in terms of opening markets and I would do everything I could to encourage you and Secretary Glickman to continue that as an open and strong relationship that, I think, that we have to have.
    Mr. HATAMIYA. Mr. Chairman, I think that's equally recognized at the Department. As I mentioned, Secretary Glickman and I are planning a trip to those countries later this year. We believe it is true.
    There are a lot of commonalities that we share with Australia and New Zealand, and we try to work very closely with them in addressing some of the other tariff subsidy and other barriers we face throughout the world. So it's important to have that partnership and develop it as time goes on.
    Mr. POMBO. I have a number of questions that I'd like to ask you, but since we are limited on time, I would like to discuss somewhat the Project 2, the meat inspection proposal that was put out by Australia that they are currently involved with, and what the U.S. position is and where we expect to go from here.
    Mr. HATAMIYA. Well, let me just generally answer that question, and I do have my colleague here from FSIS if you get involved in a more technical discussion.
    Generally, the position of the Department has been that, obviously, food safety is of the highest priority, I know, for this committee as well as for the administration. The President has put forward a food safety initiative that heightens our attention to food safety, not only domestically but the imports that come into this country.
    We believe it's very important that, in recognition of other systems in place, that sound science be addressed. We had a number of concerns about the Federal and government oversight that Project 2 has been involved with Australians.
    As I mentioned, Mr. Billy has been in Australia the last two weeks. He anticipated to actually visit one of the Project 2 slaughter plants either today or tomorrow and to get firsthand impressions as to that pilot project.
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    So we're working very closely to ensure that we have the appropriate information available to us, but again I will emphasize the point that we're trying to focus in on the agreeable areas, especially in terms of sound science. That's been a policy of this administration. I know that's a policy that this committee agrees with.
    Mr. POMBO. That is one of our major issues. As the administration struggles with the whole issue of meat inspection, as this committee struggles with these issues, I think both of us want our ultimate decision to be based on sound science, because that's the only thing any of us can trust going into making these kind of decisions.
    So it is extremely important that the administration, Mr. Billy, report back to us exactly what they found, what their opinion is of that, because a lot of the things that we are looking at are similar to things that the Australians put on the table.
    So it is something that's of a great deal of concern to me exactly how we respond to that, and that any decisions that we make be based on sound science.
    Mr. Peterson, did you have any questions at this time?
    Mr. PETERSON. Thank you, Mr. Chairman.
    Mr. Hatamiya, New Zealand and Australia, as I understand it, ban imports of most of our U.S. poultry products, live birds and hatching eggs, due to some concern over poultry diseases. Could you tell us what the current status of our applications to these countries for this increased access are, and what the status is and what the potential market impact would be if we are granted access?
    Mr. HATAMIYA. Yes. Mr. Peterson, I'm sure you saw the impacts of that in your recent trip to those countries. We continue to pursue these issues and our scientists, both at APHIS and other agencies, are reviewing these issues, and we've presented these concerns. We continue to raise these concerns with our Australian and New Zealand counterparts.
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    To further answer your question, if the Australian and New Zealand markets were opened to U.S. poultry exports, we estimate that exports can increase anywhere from $7 million to $14 million. The impact of that is really going to be generally based upon the value of the dollar at the time.
    As you well know, with the financial crisis in Asia as it exists today, the dollar has a much greater value than many of our competitors who grow poultry in that very region. For example, in Thailand, which is a major competitor in poultry, the Thai baht is worth about 50 percent of what it was only 6 months ago. So they have a competitive advantage just in the cost of their product into many of those markets.
    In spite of that fact, we need to have open access and equal access to these markets, and we are working very hard at trying to achieve that.
    Mr. PETERSON. The Australian dairy industry has been expanding, as I understand it or we were told, 5 or 6 percent a year, and that their exports have doubled between 1990 and 1997.
    I don't know if I understand this completely, but apparently Australia has some kind of a domestic market support scheme in which the assessments on fluid milk are used to finance payments to the farmers.
    Mr. HATAMIYA. Yes.
    Mr. PETERSON. And exported dairy products are exempt, apparently, from this assessment. So they can encourage exports of those products. The effect of this scheme apparently will be the same as previous Australian export subsidy programs.
    My question is: Is this scheme—is that considered an export subsidy under WTO rules, or not?
     Mr. HATAMIYA. Well, we're very concerned about a number of programs maintained by countries, including Australia, that we believe are circumventing WTO export subsidy disciplines.
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    In fact, we've initiated WTO proceedings against Canada for a very similar type of program. Although their program is much more egregious, it's very similar in the type of relief it provides Canadian farmers.
    So, you know, we've discussed this program with Australians. We've expressed our concerns. I think, more importantly, this program is due to expire in the year 2000. So we're continuing to press through our movement towards the negotiations for WTO in 1999 to ensure that these export subsidies or a similar type export subsidy programs are eliminated for the future.
    Mr. PETERSON. The Australian Wheat Board has in recent years apparently been very successfully marketed its products to Indonesia's BULOG, which is an important STE. How will that relationship be affected by these IMF required reforms that are being proposed?
    Mr. HATAMIYA. Mr. Peterson, I just returned from a 7-country, 10-day tour of Asia, including Indonesia. We met with officials from the BULOG at that time, and I can report to you that the IMF reform package that's been proposed and implemented or in the phases of implementation in Indonesia structurally take away the monopoly and relinquish the monopoly that the BULOG has in control of imports of wheat, wheat flour, soybeans, and garlic.
    We believe that, with the de-monopolization, the BULOG will give U.S. wheat and soybean and garlic producers an opportunity to gain access to that market that's been really excluded to us in a general fashion because of that monopoly.
    I think it's extremely important to emphasize the IMF package. The IMF package—not only does it bring financial stability, hopeful financial stability, to these markets, but it brings about some of these trade reforms that we've tried to initiate over the last number of years.
    I think it's important also to note that the IMF package reduces tariffs on various food commodities. Effective February 1, various commodities that had been tariffed at rates up to 30–40 percent are now dropped to 5 percent, and that's also a result of the IMF package.
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    So in long term rounds, we believe that the benefits to U.S. agriculture will be very positive with the IMF package.
    Mr. PETERSON. Lastly—and you're probably going to get more questions about STEs from other folks on this committee, but I'd just like to get—we discussed this at length when we were over at the New Zealand Dairy Board and others—just generally your view on how these are created, whether they're profitable and how you think that these STEs affect competition in our situation.
    Could you just give us a general overview of your position?
    Mr. HATAMIYA. Sure. We, Mr. Peterson, as part of the administration—we've taken a policy of opposition to STEs or actually reform of STEs. It's among a number of important issues that we hope to address during the 1999 round and on negotiations on the WTO and the continuation of those.
    There's a working policy committee on STEs. We've proposed in the past that an informational questionnaire be produced to those countries that have STEs to provide more transparency.
    The problem that we have with STEs as they exist today is the lack of transparency, that they are really a monopoly that controls one commodity in a specific country without the sharing of price and supply data that is so important to enable us to remain competitive as a country and as industries.
    That's a major focus of our concerns on those STEs, and I know that you shared those concerns when you were in Australia and New Zealand, about hammering home the message of increased transparency. That's what we're working towards. That's what we're hoping to engage with these countries for the future.
    Mr. PETERSON. Thank you. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Blunt.
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    Mr. BLUNT. Thank you, Mr. Chairman. I just have a couple of questions, Mr. Hatamiya.
    First of all, the example you gave in Indonesia of opening up those markets to wheat. Are there other examples in the IMF package in either Indonesia or other countries of how we've worked to open up specific markets that we haven't had the access to we should have had?
    Mr. HATAMIYA. Yes. I can mention just a couple of others. I mentioned, I think, the things in Indonesia about the access to and the demonopolization of the BULOG, in addition to the drop in the tariff rates on some of the food products there.
    Also we have seen with the IMF package to Korea also an agreement to drop tariff rates on various products going into Korea as well. Also, the IMF package has opened up access of many of those markets to recognizing international standards as the level that should be recognized.
    Let me talk very specifically. It doesn't really apply to this subcommittee, but we have gotten agreement from the Koreans to accept Codex Alimentarius standards on pesticide residues for citrus shipments into Korea. So there are a number of successes we can point to, and those are certainly due to the diligence of our efforts, but also because of the existence of the IMF package.
    Mr. BLUNT. Are you in a position where you could share those handily at some future time with the committee?
    Mr. HATAMIYA. Yes. Mr. Blunt, we have put together, I think, a table that I'll be glad to share for the record and also for your information. I'll be glad to come up to brief you personally on the various benefits that we've derived from the IMF packages.
    [The information follows:]
    "The Official Committee record contains additional material here."
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    Mr. BLUNT. I would also like to know, on the Dairy Incentive Program, how extensively is that being used in Asia right now?
    Mr. HATAMIYA. Well I can tell you, the DEIP program that we have at our fingertips to use, that you've given us in Congress as a tool—we've exhausted our allocation to Asia already for this fiscal year. And we've used in the various countries there in terms of nonfat milk powder and many of the other products that are included under that, and we're looking to next year to do the same.
    Mr. BLUNT. How does Australia and New Zealand react to our use of the beef program in Asia?
    Mr. HATAMIYA. Well, they're not big fans of it, but I will say that, under our GATT authority under the Uruguay Round—and I mentioned in my opening statement, we only utilize that in fair and open markets.
    We identify markets. Again, the transparency of that program is evident in the way we bid those programs out, in the way we allocate the various commodities to the countries. I think that's extremely important as we look at transparency in sharing of information.
    Mr. BLUNT. Is Australia still complaining about our use of export credits as part of the Asian relief package? I know, initially, they were very critical of that. Have they backed off that?
    Mr. HATAMIYA. We have had discussions on a number of different issues. This is an issue that, again, they don't necessarily agree with us on, but it is a tool that, again, Congress has given us that we've tried to maximize in that region of the world, not to the detriment of other countries, but to maintain the market share that our industry has worked very hard to accomplish over the last 10 to 20 years.
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    The GSM–102 program, the $1.1 billion that we allocated for Korea has been about 40 percent used up. We also allocated another billion dollars in total to Malaysia, Philippines, Thailand, and Indonesia, and we're seeing a great amount of that starting to be used.
    A lot of it is the problem in Asia is the lack of liquidity, lack of access to credit. We had the ability with the GSM program to provide that and to provide the type of credit guaranty that many of our customers in those markets needed, and we've employed that as best we can, and it's been beneficial to not only our producers but to the consumers in those markets.
    Mr. BLUNT. Thank you. Thank you, Mr. Chairman. That's all I have right now.
    Mr. POMBO. Thank you. Mr. Boswell. Mr. Johnson.
    Mr. JOHNSON. Yes, thanks for being here, Lon. I was looking ahead to some of the other testimony, but we've expressed the concerns today about New Zealand, hearing about Australia opposed to our DEIP program.
    Do we have to wait until the next round of these trade talks, until 1999, to more strongly express our concerns about these issues or can we do something between now and 1999, and what can we do?
    Mr. HATAMIYA. As I mentioned earlier, Mr. Johnson, we continue to hold bilateral discussions with both Australia and New Zealand on these very issues in international organizations such as the OECD and others.
    The Secretary has brought forth these issues directly to his counterparts in those governments. We try to raise these issues at every opportunity and to express our concerns.
    Again, you mentioned the Dairy Board issues and some of those. We continue to press for sharing of information. I can't emphasize anymore the transparency that's important for these types of programs. We continue to press forward on all of these.
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    It's also important to keep in mind that working with these countries on a positive hand, too, assists us in addressing some of the problems and commonalities we have with the European Union and other trading partners. So we try to work with them also hand in hand to ensure that those markets are opened up as well to all of us.
    Mr. JOHNSON. So we're working with them, and also to make a free and fair market. You know, I look ahead to the statement of Mr. Tipton from the Dairy Foods Association, who remarks that the distortion caused by the trade barriers and the subsidized competition are holding us back from significant market opportunities.
    If that's, again, forcing us to wait until 1999, if we can make some moves in between to remove the distortion, are there ways that we in this committee or we in this Congress might help?
    Mr. HATAMIYA. Well, I think this committee has already done quite a bit to assist us in that with your colleagues' trip to those countries last year, heightened those issues to the highest possible levels in Australia and New Zealand.
    I think we just need to continue to press the concerns that we have on all of these issues.
    Mr. JOHNSON. Another one that I don't know if it's addressed in the testimony, but I have heard from some of our genetic organizations in my district. One of Wisconsin's large exports is genetic products, both semen and embryos—it's a $22 billion genetics market in New Zealand.
    It's difficult to access, I am told by folks in our district, because of tight government control on marketing procedures. What might be done to address these difficulties?
    Mr. HATAMIYA. Mr. Johnson, I would prefer if I could get back with a detailed answer for you on that. Again, it's important as many of these other issues, and we will continue to press those; but if I could get back, not only for the record for this committee but back to you and answer specific to the genetic issues.
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    Mr. JOHNSON. All right. Those are the questions that I have. Thanks very much.
    Mr. POMBO. Mr. Goodlatte, did you have any questions at this time?
    Mr. GOODLATTE. Yes. Thank you, Mr. Chairman.
    I was going to ask about fast track negotiating authority or the lack thereof. What impact is that having on you in negotiating with these countries?
    Mr. HATAMIYA. Obviously, it would make it a lot easier to have the fast track authority to move forward and to ensure that any agreement we reach is agreement that can be supported.
    I think that it does hinder us in trying to move forward with a number of bilateral and multilateral discussions. However, we continue to move forward in discussions with all of these partners, trading partners, and try to open markets.
    The United States is the most open and freest market of any in the world, and I know that the industry supports the fact that, if we had that same access elsewhere, that's all we're asking for, because we can compete on a commodity by commodity basis.
    So I think it's extremely important that we do have fast track authority to enable us to open those markets around the world.
    Mr. GOODLATTE. During this next 2 years, how much of an impact do you think we're going to experience in terms of the lack of fast track authority? Are we already seeing the United States beat to the table by other countries that don't have to go through all the hoops we have to without that authority?
    Mr. HATAMIYA. I'm not certain I can accurately answer that question, but I will say that, as Mr. Pombo, the Chairman, recognized earlier, as a farmer from California I would hope that we have as many tools available to us in agriculture to open markets as possible.
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    Again, we are trying to work bilaterally, multilaterally, with as many partners as possible, and it's hard to determine whether or not it's delaying our ability to reach agreements without that authority. Again, I think the tool that it provides us and the power it provides us is essential, though, to move forward into the millennium and to seeing our exports continue to increase.
    Just this past week on Monday, Secretary Glickman announced an anticipated drop in our exports from what we projected to be about $58.5 billion for 1998 down to about $56 billion. Now we have to keep that in perspective. That's the third highest we've ever had, but it is a drop, and that's because of a number of different reasons; but we've had enormous gains over the last 5 to 10 years, and I would be hard pressed to continue that without the ability to negotiate most fully.
    Mr. GOODLATTE. Now we have a lot of things in common with Australia and New Zealand as well, a number of common interests. Is the United States working with these countries to develop some mutually supporting positions as you go into the next round of agricultural trade negotiations to pose a unified front in areas where you can?
    Mr. HATAMIYA. Yes. Mr. Goodlatte, as I mentioned in my opening statement, we look at the commonalities and the positive relationships that we have with Australia and New Zealand, where we can work together to break down trade barriers, nontariff trade barriers that exist for many of our products.
    We probably have more contact with Australians and New Zealanders on many other issues than any other countries, and we continue to work that very closely with them, and I think it is important. I agree with you that to engage countries with similar interests so we can open up markets like the European Union and others that have been closed to us in the past.
    Mr. GOODLATTE. Now conversely, we've had some problems not just with these countries but all around the world with our livestock and poultry exports being limited by quarantine and health restrictions. The poultry industry has definitely been impacted by that in Europe.
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    I wonder what your view is of that issue in Australia and New Zealand?
    Mr. HATAMIYA. Again, I think that we will continue to press those issues. There have been concerns raised by both Australia and New Zealand regarding various avian diseases that are found here in the United States.
    We've argued that those same diseases are found in those countries, and that we will continue to work with their scientists, our scientists at the Department, APHIS, continue to press those issues, and we believe, again, as I mentioned in my opening statement and opening question, that decisions should be based upon sound science.
    That's a policy that this administration and, I know, this committee agrees with.
    Mr. GOODLATTE. Do you sense any progress?
    Mr. HATAMIYA. You know, I think it varies from commodity to commodity. We have seen some progress, not specifically in the poultry and pork areas, but in some of our horticultural products. We've gained access for almonds. We're looking at table grapes, the risk assessment that the Australians have reviewed there as a potential to open that market.
    So it's been one commodity by commodity, but we keep plugging away to ensure that open access is provided.
    Mr. GOODLATTE. Do we have any kind of leverage with these countries with regard to their refusal to use sound science and to not recognize that our products are perfectly viable in their markets, and that these appear to us to be nontariff trade barriers to our products?
    Mr. HATAMIYA. Mr. Goodlatte, I guess it depends upon how you define leverage. We try to use all the available information we have at hand. We try, again, to work in conjunction with these countries where we, again, have commonalities, but also to press these issues very strongly, when possible.
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    Mr. GOODLATTE. But no one has said there's a quid pro quo here. Is that right? No one has said you don't allow these products into your markets for these specious reasons; we may have to take alternative action and review some of your access to our markets?
    Mr. HATAMIYA. There are methods through the WTO to address these types of issues, and we believe that's the appropriate forum to address any kinds of disagreements that we might have with other member countries.
    Mr. GOODLATTE. What do you do when you take it to that forum and you lose, like we did in Canada?
    Mr. HATAMIYA. Well, we've had many more successes than losses at the WTO. I think, out of the number of cases brought to the WTO by this country, about 40 or 50 percent of those are agricultural issues, and out of those we've won, I think, about 80 or 90 percent.
    We continue to press forward with, again, sound science, with sound facts, and hopefully, the openness of our market on our side. Again, we'll just continue to press.
    If, in fact, we're not successful there, we continue to utilize our opportunity for negotiations as they lead up to 1999 and beyond for the WTO.
    Mr. GOODLATTE. Thank you, Mr. Chairman.
    Mr. POMBO. Thank you. Mr. Boswell, did you have a question you wanted to ask?
    Mr. BOSWELL. I would, just briefly. Reflecting on some of my own experiences, listening to some of this discussion, in another part of my life I had a lot of association with some of our friends from Down Under, and I can tell you this. They're great people, and they're great soldiers. I was always proud to have them with me on anything I was involved in.
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    You could depend on them 100 percent, but they're very shrewd. That's a compliment to them. I think they've been quite successful in figuring out ways to kind of hold us back in using science and sometimes not too well founded, I might say as a matter of opinion, but using technical protection to kind of keep us from exporting to them in areas that they are not trying to do too much export of their own, like pork or poultry and some of the fruits.
    What do you see from your perspective as them loosening up or opening up or you think they will continue to do this, if you agree that they are doing this. Maybe you do or you don't. I would be interested in what you got to say, but what do you see as forthcoming in that particular area?
    Mr. HATAMIYA. Mr. Boswell, I think, as I mentioned before, it varies from commodity to commodity about our ability to access those markets. I think the most important avenue to use to address these issues are not only through bilateral discussions but through the multilateral organizations that exist.
    Australia and New Zealand are also members of APEC. We have reached some agreements in a general term that will apply to all of those countries. That's something, as we, again, lead into the negotiations on the furtherance of the WTO, we need to have international recognition to specific standards that are adopted by all countries, and that's the ultimate goal that, if we have recognition by a good majority, then by recognition and membership of those, that they will also follow in suit.
    So we continue to press on many different levels and hopeful that we can achieve some positive results.
    Mr. BOSWELL. Well, I commend you for those efforts and would urge you to keep it up. Of course, we want to assist you in doing that. So if I ever have the occasion to go there with you and look up some old comrades, I might do that, but they're very shrewd, very smart. They're very good people.
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    I would just hope that we can have some successes in them opening up a little bit to us. So be on your best behavior. You're going to have to be sharp. I know you can be. Thank you.
    Mr. HATAMIYA. Thank you, Mr. Boswell.
    Mr. POMBO. Mr. Farr.
    Mr. FARR. Thank you very much, Mr. Chairman. First of all, I want to congratulate you on the great work you're doing in your new job. You certainly were able to solve the PACA problem when you were in your former position, and now you're solving the global problems.
    You know, when I went on this CODEL, what I was very interested in is listening to some of the farmers in New Zealand talking about how they've been able to find niche markets abroad. It really occurred to me that I represent a county, Monterey County, and they produce 82 different specialty crops, most of which are sold domestically, but there's a keen sense in looking at foreign markets; because, as Mr. Myers who grows tomatoes in my district said, he can get a better price for tomatoes in Mexico City than he can in New York City.
    I think what we're all about here is how do we allow our farmers to do what Dean Kleckner said in his Farm Bureau statement that's about to be presented is really this free market process of how do you link grower/producer with consumer?
    It ought to be just as easy to sell your commodity overseas as it is to sell it over the back fence. What I think we need to do is to give more tools to our farmers to be able to do that. We need to, in government, make it much more user friendly.
    I appreciate the fact that you have to do this through WTO and all of the things that we negotiate, but I think we can do a better job. I'm wondering whether your experience now with the export credit, which you have used very effectively in the Asian markets, particularly in the last couple of months—do you think that we do enough to allow people to understand how they can sell their product to niche markets perhaps using export credit?
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    Is export credit limited to, essentially, like promotional marketing? Seems to me, this country has an incredible push/pull. We push our product with government help, and then we can pull a product with credit, but is that credit available?
    As a producer, can you get access to that credit to sell to a niche market overseas?
    Mr. HATAMIYA. Mr. Farr, that's a very good question, and that's something that I had members of my staff just in California—what was it, 2 weeks ago, Jim? Jim Parker from my staff who accompanied you to Australia and New Zealand——
    Mr. FARR. We accompanied Jim Parker to Australia.
    Mr. HATAMIYA. Right. That's usually the case. Chris Goldthwait, our general sales manager, met with many of the specialty crop industry in California a couple of weeks ago to address this very issue.
    We have made the GSM 102 credit available specifically in Korea for many of these commodities that have not necessarily used them in the past, and they're not always aware of how to access that credit, and we're doing an important outreach effort to ensure that commodities that haven't been included in the past or haven't known about the use of this program can be included.
    Now, obviously, there are a lot of competing interests and a lot of other industries that are pressing for that same piece of the pie that's available in our allocations, but we want to be as fair as possible to enable specialty crop producers to access this.
    As you all know, my background is in that area, and I think it is important to provide as many tools as possible to all commodity groups throughout this country.
    Mr. FARR. Well, could you let us know what you're doing, what the Department is doing, to try to make these programs more user friendly for producers. You know, particularly specialty crops, because you have to move them quickly, and there's a growing awareness that the Pacific Rim is one of our best markets. We can get a better price sometimes overseas than we can domestically.
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    So whatever things you're doing to make—the Department making this more understood at the ground level rather than just the Washington level would be very helpful.
    Mr. HATAMIYA. Mr. Farr, I'll be glad to provide that for you.
    Mr. FARR. Thank you. Thank you, Mr. Chairman.
    Mr. POMBO. Well, I believe that's all the questions the Members currently have. I know Mr. Peterson said that he did have a few more questions that he would like to submit to you for the record. If you could answer those in a timely fashion, it would be greatly appreciated.
    Thanks for coming in and testifying today. Ms. Glavin, thanks for coming in. We could have really gotten into this, if you wanted to, but maybe that's better reserved for a later time, but thank you very much.
    Mr. HATAMIYA. Thank you.
    Mr. POMBO. I'd like to call up the second panel. We have Mr. Dean Kleckner, Mr. Leonard Condon, Mr. Steve Raftopoulos, Mr. Linwood Tipton, Mr. David Krug, Mr. John Hardin, and Mr. William Roenigk.
    I'd like to welcome the second panel here. You're all familiar with the timing system. On that, if you could summarize your testimony, the entire testimony will be included in the record, but we would like to keep your oral testimony within 5 minutes. You're all familiar with the lights: Green, go; yellow, hurry up; red, stop.
    Mr. Kleckner, you can begin.
    Mr. KLECKNER. Thank you, Mr. Chairman. I am Dean Kleckner, president of the American Farm Bureau, elected president. I'm a 350 acre family farmer from north central Iowa raising corn, soybeans, and hogs. Farm Bureau is the largest farm organization in the United States and in the world, as far as I know, and our members produce every commodity that's commercially grown in the United States.
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    Australia and New Zealand, while not our biggest trading partners in dollars and cents, are often our best friends in international negotiations. As members of the Cairns Group during the GATT Round they supported many issues of importance to our agriculture. They support now the United States position versus the European Union on the use of hormones for beef production.
    During the Singapore meeting—I think that was last fall—of the WTO, Australia and New Zealand worked with the United States and other U.S. agriculture groups, with Farm Bureau, to ensure that agriculture stayed on the agenda in the upcoming 1999 round of WTO.
    While we work very closely with them, and they are our friends very, very often in areas of trade policy, there are outstanding trade issues that need to be resolved. Australia, which supports the use of sound science on sanitary and phytosanitary trade restrictions, continues to block many of our products through quarantine and health restrictions. We believe these are not scientifically justified.
    For example, the Government of Australia has agreed to allow cooked chicken in under a recommended time and temperature requirement. Our officials believe that these requirements are so extreme that they restrict import. For example, I've been told that it's 158 degrees Fahrenheit for 2 1/2 hours. Goodness sakes, I wouldn't want to eat that chicken that's been cooked to 158 degrees for 2 1/2 hours, and that's the standard, we believe.
    Pork is kept out of the market for the same reasons, that we don't think are consistent with WTO sanitary agreements. Phytosanitary restrictions are being used to prohibit imports of fruit and vegetables. Florida citrus, stone fruit, apples, blueberries, pears are being blocked without proper risk assessments.
    I'd say the pork, poultry and apple industries in Australia are very well organized, and they've been very successful in sustaining technical protection against import competition.
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    They have state and national commodity boards that control the marketing and export of certain A. products, and these, by and large, enjoy monopoly powers. They tend to be very transparent, as we heard Lon Hatamiya say, and they can create market distortions.
    The Australian Wheat Board is being restructured. I've had a number of meetings over the years with the Australian Wheat Board leadership, and I believe they are dedicated to changing to a privately operated system, but that change is not going to be without its obstacles and challenges.
    In addition to wheat, sugar, rice and barley lead the list of Australia's Board controlled exports, and we've got concerns about each one of those. New Zealand has transformed its economy from one of the most heavily subsidized, regulated, protected in the world to one of the most open market oriented economies in the world.
    Without phase-in periods or major adjustment payments, they just halted overnight all subsidy payments to farmers. I know your committee was, Mr. Chairman, in Australia and New Zealand recently. I led a group of Farm Bureau leaders to New Zealand last spring to visit with their producers.
    We wanted to see how they had fared under the open market system. Some producers did go out of business, but we were told they were mostly on the margin going into the change in New Zealand. Every one of the farmers we visited with, no exceptions, was pleased with the new open market program and did not want to go back to the old program.
    Part of their success in New Zealand is a very aggressive, worldwide marketing program, and we agree that to succeed with reduced support programs we've got in the United States right now, we must have access to world markets.
     It's some of their marketing programs that we've got concerns about. In particular, the New Zealand Dairy Board continues to operate as an STE, controlling all exports of dairy products manufactured in New Zealand, the worldwide marketing practices of the Dairy Board and its ability to license individual companies to export products lack transparency and raise many questions. We heard that form Lon earlier on also.
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    New Zealand, for example, should be a market for 100,000 tons of frozen poultry, but the market is closed. Currently, only cooked poultry is allowed entry. We believe there is no sound reason for New Zealand to prohibit the importation of U.S. frozen poultry.
    New Zealand has been a valuable friend on many trade issues. They recently sided with us against the Canadian special milk pricing scheme and on component subsidies for cheese in the European Union. Both Australia and New Zealand are as concerned as we are that China not enter the WTO until there are sound business principles involved, and not enter for political reasons.
    They have also supported our concerns that labor and environment issues not be a part of trade negotiations. Both Australia and New Zealand recognize the importance of the U.S. leadership role in world trade negotiations. They really think we ought to lead, and I think we ought to lead also.
    They are especially concerned about the future of the WTO round of negotiations scheduled to begin next year and the fact that we don't have fast track negotiating authority. I can't answer the question to them satisfactorily as to why don't you have it in the United States. They want us to have it. They want us to lead.
    I want to take this opportunity to urge you people on the Agriculture Committee to do everything possible to quickly provide the needed funding for the IMF. We know that, until this issue is resolved, we will not be able to get the administration to concentrate and focus on fast track.
    We support both IMF funding and fast track, and believe that your committee, the Agriculture Committee, should also support them. We stand ready to work with you in every way we can on both those issues of IMF and fast track authority.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Kleckner appears at the conclusion of the hearing.]
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    Mr. POMBO. Thank you very much.
    Mr. Condon.
    Mr. CONDON. Thank you, Mr. Chairman. I appreciate the opportunity to participate in this hearing.
    The previous hearings you held focused on Europe and Asia, two regions with considerable market potential for U.S. meat and poultry products, but since Australia and New Zealand are significant net exporters of meat, the potential for increasing our exports of meat and poultry to that region is more limited.
    The Oceanic countries have a comparative advantage in the production of ruminant animals and are relatively free of contagious animal diseases. For that reason, they are important net exporters and are our major suppliers of imported beef and lamb.
    Traditionally, the United States has been a large and relatively open market for meat. We have long been a major producer, consumer, and importer of beef, pork and also lamb. We are now the world's largest exporter, and second largest importer, of pork.
    We import more beef than any other country, and we are challenging Australia's position as the world's largest beef exporter.
    The market strategy of the U.S. livestock and meat industry has clearly changed. Because the U.S. population is growing slowly and aging, compared to countries in the developing world, future growth of the U.S. livestock and meat sector is inextricably linked to our ability to open and expand export markets.
    There are some niche markets in Australia and New Zealand for high quality U.S. beef, but greater opportunities exist for pork and poultry. While the New Zealand market is the smaller of the two, we face fewer import barriers in accessing that market.
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    The Government of Australia limits pork and poultry product imports through animal health quarantine restrictions which do not appear to be scientifically justifiable. The new WTO SPS agreement requires that sanitary barriers be based on scientific risk assessment.
    In general, Australia is notorious for its tough plant and animal product quarantine restrictions. With the new WTO SPS agreement, however, those requirements which have no scientific basis, like those which apply to pork and poultry in Australia, are now vulnerable to WTO challenge.
    With regard to New Zealand's trade policies, a WTO review conducted in 1996 found that trade liberalization, privatization, and domestic deregulation have transformed New Zealand's economy from one of the most heavily protected and regulated into one of the most market oriented and open economies in the world. However, the report also noted some sanitary restrictions, which have already been mentioned here, with regard to poultry and the country's tendency to maintain a number of marketing boards in its agricultural sector, and pointed out that some of these boards are essentially export monopolies, and I'm sure you'll hear some more about those in a minute.
    We increasingly find ourselves cooperating with Australia and New Zealand in supporting a number of international initiatives that impact upon global trade in meats. Because of our heavy focus on animal agriculture and growing dependence on trade, we have many common interests and concerns.
    The United States, Australian and New Zealand officials work closely together in international organizations such as the WTO, the OIE, the OECD, and the Codex Alimentarius. Our Government officials cooperate in international fora to advance policies directed towards liberalizing trade in livestock and meat products, in eradicating animal disease, and enhancing food safety.
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    The United States, Australia and New Zealand strongly supported the general liberalization of agricultural trade on a global basis. The three countries, along with others, pressed for the conversion of all non-tariff barriers to tariffs and a general lowering of all tariffs. Further, all three supported inclusion in the SPS agreement of the concepts of regionalization and equivalence.
    Regionalization recognizes the modern scientific reality that it is possible to confine animal diseases to identifiable regions within countries, and that whole countries do not have to be quarantined when an animal disease breaks out and is confinable.
    We strongly supported including the concept of equivalence in the WTO SPS agreement, as did Australia and New Zealand. In general, this concept applies to inspection procedures.
    As a practical example, the United States has argued that a number of our meat inspection procedures, while not identical to the requirements of the European Union, should be considered equivalent, since our measures enable U.S. firms to deliver products that meet the European Union's specified level of protection. We have been successful on some of those issues, and still arguing on others.
    Interestingly, at the same time the United States is a plaintiff against the European Union on a number of equivalence issues related to our respective meat inspection program requirements, it is, in a sense, a defendant in Australia's Project 2 initiative.
    Australia has asked the United States to accept meat products inspected under an innovative system which turns over many of the inspection functions to plant employees. Australia contends that it will continue to deliver under this new system meat products which meet the United States' specified level of protection.
    The important point is that, as a major exporter and importer of meat, the United States is in a unique position and has interests in requesting and granting equivalence determinations. If we want other countries to respond reasonably and expeditiously when we request that our inspection measures be considered equivalent, it is important for us to respond to requests made to us in a reasonable and expeditious manner.
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    As you know, Mr. Chairman, Australia is the leader of, and New Zealand is an important active participant in, the Cairns Group. The Cairns Group was very influential in the Uruguay Round negotiations, and contributed significantly to the positive outcome of that important initiative.
    The Cairns Group is still active. It was a third force in the Uruguay Round negotiations. The United States, the European Community were the other two forces. If we don't have fast track authority, and we can't participate in the negotiations that are scheduled to begin in 1999, that means there will only be two forces, the Cairns Group and the European Union.
    Under that scenario, it's unlikely that the results of the next negotiation will be what we would consider very ambitious results.
    That concludes my testimony, Mr. Chairman. Thank you very much.
    [The prepared statement of Mr. Condon appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you.
    Mr. Raftopoulos.
    Mr. RAFTOPOULOS. Mr. Chairman, on behalf of the American Sheep Industry Association, I applaud you and your leadership in conducting this hearing on agricultural trade issues with Australia and New Zealand.
    I'm focusing today on the U.S. lamb market, because we are big importers of U.S. lamb. Since the legislation that phased out the National Wool Act was approved in 1993, domestic sheep inventories have fallen 25.3 percent. Imported lamb has increased from 11 percent of U.S. consumption to 20 percent, and in January of 1998 jumped to nearly 31 percent of total supply.
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    The primary lamb exporting countries to the United States are Australia and New Zealand. The United States continues to be the largest export destination in the world for Australia and a growing market for New Zealand, in spite of the fact that both New Zealand and Australia have lost 14 and 27 percent respectively of their sheep inventory since 1991, hitting 30 and 40 year lows.
    The U.S. sheep production base that has survived from the loss of the Wool Act is at a critical stage. From August of 1997 to January of 1998, wholesale carcass price for lamb has dropped from $1.81 a pound to $1.51 a pound, live price from $1 a pound to 75 cents, and I hear last week they are bidding lambs at 63 cents a pound live. So it continues down.
    This dramatic drop has brought a severe case of where we have no equity left in our feeding sector. If this continues through June, we may lose a large portion of our feeding sector.
    Our contacts with the packing, processing and distribution sectors of our industry continually point to the increasing share and pricing and marketing practices of lamb importers as a factor in the current market situation. Any arguments claiming that imports help stabilize prices and supply or fill holes in the market are quickly dropped in light of our market in 1997, and the increase in lamb imports is furthered by the currency crises in Australia and Asia.
    As far as Australia goes, the devaluation of the Australian dollar makes it a lot cheaper to bring lamb here.
    With the dramatic loss of domestic production industry infrastructure since 1993 and the serious market conditions we face today, the remaining U.S. production is at risk if prompt measures are not taken. I cannot understate, Mr. Chairman, the seriousness of the situation for the American grower in the next 6 to 12 months.
    Under the common goal of a strong and profitable lamb market in the United States, we urge expediency in addressing the following issues. The fact that imported lamb traded in the United States is not part of USDA's price reporting is of tremendous concern. Efforts by USDA to include the imported lamb prices in weekly livestock market news reports have been refused by the importers.
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    Every possible safeguard under GATT regarding import surges must be reviewed immediately for implementation. You can be of great assistance to our industry in consideration of legislative options, as well as with the administration on measures to ensure equitable and fair trade in the U.S. marketplace.
    Identification of imported lamb in the retail meat case has been a longstanding concern of U.S. sheep industry. Our industry has spent great resources over the last two decades trying to inform consumers of fresh American lamb. Allowing foreign lamb to masquerade as domestic behind a generic lamb label or mixed with domestic product is not only a disservice to the American grower, but a greater disservice to the American consumer.
    We urge this committee to move forward with legislation requiring a label at the retail level for imported lamb.
    We fully appreciate the commitment of Chairman Smith to bring the producers of Australia and New Zealand and the United States together to discuss trade issues, and we pledge our assistance in that effort; but I'd like to say that, while the New Zealand Meat Board and the Australian Meat and Livestock Corporation officials often express cooperation with the U.S. industry as positive, in practice that has not always been the case.
    As evidenced by their own publications, the chairman of the New Zealand Meat Board continually credits their lobbying efforts to bring about the USDA decision overturning the successfully passed promotion referendum of 1996. This is not conducive to cooperation.
    With your permission, Mr. Chairman, I'd like to provide these documents for inclusion into the record. Our association policy requests the Government address unfair trade situation for U.S. sheep producers due to production subsidies of import quotas maintained in the European Union. We feel that could help open up the market for Australia and New Zealand, maybe relieve some pressure here, as well as try to establish some equitable measures for American producers.
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    As the lamb and wool industry in American adapts to rapidly changing market conditions and industry infrastructures, part of which was caused by changing government policy, we cannot allow our lamb market to be driven below cost of production and expect domestic production to survive.
    Mr. Chairman, I thank you and appreciate your continued support and the opportunity to participate in this hearing, and look forward to working with you and the subcommittee.
    [The prepared statement of Mr. Raftopoulos appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you very much for your testimony.
    Mr. Tipton.
    Mr. TIPTON. Thank you very much, Mr. Chairman.
    In the dairy sector, Australia and New Zealand are very important trading partners of the United States. The nature of our relationship, however, is less a function of the volume of trade between our countries than a reflection of our common goals and perspectives on dairy trade policy issues.
    The dairy industries in Australia and New Zealand is much smaller than that of the United States. Australia produce about 20 billion pounds of milk, and New Zealand about 22 billion pounds of milk each year, and that's roughly equal to the production of the State of Wisconsin in each of those two countries. Even when aggregated, the combined production of Australia and New Zealand represents less than 25 percent of the U.S. production.
    Australia exports about 40 percent of its milk production, and New Zealand exports about 80 percent of its production. Australia's dairy sector accounts for about 2 percent of the world dairy production but 10 percent of world trade. New Zealand has about 3 percent of production and about 30 percent of world trade. That's contrasted to the United States, which has about 19 percent of the world's production and only 3 percent of world trade.
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    Clearly, New Zealand and the European Union are the powerhouse exporters and, of course, Australia is an important part of that as well.
    The major problem that we are confronted with in the United States in our ability to trade are the European Union subsidies, and our major priority for the dairy industry in the next few years is to eliminate export subsidies.
    Australia and New Zealand, in part because of the importance of world trade to their dairy industries and also in part because they are probably the lowest cost producers in the world, support this effort. The United States is about the third lowest cost producer in the world, and if we could get rid of the European subsidies, we would be a major participant in world markets as well.
    I've attached to the statement some description of shares of market, and you'll see that there are three areas that dominate, Australia, New Zealand and the European Union, but we are delighted that Australia supports us in this full effort to eliminate the European subsidies.
    As you know, the International Dairy Foods Association, National Milk Producers Federation and the U.S. Dairy Export Council filed a section 301 petition challenging Canada's special milk classes, which is an export scheme to further put subsidized dairy products onto the world market. In late December New Zealand filed a notice that they would join us in that effort, and those cases are being combined, and we look forward to having New Zealand as a partner in that case.
    It also, I think, signifies the importance of export subsidies, albeit even from the country that doesn't export a large amount of product like Canada. It's an extremely important issue for the entire dairy industry.
    We support fast track and would like very much to see fast track legislation passed. I think it is hurting us, particularly in some of the Latin and South American countries at this point, and it's important that that be done as quickly as possible.
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    The last point I would like to make is I think that it is extremely important that U.S. domestic policy stay consistent with a goal of increasing exports. We recently have seen a flurry of activity that is related to domestic policy which, if adopted, in our opinion, would make the United States less competitive in world markets instead of more competitive.
    So if we were to eliminate the European export subsidies, we believe world market prices would rise to a level that the United States would be a major competitor and would increase its share quite substantially without export subsidies.
    Thank you very much.
    [The prepared statement of Mr. Tipton appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you.
    Mr. Krug.
    Mr. KRUG. Thank you, Mr. Chairman, members of the committee. I am David Krug from Owen, WI. I am a dairy farmer and chairman of the Farmers Union Milk Marketing Cooperative. Mr. Jim Eichstadt to my left, general manager of FUMMC, appears with me today.
     Farmers Union Milk Marketing Cooperative is a founding member of the Dairy Trade Coalition. FUMMC and the Dairy Trade Coalition believe in and want fair trade. Thus, your hearing is timely and greatly appreciate, Mr. Chairman. We need and want greater sophistication in negotiating international trade agreements. Our trade agreement needs to provide American dairy producers with a fair shot at penetrating and maintaining foreign markets.
    This can only be done if we are able to compete without having to contend with trade distorting elements such as state trading enterprises. I am proud FUMMC and the Dairy Trade Coalition are working side by side with important farm groups such as the American Farm Bureau, the National Barley Growers Association, the National Association of Wheat Growers and others who share our concerns about state trading enterprises or STEs.
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    State trading enterprises are endemic throughout agriculture and are often statutory import or export monopolies. Research recently conducted by our DTC, based largely on statistical information submitted to the World Trade Organization, indicates there are a total of 159 STEs in operation.
    I have attached a summary of the DTC's work to my testimony. A brief overview of our data will demonstrate to you that, of the countries reporting STEs, over 62 percent of the STEs were in agriculture; 8 percent were in petrochemicals; 6 percent in minerals; and 5.5 percent operate in utilities.
    Monopolistic STEs are of great concern to us. STEs often receive preferential treatment from their governments, such as subsidies, tax breaks, statutory authority to act as a monopoly, or other measures which private sector competitors do not enjoy. This preferential treatment, along with a lack of transparency in pricing, means that STEs are able to unfairly control price and quantity of product into any targeted market to the detriment of their non-STE competitors such as American producers or exporting firms.
    State trading enterprises may use transfer pricing schemes to minimize U.S. tax on their U.S. affiliates. That is, intercompany prices are set at levels where the U.S. subsidiary makes little or no profit on its sales. Under this scheme, it may be possible for them to use tax-free trade profits from their sales in the U.S. market and other arenas to offset losses or competition in other parts of the world.
    These untaxed funds may provide STEs with a competitive advantage against American producers, thus distorting trade and amplifying market volatility. At this point, I want to publicly thank Congressman Ron Kind and Senator Herb Kohl for the work they are doing in the area of transfer pricing.
    Mr. Chairman, recently Mr. Dick Groves of the Cheese Reporter wrote in reference to the Uruguay Round that, and I quote, ''In the end, it would appear that U.S. dairy trade is now becoming subjected to the same forces that the domestic market has been subjected to in recent years, rising volatility and more uncertainty. As global dairy trade becomes more liberalized in the years ahead, we expect dairy trade volatility and uncertainty to increase.'' End of quote.
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    We agree with Mr. Groves, and we are prepared to work with you to meet an uncertain future, for we know that the GATT ushered in a period of great change for the American dairy industry. We were told the future is in exports. Yet I can tell you, the future isn't what it used to be unless something is done about the trade distorting practices of monopolistic STEs such as the New Zealand Dairy Board, the Canadian What Board and the Queensland Sugar Corporation.
    Since the archives of the House Agriculture Committee contain extensive information provided at a full committee hearing on September 12, 1996, by the DTC on how world trade is influenced and manipulated by the New Zealand Dairy Board, I will not provide you with that information today. Much of that same information can be found on the DTC's web page at www.dairytrade.com. I invite you to visit our site.
    Mr. Chairman, some public office contenders have spent a great deal of time arguing over trade. Some have said that we should get of the World Trade Organization, while some maintain that to do so would be protectionist.
    The press has framed the issue as free trade versus protectionism. To me, this is all simplistic rhetoric. Trade agreements have caused concern about job security throughout America. These concerns must be addressed by knowledgeable members of the community working in concert with their elected officials in order to make less onerous the terms of NAFTA and GATT.
    It falls to your sense of fair play to make sure that the issues of STEs and their ability to distort trade is weighed carefully and remedied before our Government negotiators enter into any future trade agreements armed only with ivory tower ideologies and good wishes for a happy future.
    The issue of STEs provides us with an opportunity to help fine-tune recent international trade agreements. It is time that the forces of the United States Government were directed at the activities of STEs, because many of their essential features are directly contrary to the letter of U.S. law and the spirit of competition and fair play in the marketplace.
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    A number of important policy makers share DTC's concerns about unfair trade practices of STEs. Mr. Chairman, I hope that the members of this subcommittee will join their ranks.
    I thank you for allowing me to testify today.
    [The prepared statement of Mr. Krug appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you for your testimony, Mr. Krug.
    Mr. Hardin.
    Mr. HARDIN. I am John Hardin, a pork producer from Danville, IN, and I appreciate the opportunity to be with you once again today.
    I serve as a representative on the Agricultural Policy Advisory Committee to the U.S. Trade Representative and the Secretary of Agriculture. I'm very appreciative of the opportunity to present our views on behalf of U.S. pork producers with regard to agricultural trade with Australia and New Zealand.
    The U.S. pork industry values its trading relationship with Australia. Australia has been a staunch ally of the United States in working to achieve greater trade liberalization in agriculture and in developing disciplines to foster a more open agricultural trading system.
    Unfortunately, however, there is a disconnect between Australia's public pronouncements and the importance of agricultural trade liberalization, on one hand, and the Australian Government's attempts to protect politically powerful sectors of Australian agriculture.
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    This is particularly true in the pork industry where Australia has erected a de facto ban on U.S. pork imports, allegedly to control the transmission of certain animal diseases. However, there is no scientific basis justifying Australia's concerns.
    For example, Australia claims that imported pork could potentially transmit pseudorabies virus, known as PRV, to domestic livestock. However, PRV is transmitted through contact with positive live hogs rather than through pork products. Indeed, Canada, which is PRV-free and a large pork producing and exporting nation, makes no such strictures on U.S. pork products and does not attach any appreciable risk of PRV transmissibility to domestic livestock from imported pork.
    The Australians have made similar claims of transmissibility with respect to Porcine Reproductive and Respiratory Syndrome, known as PRRS, and Transmissible Gastroenteritis, known as TGE. Yet, as with PRV, the transmission of these diseases through imported meat has not been scientifically documented. A risk assessment study vis a vis Canadian imports to Australia apparently confirms that the risk of transmission of the TGE virus through imported meats is minimal.
    Yet another example of Australia's unjustified attempts to ban pork imports involves trichina. The U.S. Department of Agriculture recently coordinated a study in which more than 220,000 pork carcasses were tested under two different methodologies. Not a single carcass tested positive.
    Notably, officials from Australia's quarantine review committee have candidly admitted that these barriers are politically rather than scientifically motivated. As such, they contravene the requirements of the Uruguay Round S&P agreement to follow sound scientific principles and to avoid imposing measures that are maintained without scientific evidence.
    These restrictions, importantly, are creating a disadvantage to U.S. pork producers, in particular. Imports from Canada and Denmark are now allowed limited access to the Australian market. Moreover, experience demonstrates that the process of gaining similar concessions for U.S. pork may be long and arduous.
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    Denmark, for example, began working towards approval in 1994 and waited until 1997 to gain the limited access it now enjoys.
    In response to calls for Australia to open its market to imported pork, the Australian Government has undertaken several initiatives aimed at enhancing its pork exports to lucrative Asian markets.
    For example, Australia has authorized 10 million in funding to its pig industry over the next 3 years to develop export trade, particularly with respect to Japan. This financial aid is being bolstered by various initiatives aimed at securing Australia's position as the supermarket to Asia.
    Although it's too soon to tell the extent to which these efforts will come to fruition, the U.S. pork industry is concerned about the increasing presence of Australian pork in Asian markets. The Australians have already demonstrated their import market power in Indonesia, where they maintain a stronghold on imported beef.
    Even though the Australian plan to boost pork exports is, by itself, problematic, it demonstrates the importance of maintaining or developing market access potential for U.S. pork exports in every export market where pork is consumed.
    Further, while the Australian pork market is relatively small compared to most Asian Pacific markets, the U.S. pork industry is committed to exporting pork to all consuming nations, regardless of size. Importantly, Australia's import market is expanding. The Australian import market for pork for processing, primarily into ham and bacon, is already established, and the market for deli meats is growing.
    Given the importance of exports to the future financial health of U.S. pork producers, the United States must work to eliminate Australia's ban on pork imports, as it does not stem from sound science. Otherwise, Australia, one of the most outspoken countries on behalf of free trade in agriculture, will be setting a poor example for developing countries by flaunting the basic rules of agricultural trade at the expense of the U.S. pork industry.
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    Thank you.
    [The prepared statement of Mr. Hardin appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you.
    Mr. Roenigk.
    Mr. ROENIGK. Thank you, Mr. Chairman. I am Bill Roenigk, vice president with the National Broiler Council. Our organization represents companies that produce, process and market chicken, both domestically and internationally.
    Our members market several hundred different types of chicken products to well over 100 countries around the world. We certainly appreciate this opportunity to share our concerns on this important trade issue.
    Poultry consumption in Australia is something over 60 pounds per person. In New Zealand, it's almost 60 pounds, about 55 to 60 pounds. Here in the United States, poultry consumption is over 90 pounds. So we believe there is room for growth in both Australia and New Zealand in terms of poultry consumption.
    What the markets need in Australia and New Zealand are more consumer friendly prices and a wider variety of products, both at the lower end of the market and the higher end.
    Imports of poultry from the United States can provide value products. They can provide a wider variety of products, and they also can offer a very high quality level of healthiness.
    We had hoped the last round of the multi-lateral trade negotiations would, in fact, lead to an opening of these two markets, but as we know, as we've heard, that has not happened. This committee will also recall that in April 1997 the European Union closed its border to U.S. poultry. After more than three decades of exporting poultry to the European Union, the border was closed to us.
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    That was a loss estimated by our Department of Agriculture of over $50 million on an annual basis. USDA said they would help us regain or gain other markets to help replace this loss to E.U. market. Australia and New Zealand were listed as two of the 12 countries that would be good possibilities and receive the focus of the Department in trying to replace this loss of a $50 million market.
    The markets, as you are aware, are not open, and it doesn't appear that they are moving in that direction. to the contrary, Australia in November of last year increased its already very stringent quarantine requirements for imported cooked chicken.
    As Mr. Kleckner pointed out, now if you want to export chicken or import chicken into Australia, you need to cook it to 158 degrees Fahrenheit for 143 minutes. That condition renders the product unsuitable for human consumption. Scientists will tell you that 140 degrees for 20 seconds will kill all pathogens—140 degrees for 20 seconds.
    We think this nontariff trade barrier must be challenged, and we think it can be challenged. It is now time for Australia and New Zealand to open their markets to U.S. poultry. As Mr. Hatamiya indicated, the market would be somewhere between $7 to $14 million. That's pretty close to what we believe. We believe the first year could be $5 to $10 million for these two markets, and in time could easily grow to $20 to 25 million in 2 or 3 years.
    We appreciate the opportunity to share our input with you. We look forward to working with the committee, USDA and USTR to achieve a successful resolution of these issues. Thank you.
    [The prepared statement of Mr. Roenigk appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you very much. Just to start off, Mr. Roenigk, that was one of the issues that we spent a considerable amount of time on when we were in that part of the world. At times, it appears that we were making progress. I am, I guess, guardedly optimistic that we will make progress in the near future on that issue.
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    I know that that is something that Chairman Smith has stayed very much on top of since we returned, and that there have been communications between us and them over that particular issue. Hopefully, in the not too distant future we can come to some kind of conclusion on that.
    Mr. ROENIGK. That's very good to hear. Thank you.
    Mr. POMBO. Mr. Tipton, one of the things that you mentioned in your testimony was something that we heard from the dairy farmers in New Zealand and in Australia. We spent a great deal of time with them when we were over there. We visited several dairies while we were there, trying to figure out exactly what it was they were doing.
    One of the things that they mentioned was that they felt that the subsidies coming out of the European Union artificially held down the world price on dairy products, that they felt that if everybody competed on an equal basis that the actual price would be higher than it currently is.
    You mentioned that in your testimony. Would you care to go into that a little bit more?
    Mr. TIPTON. Yes, sir. I think, very clearly, that European prices are the way they are, that world market prices are at the level they currently are because the European community primarily, there are a few others, but primarily the European Community has subsidized exports and done so extensively.
    The United States, back during the period when we were subsidizing exports rather extensively and were giving away substantial amounts of surplus, had 50 percent of the world market trade as well. When the United States began to discontinue that or to reduce it very substantially, our share of the world market declined drastically to the current levels, which are extremely small.
    We believe that, if the Europeans were not subsidizing exports, that the world market price would probably approach a level at the minimum level in the United States, because we are the third largest lowest cost producing country, and I would suspect that those prices could easily rise into the $10-plus level on a world market basis.
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    Mr. POMBO. Well, that seems to confirm what they're saying in terms of they feel that the real world market price would be in excess of $11 if we didn't have to compete with the subsidized countries in that respect.
    I know that I found that very interesting on the trip, that they took that position.
    Mr. TIPTON. I think that's the single most important thing for the United States to enjoy an export market, is to get rid of the subsidies. The Europeans are, by far, the largest. The Canadians have just implemented a similar system.
    Quite frankly, we have some concerns that the U.S. policy, as proposed by the Secretary in the new Federal order reform package which puts in a class IV pricing proposition, probably doesn't help. I'm not saying it's a direct subsidy, but it probably will depress world market prices somewhat, and we have some apprehensions about that as well.
    Mr. POMBO. Mr. Kleckner.
    Mr. KLECKNER. Thank you, Mr. Chairman. I'd like to respond to that also. I agree with Linwood Tipton on that, and I saw other heads nodding at this table.
    I mean, you can make the case for dairy, for sugar, right on down the list. If there's one thing, seems to me, that ought to be accomplished in the next round of WTO, it's to eliminate on a time-certain basis export subsidies. They cannot be justified for us or for anybody else.
    In fact, if I'm not mistaken—Len Condon probably knows this for sure—but I've been told a number of times that the only area of world commerce where export subsidies are allowed is in agriculture. They don't allow them anywhere else. You can't have export subsidies on fountain pens or refrigerators or cars, but in agriculture we allow them.
    So somehow if we can, for everybody in the world on a time-certain basis—that may take 5 years or 10 years or even 15 years—eliminate export subsidies in the next GATT or the next WTO round, that would do more to bring equity and market pricing in the world than anything else we could do.
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    Mr. POMBO. Well, I don't want to get on my soapbox, but since I'm chairman, I will.
    In going around the world and talking to different countries, different trade people, one of the things I've noticed is that for them agriculture is No. 1 when it comes to trade agreements. They will fight for everything they can on agriculture, and in this country, a lot of times, I've felt like agriculture was treated as a bargaining chip.
    I think that, going into the next round of negotiations, agriculture has to be the most important thing for us. I think it would make a huge difference in our competitiveness in the world market if agriculture was treated just as important as computer chips or CDs. I think that that is a message that all of us need to send to the administration, around the world, that that is extremely important to us.
    Mr. Condon, I will include in the record the printouts that you've provided. One thing that did concern me—I was flipping through them, and it was a magazine article that was included. I believe this is Wool Magazine from September 1996.
    You have underlined in here,
    The deal will allow Australian wool growers to exploit Mexico's open door to the United States from 2003 under the NAFTA agreement by offering assistance to Mexico's wool textile industry. The signing of the trade agreement with Mexico in July will page the way for fabric and clothes made from Australian wool and manufactured in Mexico to enter into North American market, avoiding U.S. tariffs on raw and processed wool and dramatically boosting Australia's exports.
    That's of concern to me, exactly how that's put together. So I'm sorry, that was from Mr. Raftopoulos. I got them backwards. Would you care to comment on that?
    Mr. RAFTOPOULOS. Well, with NAFTA, what happened on the wool was it was a yarn forward agreement, not a fiber forward agreement with NAFTA, which allows Australia to come in and finance and supply these firms with the dollars and the wool to come up through Mexico and bring the yarn forward, because that's the way it was negotiated earlier. That's the concern we had there, but that's happening everywhere.
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    I mean, you know, we see that. That was one of the loopholes we fought with NAFTA and with trade agreements, and I think you're right. I think you hit it earlier, Mr. Chairman, when you said that agriculture was a bargaining chip. No matter how much we tried to bring out the issues, whether it was in NAFTA or GATT, that affected those specific industries, we were bargained away.
    I think that things like this could happen down the road where we need to be in the forefront, but that's what happened on the wool, and I have to look at this specifically, but that's exactly what—they are utilizing the NAFTA agreement with Mexico and the yarn forward agreement to bring in their wool, to produce it there, and with the yarn forward agreement be able to ship it into the United States to sell it without restrictions.
    Mr. POMBO. I think that's something that probably concerns everybody sitting at the table, and these are the kind of issues that agriculture in general needs to be united on, so that we are competing on a level playing field and we know exactly what we're agreeing to in those particular agreements.
    Mr. Johnson, did you have any questions at this time?
    Mr. JOHNSON. Yes, a few questions I know Collin Peterson joined with me in asking, that he was sorry he had to leave, but asked me to ask some questions, two things probably upsetting.
    One, I'm sorry I'm up here drinking a cup of coffee, and I promise I'll have milk next time. Second, here's an article that upsets me. It was in the Green Bay Press Gazette, home of the cheeseheads: Cheese to be Imported from New Zealand.
    Let me ask Mr. Krug and Mr. Eichstadt a couple of questions. You referred to your web site earlier, and I understand on that web site that you produce, there's a letter that indicates that the New Zealand Dairy Board, in the terms of the letter, attempted to collude with another country to monopolize an important cheese market.
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    Do you think that it may demonstrate a tendency to engage in any anticompetitive behavior, contrary to the letter and spirit of our antitrust laws?
    Mr. KRUG. Mr. Johnson, I defer to Jim Eichstadt.
    Mr. JOHNSON. All right.
    Mr. EICHSTADT. Yes, Mr. Johnson, you are absolutely correct on that point. It's a major concern, and it needs to be addressed.
    Mr. JOHNSON. Mr. Dooley.
    Mr. DOOLEY. If this is going to be a part of the record, I'd be interested in knowing, you know, if we can get a copy of that letter, insert it into the record, so we know the source of it.
    Mr. JOHNSON. Do you have a copy of that letter?
    Mr. EICHSTADT. Not on me, but it's available over our web site, and we would be happy to provide it for the record.
    Mr. POMBO. Without objection it will be put in the record.
    [The information appears at the conclusion of the hearing.]
    Mr. JOHNSON. Thank you. Does the New Zealand Dairy Board control any of the import licenses for New Zealand cheese in the United States?
    Mr. EICHSTADT. Yes, they do. They control about half of the licenses, as I understand it, and they use preferred importers to further control the market. So this is a major concern also.
    Mr. JOHNSON. And in your opinion, the effect is what on American producers?
    Mr. EICHSTADT. Well, it's anti-competitive. It restricts competition and harms our producers, we believe.
    Mr. JOHNSON. What about steps that you have in mind that may be used as corrective measures? We've talked about corrective measures and, obviously, we have to wait sometimes until the new round of trade talks in 1999. Do you have corrective measures in mind?
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    Mr. EICHSTADT. Well, in fact, we do. We have been discussing certain remedies with other agricultural groups we've been working with in this regard. There have been discussions with different agencies of the Federal Government, and we've even engaged in dialog with our international colleagues on this, and we would be happy to provide you with some specific recommendations which this body could use in fashioning remedies to the problem.
    Mr. JOHNSON. Be happy to do that. You would send those recommendations that you have?
    Mr. EICHSTADT. Yes, sir, we'd be happy to.
    Mr. JOHNSON. Thank you. Those are the questions I have for the two of you, Mr. Chairman.
    Mr. POMBO. Mr. Dooley.
    Mr. DOOLEY. Thank you, Mr. Chairman.
     Mr. Tipton, you made the statement that the European Union subsidization of dairy products has a downward pressure on world milk prices. Would you say the same is true of our DEIP program?
    Mr. TIPTON. Yes, I think it has the same kind of impact. It's the same kind of subsidy. The slight difference is that I think there is an effort to make the U.S. DEIP program not aggressively setting prices, but following prices, and I think there is a conscious effort to do that. Whereas, I think the European markets are aggressively trying to dispose of their surplus and, therefore, moving—or affecting the prices much greater, but they both have the same impact of downward pressure.
    Mr. DOOLEY. Mr. Krug, would you agree with that, that the E.U. subsidies are having downward pressure and that DEIP also could have that same impact in lowering milk prices, which impacts U.S. producers?
    Mr. KRUG. I think anytime we have subsidies, it does have a tendency to have downward pressure. However, there are some other issues, I think, that would kind of differentiate between the European system—part of the system and the STE issue.
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    Mr. DOOLEY. I guess, would you contend, Mr. Krug, that one of the greatest problems facing U.S. producers is the E.U. subsidies? Or whoever. I don't know.
    Mr. EICHSTADT. Mr. Dooley, I would say that the E.U. subsidy issue is of some concern, but given the European experience with hunger over the course of two major world wars, we don't believe it's realistic for them to——
    Mr. DOOLEY. These are export subsidies, aren't they?
    Mr. EICHSTADT. These are export subsidies, yes. We don't believe that they will drop those subsidies at the level that some in this country would like to see in the short term or the mid-term. That may be possible in the long term, but we don't think it's a realistic negotiating strategy on our part to pursue that in the short term.
    Mr. DOOLEY. I guess, you know, as a followup, I guess, to that is that I guess I have difficulty. If we accept that the E.U. subsidies—and when it comes specifically to dairy or what is precluding, you know, I guess, the opportunity to have a more rational international pricing and marketplace for milk products, it makes sense for the United States to be a strong advocate for the reduction of those subsidies, does it not?
    Mr. EICHSTADT. There are people pushing for the reduction of those subsidies.
    Mr. DOOLEY. Well, what is the position of the Farmer's Union. Are you not advocates for the reduction of the European subsidies for export subsidies for milk products?
    Mr. EICHSTADT. I would say we are, yes.
    Mr. DOOLEY. Okay. Well, then I guess, you know, what I was really—Mr. Kleckner, I think, you know, you're representing the American Farm Bureau, and you folks have been strong proponents of fast track and a number of other issues.
    Is it not your contention that the only opportunity that the United States has to provide leadership in the world in order to reduce and to effectively effectuate a reduction in the E.U. milk subsidies is really for this country to have a seat at the table the next round of WTO. Is that not correct?
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    Mr. KLECKNER. You're absolutely right. We're losing that leadership position right now. I mean, talks haven't started yet, but because we don't have fast track, the world is perceiving us as not a player at the table.
    I hope that can be reversed this year, if not this year—because it could—you know, honestly, I got to say, because it wasn't done last fall, it may not be any easier to get it done this spring, although I think there are some House members that have changed their minds on the fast track issue.
    You're right, Mr. Dooley. We're away from the table, and we're not going to be at the table other than being there to set the size and shape of the table and how soft the chairs are, until we have fast track.
    It really bothers me that—and I have, you know, dairy farming friends and members in the United States and Durham growers and tomato growers in Florida that are, in essence, saying we didn't get everything we wanted the first time; we got fooled. Our negotiators got out and negotiated, which I don't happen to believe to any degree happened, but we didn't get everything we wanted in retrospect. So they're saying, in essence, something that we've all heard said, fool me, fool me once, shame on you; fool me twice, shame on me.
    So we're not going to be fooled again. We're not going to support fast track. I just say to them, you don't fix what's wrong other than in the context of a new agreement, and you don't get new agreements without fast track, because we're not at the table.
    So if you really believe you want to fix what's wrong with tomato dumping from Mexico or Durham competition in North Dakota or dairy—lack of dairy exports to Canada because they converted to high tariffs, all of those things are problems, but you fix them in the context of new agreements and no other way.
    So unless we have fast track, we ain't going to fix what's wrong. So let's go with fast track.
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    Mr. DOOLEY. I thank you for those comments, and I thank American Farm Bureau as well as the Meat Institute and the IDFA folks, as well as National Pork Producers and the Broiler Council for providing leadership to try to ensure that more of our producers understand that the only way that we're going to address some of the unfair barriers and unfair competitive situations that we find in the world agriculture market is for us to have a seat at the negotiating tables. I just commend you for that effort and, hopefully, we'll be successful in the near future.
    Mr. HARDIN. Mr. Dooley, we thank you for the leadership you've given us. Thank you very much. If I might just add to that comment, from the standpoint of the 1996 farm bill, this committee passed out a farm bill that depends upon exports, research to replace Government supports, and without positive action the popular sentiments will rise, and you'll have people standing here asking for protection once again.
    I don't think our budget can support that. So it is absolutely vital that we find some way that a majority of both houses can move forward, and I'll leave that to you legislators, but we have to find some way that we can move forward or we'll pay very serious consequences. In effect, when we talk about what's going to happen in 1999 as far as the United States is concerned, not much will, if we don't find a way to be at the table.
    Thank you again.
    Mr. KRUG. Mr. Chairman.
    Mr. POMBO. Yes, Mr. Krug.
    Mr. KRUG. Before Mr. Dooley leaves, it was very noticeable, Mr. Dooley, that you eliminated or omitted the Farmer's Union in your inclusion of the supporters of fast track. I just want to make it clear. It is also very noticeable that under the Uruguay Round, dairy was the sacrificial lamb or one of them—excuse me—and we lost big.
    We lost on the section 22 quota limitations. We lost on the market access provisions, and before we as an industry, at least our organization, can come about and suggest to our representatives that they support fast track, we need to have some assurances that the flaws in the past agreements will be addressed and will be fixed.
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    Mr. DOOLEY. I appreciate your comments, and there's, obviously, some difference of opinion within the industry, as well as between you and I; because the National Milk Producers did, in fact, support the fast track and the passage of the Uruguay Round, I believe.
    That was based on, yes, that we might not have had—we didn't achieve every success we wanted in the negotiations, but based on comparing the status quo with the significant and, from a volume standpoint and a gross standpoint, we saw a significantly greater reduction in the subsidies in Europe than we did prior to those negotiations.
    Yes, we would like to do better, but the only way we're going to do better is by this country having and providing the leadership in the next round of the GATT talks. If you withdraw us, the European Union is going to have a seat at the table, and you can be damn sure that they're going to continue to promote their continuation of subsidies.
    I have a hard time understanding how my milk producers and milk producers that are part of your group have anything to gain by the status quo.
    Mr. POMBO. Mr. Peterson.
    Mr. PETERSON. Well, I'd just like to point out that the National Milk Producers didn't support fast track until the last week when they were reluctantly drug to the table. So it was not an enthusiastic, ringing endorsement of fast track, because of, you know, some of the things that was discussed here.
    I understand everything everybody is saying, but I just need to say this as a message from northwestern Minnesota, that we are the people that are the reason that I voted against the farm bill, and we're experiencing right now what the problem with Freedom to Farm is.
    Everybody better listen to this, because at some point a lot of you are going to be in the same predicament. The problem I had with Freedom to Farm—I mean, there's a lot of good things in there, but we did not—we put our farmers into a world market that they have no control over. We put them into a situation where they have absolutely no control over the value of the dollar and all this other stuff that's going on, which is fine. That's where we're heading.
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    The problem is we didn't give them the tools to manage this, if things go wrong. What happened up in our country is we've had five crop losses the last 5 years because of scab and weather, and our guys—These are the good farmers. There's no bad farmers left. They've lost equity every year, and now this year, I would say, 25 percent of the farmers in the five counties up in northwestern Minnesota are not going to be farming.
    I think there's going to be land that's not going to be farmed, and it's literally the Government that's at fault. The big problem is they can't get crop insurance to cover the input cost of their crops, because the crop insurance system. Every year you have a loss, it takes it out of what you can cover, and so now they can buy $80 worth of coverage when they got $120 in the ground.
    The banker is saying we aren't going to finance you. So we brought USDA up there, and they said, well, we sympathize with what your problem is, but we can't do anything about it, because we got to go through the Administrative Procedures Act, and we can't do anything until next year.
    Then they come back here, and they say we got to pass an IMF thing in one week or the whole thing is going to go to hell. So the message back to my farmers is that it's more important that we bail out big banks in Korea than it is we take care of people at home.
    I mean, we got rid of the disaster program, and we promised people that we were going to give them a crop insurance system that would work. We have not done that. The crop insurance system does not work, and I will argue that the reason we can't get crop insurance is because of us, not—because the insurance can't do it because we've got too much Government regulation in the way of getting it done.
    Then they tell us that we're supposed to switch crops, which is tough to do up by the Canadian border in that particular area; and when they try to switch crops, you can't do it, because you can't get crop insurance to cover the crop that you want to switch to.
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    You know, we're a little pocket of 10 counties, five in Minnesota, five in North Dakota, that got hit with this. I'll guarantee you, if we had 15 States that were in this situation, there would be something changing. We're sitting up there twisting in the wind, and nobody is helping us.
    You know, part of the reason that there's resistance to fast track—it isn't just the dairy problem that was out there and the Durham problem and all this and that. They just feel like they've been left by the Government, and I think they're right.
    You know, somehow or another, we've got to address this, and I've been talking to Chairman Smith and Charlie Stenholm and others, and I don't know if we're ever going to come up with a solution; but that's where a lot of this concern comes from.
    If we're going to get into this world market where we have no control over all these things that happen, as I said earlier, we've got to have something to underpin this so that our economy can stay together. Right now, we don't have it.
    I'm not going to vote for fast track unless we get a crop insurance system, a revenue coverage system, that will underpin my farmers so, if everything goes to hell, they are at least going to be able to stay in business. And I'll get off my soapbox, but I just had to say that, Mr. Chairman.
    I don't have any questions. If I asked any questions, I would probably repeat something that somebody said, but thank you for letting me get that off my chest.
    Mr. POMBO. You're welcome. I'm going to go ahead and dismiss this panel. We probably will have further questions to ask that either members that weren't able to be here or others would like to ask of you. Those will be submitted to you in writing and, if you could respond to those in a timely manner, they will be included in the hearing record.
    So thank you very much, all of you, for your testimony.
    Mr. POMBO. I'd like to call up the third panel: Mr. William Joyce, vice president of the North American operations, representing the New Zealand Meat Board; and Mr. Jim Hepburn, chief executive officer, Milk Products Holdings Inc., representing the New Zealand Dairy Board.
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    Thank you very much for joining us today. Mr. Joyce, if you are ready, you can begin.
    Mr. JOYCE. Thank you, Mr. Chairman. I'm Bill Joyce of the New Zealand Meat Board. I am accompanied today by Mr. Edward Farrell of the law firm, Wigman, Cohen, Leitner & Myers.
    We appreciate this opportunity to share with you our thoughts concerning the current state of agricultural trade between our countries and the future prospects for that trade in beef and lamb.
    Established in 1922, the New Zealand Meat Board is a statutory body representing the livestock producers of New Zealand. However, the meat board does not export meat. It does have the responsibility for the overall coordination of export activities.
    Thus, the board follows with interest developments in the international trade arena, and is pleased to offer its views to the committee on the impact of these developments.
    As you are aware, New Zealand is a major supplier, along with Australia, of manufacturing beef to the U.S. market. Indeed, the United States is the most important beef market for New Zealand, with around 56 percent of New Zealand's beef exports coming here in 1997.
    While the U.S. lamb market is less significant in volume terms, it is, nonetheless, an important and recently growing export market. In 1997, New Zealand shipped roughly 31 million pounds of lamb to the United States, equating 4.5 percent of our lamb exports.
    The current situations in the beef and lamb markets in the United States are quite different. So I would like to take a moment to review our perspective on each.
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    First, beef. With respect to the U.S. beef trade, the single most important recent development was the repeal of the meat import law, pursuant to the Uruguay Round agreement.
    As the committee is well aware, since 1964 beef imports were subject to the strictures of the meat import law, which in practice caused considerable price volatility in the U.S. market for imported beef. This volatility not only affected New Zealand cattlemen, but also the profitability of U.S. importers, transport operators, and shippers.
    Given this industry profile, the Uruguay Round's abolition of the meat import law can only be of overall benefit to the U.S. economy. The meat import law has been replaced by tariff rate quota of some 656,000 tons, of which New Zealand has been allocated 213,402 tons.
    Access is generally consistent with historical levels of beef imports from New Zealand. In fact, in recent years New Zealand and Australia have not filled their tariff rate quotas.
    For the United States there have been considerable changes in the beef sector which have been abetted by the Uruguay Round agreement. I think, most notably, these changes have been that U.S. beef exports have increased while U.S. imports generally declined to the point that the U.S. economy had net beef export by value, although admittedly not by volume.
    The improved market access under Uruguay Round agreement has also created opportunities for New Zealand beef industry, notably in Asia.
    Turning to lamb. Certainly, ever since the end of the last World War, the U.S. market for lamb has been in steady decline. Sheep inventories are now less than a fifth of what they were in 1940. The per capita consumption has dropped to a very low level of barely one pound per person.
    The U.S. sheep industry has been caught in a declining spiral with lower supplies and high marketing costs, tending to hold retail prices above those of competing red meat and poultry, therefore reducing further consumption. In addition, lamb remains far more dependent on traditional holiday meals.
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    Lamb continues to be sold in an increasingly restricted market without widespread brand identification. The lack of product consistency has always been troublesome. To its credit, the industry has tried to address this problem through changes in the grading system and introduction of a certified lamb program, and has developed an industry strategic plan to address the wider issue it faces.
    The New Zealand Meat Board has supported both Congressional hearings and in marketing forums these developments. However, if the industry is really going to succeed in reestablishing lamb in the domestic market, it must stop trying to sell what it produces and instead focus on what the market wants, with a supply on a year-round basis of a consistent product.
    New Zealand has made some modest gains in this market by adopting this approach. In fact, imported and domestic lamb, to a significant extent, are sold in different market segments.
    Because much of the imported product is frozen, it suffers greatly in competition with fresh domestic lamb at retail. For the food service sector, however, this preference for fresh, while undeniable, is less than significant.
    The New Zealand industry has focused its energies on this part of the market. The result is that currently nearly 75 percent of New Zealand lamb sales in the United States are to the food service sector. This is a virtual mirror image of the domestic sales, which are at least 75 percent to the retail sector.
    The New Zealand lamb chilled trade, accounting for around 21 percent of our market in the United States has developed in response to the demands from particular market segments, such as specialty retail outlets and white tablecloth restaurants.
    I think, in summary, Mr. Chairman, the U.S. market will continue to dominate New Zealand's beef industry in the long term. However, we don't see our production significantly increasing in New Zealand of beef, because of calls on other land uses in New Zealand.
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    For lamb, again, land use changes in New Zealand have meant that the opportunities to increase sheep numbers in New Zealand are limited. Although there is likely to be some further improvement in productivity, opportunities for significant increases in lamb production for export are limited.
    This factor, combined with the financial benefits of exporting product to the European Union, means that the New Zealand lamb sector is unlikely to change significantly in the medium term in its pattern of markets.
    In terms of New Zealand's lamb trade, the United States comprises just 5 percent of New Zealand's lamb export trade, and New Zealand supplies only around 10 percent of the lamb market in the United States Although this may grow in the future, we are only too willing to work with the U.S. sheep industries in making sure that lamb is on offer to consumers throughout the year.
    Thank you, Mr. Chairman. That concludes my address.
    [The prepared statement of Mr. Joyce appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you.
    Mr. Hepburn.
    Mr. HEPBURN. Mr. Chairman, my name is Jim Hepburn, and I'm the chief executive officer of Milk Products Holdings (North America) which is a wholly owned subsidiary of the New Zealand Dairy Board, and it's based in Santa Rosa, California.
    We appreciate your interest in our part of the world, and we are delighted that the House Agriculture Committee was able to visit New Zealand in December 1997, and was able to see something of the New Zealand dairy industry. We see today as a useful followup to the discussions we had at that time.
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    As you saw in New Zealand, Mr. Chairman, agriculture plays an even bigger role in the New Zealand economy than it does here in the United States. Agricultural products account for more than half of all New Zealand exports. The dairy industry alone earns one-fifth of New Zealand's total export income. It's New Zealand's No. 1 exporter.
    Our dairy industry is small by international standards, but it's highly efficient and overwhelmingly export oriented. This year the New Zealand dairy industry will produce around 24 million pounds of milk, close to 95 percent of which is exported. In comparison, U.S. milk production stands at around 156 million pounds, only a tiny fraction of which will be exported.
    Our competitive advantage lies in our pasture based dairy farms which produce milk seasonally rather than all year round. This is a low cost method of farming made possible because New Zealand is blessed with a temperate climate and good rainfall most of the year.
    A key part of New Zealand's cooperative approach to milk production and marketing is the New Zealand Dairy Board. While some 5 percent of New Zealand milk is sold by the cooperatives in competition with each other on the domestic market, most of the remainder is exported by the New Zealand Dairy Board.
    The dairy board has a cooperative shareholding structure. As detailed in my statement, although the dairy board has a unique structure, its operations are strictly conventional and are funded directly and exclusively by the dairy farmers of New Zealand. The costs are paid for by the board from its sales revenues before the disbursement of those revenues to the manufacturing dairy companies and, through them, to individual dairy farmers.
    There are no government subsidies for the production of milk, the processing of milk, or the export of dairy products from New Zealand. The price that the farmers receive for their milk is completely market determined.
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    The domestic New Zealand market has no government intervention, and imports take place over very low tariffs, including zero tariffs for butter and cheese. The dairy board has no role in relation to dairy imports into New Zealand.
    New Zealand is a major participant in international dairy trade. It has between 25 and 30 percent of the world dairy market, depending on the year and how the calculations are done. That makes New Zealand the second largest player after the European Union, which has around 45 percent market share, but the international dairy market is very small.
    Little more than 5 percent of total world production of milk is traded between nations. The rest is consumed domestically in the country of origin. We may appear to be a big fish, but our pond is regrettably small.
    The international market is characterized by several major sources of distortion, export subsidies, market access constraints, and high levels of domestic support. Such protectionist policies are not available to the New Zealand dairy industry. Our economy could not support them, even if we wanted them.
    Our keen interest is to eliminate these distortions, a goal which we believe the United States dairy industry increasingly shares.
    Trade in dairy products between New Zealand and the United States is characterized by the same dichotomy as New Zealand's dairy trade generally. Namely, it is significant from New Zealand's perspective, but not nearly so substantial when viewed from the perspective of the consuming market.
    The United States market is mostly supplied from its own production, with the role of imports from New Zealand quite limited except in products where there is little or no domestic supply.
    New Zealand's largest exports to the United States are casein, caseinates and other specialized milk protein products. We are the principal supplier of these products to the United States market.
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    On the other hand, from the United States' perspective, imports of cheese from New Zealand represent just 0.6 percent of total United States cheese consumption. The remainder of our trade comprises butter, nonfat dry milk and whey products.
    Much of our trade to the United States is licensed, with many licenses allocated on either a historical basis or a lottery basis, thus conferring a buying monopoly on the license holder. In our view, this is the most complicated dairy import administration system to be found anywhere in the world. However, there are significant common issues for the United States and New Zealand dairy industries.
    The New Zealand and the United States dairy industries are significantly different in size and orientation. The U.S. industry's dominant concern is its domestic market, while New Zealand is focused on the export market. However, the U.S. industry is becoming an increasingly significant exporter.
    While in the past exports might have been seen primarily as a surplus disposal mechanism, in recent years the U.S. dairy industry has become much more focused about marketing and promoting its exports. The creation of the U.S. Dairy Export Council is testimony to this trend.
    As a result of this enhanced export awareness, the U.S. industry has a major interest in the further liberalization of trade in dairy products. The Uruguay Round made a useful start in disciplining export subsidies and opening up markets, but the international dairy market remains characterized by high levels of government intervention.
    We look forward to working with the United States in the next round of multilateral agricultural negotiations to bring an end to these policies so that we can all compete on a level playing field.
    There is good potential for New Zealand and the United States to work together on trade issues of mutual interest. We are already working well together in regard to Canada. At the behest of both industries, our governments are pursuing WTO action over the Canadian special classes scheme, which we believe is a thinly disguised export subsidy scheme, despite Canadian assertions to the contrary.
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    We are keeping in close touch with United States dairy industry groups on this important issue. We also support the United States in opposing European Union efforts to weaken the Uruguay Round disciplines on cheese subsidies by tinkering with its Inward Processing Relief scheme for processed cheese.
    In broader terms, the objectives of the United States and New Zealand dairy industries in further multilateral negotiations appear to be very similar. The New Zealand Dairy Board supports the points made in a joint letter to the administration dated August 11, 1997 from the Dairy Exporters Council, the National Milk Producers Federation, the International Dairy Food Association and the American Dairy Products Institute.
    Those objectives include: Full compliance with Uruguay Round commitments; further major export subsidy reductions; improved market access; more transparency in state trading enterprises; and reduction of domestic subsidies.
    In conclusion, the message I would like to leave with you is that the U.S. dairy industry has the potential to be internationally competitive in the export of dairy products. The key to the U.S. dairy industry realizing its potential lies in the control and elimination of export subsidies which distort and lower prices internationally.
    We urge the U.S. industry to take up the elimination of export subsidies as its number one issue. However, that does not sit well with continuing calls for full funding of the Dairy Export Incentive Program.
    The DEIP is ultimately self-defeating, because it contributes to lower world prices, making it harder for the United States to adjust and compete in a fair fight on the world market.
    As dairy exporting nations, we have common interests which we should pursue together as far as possible. We look forward to working with the United States dairy industry and our respective governments to achieve these goals.
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    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hepburn appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Thank both of you for your testimony.
    We did have an opportunity while we were in New Zealand to spend quite a bit of time with producers, with farmers there and discuss a number of different issues and, hopefully, to understand exactly what their perspective was on U.S. policies and to work out some of the differences that we had.
    It was interesting to me, essentially from the dairy perspective and what we're going through in the United States right now, to have the opportunity to sit down with dairymen and hear them fight the way mine do. That made me realize that dairymen just don't agree with each other, no matter where they are.
    In going through all that, New Zealand has done an extremely good job in being competitive on the world market, in reforming their system. I think that we do have something to learn from what they went through, and I look forward to further discussion with you in moving to those goals of opening up world markets, which is something that I think all of us look forward to.
    In terms of the lamb industry, one of the questions I had as we were over there was that a lot of the guys said that they had a declining market, that the world price just wasn't any good for anybody right now, that they had less lambs than they had ever had, and that they were going through a lot of land conversion, that people that used to pasture lamb were now into dairy or deer or something else.
    Is that a trend that you see continuing?
    Mr. JOYCE. Mr. Chairman, the trend has been quite significant over recent years. Roughly, about 50,000 hectares a year have been converting out of sheep—let's say, sheep and mixed sheep meat farms into forestry. We think there are forecasts that now that trend is declining, and we should see a stabilization of our total sheep flock over the next few years.
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    I think that's because sheep meat prices, especially in Europe, have recovered over the last year. Forestry prices aren't looking quite so attractive as they were, let's say, a few years ago and, as a result, there is a stabilization occurring.
    Having said that, we don't really see any expansion in our sheep flock. We think the purpose for alternative land use, especially for forestry but also for, say, urban lifestyle blocks, is such that we won't see it in any increase.
    Mr. POMBO. Well, thank you very much.
     Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman.
    Following up on that, we had some discussions with guys going out of cattle and starting to raise replacement heifers for dairy and so forth. If the dairy market—I guess maybe this is to both of you. I'm not sure which one—expanded substantially, how much more expansion would there be in dairy, and would we see some more shifting of sheep to dairy or would it be from cattle to dairy?
    I think that somebody told me some estimates of how much more you could expand. So I guess I'm asking two things. How much do you think you would expand, and what is the maximum amount that you can expand?
    Right now you've got, what, 20 million metric tons?
    Mr. HEPBURN. Twenty-four.
    Mr. PETERSON. Yes. So if you converted everything to dairy, how much could you put out, and where do you see that trend going? It's maybe not a very good question.
    Mr. HEPBURN. I understand the question. We have seen a considerable swing into dairying in the last 5 years. There's been several significant factors involved in that, and it's really because dairying has been the most profitable land use option in New Zealand for land that was suitable for dairying.
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    So as Mr. Joyce was explaining, there's been quite a big swing of sheep and beef farming into dairying, where it was possible to do so.
    I would say that in the north island, which has always been, certainly for the last 30 to 40 years, the predominant dairying area, there is not much more land available for conversion to dairying, and I think the slowdown that Mr. Joyce has been explaining is a factor in that.
    In the southland, particularly down in the very bottom of the South Island at Southland, there is considerable more land available which could be converted into dairying; but we've had increases in the order of 8 to 10 percent for the last 2 or 3 years in milk production in New Zealand, in part driven by conversion into dairying.
    They are also in part driven by the need for farmers who are converting their production into shares in their cooperative dairy companies, which actually incentivized them to increase their own production for a couple of years, because they were getting bonus shares in return for increased milk production.
    So we're going to see that slackening off, because that incentive is taken away from this year onward. Our optimal rate of production increase that we believe is sensible is about 3 percent, and we see that dropping back to that in the next year or 2.
    The final point I would like to leave with the committee is that New Zealand's milk production is totally weather dependent. We can get a 15 percent swing if we get dry conditions in January and February. That drops the milk off quite dramatically, and we get a 15 percent reduction from year to year, depending on the weather.
    We've had some very good winter weather in the last 2 or 3 years, and that's also contributed to the increases we've had. So the next year with this El Nino thing, or right now—I mean, our milk is drying off. I mean, in certain parts of the country we've had drought. So we've got cattle that are dried off right now, which is way, way early.
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    So we are very weather dependent in that respect. So to summarize the answer, we would anticipate 2 to 3 percent increase as a sort of natural rate of increase in New Zealand, short of other factors.
    Mr. PETERSON. At South Island way down south there, it's colder. Right?
    Mr. HEPBURN. Correct, yes.
    Mr. PETERSON. I mean, we'd like to do rotational grazing in Minnesota, but grass doesn't grow quite a bit of the year.
    Mr. HEPBURN. Yes.
    Mr. PETERSON. It must not be as good down there for the rotational grazing method that you use as it is up in the north island. Right? Or is it?
    Mr. HEPBURN. It's more temperate. It is cooler, certainly, and——
    Mr. PETERSON. The grass grows year-round?
    Mr. HEPBURN. The grass tends to grow the year-round, although not quite as readily as it does on the north island, but it does tend to grow year-round.
    Mr. PETERSON. And if you run out of grass, you're not going to move into starting to feed your cattle like we do in the United States?
    Mr. HEPBURN. If you do that, you lose money so fast you're closed down by the bank immediately. It just doesn't work. I mean, what we get for our milk just can't—we cannot afford to feed. It's simple as that. If a farmer tries to do that, he goes out of business.
    Mr. PETERSON. Mr. Joyce, you mentioned your willingness to work with the U.S. sheep industry to increase U.S. consumption of lamb. Can you outline what the elements of that program would be that you would—I think in your testimony you said you would like to do that. Could you kind of tell us what you would envision that to be?
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    Mr. JOYCE. Certainly, Mr. Peterson. I think the basic criteria, that anything has got to be commercially driven—if you look at the customer focus and see what the retail sector wants, the retail sector wants a supply of a consistent product on a year-round basis.
    Now with a production system in the United States and in New Zealand, it's sometimes very difficult to do this on a year-round basis. I think, ultimately, we will see the meshing of U.S. product with some New Zealand product and Australian product under a common brand that offers something to retailers.
    We're very much in favor of branded products, and I think we would try to work alongside the domestic industry here and certain packers in producing a branded product that may be derived from both domestic product and imported product on a year-round basis.
    I think where we would differ is that we don't believe there is much scope for, say, a common generic promotion campaign for lamb. Our experience in other markets—and we've made mistakes, certainly, in other markets. This generally doesn't work.
    Promotion has to be highly focused, and I think in this day and age, it's going to be focused on the brand. I think that's the way in which we would like to work with the domestic industry here.
    Mr. PETERSON. Mr. Chairman, if I could, just one more thing I wanted to ask about. As I understand it, some of my dairy cooperative people were telling me that they are doing a joint venture with the New Zealand Dairy Board.
    I guess what I forgot to ask: We, under the GATT agreement, opened up 3 percent of our market to foreign imports. So whatever this agreement that you're doing with the Dairy Farmers of America, I guess it is—would that count in that 3 percent then? Is that part of how we're making up? I mean, I assume.
    Mr. HEPBURN. Well, there's been a bit of a hue and cry in Wisconsin, particularly, in the last week over the publication of our joint venture and the news of our joint venture, but the facts of the matter are that we've been talking essentially to Dairy Farmers of America or its precursor for quite a while, and essentially we are both owned by farmers.
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    We're cooperatives farmers with the same objectives and goals in mind, and essentially we have exactly the same objective, which is to increase the markets for and the consumption of dairy products.
    We believe that our organizations bring things to the table which we can achieve together, and it's a learning step. It also really emphasizes New Zealand's belief that the United States, if we got rid of export subsidies, will become the preeminent and also the pricing leader in the international dairy market, and we want to forge alliances with cooperative organizations in the dairy industry in the United States.
    We do this routinely around the world. Let's hope that we actually operate commercially, and this is our first step and first venture in the United States, and we think it's a highly positive thing for the industry in the United States.
    Now to specifically your question, we don't have any extra quota to bring into the United States. Whatever we eventually do supply into that joint venture will be part of the existing quota.
    Mr. PETERSON. Right. That's my question. So, I mean, we opened up 3 percent of our market where we don't have any tariff. Is that correct?
    Mr. HEPBURN. Well, there is a tariff, but it's a small tariff.
    Mr. PETERSON. But it's a small tariff. So then this would be part of that?
    Mr. HEPBURN. Well, we actually haven't supplied anything to this joint venture yet.
    Mr. PETERSON. No, but I mean if and when it gets going, it will be part of that—I mean, if it was a big quota, you probably couldn't make it work.
    Mr. HEPBURN. No, absolutely not.
    Mr. PETERSON. So it would have to be part of that 3 percent. That's my point. That's what I was getting at.
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    Mr. HEPBURN. Absolutely. We have no extra access as a result of this joint venture. Absolutely not.
    Mr. PETERSON. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Johnson.
    Mr. JOHNSON. Thank you, Mr. Chairman, just a couple of questions. Mr. Boswell, obviously, had a very nice, high compliment, calling our friends shrewd, and you've heard comments from earlier testimony today, agriculture groups, in particular from groups representing some of the dairy farms—some of the dairy farmers, and I point that out, some because, as Mr. Peterson pointed out, it's sometimes tough getting universal agreement among all the dairy farmers. I guess it is in your countries.
    You've heard some of the comments, and I wondered if you had any comment or reaction to the earlier testimony you heard about some of the difficulties we're having.
    Mr. HEPBURN. You're referring to Mr. Krug?
    Mr. JOHNSON. Mr. Krug.
    Mr. HEPBURN. And the testimony about STEs?
    Mr. JOHNSON. Yes.
    Mr. HEPBURN. Yes. Well, the New Zealand Dairy Board is nominally an STE. It falls within the definition in the WTO area, but I mean it marginally falls within the definition, because there are a whole spectrum of STEs out there, all the way from import STEs which have the most important distortional effect on international dairy trade, because they have a total buying monopoly and control the market entirely, all the way across the spectrum to the only marginally STE New Zealand Dairy Board.
    The only thing that makes us qualify as an STE is the Dairy Board Act, which says that the farmers, whose desire it is, have a unified export entity, and they actually own that entity, and that's the only thing that makes New Zealand Dairy Board an STE in the definition of the word.
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    It's the chicken and the egg argument, because we only have an STE in our dairy board because of the hugely distorted markets and subsidized markets that we have to make a living in. If those weren't there, we wouldn't have an STE. We would have an entirely different structure, I would wager.
    If all those constraints and things were negotiated away over the next 5 to 10 years in the next two rounds, let's say, being realistic, of the WTO, I will wager that the New Zealand structure will change accordingly. I mean, you could envision situations where you have joint ventures, global marketing ventures, between the United States and the New Zealand dairy industry.
    So I would prefer to look at this little small step that we've made in Wisconsin with Dairy Farmers of America perhaps as a first strategic step towards those entities. So, I mean, I really would urge you to consider the issue of export subsidies and the distortion it has on international trade.
    We truly believe that the United States will become the market price leader internationally if we didn't have export subsidies, because you have the biggest opportunity to expand production. Of all the countries in the world, you have the biggest opportunity to expand production.
    We are only a little drop in the bucket in New Zealand. We can only get a teeny little increase, but if we actually used our heads for once internationally and globally, and say, hey, we should be trying to expand markets in all those hungry countries of the world; we should be selling our products out there; we should use our heads and say, stop beating each other up, let's get rid of those export subsidies, and let's get out there and actually use our heads to market our products. Brand them, and do all the things we need to do.
    Where is all the supply going to come from? Well, it's going to come from this country, but all the shortsighted stuff stops you doing that. I know it's very hard to get them to agree, because, you know, they never agree to anything.
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    You're right, but if you get that one single thing into everybody's heads here—get rid of those export subsidies—the milk price in the United States will set the international price, and then you boys are going to cream it out there.
    That's why we want to talk to you. We're working with you. We don't want to fight you. The other thing we really have to say to you, for God's sake, get in that driver seat in the bus, get fast track, and go lead the charge in the WTO. Without you, this thing isn't going anywhere. It really isn't going anywhere, because you're really in the driver's seat in the United States. This thing is going nowhere.
    Mr. JOHNSON. I like the term ''we're going to cream you.'' I brought this in from my office. You asked us to use our heads, and I think, because it represents—this is actually the problem we have that you were talking about when we see this—you know, where the cheese hits it in Wisconsin, and we see that cheese to be imported from New Zealand, it's very difficult for people in an area to understand.
    When we're going back and talking to folks back there and telling them, you know, what we heard today, I think that they will listen and understand, but it is a difficult transition period we're going to.
    Let me ask this, because it was brought up in the broader context. Do you see progress in international standards? We've heard about the—you know, asking that standards be based on sound science.
    Are we making progress in international standards for agricultural products worldwide, so that there can be imports and exports on an equally receptive basis?
    Mr. HEPBURN. Well, I think there is. There's progress, but as always—I mean, it's a difficult process getting agreement, getting someone to communicate. Communication is a very difficult art.
    I mean, I can say something to someone and they misunderstand it. I think I said one thing. You hear something else. This is particularly evident when you've got cultural clashes, and you're negotiating technical issues over cultural barriers and so on.
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    What is good in one culture—for instance, in an Asian culture they have a great belief in food as a medicine. Well, in the Western culture food is not a medicine. Food is a nutrient, and therefore, to call food as some sort of palliative or even cure for an ailment is foreign to the Western ears; but in fact, that's standard practice in an Asian culture.
    So the whole thing is bedeviled by those sort of areas, but nevertheless, the only way to resolve these things—and that's why I believe with Cal Dooley, exactly what he said—you have got to sit down and talk them out. You've got to understand each other's positions and work them out.
    I think progress and quite a lot of progress is being made. I think the world is a lot better off since the WTO agreement. I believe and hope that, by the next time we have an agreement, that we address these issues.
    May I say something else. I have a great deal of sympathy for the farmers in Wisconsin who are in this economic squeeze, really, because—I mean, their units are increasingly more difficult to preserve as economic units.
    We have exactly the same situation in New Zealand. We have farmers who are farming sub-economic units, and they feel the same squeeze, and they have exactly the same concerns as your constituents have. So don't think that we don't have sympathy for their position, but we just need to communicate with you.
    I'd be happy to come and talk to your constituents and talk to them, and just sit down around a table and have a chat about it, because really, if we could get into their heads that their big enemy is export subsidies and a better future without them, you know, we're all going to be better off.
    Mr. JOHNSON. You're invited to Wisconsin.
    Mr. HEPBURN. I'd love to come.
    Mr. JOHNSON. All right. I don't know if I have time for just one quick question about the genetic exports that I asked about the bull semen. Any response to that?
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    Mr. HEPBURN. Well, I know a little bit about that, basically, because the New Zealand Dairy Board owns and operates the Livestock Improvement Corporation, which has got the total genetic database for all of New Zealand's dairy herd there and manages its insemination artificial breeding programs and everything else.
    It's run as a commercial enterprise, and there is also competitor providers of genetic services; but the fact is that, for New Zealand conditions, the genetic requirements of an animal which is being fed all the grain that's being fed up here, just won't hack it down in New Zealand where they're only munching on grass.
    So you need a different breed of animal. So the answer isn't that there is a barrier. The answer is that you have got to understand your marketplace and get the right genes, and then go sell it to them. There is no barrier to do that. You can go there and do it tomorrow.
    Mr. JOHNSON. Thank you.
    Mr. POMBO. We had the opportunity to visit one dairy down there—and I'll just say this in closing—one dairy down there where he's bringing in the genetics of California style dairy, and feeding his cattle and making a very strong argument that the future of the New Zealand dairy industry is that you're going to have to start feeding your cows, because you can't operate ten months out of the year.
    That sparked quite a lively debate amongst the other dairymen that were present, and it was actually quite entertaining to have an opportunity to hear that debate coming from New Zealand; but I think that you will go through changes, beyond a doubt, just as we will, and where it all ends up, I don't think anybody knows for sure.
    I appreciate the good relationship that the United States has had with New Zealand over the years, that it is a strong relationship, a strong trading relationship, and I think it will continue to be that, even though we will always continue to be competitors.
    I don't think there's any question that that's going to be there, but thank you very much for taking the time to come in. I apologize to you for the length of time it took to finally get your panel up, but I do appreciate you coming in, and thank you very much for being here.
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    Mr. JOYCE. Thank you.
    Mr. HEPBURN. Thank you.
    Mr. POMBO. With that, this hearing is adjourned.
    [Whereupon, at 3:45 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
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