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OVERSIGHT OF THE NORTH AMERICAN FREE TRADE AGREEMENT

THURSDAY, APRIL 17, 1997
House of Representatives,
Subcommittee on General Farm Commodities,
Committee on Agriculture,
Washington, DC.
  The subcommittee met, pursuant to call, at 9:35 a.m., in room 1302, Longworth House Office Building, Hon. Bill Barrett [chairman of the subcommittee] presiding.
  Present: Representatives Moran, Thune, Smith of Oregon (ex officio), Minge, McIntyre, Stabenow, Etheridge, John, and Johnson.
  Also present: Representative Pomeroy.
  Staff present: Paul Unger, majority staff director; Lynn Gallagher, senior professional staff; Pete Thomson, legislative director; Mike Neruda, director, Subcommittee on General Farm Commodities; Brian Hard, legislative assistant; Mason Wiggins, legislative assistant; Callista Bisek, assistant clerk; Andy Baker, minority associate counsel.

  Mr. BARRETT. Good morning, ladies and gentlemen. The hearing of the General Farm Commodities Subcommittee to review the status of the North American Free Trade Agreement will come to order.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA

  Mr. BARRETT. I want to take this opportunity to thank the members of the General Farm Commodities Subcommittee. Many of them are not here at this particular moment, but we expect them at some future point in time. We are competing with a Republican conference in which the Speaker is making a rather momentous comment, and it is a little hard to compete with that. So bear with us, please.
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  But I also want to thank not only the members of the committee but the full committee under the chairmanship of Bob Smith for their cooperation in reviewing the status of the North American Free Trade Agreement. There are a lot of aspects of agriculture that are affected by NAFTA, and I am pleased to have our witnesses here today who will share with us, and I hope that we can focus our attention on those issues over which this subcommittee has jurisdiction.
  I am pleased that Chairman Smith has made trade a key issue of the House Agriculture Committee. The results of some of these efforts can already be seen in the decision to open up the St. Lawrence Seaway facilities to our U.S. durum wheat, and we expect some other activities along that line in the very near future.
  Today I hope that we can have an open and a productive discussion, a dialogue on how NAFTA and its rules and regulations have worked over the past few years and how we hopefully intend to see them working in the near future. The North American Free Trade Agreement is certainly an important issue for our farmers today.
   They are under a lot more pressure, a lot tougher competition than ever before, and the ability to open up our markets with our neighbors to the north and to the south, and remove the barriers which restrict free trade, are certainly essential for the ultimate success of United States agriculture.
  Canada, of course, is our largest agricultural exporter, per capita, in the world. It's due, of course, to a small population and abundant resources and sources of rich and natural resources. On the other hand, less than 10 percent of Mexico's land is arable, and it has a large and a rapidly growing population, and the United States is ideally situated between the two.
  One of the things that I am concerned about is the sanitary and phytosanitary barriers that have arisen within the context of this so-called free trade agreement.
  Two of our most contentious issues with Canada and Mexico are trade barriers that may not have any legitimate scientific basis, and barriers that do not conform with NAFTA as it was adopted. With respect to U.S. exports, it appears that the sanitary and phytosanitary issues raised by Canada and Mexico might be manufactured.
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  United States health and sanitary standards are based on numerous years of sound scientific research and data in this country. One only has to look at the U.S. food supply, considered to be the safest in the world, to realize that our standards are of the highest degree.
  In addition, I am concerned about press reports stating that Canada may not be willing to accept voluntary restraints on its exports of wheat and barley to the United States. This is contrary to what Chairman Smith's delegation to Ottawa was told. It is also contrary to comments made in a recent meeting in Washington, DC., during which Canada stated that it was willing to stay broadly in line with the 1.4/1.5 million metric ton agreement under the 1994 memorandum of understanding.
  I know that each industry in the agricultural community is affected by NAFTA and has their own specific areas of concern. Some industries have been successful under NAFTA with one of our trading partners, while not being able to realize the Government's full potential with the other trading partner.
  This is why today's discussions are important. This subcommittee needs to take the next step and review how America's relationship with Mexico and Canada has worked so far and how we can make it work better. I look forward to the discussion.
  I would also recognize the ranking member, Mr. Minge of Minnesota, for an opening statement.
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA

  Mr. MINGE. Thank you, Chairman Barrett.
  I certainly appreciate the importance of NAFTA and would like to thank you and Chairman Smith for ensuring that we take this up early in this session of Congress.
  Certainly, international trade is an opportunity for American agriculture that has been true throughout the history of our country. This has been one of our strong export sectors in the economy, and it is one that I think all of us from agricultural regions are keenly sensitive of and are interested in trying to promote.
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  At the same time, we share a concern about free trade and open markets, and are very curious to determine whether or not the efforts that we have had in international trade, with the recent agreements such as NAFTA, have been successful on an overall basis. What, for example, has been our experience for the balance of payments with our trading partners to the north and to the south since this agreement has been approved?
  Similarly, I know that in the upper Midwest there continues to be some friction over the wheat and barley situation with product coming into this country and the opportunities for American products in the dairy and poultry industry going north out of this country, and how is that being resolved.
  So I look forward to the hearing this morning and will file a written statement for the record subsequent to the hearing. Thank you.
  [The prepared statement of Mr. Minge follows:]
PREPARED STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. Chairman, thank you for holding this hearing. As we prepare for the next round of agricultural negotiations and consider expanding NAFTA to include other Western Hemisphere nations, we need to assess the effects of the current agreement on U.S. agriculture.
Although the agreement has, in general, been good for agriculture, there have been some specific commodities that have not fared as well as others under the treaty.
For example, last year a NAFTA Dispute Resolution Panel issued findings that allowed Canada to leave in place tariffs up to 350 percent on dairy products. This issue should be at the top of U.S. negotiators' list in the next round of agricultural talks.
I look forward to the testimony, and thank you again, Mr. Chairman for the opportunity to discuss NAFTA and its effects on American agriculture

  Mr. BARRETT. Thank you, Mr. Minge.
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  I am very pleased that the chairman of House Agriculture Committee is with us this morning, and I would recognize Chairman Smith for an opening statement.
OPENING STATEMENT OF HON. ROBERT F. (BOB) SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON

  The CHAIRMAN. Thank you very much, Mr. Chairman, and I, too, thank you very much for beginning these hearings with respect to NAFTA.
  As you indicated in your statement, the Agriculture Committee has recently traveled to Canada, as well as to Mexico, in seeking the truth about NAFTA. Unfortunately, if there is a bad market in the United States for any commodity, you must blame somebody, so NAFTA usually gets the blame. I think it's essential that we determine exactly what is happening with our trading partners, and to report that to the American people.
  For instance, while we are still troubled with Mexico, the facts are that during the time that the peso faltered in Mexico trade expanded rather rapidly. In fact, probably in addition to our $30 million loan and repayment by Mexico, by the way, trade likely will bring them out of what has been a desperate situation in the monetary system in Mexico.
  For instance, during the time that the peso was in trouble, trade expanded to something like $140 billion from something like $80 billion, through the middle of that depression. And agricultural trade expanded at the same numbers between us to about $8 billion. So that Mexico, in recovering, may well one day replace Japan as the second largest trading partner for the United States.
  We still have irritant issues and problems. Mr. Chairman, you mentioned phytosanitary and sanitary problems with Mexico, and with Canada by the way, and those things must be addressed, of course, and will be addressed. There is nothing like the light of day shining on an issue to make folks act more judgmentally on either side of the issue.
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  But especially I think it is important that we analyze NAFTA because we are faced with the question of fast track, to include other nations in South America, likely, in a trading arrangement with us. And if NAFTA is a failure, then it's less likely that we are going to extend fast track to any other nation, certainly not to this administration to include other nations in trade. I hope that doesn't happen.
  So we have found, as you indicated, several issues, including the wheat issue which you're going to discuss this morning--and you have two gentlemen here, Mr. Chairman, who are experts worldwide on trade, but especially NAFTA, and one of them traveled with Mr. Trudell in Canada. The Canadians were here yesterday, so you'll hear from Mr. Schumacher about that visit.
  But we must continue to keep the pressure on our trading partners, and they will upon us. But at the end of the day when we recognize that trade is essential to America, to both of them, when we have difficulties, I have been suggesting that we should lock arms and really try to open markets in the European Union and in Asia, which are closed to NAFTA markets.
  When we sell wheat from one of the NAFTA trading partners to somewhere else in the world, that is a bushel of wheat that doesn't command a surplus on our market. We do that in the United States. When we sell wheat in the Northwest, folks in the Midwest, in Nebraska, believe wheat is wheat and that is a positive thing.
  We ought to be thinking about together opening markets, NAFTA partners opening markets in Asia and Europe. And in those instances, we can rally around each other, and we can find a common ground. But in the meantime, I think we ought to take on these issues one at a time, be it Karnal bunt and wheat or be it a problem with cholera in hogs. We ought to take it an issue at a time, concentrate on it, and try to solve it.
  So thank you very much, Mr. Chairman, and I think this will be a very educational hearing.
  Mr. BARRETT. Thank you, Mr. Chairman.
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  If there are any additional statements by members of the subcommittee, they may be placed in the record at this point.
  [The prepared statement of Mr. Thune follows:]
PREPARED STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Thank you Chairman Barrett and Mr. Minge. I appreciate the opportunity to learn more about the North American Free Trade Agreement.
One of my top priorities as a Member of Congress is to ensure our agriculture producers are able to compete in the world market. Foreign trade has been and will continue to be vital to the agriculture industry's success. The economic viability of the United States depends on free trade. At the same time, free markets do us no good if they are not fair markets. Our producers must have a level playing field in order to market their products. Commodity groups in my State of South Dakota tirelessly work to develop new markets for South Dakota products. Farmers and ranchers in my State produce among the best grains, oilseeds, meat, and dairy products in the world. They welcome the opportunity to compete in the international marketplace.
One of the most important tools to open trade has been NAFTA. As you may know, South Dakotans depend upon agriculture more than any other State in the Nation. Agriculture consistently has ranked as the No. 1 industry, contributing nearly $14 billion to the economy. Without question, growth in the agricultural sector is essential to South Dakota's future. It follows then, that exports are crucial to that growth. In 1995, South Dakota's agricultural exports totaled $1.1 billion.
Because trade is so important to my State and the entire Nation, benefits from NAFTA must be examined. As we consider NAFTA, we must ensure a level playing filed for our producers

  Mr. BARRETT. We'll proceed now with our first panel from the U.S. Department of Agriculture. We have Mr. Gus Schumacher, the Administrator of FAS. And with Mr. Schumacher, is Mr. Lyle Sebranek, Minister-Counselor, American Embassy, Ottawa.
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  Gentlemen, please proceed.
STATEMENT OF AUGUST SCHUMACHER, JR., ADMINISTRATOR, FOREIGN AGRICULTURAL SERVICE, DEPARTMENT OF AGRICULTURE

  Mr. SCHUMACHER. Thank you, Mr. Chairman, Mr. Minge.
  Members of the subcommittee, it's a real pleasure for me to be here and to review progress under NAFTA and problems under NAFTA. I'm going to keep my remarks very brief, because there are very distinguished panels following me, and I'm sure there will be many, many questions.
  As you know, the global market opportunities are enormously important to America's family farmers and ranchers in the years ahead as they are today. As Government's role in agriculture continues to diminish, our family farmers really must look externally and overseas and to our partners in Mexico and Canada for their growing efficient production.
  Not only do we see these markets in the Pacific Rim and down in South America, but today I want to focus on our two neighbors, to the north and south.
  As we are well aware, American agricultural exports have grown 50 percent in the last 6 years, a remarkable achievement. Each week we export more than $1 billion of food outside of our borders. But to our NAFTA markets, our food and farm exports grew more than 70 percent. Last year, calendar 1996, total agricultural exports grew $4 billion.
  But Mexico and Canada, out of 200 foreign markets for our products, accounted for 54 percent of the $4 billion increase. In other words, Mr. Chairman, nearly 1 one out of 5 dollars of what our family farmers export is earned right here in North America in our NAFTA partners.
  Secretary Glickman has been mentioning this as well. He has been talking about our agricultural trade surplus, which was $27 billion last year. The agricultural trade surplus is the leading contributor to our net balance of payments. And the Secretary has mentioned that the $27 billion is sufficient to pay for every Japanese car and truck and have a little left over for cars from Europe.
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  I have brought three charts with me today to illustrate Chairman Smith's point as well. The first chart shows growth in agricultural exports to Canada, where we're doing particularly well on consumer products. It is $6 billion. It is the highest ever in our trade. Exports are rising, and particularly in business our market share is doing well.
  Now, let me turn briefly to Mexico, and we can look at the, in a way, complementary growth to Mexico. Whereas, in Canada our exports have done very, very well on the consumer side, in Mexico we have done quite well on the bulk side, on the commodities.
  Our first year, of course, was disappointing under NAFTA with the peso devaluation, but we had a dramatic recovery in 1996 with a record $5.4 billion, led by corn showing the largest growth. And Mexico imported much more corn than we had negotiated under the tariff-rate quota.
  Now, let me just briefly, as we conclude, look at the third chart, which is the illustration of benefits of our trade with Mexico under NAFTA. If we go back to the last big problem in Mexico, which was the crisis of 1982 with the peso, it is not unlike the recent crisis in 1994. But the result in the 1980's was a severe and prolonged slump in U.S. exports, particularly agriculture.
  Mexico, at that time, was not bound by NAFTA or GATT. Mexican officials raised a number of import barriers, tariffs, quotas, licenses, and U.S. farm exports plunged 50 percent. But Mexico's response in the post-1994 difficult devaluation was very, very different. Instead of raising its import barriers, Mexico adhered to its NAFTA commitments and continued to reduce its tariffs.
  Not only did our access improve, but more importantly U.S. market share increased at the expense of other suppliers because our products had preferential access under NAFTA. Instead of falling 50 percent, our exports declined by less than half at that time, and then clearly bounced back in the following year.
  What is equally important, in 1982, it took 7 years for U.S. agricultural exports to recover from their predevaluation levels. In 1994, U.S. exports are back on track, and much of the credit I think goes to the NAFTA agreement with that $5.6 billion.
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  But these charts, while useful as they are, fail to look at the other side of the picture, and that's our frustrations on some of the issues and some of the irritants that Chairman Smith talked about. In my full statement, I mention a number of the troublesome issues that were outlined in your statements in our relationship with Canada and Mexico.
  We do want to assure you that we are taking these very seriously, and I have with me today not only Lyle Sebranek but our colleagues who work on this day to day in the Agricultural Marketing Service and in APHIS, Dan Sheesley and Sharon Bomer, who will join me as these questions arise.
  Mr. Chairman, if we measure progress by the issues still on the table, we have a long way to go under NAFTA. I fully agree we have a lot of work ahead, but I think we need to measure progress by the issues that have been resolved, by the growth in access, growth in sales, and particularly growth in market share, as any businessman will discuss. By these measures, NAFTA is broadly working.
  We have access issues, we have SBS issues, and we have some difficult issues with Canada on wheat, barley, and the unresolved dairy and poultry issue.
  For NAFTA to be judged a success, it must be a success for American agriculture. Promises made must be promises kept. The bipartisan cooperation and close partnership with Congress and yourselves that led to the NAFTA agreement is the best guarantee of its ultimate success. And this bipartisanship was shown by the recent congressional trips by Chairman Smith and his colleagues to Mexico and Canada, which reinforced our concerns in those two countries. This hearing is another example.
  To conclude, NAFTA is a solid, comprehensive, carefully negotiated agreement that has received a great deal of scrutiny from Congress and from virtually all sectors of American agriculture. It is a good foundation. We can talk about the successes, even at this early stage of implementation.
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  But like any agreement, we cannot sit back and relax with a signed piece of paper in hand. No trade agreement covers every contingency, anticipates every issue, or solves every problem. For NAFTA to succeed and to fulfill its promise to agriculture, we must work, and work hard, at making it succeed.
  Mr. Chairman, with the continued advice and support of your committee, yourselves, Mr. Smith, and Congress, this is exactly what we are doing together.
  I am very pleased to be able to answer your questions as they arise, and my colleagues can join me as they wish.
  Thank you for holding this hearing. We appreciate coming up here.
  [The prepared statement of Mr. Schumacher appears at the conclusion of the hearing.]
  Mr. BARRETT. Thank you, Mr. Schumacher.
  I touched on the fact that the Canadians apparently are not willing to accept, at least at the moment, any voluntary restraints on exports of wheat and barley to the United States. Is there any indication that the Canadians will stay broadly in line with that memorandum of understanding, that 1.4/1.5 million metric tons?
  Mr. SCHUMACHER. Yes. I'd like to address that in some detail, this issue of wheat and barley, and the discussions that we've been holding. We had a number of discussions yesterday on this issue at the highest levels with the Deputy Minister, and we spent 5 or 6 hours with him and his senior colleagues yesterday.
  As you recall, Ambassador Barshefski visited Minot, ND and met a number of farmers in discussing this in some detail on the ground with the affected farmers in that State. We are also sending a team back April 25 to Canada to continue negotiations.
  This is one of the most difficult issues we're facing right now with Canada because of the grains that have come down back in 1993—1994 and a little bit in 1995, and the secession of our agreement on the tariff-rate quota.
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  We certainly are monitoring these, and it appears that today they are beginning to get close to the 1.4/1.5 million metric tons that was under the original tariff-rate quota. We understand that they have given indications to us that they are going to not try and exceed this, although there are some press statements to the contrary.
  My understanding is, and we're going to try and confirm this on April 25, that they're going to stay slightly below the 1.5/1.4 million target. And, of course, the Canadian Wheat Board, a state board, is capable of keeping that in line.
  Now, we're pursuing this as well in, as I said, bilateral discussions, but it is difficult. And as Ambassador Barshefski says, this administration--I want to make this very, very clear. This administration will simply not tolerate market disruption in imports of Canadian grain, will not tolerate that disruption. So we hope that we can stay well within the informal 1.4/1.5 million metric tons, and we're monitoring this very, very carefully.
  The CHAIRMAN. Would the chairman yield on that question?
  Mr. BARRETT. Certainly, Mr. Chairman.
  The CHAIRMAN. Thank you.
  I understood as well from them that they would, indeed, voluntarily try to restrain wheat sales to the United States under 1.5. We were doubly concerned, as you folks know very well, because it appears as though they could have a season and a half or two seasons worth of grain in Canada, simply because of the very harsh winter and transportation to the west coast was impaired for a long time.
  There were 35 to 40 ships standing in the harbor empty, waiting for the railroads to deliver the grain, and they couldn't deliver the grain because of the very heavy snows and disruption in transportation. So we were doubly concerned that wheat may come south.
  And I heard these reports, Mr. Chairman, in the paper, read news reports, that there were other indications that they were not going to pay any attention to a former agreement, which now is voluntary. That's the 1.5.
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  However, as of yesterday, I was again pleased that the Deputy Minister reasserted to me--and I understand to you--that they are going to control export of wheat from Canada within the 1.5 range, even though they have a huge surplus of wheat that they say they will market in normal methods.
  Is that roughly what you heard?
  Mr. SCHUMACHER. Yes, sir. It is consistent with what we are hearing, and I think the key one is our negotiations on April 25 when we discuss this further.
  One of the issues that Ambassador Barshefski--and when I visit North Dakota, and I've been there a number of times, and talk to the wheat and barley farmers, is that there is another problem that they can get their grain into here with less paperwork than our farmers can sell grain into Canada. And that's something, Mr. Chairman, we're going to be looking at aggressively. It's going to be equivalency as well, and we're going to have to take a tight look at how the paperwork flows.
  So if there is issues on both sides, we need to look at if we can't sell our grain with minimum paperwork that we provide, we will certainly have a look at, on our side, paperwork that they may need to tighten up a little bit on us. We're going to consult with you carefully before we look at that further and look at our friends in the special trade representative's office. But we have some things we want to explore on this as well.
  And I don't want to talk too much about that today, but I want to alert you, too, that we're certainly beginning to look at that in the administration.
  Mr. BARRETT. Perhaps one concluding quick question, and then I'll recognize Mr. Minge.
  You touched on state trading.
  Mr. SCHUMACHER. Right, the wheat board.
  Mr. BARRETT. Canadian Wheat Board. That's correct. It's my understanding that they are presently unwilling to talk seriously about anything until the next round of the WTO negotiations, which is, what, 1999 or some----
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  Mr. SCHUMACHER. Well, we're starting discussions on state trading now in the OECD and bilaterally, but the formal negotiations don't start until 1999.
  Mr. BARRETT. But you are in the process of negotiating now?
  Mr. SCHUMACHER. Not negotiating. But we have a number of committees on state trading, for example, with the OECD and the World Trade Organization, where preliminary discussions are taking place. And we've had discussions with--for example, New Zealand is Dairy Board, and Canada and others and Australia on transparency, and the data that we will need to get into the actual negotiations on state trading when the negotiations take place.
  Mr. BARRETT. Thank you, sir.
  Mr. Minge.
  Mr. MINGE. Thank you.
  I'd like to join in welcoming you to the committee, Mr. Schumacher, and I deeply appreciate the work that you and others at USDA have done on behalf of American agriculture.
  We have had several issues that have arisen that indicate some awkwardness in the NAFTA agreement with Canada, and you have touched on wheat and barley. I'd like to turn for a moment to dairy and poultry products. Where are we headed with respect to the opening of Canadian markets to U.S. dairy and poultry products?
  Mr. SCHUMACHER. Well, first, thank you for that question. On dairy and poultry, we were not happy about the result of the dispute mechanism settlement when Canada put on the 300 percent tariff. And when that went to dispute mechanism we lost 5 to nothing. That came as a surprise. I'll be very frank about that.
  I think it's just unconscionable that the Canadian dairy consumers have to pay 300 percent and that that tariff is there and is preventing our dairy and poultry from crossing the border and keeping the Canadian dairy consumers in less expensive product than they have now.
  We have, again, discussed these issues extensively yesterday and before, and we will continue to discuss them again in the next round. What is interesting is despite this, our dairy, poultry, and egg exports are rising. I think what people really need to realize is this year we'll sell $320-odd million worth of poultry, eggs, and dairy products into Canada. We do have tariff-rate quotas. For example, on poultry, we're growing about 7 1/2 percent per year.
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   People really need to know that we still can sell those products into Canada and are doing actually fairly well. We could do much, much better if we didn't have this 300 percent tariff there. So, again, as we said on the state trading, we're going to be working very hard in the next round to move this along.
  Mr. MINGE. Let me ask, would our increases with Canada be about the same, even if we did not have these agreements? It strikes me that we have had increased international trade on a global basis, and here we have a special trading partnership, almost a single economy in many areas. Yet, the growth is so modest, and the disparities are so substantial in terms of prices. And it strikes me that the agreement has perhaps been unsuccessful in these fairly significant sectors of agricultural production.
  Mr. SCHUMACHER. That is correct. In the dispute mechanism settlement, we did not manage to overturn those 300 percent very, very high tariffs. We intend to continue pursuing this very aggressively. And if we had managed to win under dispute mechanism, we would have had substantially increased exports, I predict, from dairy and poultry.
  One issue that I am concerned about--and I'm going to monitor this very, very carefully, and consult with you very carefully on this--is we noticed that some of Canada is beginning to export dairy products to third countries. And how is that possible when they have such high dairy prices?
  So there is some export pooling and some other issues that we find discomforting, and we're going to join with the New Zealanders and ask Canada to explain this in WTO committees. It's a very important issue. How can they have 300 percent tariffs and still be exporting, and how they manage their export pooling system? So we're monitoring this very carefully.
  Mr. MINGE. We'd like to urge that you continue to address that and give it a high priority.
  Another topic which has been very controversial, and certainly newsworthy in the past month, is the strawberry contamination in school lunch programs, and the disclosure that the strawberries that apparently were eaten and that children became sick from were actually imported from Mexico, and mislabeled or misused in the Federal program.
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  And it raises a question about food safety and inspection. And as I understand it, we do not inspect the table commodities and prepared foods that are coming in from Mexico either at the border or at the production plants in Mexico. Am I correct in that?
  Mr. SCHUMACHER. Well, we have two levels of inspection, Congressman. One is the Agricultural Marketing Service that inspects products coming in for consistency with our grading standards. And the second level, by FDA, for pesticides and bacteria, the Food and Drug Administration.
  Mr. MINGE. But as I understand it, less than 1 percent of the shipments that come in are even sampled for inspection. So that, as a practical matter, there is virtually no inspection.
  Mr. SCHUMACHER. Well, there is considerable inspection on the agricultural market for grading. It is on the FDA, on the sampling for pesticides. I've had a call into them and I'm going to ask, and we're going to come back to you on that question, on exactly what the sampling is on pesticide and bacteria on imported fruits and vegetables into this country.
  Mr. MINGE. I think that there certainly is a great concern here that the domestic market is inspected quite often, and the high standards are observed, and we have even State inspection programs and the consumer groups that are fairly vigilant, because they are aware of what's going on in our production areas. Yet, when we're dealing with Mexico, it is much more difficult, and whether we don't have a double standard or less than an adequate playing field.
  I see my time is up. Perhaps we could return to this in another round.
  Mr. BARRETT. Mr. Chairman.
  The CHAIRMAN. Thank you, Mr. Chairman.
  To just extend this discussion for a moment on the strawberry question, the strawberries that came from Mexico were unlawfully distributed through the school lunch program, is that correct?
  Mr. SCHUMACHER. That is correct. I should be clear. There was an allegation that that is true.
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  The CHAIRMAN. Right. I'll accept that. Thank you. That's a more correct way to explain it, since we don't really--we're not at the bottom of this question yet.
  So the allegation is that they were distributed unlawfully. And they were frozen strawberries. They were last year's crop. They were handled in San Antonio, reconstituted I understand. And we still don't know whether the problem arose in Mexico or in the handling, or do we?
  Mr. SCHUMACHER. You are correct, Mr. Chairman. We do not know as yet where the contamination took place. It was very clear that there was misinformation provided by the processor when AMS bought the product. Under our laws, we can only use American origin food in our school lunch program, and it is alleged that they misstated documentation.
  But it is still unclear where the contamination occurred in the system, and so it is very important that we try and sort out where in the process did the alleged contamination occur, whether it was from the strawberries or from the handling or the processing or somewhere in the system. There is a lot of work being done now by all parties concerned to try and uncover where this took place.
  The CHAIRMAN. Well, I ask these questions because I don't--and I know Mr. Minge didn't infer this--but I don't want to discourage the food safety program in America over this incident, because it is serious. Yet, we must take pains to correct the situation, if that's possible. But it was an illegal act, and we must enforce the law. But I want to make sure that the food safety issue isn't blown out of character on this incident.
  There have been other incidents like that. So it's our responsibility to get the facts. And by the way, I'm having strawberries for lunch, so, if that's a problem, I'll take the first hit.
  I'd be happy to yield to Mr. Minge, if you have other questions on this issue.
  Mr. BARRETT. Mr. Minge?
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  Mr. MINGE. I do, but they don't pertain directly to the strawberry incident. And so perhaps rather than consume your time, I'll yield back to you and----
  Mr. BARRETT. The gentleman's time has expired. But may I suggest that we return to this issue for perhaps a second round, a quick second round of questioning? I, too, am interested in the border and some of the inherent problems that have come from that situation.
  The Chair would like to recognize the gentleman from Green Bay Packer territory, the gentleman from Wisconsin, Mr. Johnson.
  Mr. JOHNSON. Thank you, Mr. Chairman.
  Mr. Schumacher, I also have people in my district who also consumed some of the strawberries we talked about, and so we have concerns up there. And I wonder if you might address the overall subject. Obviously, the allegations were that these were not supposed to be in the program. They were supposed to be domestic produced fruit and vegetables in our program.
  The indication was that it was probably an economic incentive, that they were cheaper to get it in. And I wonder if you might address the overall issue that our farmers face, and I think that's the problem that they're concerned about--that people were so anxious to get these strawberries in that they were willing to risk getting them in illegally, which is apparently the type of problem that--it's still an allegation. We haven't proven that yet.
  But what are we doing to correct that balance so that we make sure that first we use domestic products? And how do we make sure that others do not, because of economic advantage, will even try illegal means to get foreign strawberries in?
  Mr. SCHUMACHER. Mr. Johnson, thank you for your question. It is not illegal to bring products across the border and process it in this country. What is illegal is to sell it to the school lunch program and attest that its origin is American. The law is very clear on that--very clear, indeed--on that issue. And that's what the OIG and other investigations that are going on right now on this affirm. It's a very important issue--that the product is coming in and being processed and that it's perfectly legal to sell in this country.
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  To come back to the wider question on food safety, the Food and Drug Administration has been testing these products that are coming across the border and finding the levels of, certainly, pesticides well below the set tolerances that are coming in on their sampling.
  I'm looking forward to providing further information or having the Food and Drug Administration provide further detailed information to your committee on the results of their testing, both for pesticides and for bacteria and others on that. But my understanding is that it is below the levels set, and the product coming in is tested and has been tested safe.
  Just to clarify, the alleged illegality was in selling to the school lunch program. Sharon Bomer is here from the Agricultural Marketing Service, if you wish to have her comment further on the details of that.
  Mr. JOHNSON. Certainly.
  Ms. BOMER LAURITSEN. Thank you. I would like to point out that there is another hearing going on in the House at this very time on this issue.
  But to address your question as to what AMS is doing to do a better job of ensuring the domestic content of the school lunch program, I will point out that previously we required the suppliers to certify that product was of domestic origin.
  In this particular situation, we had that certification. The company has admitted that the product was not of domestic origin, and the Inspector General is currently in the process of checking on that. We are now instituting new procedures, realizing that this certification is not sufficient.
  And now, prior to entering a plant to do our sanitation inspection or our grading inspection, we will be reviewing records to ensure that the product is of domestic origin. So whereas before it used to be sort of an after-the-fact type of check, now it will be a before- the-fact check.
  Mr. JOHNSON. I'm wondering, though, when I asked about the price difference, the economic incentive. What is the price difference of the foreign produced strawberries coming in here versus if they had bought them on the domestic market that would cause a company to falsify their records?
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  Ms. BOMER LAURITSEN. We do look at prices on a daily basis, and generally we find that prices of the imported product and the domestic product tend to be fairly close. There may be some differences, but generally it is not significant. Certainly, it could have been a supply situation. He couldn't get supplies from California when he needed them, and he could get supplies from Mexico. But this is part of the investigation that the IG is undertaking.
  Mr. JOHNSON. Something enough to falsify records. Some incentive there.
  Ms. BOMER LAURITSEN. Right.
  Mr. JOHNSON. Let me switch back. I see my time is up. Thank you, Mr. Chairman.
  Mr. BARRETT. Thank you.
  The Chair would recognize the gentleman from North Carolina.
  Mr. MCINTYRE. Thank you, Mr. Chairman. Chadbourn, NC is in my district in southeastern North Carolina, and is home to the North Carolina strawberry festival that I'll be attending in a couple of weeks as their grand marshal. Strawberries in our area are not just a nicety to put on a plate but are very crucial to rural southeastern North Carolina's economy.
  Of course, the festival is a celebration of that, but for many farmers and growers it is part of their very livelihood in rural eastern North Carolina, and particularly in Robeson, Bladen, and Columbus counties.
  And I take from what you said that you're giving us a commitment on this check on the domestic content that this is something that you realize is important not only to the program that you've talked about but important for the ripple effect it has on many other areas in terms of producers, growers, buyers, and those in the other process on the food chain, if you will.
  And I want to make sure we understand that is a commitment, that you're going to be following up on that, is that correct?
  Ms. BOMER LAURITSEN. Absolutely.
  Mr. MCINTYRE. OK.
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  Ms. BOMER LAURITSEN. We, unfortunately, have been watching the prices as a result of this situation, and the California strawberry growers have had a terrible market in the past three weeks.
  North Carolina market just came on. Fortunately, most of the Florida shipments were already finished by the time this happened. But there are a lot of growers out there that are hurt by this, and we are very concerned about that.
  Mr. MCINTYRE. Thank you, ma'am.
  Thank you, Mr. Chairman.
  Mr. BARRETT. Thank you.
  Sharon, for the record, would you state your name and whom you represent?
  Ms. BOMER LAURITSEN. My name is Sharon Bomer Lauritsen. I am with the Agricultural Marketing Service.
  Mr. BARRETT. Thank you.
  The Chair recognizes Mr. Etheridge.
  Mr. ETHERIDGE. Thank you, Mr. Chairman. I apologize for my tardiness this morning. I was in another meeting.
  One question as it relates to this issue, and it really gets back to the safety and health. And I trust this has not been covered. If it has, I apologize.
  But I am concerned about, certainly, the school food service program, where it wound up with the students, and then we have a lot of students, of course, who had to have shots. That cost, of course, is being borne either by the individuals or by the public.
  And my question comes back to the suppliers who supplied the product, that falsified the records. And those dollars, on recovery, ought to go back, it seems to me--and maybe you can talk about that--to cover the costs paid out by either the local school system, the local public entity, or those individuals. Would you share with us that, please?
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  Ms. BOMER LAURITSEN. My understanding, and it has not been verified, is that the company that processed the strawberries has volunteered to pay for the cost of the vaccinations. The cost of the actual strawberries, however, is one that we bear at the Department. Once we get the Inspector General report, and should the company be found to be guilty of fraud, we will be taking penalty actions against the company, which involve monetary penalties as well as possible jail.
  Mr. ETHERIDGE. May I follow up, Mr. Chairman?
  Has the Department, or do you at any time require a bonding on the part of any suppliers?
  Ms. BOMER LAURITSEN. Not for the school lunch program, no.
  Mr. ETHERIDGE. Do you do that for any other programs?
  Ms. BOMER LAURITSEN. Where we are purchasing?
  Mr. ETHERIDGE. Where you purchase from them the bond that they do what they say they're going to do.
  Ms. BOMER LAURITSEN. Right. Well, we don't usually pay them, because we'd have to pay them money for their product they're selling us. So we usually don't pay them until they have delivered product. This, unfortunately, is a situation that occurred where the strawberries had already been delivered, and we had already paid for the strawberries.
  Mr. BARRETT. The Chair recognizes Chairman Smith.
  The CHAIRMAN. Thank you.
  I, further, want to get from you some information on this issue to point out exactly where we are. Hepatitis A is not a deadly disease or problem, is that correct?
   Ms. BOMER LAURITSEN. For most individuals, that is correct. It can be life threatening for----
  The CHAIRMAN. There were no deaths in this outbreak, is that correct?
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  Ms. BOMER LAURITSEN. That's correct.
  The CHAIRMAN. The outbreak was in Michigan, as I understand, some further than that?
  Ms. BOMER LAURITSEN. Where we have directly connected the frozen strawberries to the Hepatitis A outbreak, that is in Michigan. There has been reports of a couple of other outbreaks, one in Wisconsin, and possibly in Louisiana. The Centers for Disease Control are currently investigating that to see if it can be directly tied to the strawberries.
  The CHAIRMAN. But the impact of the strawberry Hepatitis A has run out, as I understand it. There is no more exposure to Hepatitis A through strawberries, is that correct?
  Ms. BOMER LAURITSEN. We certainly hope so. The company has done a total recall of the product for all of its 1996 and 1997 product, There is an incubation period, I think, of 28 days.
  The CHAIRMAN. Right. So that 28 days is over?
  Ms. BOMER LAURITSEN. Or it's pretty darn close, yes.
  The CHAIRMAN. OK.
  Ms. BOMER LAURITSEN. It depends on when the strawberries were consumed.
  The CHAIRMAN. Well, I'm trying to identify--as you understand, I want you to answer as honestly as you can--I'm trying to identify the scope of the issue. And while it's serious, I want to make sure that people don't take the idea that you can never ever again consume strawberries. That's ridiculous. And this is not a food safety issue. It is a problem that we've had.
  And for just a minute, I want to go back to the border issue on these questions of inspection. I spent some time, as did the committee, in Laredo. And while only 1 percent of the commodities may be inspected, no one knows which 1 percent is going to be inspected. So if we have a pure system, we would put 5,000 people in Laredo and stop every truck and every automobile.
  By the way, 75 million cars cross into Mexico every year, and 55 million cars come across Laredo going into the United States. That is not to count the trucks and all of the produce, so it's a very large issue.
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  But as I understand it, we have had very, very few problems with the inspection process, even though I would agree that they need more people on the border for inspection. Is that the case? What other problems have we had in the last 5 years on the border that have resulted in some sort of----
  Mr. SCHUMACHER. Well, I think that, again, there are two inspection issues, one that Sharon's Agricultural Marketing Service addressed, and that is grades and standards. And the second is the one that we discussed just with Mr. Minge, the issue of food safety, in the FDA sampling.
  The CHAIRMAN. I'm talking about border inspection now.
  Mr. SCHUMACHER. At the sampling level, the FDA has done the 1 percent, and they pull that in in a statistically valid way, and indicate that this has not been a problem until this issue has arisen.
  And again, I want to be very clear, we simply don't know yet, Mr. Chairman, where the contamination took place in this system. I want to just reiterate that. We're working very, very hard, all of the Government agencies, to try and figure that out.
  The CHAIRMAN. The exposure to further problems with strawberries is over. Is that fair to say?
  Ms. BOMER LAURITSEN. I think we believe so. I think the Centers for Disease Control and the Food and Drug Administration would be better able to answer that, since they have the ongoing investigation and have the most knowledge.
  The CHAIRMAN. Well, somebody should answer the question for the American people, because if the strawberry market went to pot in California, because people are afraid to eat strawberries, people ought to have an answer.
  Ms. BOMER LAURITSEN. Well, I would like to point out that this was last year's crop of strawberries.
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  The CHAIRMAN. OK.
  Ms. BOMER LAURITSEN. And we have a new crop of strawberries that are perfectly fine.
  The CHAIRMAN. Thank you. I don't want to ruin the strawberry market in North Carolina or California over an issue that people do not understand. So this is a public opportunity to reassure the American people that strawberries are safe to eat, fresh, good, wholesome, and even in our school lunch program.
  Ms. BOMER LAURITSEN. Absolutely.
  The CHAIRMAN. Thank you.
  Mr. BARRETT. I would like to continue the discussion on border delays, the problems that have been taking place. I had another call from a constituent yesterday who is now suggesting that drugs are being transported across the border. We have had problems of trains being stacked up. I know we have had trucks stopped for safety inspections, or not stopped as the case may be. Would you elaborate?
  And again, following up on Mr. Minge's concern, share with the committee what is happening and why, and what is being done to improve it.
  Mr. SCHUMACHER. Well, we had a meeting in Laredo a few weeks ago on this particular issue of delays in the paperwork on the Mexican side on customs processing and other delays--for example, on unnecessary fumigation delays regarding movement of grain across, and other products where there seems to be not enough Customs inspectors on the Mexican side of the border.
  We have had very good talks with the Mexican authorities, and we hope to begin to resolve this with further working hours, so that there aren't these delays because of lack of staff on the other side of the border. And we're working very hard to get some of these issues of fumigation and other phytosanitary barriers resolved in a timely fashion.
  We'll be traveling to Mexico for the bi-national commission, and I'll be holding a number of meetings to further discuss these border issues.
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  And then, finally, I have decided to put two of my own people from the Foreign Agricultural Service to be on the border in Nuevo Laredo, to work up and down the border as these issues come up, and they come up frequently on both sides, and my Mexican colleagues as well, to expedite and to find out really what is going on in any of these delays that occurred, and then they would get back to me in a very timely fashion, or other agency.
  So we're taking three different approaches to facilitate these border problems on transportation, Mr. Chairman.
  Mr. BARRETT. Is this specifically a labor question? Is it personnel, a lack of personnel?
  Mr. SCHUMACHER. Well, apparently, there are a number of issues, but that is one of the main ones. The Mexican customs brokers themselves are concerned, but there is a 5 1/2 day working week, but transportation moves 24 hours a day, 7 days a week. So we're going to work this through with our colleagues, and I'll report back to you as we make progress on that.
  Mr. BARRETT. Thank you. You will be proceeding, as I just understood your last statement, perhaps to increase the work week from 5 or 5 1/2 days to perhaps 7?
  Mr. SCHUMACHER. We can't--they're a sovereign country. We're going to have discussions with them. We have been discussing it with them, and I'll be further discussing it when I go down to Mexico.
  Mr. BARRETT. We'll look forward to that report. Thank you.
  Mr. SCHUMACHER. I will report back to you.
  Mr. BARRETT. Thank you very much.
  Mr. Minge?
  Mr. MINGE. I'd like to address the question of parity of treatment at the Mexican and the Canadian borders and the products. As I understand it, when American grain goes into Canada, there is a fairly stiff inspection and certification process that takes place. But when Canadian grain comes this direction, it is not subject to that scrutiny.
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  And I'd like to know, are there any talks under way to try to achieve a certain parity of treatment of products going both directions, so that we don't have that discrepancy? And this has come up in barley and wheat particularly from the Minnesota and North Dakota area, I know. What discussions are taking place on this, and when can that be brought to closure?
  Mr. SCHUMACHER. I did raise this yesterday when I met with my Canadian colleagues. That it is an important issue, Congressman. That there is a difference in paperwork, as I mentioned earlier in my response. It is one that I plan--we are going to look at, Lyle and I, very firmly in terms of equivalency as we have border crossings.
  It's not just on wheat and barley, but we have other products--for example, on potatoes and many others. We are also working very hard on the harmonization, for example, on the movement of feeder cattle. And we have a pilot program we're trying to get resolved, and I discussed that with Canada, and we hope to expedite that so we can get equivalency of border movement not just on the issue of paperwork and end use certificates, and so forth, but also on the paperwork on cattle going into feed lots and on potatoes and other products.
  It's something that is important. We are raising this. And with Lyle's work, we're going to work even harder on this over the next year or so, to get some of these issues that people on the border--bother them and have equivalency and movement of product on both sides.
  Mr. MINGE. As you might expect, this is very frustrating to American farmers who see their markets being invaded with additional Canadian product. And not only do we have a monopoly marketing arrangement in Canada, but we also have these problems at the border, so that as we try to enter their market we encounter barriers. And I think that this is a fundamental disconnect in what ought to be a free trade arrangement.
  The parallel situation I'd like to just explore briefly, on the Mexican side, is related to food safety. And putting to one side strawberries, there is very deep concern as to what is the food inspection process in Mexico. And let me just ask: does the FDA or USDA or anyone inspect the Mexican processing plants for fruits, vegetables, meat products, or anything like that?
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  Mr. SCHUMACHER. I could answer. I'm going to ask Mr. Sheesley to join us at the table, because the APHIS has extensive programs.
  Dan, do you want to join us for a second on the inspection processes in Mexico?
  Mr. BARRETT. Would the gentleman please state his name and whom he represents?
  Mr. SHEESLEY. My name is Dan Sheesley. I'm with the Animal and Plant Health Inspection Service, International Services.
  The question was on the inspection processes in Mexico. I can state that the Food Safety Inspection Service does inspect and certify plants for the exportation of certain meat products out of Mexico. So there is inspection that goes on in certain of the plants that are meat processors in Mexico.
  Mr. MINGE. Do we simply accept, though, by and large, the Mexican inspection process--for example, if we're importing any finished beef products or pork products or poultry products, as opposed to in this country where there is a carcass-by-carcass inspection?
  Mr. SHEESLEY. The process and the entire system has to be inspected by the Food Safety Inspection Service. And the certification of the plant is specific to the product that is being exported and the processes that the plant goes through. It usually is a phase-in process where the infrastructure is evaluated, as well as the processing at the plant.
  And there are two certifications that are involved there. One is their Federal inspection process, and then the certification by Food Safety Inspection Service.
  Now, there are not many plants that have been certified by the Food Safety Inspection Service from Mexico, but those are the only plants that are certified to export product.
  Mr. MINGE. I'd expect there is much more coming this direction on the fruits and vegetables side than there is on the meat side.
  And I'd just make a statement, since I see our time is up, that there is continuing concern that the integrity of the process on the Mexican side does not meet the standards that exist in this country, and that some of the recent disclosures about problems in our neighbor to the south have exacerbated this concern.
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  And I think it's extremely important that USDA or FDA maintain a very high degree of scrutiny, so that the U.S. market is not compromised, and so domestic production is competing on a level playing field.
  And this extends all the way back to worker safety, because it is important that we not be bearing a very high cost for ensuring that our workers are in an environment that provides for their safety. But on the other side, this same standard is not being met, and that undermines the ability of this Nation to maintain those standards, which I think are very important and are well accepted in this Nation.
  Thank you.
  Mr. BARRETT. Does the gentleman from Wisconsin have further questions for the Department?
  Mr. JOHNSON. Just a quick question, Mr. Chairman, back to Mr. Minge's line of questioning on the dairy products.
  And I know you talked about the disappointment with the 300 percent tariff on U.S. dairy products. I wonder if you can give us a timeline, and perhaps your best realistic assessment, in regards to dealing with that, and if I'm asked by dairy farmers what I can tell them in terms of when that is coming down, when that might change, when we may have an opportunity to increase our dairy exports.
  Mr. SCHUMACHER. Well, we asked that directly to the Deputy Minister yesterday, and so we are on the same page on that issue. I think they do believe that they have to make changes. I think, as I said earlier, the change will have to come in our next round of the WTO negotiation, and we are prepared to take that up as one of our major issues with Canada on the next round.
  Lyle, do you want to expand on that?
  Mr. JOHNSON. What is the timeline on that?
  Mr. SCHUMACHER. We start the negotiations in 1999. But I want to reiterate again, as I said earlier, we are still--the impression is we cannot sell dairy products, poultry, and eggs, into Canada. In fact, this year we'll sell nearly $330 million worth of those products into Canada in different products.
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  So Lyle and I will work with our dairy industry, egg, and poultry, so that we let them know that there is a market for those products in Canada. The problem is there could be a much bigger market once we resolve this tariff issue in the next round of the WTO.
  In the meantime, we will be looking at this export pooling on class 5 to see if they are in violation of the WTO. And New Zealand will join us in that as well. So we are working on this very, very hard, Mr. Johnson, and at some point we might come up and visit and talk to your dairy farmers on that.
  Mr. JOHNSON. We appreciate that.
  Thank you very much, Mr. Chairman.
  Mr. BARRETT. Thank you.
  Does the gentlelady from Michigan have questions for the Department? Ms. Stabenow.
  Mrs. STABENOW. Thank you, and good morning. I apologize for being late. At this point, I'm going to listen, and I appreciate the opportunity at some point. Thank you.
  Mr. BARRETT. Thank you.
  The gentleman from Kansas, Mr. Moran.
  Mr. MORAN. Mr. Chairman, thank you. It's my understanding that Chairman Smith has been here and asked questions about wheat in Canada. And rather than take the chance of repeating anything that has been asked, I also will listen.
  Mr. BARRETT. Thank you, sir.
  With that, this will then conclude the first panel. We thank you, ladies and gentlemen, for your attendance, for your sharing with us.
  And we will recognize the second panel consisting of the American Farm Bureau Federation, representing that organization, Mr. Dean Kleckner; and representing the National Farmers Union, Mr. Larry Mitchell.
  Thank you, gentlemen, for being with us. We will proceed with the president of the Farm Bureau, Dean Kleckner.
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STATEMENT OF DEAN KLECKNER, PRESIDENT, AMERICAN FARM BUREAU FEDERATION

  Mr. KLECKNER. Thank you, Mr. Chairman, members of the committee. I am Dean Kleckner. I'm an Iowa corn/soybean/hog farmer. I am president of the American Farm Bureau.
  NAFTA was implemented on January 1, 1994. At that time, Farm Bureau was one of its strongest supporters. We continue to believe that higher living standards around the world depend upon mutually advantageous trade among nations. The facts and figures still lead to the conclusion that NAFTA ultimately will be a success for all free trading partners.
  I have included in my testimony recently revised USDA figures by fiscal year, and you saw some of those figures earlier from Gus Schumacher. As you can see by the figures in my testimony, U.S. agriculture trade with both Mexico and Canada has increased since the implementation of NAFTA. However, the devaluation of the peso has made U.S. goods more expensive there and made Mexican goods less expensive here. So a significant 1993—1994 agriculture trade surplus with Mexico vanished in 1995.
  The NAFTA agreement, though, did guarantee movement of exports to Mexico during the peso devaluation. It did preclude Mexico from stopping imports, all imports, to protect its foreign currency base. That's an advantage. Trade did continue through even the lowest peso levels.
  Our exports to Mexico in agriculture reached $5 billion in 1996, led by increased payments for corn, wheat, soybeans, and cotton. And this is an increase of about $900 million from fiscal 1994, which was prior to the devaluation. Figures for October 1995 through May 1996 indicate that U.S. exports to Mexico rose 34 percent over that period.
  Now, the data also reveals that Mexican tomatoes entering the United States are at record levels. For the 8-month period, imported Mexican tomatoes, in dollars, were up about 70 percent. And that caused severe problems for our Florida tomato farmers. The situation was believed to have been solved through negotiations. We're wondering about that today, actually. But I stress here the problem was not caused by NAFTA, but by the devaluation of the peso.
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  The data also indicates that cattle imports from Mexico lessened during the recovery. But they had a 1994 drought in Mexico, in northern Mexico, and that forced the massive liquidation of their cattle herds, with many of those cattle coming to the United States The situation did reverse. For the 8 months, October to May 1996, cattle from Mexico to the United States, in dollars, were down over 60 percent.
  In this case, weather led to big changes in trade, not NAFTA. NAFTA gets blamed often, but there are other problems. In this case, it was weather.
  Mexico's gross domestic product was recently reported to have increased by over 4 percent during 1996, after 5 quarters of decline. Mexican exports have led the way for them. Agriculture production in Mexico grew by 4 percent late last year, and certainly I'd say a more stable peso down there has aided this emerging turnaround. But if they're going to continue to turn around in Mexico, they have to do it with lower taxes, best regulations, and a truly stable currency, and that is the formula for anywhere in the world.
  Once again, I would say that NAFTA is not the reason for these issues. Since December 1995--and I don't have what I'm going to say now in the prepared testimony, but just a few--just less than a minute on this. Since December 1995, the opening of the U.S.- Mexico border for cross border trucking into the United States and Mexican border States has remained difficult.
  And those most hurt by the delay are the American consumers, farmers, and truckers that would have benefitted from a safe and efficient cross border trucking system. And in this trucking system, trucks carry over 85 percent of the U.S.-Mexican trade.
  United States officials have indicated, I believe wrongly, that the Mexican trucks continue to have safety problems. In fact, Mexican carriers must follow the same safety regulations in the United States that our own carriers face. The governors of the four U.S. border States have all said that they are prepared to enforce the rules and regulations.
  Mexican trucks have operated into commercial zones along the border for years. American companies have been seeking equity. The administration should move immediately to open the border, which will help ensure that our trade continues to grow.
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  Now, regarding Canada, the United States ran a positive but narrowing agriculture trade surplus with them until last year. For both 1996 and 1997, the expectations are that we'll have a slight trade deficit with Canada. A portion of that deficit relates to the fact that they continue to place very high tariffs on dairy and poultry, and we have already talked about that. They also manage grains with the Canadian Wheat Board.
  Suffice it to say that since the CFTA, the free trade agreement, was implemented on January 1, 1989, bilateral trade has increased steadily. It has increased by nearly $2.5 billion from pre-trade agreement days. Fruit and vegetables have led the way. Both imports and exports are above $6 billion, but the trade problems still remain with wheat, barley, beef, poultry, dairy, and potatoes.
  We got ruled against last year with a NAFTA panel in the dairy and poultry dispute, so we are still facing those high border tariffs of up to 350 percent. That has already been talked about.
  In conclusion, I'd say that trade agreements must be monitored and enforced. I heartily applaud Ambassador Barshefski in her move toward designating an ambassador for agriculture under the title that was previously carried by Ira Shapiro. But this is simply granting the use of the title by the State Department. It is not a permanent position.
  We believe that there ought to be a permanent position of Deputy Trade Ambassador for Agriculture that wouldn't change with changing of personnel or administrations.
  We need to continue to closely coordinate USTR with USDA for long-term agricultural trade to be successful. Agreements like NAFTA should ensure that trade remains both freer and fairer for all commodities.
  I conclude by saying we simply need to enforce even more and monitor these accords to make sure the benefits promised to farmers and ranchers are fully realized. Thank you.
  [The prepared statement of Mr. Kleckner appears at the conclusion of the hearing.]
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  Mr. MINGE [presiding]. Thank you very much, Mr. Kleckner. We deeply appreciate the participation of the American Farm Bureau in this proceeding.
  And now I'd like to call on Mr. Mitchell from the National Farmers Union, and welcome you to this hearing, Mr. Mitchell.
STATEMENT OF LARRY W. MITCHELL, VICE PRESIDENT, GOVERNMENT RELATIONS, NATIONAL FARMERS UNION


  Mr. MITCHELL. Thank you, Mr. Minge. And on behalf of President Lee Swenson and the 300,000 farm and ranch families of National Farmers Union, we want to express our appreciation for having the opportunity to testify here today.
  Trade is essential, and Farmers Union doesn't come here today to call for withdrawal from NAFTA, but to offer some constructive criticisms on key points that need to be addressed to improve the agreement.
  Our points for NAFTA improvement fall into four general categories. That would be: dispute resolution, currency fluctuation, food safety, and proper reporting of imports and exports. But before I go there, I want to discuss real briefly a litmus test to determine if there is a problem with NAFTA for U.S. producers. And I've got a list of some questions here that we'd like folks to ponder a bit.
  Are not today's producers the most educated in U.S. history? Are not today's producers the best informed in U.S. history? Has there been one Federal agency, in this administration or the past administration, that has not been pro-trade and pro-NAFTA? Can you name me one major U.S. newspaper, or U.S. magazine, that is not pro-NAFTA or pro-trade? Can you name me one major national agriculture publication that is anti-trade?
  Can you name me one national commodity organization that is anti-trade? State commodity organizations that are anti-trade? With the Farm Bureau's 5 million members, can you name me one of their State organizations that is not anti-trade?
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  So with all of the pro-trade information out there, and so many well-educated producers, so many well-informed producers, why, then, are we getting reports not only from our members but producers across the spectrum that there is a problem with NAFTA? They're not stupid. They've got the information. They are very well read.
  Then, why don't they support NAFTA as vigorously today as they did when we ratified it? One or two answers that I see. Either the Farmers Union is the most effective farm organization in the history of mankind, or there is a problem with NAFTA.
  Dispute resolution has been discussed already today. We have had a dismal record on dispute resolutions. Our win-loss ratio would be unacceptable in the corporate world, the sports world, you name it. We can't really lay this dispute resolution problem at the feet of the negotiators. We have had two teams involved since we have had the Canadian free trade agreement and the NAFTA come along, two different administrations, two different parties.
  It is a flawed trade agreement, and a lot of discussion was held earlier this morning so I won't go into the details of this. But somehow or another, we need to address the dispute resolution problems within this trade agreement.
  Currency fluctuation. NAFTA and the WTO are flawed in the aspect that there is no way to address currency fluctuations. I mean, I am very pleased that the Mexican government has repaid the loan, repaid the interest, and repaid it ahead of time. Quite frankly, I think we dodged a bullet. We did see a drop in trade, as Mr. Kleckner pointed out, because of that currency fluctuation. Somehow or another, we have got to address that in future trade agreements.
  One of the main themes this morning seems to be food safety. How many times have we heard the braggadociousness of farm organizations and agribusiness proclaim that the U.S. consumer has been blessed with the most affordable, most abundant, and safest food supply in the history of mankind, and that those consumers have taken it for granted.
  Well, I submit today that if anyone is guilty of taking something for granted, it has been U.S. agribusiness, which has taken our domestic customers for granted. To retain our customers, be they domestic or foreign, we must continue to supply them with a safe food supply.
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  All imported foods, feeds, and fibers should meet the same health and inspection standards as those required for our domestic products. All foods, feeds, and fibers should be labeled disclosing the country of origin, actual contents and additives.
  In the past few weeks, as we have talked this morning, we have had the unfortunate incident, alleged incident--but I don't think it's alleged for those children that are sick, and all those children having to get injections--with an outbreak of Hepatitis A in some strawberries. Once again, consumers' fragile confidence has been shattered as they no longer know where their food is grown or under what conditions.
  The U.S. consumer is also the U.S. taxpayer. And those taxpayers have invested a lot of money, whether it's through USDA, FDA, Customs Service, the EPA, and even with passage last summer of the Food Quality Protection Act, to ensure that their domestic production system is the safest in the world. Should not, then, those people that have invested that money into that safe product have the option of purchasing that product in the grocery store?
  A couple of areas real quickly on country of origin labeling. There are three initiatives going on right now. A new customs regulation to redefine a 67-year old law from the Trade Act of 1930 that frozen fruits and vegetables must be labeled as to the country of origin. They're asking now that that label be prominently displayed on the front panel of that product.
  Also, last week Congressman Bono of California and 21 cosponsors introduced legislation to require country of origin labeling on all perishable agricultural products. And very soon we understand that the Senators from South Dakota will introduce legislation to require country of origin labeling for red meat.
  The last area would be in reporting. We have seen great improvement from the USDA on the reporting of live cattle imports and exports from Mexico. Those need to be standardized. Our American producers have, over the past several years--be it the farm bill, crop insurance reform, various other aspects of Federal policy--have been required to accept more risk in the management of their operations.
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  The lifeblood of managing risk is information--good information and timely information. So we request that the reports of imports and exports from Canada and Mexico be standardized. They should be as readily available as our market reports are, as they're read on the noon radio programs or printed in the newspapers.
  With that, I will turn it over and be glad to answer any questions, Mr. Minge.
  [The prepared statement of Mr. Mitchell appears at the conclusion of the hearing.]
  Mr. MINGE. Thank you very much.
  I will return the leadership of this hearing to Mr. Barrett as chairman, and he will begin the questioning.
  Thank you.
  Mr. BARRETT. Thank you so much. Sorry for the inconvenience. These 15-minute votes become a bit of a problem.
  Dean, I noticed in your testimony that you named, or you talked about some of the great assets, attributes of NAFTA, some of the good things that have happened. Name for me one that you think is perhaps the best. What is the greatest benefit to your organization as a result of NAFTA?
  Mr. KLECKNER. I think it has been just broadly, Mr. Chairman, the increased trade. The figures with Mexico are in the grains area. In my view, NAFTA has led to trade sales that would not have been there without NAFTA. I think sales would have increased anyway. We can't give all of the credit, not can we give all of the blame, that is normally given to this accord, but it has led to increased sales. And with the Mexican economy recovering, I think there will be some dramatic increases in the years ago.
  Mr. BARRETT. In your written testimony I noticed, before I rushed out for a vote, that you talked about a transition to higher living standards. It has been a bit bumpy. And this is a direct quote. ''The transition to higher living standards has been a bit bumpy as far as NAFTA is concerned.'' What are a couple of the greatest concerns that you have? What are you telling us there?
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  Mr. KLECKNER. I think we need to monitor the accord, the agreements better than we have. The talk this morning--I was listening intently while you were questioning Mr. Schumacher regarding the strawberry issue. We need to be concerned about that.
  I hear a lot from Florida on tomatoes. I don't come from a State, that produces tomatoes other than to eat from our own gardens. But what they consider to be dumping with tomatoes, and certainly with other vegetables, again, I think it was much to do, though, with the peso devaluation, very little to do with NAFTA.
  NAFTA gets the blame in Florida. I just listen to that when I'm there and try to point out now and then that the NAFTA agreement has gotten very little--should have very little to do with the issue. And it's the peso devaluation--I think there was dumping, that it really affected those markets, because the timing is exactly the same, Mexico and Florida. Not so much with California and other States as with Florida. We need to continue to monitor that even better than we have.
  The agreement that supposedly satisfied the so-called tomato--the vegetable situation doesn't seem to be working very well.
  Mr. BARRETT. Would you agree that the biggest problem at that time was the drought and the devaluation of the peso? That's one of the biggest problems?
  Mr. KLECKNER. Yes. I think virtually all of the problems that we have had with Mexico have been related to the peso devaluation of December 1994, when the peso was cut in half in less than a year, which made our product cost twice as much and theirs cost half as much.
  And I'm just amazed, as I look at it, that we were able to export anything, to continue to export anything down there. Our exports dropped. Their exports increased. But not to the degree that you'd think it would have, and I lay some of that, Mr. Chairman, to NAFTA. That it made it possible, and somewhat required, that this trade go on despite the fact of that peso devaluation disruption.
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  Mr. BARRETT. I have some concerns about our deficit with Canada, and I think you mentioned that you had discussions with some of the farm leaders up there on a couple of key issues--the high tariffs on certain commodities and the wheat board. And did I get the impression, or do I get the impression, that you're a little discouraged about them not wanting to visit too much about those things?
  Mr. KLECKNER. Yes, you are certainly right. And I am going to visit this noon lunch with some Canadians, I think some of the same people that Gus Schumacher and perhaps some of you talked with yesterday, about dairy, poultry, the wheat situation. The farm leaders I talk with really don't want to discuss it. They will, but it's like pulling hens' teeth.
  Myself and some of our State Farm Bureau present leaders, including from your State, Mr. Chairman, are going to Canada, to Winnipeg, and visit with some of the wheat board people, some Canadian farmers, I think it's in June, to get a better understanding and talk with them about some of our concerns.
  The issue of the up to 350 percent tariffs on dairy, while legal under GATT, they're legal but it's certainly not in the spirit of opening markets and reducing barriers to trade. And they simply need to get going on that.
  I think it will require action at President Clinton's level, with the Prime Minister of Canada, the Premier of Canada, and certainly Charlene Barshefski talking with her counterpart, as well as all of the pressure that you can put on and that we can put on at the farm organization level, because those farmers that are the beneficiaries of those high tariffs and those high prices in Canada aren't very willing to change. They kind of have it made. There is a gravy train involved, and they don't want anybody stirring in their gravy.
  Mr. BARRETT. Would you be so kind as to share the results of your luncheon today with the subcommittee?
  Mr. KLECKNER. I will do that, sir.
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  Mr. BARRETT. Thank you very much.
  Mr. Mitchell, I wish you'd comment on some of the concerns that your grain producers are expressing to you, for the record, regarding NAFTA, and perhaps specifically Canada.
  Mr. MITCHELL. Well, specifically Canada, our Montana people have been the most affected. They have seen a mess--some years it's worse than others. I know in January 1994 they were upset to the point of blocking some elevators and some port entries. They are very concerned that we've seen the migration south of the Canadian wheat. It is plugging their distribution system.
  We've got members that, by July, still have not been able to deliver the previous year's crop because the elevators in the distribution system, the infrastructure for hauling the Montana wheat to port, is plugged with Canadian wheat. They're missing their deadlines on their contracts. It is very significant.
  It is not just wheat either. The live cattle coming in through the Montana ports and the North Dakota ports are very concerning.
  Mr. BARRETT. Do you attribute these problems specifically to NAFTA?
  Mr. MITCHELL. I don't contribute them all directly to NAFTA. I mean, we need trade agreements. But we need trade agreements that work. NAFTA, we need, but we need a NAFTA that works. It needs to be amended, renegotiated, something has to be worked out here. I mean, it's certainly better than no trade agreement at all. But if you ask some of those producers out there, at times no agreement at all is their preference.
  Mr. BARRETT. The tools are not there in the existing agreement to----
  Mr. MITCHELL. Evidently not. Looking at the win-loss ratio in our dispute settlement, it is very dismal. If we had that sort of a win-loss situation in corporate America, those negotiators would be out in the street. If we had a win-loss ratio like that in major league sports, the coach would be gone.
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  But, it is, in fact, a very, very pro-NAFTA, pro-trade publication. I will cite Pro Farmer. In this past Friday's publication, it had a quote in there that some of the U.S. farmers are wanting to hire a Canadian negotiator to work for them on their team. [Laughter.]
  Mr. BARRETT. Is this primarily the Dakotas, Minnesota, this area? Or how far does it extend?
  Mr. MITCHELL. We've seen unit car trains from Canada go all the way into the Texas panhandle with feed quality wheat.
  Mr. BARRETT. Yes, I understand the trains. Yes.
  The trucks, primarily that northern tier?
  Mr. MITCHELL. The trucks primarily in the northern tier. The trucks coming up from Mexico create a completely different situation that some time you might even talk with Governor Bush in Texas about what we're going to have to do with our infrastructure there to deal with the overloaded trucks.
  Mr. BARRETT. What is the answer? Did I understand you to say renegotiate?
  Mr. MITCHELL. Renegotiate. We've got to improve the agreement. We did not support ratification of this treaty because it was flawed, not because we don't like trade agreements. We tried to point that out then, and we still have those concerns. It just seems that a lot of other people have joined us in those concerns over the past several years.
  Mr. BARRETT. Thank you, sir.
  Mr. MITCHELL. Thank you.
  Mr. BARRETT. We appreciate both of you testifying. Happy to have you with us. We'll look forward to the next time.
  Mr. MITCHELL. I appreciate your hospitality.
  Mr. BARRETT. We will recognize the next panel.
  We will recognize Mr. Bill Mickelson representing the U.S. Canola Association; and Ryland Utlaut, National Corn Growers Association.
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  Did Mr. Corbett have to go to the airport, by the way?
  Mr. CORBETT. I'm here.
  Mr. BARRETT. Here he is.
  Thank you, sir. We're glad to have you with us representing the Barley Growers Association. Mr. Corbett, I understand you might have a plane to catch. Let's start with you, please.
STATEMENT OF CRAIG CORBETT, PRESIDENT, NATIONAL BARLEY GROWERS ASSOCIATION


  Mr. CORBETT. Thank you. My name is Craig Corbett, a barley producer from Grace, ID serving as president of the National Barley Growers. I want to thank the subcommittee chairs and ranking members for the opportunity to come before you today to discuss the status of NAFTA.
  As U.S. negotiators prepare for another round of agricultural trade talks in the aftermath of dismantling the supply management programs in the United States, at a time when U.S. officials have also seemingly surrendered the right to utilize our export promotion program as a market maintenance and developmental tool, I think it is worth noting that our market reform leadership has inadvertently led us to give away many valuable trading points before allowing our trade officials to seek comparable action from other participants in ongoing trade negotiations.
  Regarding NAFTA's impact on barley producers, the NBGA is pleased with the new marketing opportunities we have seen in Mexico, and we are excited about the potential to build on early successes from implementing the bilateral agreement with Mexico.
  Mexico's duty-free quota has been expanded to over 545,000 metric tons, well above the original NAFTA commitment of 132,000 metric tons this year. This includes an expansion of 176,000 metric tons for feed barley imports, above and beyond the levels reserved for malt and barley and valued-added malt imports needed for Mexico's rapidly expanding brewing industry.
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  On the other hand, I think it's important to address a persistent misinterpretation of an agreement as a trilateral agreement between the United States, Canada, and Mexico. As you may recall, Canadian trade officials rejected any new agricultural negotiations between the United States and Canada when NAFTA talks with Mexico began, insisting instead that the two parties simply negotiate bilateral deals with Mexico.
  Since NAFTA is nothing more than a set of bilateral agricultural agreements, it is incorrect to assume that this document should be used as a blueprint for multilateral, hemispheric negotiations.
  The problem with NAFTA is with the items left out of the original Canada-U.S. free trade agreement implemented in the late eighties including the failure to recognize and address the functional relationships between the Canadian Government and the quasi-governmental entities along with the pervasive amount of governmental regulations in the grain handling and distribution system.
  As a result of this failure, we have allowed a Government supported monopoly to utilize access to the open market system operating in the United States to practice discriminatory and predatory pricing in United States and global markets while maintaining its own marketing distribution and transportation systems under lock and key.
  A minimum access window was apparently opened as a result of the Uruguay Round Agreement that would allow U.S. producers to export malt and barley to Canada under a small in-quota tariff. But between the higher above-quota tariffs and the Canadian Wheat Board's control of the Canadian distribution and marketing systems, an effective storm window remains in place to keep even the most aggressive marketer from the United States out of Canada.
  Further, we remember that one of the supposed wins of the CUSTA agreement was thought to be the language precluding implementation of any new tariffs on agricultural products. Barley growers continue to be frustrated when seeking to find anything good to say about the original CUSTA agreement.
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  While we are in favor of advancing U.S. trade interest through a renewed WTO bilateral negotiations with other nations of the western hemispheric and Pacific Rim, U.S. barley producers urge you to keep in mind Canada's record for refusing to address valid U.S. economic concerns rising from CUSTA.
  It seems to us that it would be a disservice to U.S. agricultural interests to reward Canada for this rejection of our very real concerns by allowing negotiations to expand under the faulty formula of NAFTA.
  Perhaps if the WTO negotiators can successfully establish a set of disciplines addressing the anti- competitive marketing activities of STE's during the agricultural trade talks slated to be in in 1999, a more suitable structure can be formed to transform bilateral agreements negotiated throughout the western hemisphere into a more uniform, multilateral structure.
  Over the past few months, the National Barley Growers has attempted to developed a comprehensive picture of the impact of the Canadian grain marketing and distribution system on U.S. barley producers.
  Our initial efforts have done nothing to dissuade U.S. barley producers from viewing the Canadian system as an organized whole that acts as a single powerful force with an incredible ability to wreak havoc on U.S. barley growing regions along the U.S.—Canada border.
  While the attached document should be viewed as a work in progress, the NBGA believes that it's important to offer this study into public record at this time to ensure that U.S. policy makers have access to the best information possible as Congress begins to consider fast track authority in the coming months.
  We will continue to update your subcommittees on our findings at that time in the future. One point that I would like to highlight is the need to avoid sending a message that what we really need is some minimum access to the Canadian market.
  As long as the Canadian system is controlled by the Government and the Canadian Wheat Board, and assuming that the 30 percent currency differential continues to exist between the United States and the Canadian dollar, we are not going to be competitive in that market.
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  Further, the same impediments to north bound barley trading serve to make the U.S. market all more desirable to Canadian farmers. Thus, the U.S. market will continue to serve as the only real price arbitrage system in this continent, and the CWB will continue to utilize its discriminatory pricing capabilities to distort our domestic market.
  Thank you again for including us in your review of NAFTA, and I will be happy to answer any questions that you might have on this subject.
  [The prepared statement of Mr. Corbett appears at the conclusion of the hearing.]
  Mr. BARRETT. Thank you, Mr. Corbett.
  I'll exercise a prerogative of the Chair and ask you a question that I need to ask you so that you can then be excused to get to the airport.
  Mr. CORBETT. I've got plenty of time, sir.
  Mr. BARRETT. Do you?
  Mr. CORBETT. Yes.
  Mr. BARRETT. All right, then; let's proceed right down the line.
STATEMENT OF RYLAND UTLAUT, VICE PRESIDENT, NATIONAL CORN GROWERS ASSOCIATION

  Mr. UTLAUT. Thank you, Chairman Barrett.
  My name is Ryland Utlaut. I'm from Missouri and serve as the vice president of the National Corn Growers.
  The National Corn Growers was one of the first agricultural organizations to support the North American Free Trade Agreement. Our members recognized the tremendous potential of trade with Mexico. Mexico has a growing population with unmet food and feed needs.
  We are happy to report that we are very optimistic about the future after the first 3 years of more open trade with Mexico.
  Prior to the U.S.-Mexico agricultural trade agreement, U.S. corn exports to Mexico were limited by an import licensing system designed to protect Mexico's domestic corn industry. High price supports encouraged domestic corn production, but the benefits to Mexican consumers were limited by the size of the Mexican corn crop.
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  When Mexican production met demand, imports were severely curtailed. As an example, in 1992, Mexico increased production over the previous year by 28 percent and net imports of that crop fell.
  By contrast, when the Mexican crop was short, the United States was able to fill the demand, but there was little incentive for U.S. exporters to develop markets in Mexico. Although consumption rose in Mexico, the growth in demand was limited by the import policy.
  The trade agreement between the United States and Mexico changed all that. The pact converted the import licensing system to a tariff-rate quota. Mexico granted tariff-free access for the first 2.5 million metric tons of U.S. corn in the first year of the trade agreement.
  The quota increases 3 percent per year during a 15 year transition period. The quota for 1997 is 2.7 million metric tons, or a little over 107 million bushels. Over-quota exports from the United States were subject to a tariff of $206 per metric ton, but not less than 215 percent during 1994.
  Over the first 6 years of the agreement, an aggregate 24 percent of the over-quota tariff will be eliminated; the remainder will be phased out over the rest of the 15 year transition period.
  Even though Mexico experienced a financial crisis in 1995 with negative growth and currency devaluation, the outlook for feed grains suffered only a modest setback. The peso evaluation made it more difficult for Mexican consumers to purchase meat, poultry, eggs, and dairy products.
  It also made it more expensive for Mexico to meet its commitment under NAFTA. Nonetheless, in 1995, U.S. corn exports to Mexico exceeded 2.8 million metric tons. Mexico is now on the road to financial recovery, and we have every reason to anticipate that Mexico will continue to be one of our most important export markets for U.S. corn.
  If 1996 exports are any indication of the future, we have tremendous potential in Mexico.
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  It is important to note that increased exports are not expected to curtail Mexican production which is expected to increased steadily over the next 10 years. Expanded U.S. exports will accrue to the benefit of Mexican consumers. Increased availability of feed grains will lead to improved diets in the majority of the Mexican population.
  This is exactly the type of benefit that would be expected from more open trade. The certainty of minimum corn imports has also created the opportunity for increased corn processing in Mexico. The demand for higher value of food and industrial products will continue to grow as corn processors invest in Mexico and as exports of processed corn products increase.
  We still face some potential problems. First, although Mexico's financial situation has improved from the crisis of 1995, restrictions on the use of GSM credit can impede U.S. exports. We have to be responsive to the credit needs of all of our customers.
  Second, we must insist that phytosanitary restrictions on corn imports be based on sound science. Mexico has, on occasion, required unnecessary fumigation and costly testing for weed seeds. Mexico has every right to protect domestic corn production; but as exporters, we have the right to insist that restrictions accomplish legitimate, scientifically-based objectives.
  Third, the United States must honor our commitment to free trade. United States efforts to protect our domestic broom corn industry resulted in retaliation against fructose. The propensity to protect domestic interests will take real political resolve to curtail.
   Finally, we cannot leave a hearing without urging members to support further expansion of trading opportunities. We anxiously await the Administration's fast track proposal which we hope the members of this subcommittee will be able to support.
  Thank you for taking the time to consider the views of the National Corn Growers Association.
  Thank you.
  [The prepared statement of Mr. Utlaut appears at the conclusion of the hearing.]
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  Mr. MINGE [presiding]. Thank you. We deeply appreciate the corn growers' and the barley growers' presence and look forward to the U.S. Canola Association's position as presented by Mr. Mickelson.
STATEMENT OF BILL MICKELSON, FIRST VICE PRESIDENT, U.S. CANOLA ASSOCIATION


  Mr. MICKELSON. Good morning, Mr. Chairman and members of the subcommittee.
  My name is Bill Mickelson, a canola, spring wheat, durum, and barley producer from Rolette County in North Dakota. I currently serve on the Board of Directors of the Northern Canola Growers Association and as first vice president of the U.S. Canola Association.
  USCA appreciates the opportunity to appear before you at this hearing.
  I would like to commend you, Mr. Chairman, for holding this hearing at this time. Congress will shortly consider the administration's request to extend fast track negotiating authority to expand the North American Free Trade Agreement and initiate a new round of multilateral trade negotiations.
  In making this decision, it is important to review how the agreements negotiated under the last fast track authority have performed. The U.S. Canola Association was established in 1989, 3 years after FDA granted GRAS, or ''Generally Regarded As Safe'', status to canola oil as a food.
  Since then, demand for canola oil by U.S. consumers has grown from about 100 million pounds to over 1.4 billion pounds worth $400 million per year. Domestic production of canola has increased from virtually zero in 1986 to 380,000 acres in 1996.
  At this level, we supply less than 10 percent of domestic demand. The balance of over 90 percent of U.S. canola oil consumption is met through imports, almost entirely from Canada.
  USCA has worked hard to remove obstacles to canola production in the United States over the past 8 years. We supported expanding planting flexibility in the 1990 and 1996 farm bills. We established the National Canola Research Program in 1993, and have justified funding for this program to Congress every year since.
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  Two years ago, USCA convinced FCIC to initiate a crop insurance pilot program for canola and rapeseed. Additional counties have been added each year. Finally, we supported authorization of a national canola check-off program in last year's farm bill.
  When acreage warrants activating this self-help program, the funds received will also be used for research.
  One of the major impediments to producing canola throughout the United States is the availability of crop protection products. Since canola is a new crop in this country, there are only eight products registered. By comparison, Canada has 33 production products registered for canola.
  Many of these products are used to treat weeds and other pests that severely curtail canola yields and production in the United States Unless we increase pesticide availability, all of our efforts to promote canola as a viable crop opportunity in this country will be severely hampered.
  USCA has met repeatedly with EPA to defend existing pesticide registrations for canola. We have worked with IR—4, with pesticide manufacturers, and with Congress to support new product registrations. However, these efforts face an uphill battle as the EPA has focused its agenda first on eliminating old families of pesticides, and now on defining a new registration process under the Food Quality Protection Act.
  In short, we have been getting nowhere fast in registering new pesticide products for canola.
  I would now like to offer USCA's views on the potential role of NAFTA, particularly the original Canada-U.S. Trade Agreement. In addressing our concerns, USCA supported approval of CUSTA in 1990.
  We believed then and believe today that U.S. farmers can compete successfully with our Canadian neighbors for the growing market for canola oil in this country if conditions for producing this crop are also competitive.
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  We maintained this position in support of competitive trade in 1992 when Canada insisted that the United States eliminate the remaining 5 1/2 percent tariff on canola oil imports in exchange for an agreement to clarify an oversight affecting country of origin treatment of imports.
  Since then, we have faced unimpeded imports of duty-free canola seed, oil, and meal from Canada. Among its provisions, CUSTA required establishment of a Technical Working Group to promote harmonization of registrations for crop protection products between the two countries. After initially approving two products for us in each country, the TWG has been inactive in this area.
  To our knowledge, no additional products have been considered or approved during the past 5 years. No specific products are on the agenda for the upcoming meeting of the TWG in Ottawa in June. Instead, the meeting will focus on how to integrate Mexico into what has been a bilateral process.
  During the past 2 years, USCA has urged EPA to use the TWG to register several crop protections for canola. One of these products is Muster, which is used to control wild mustard. The manufacturer of Muster submitted identical registration packages in the United States and Canada in 1992.
  In 1994, Canada approved the application, and the EPA rejected it on the basis of toxicity. At our request, EPA agreed to review the criteria used in both countries to see if the two decisions could be harmonized. Six months later, we have received no indication that EPA plans to take action on our request.
  Mr. Chairman, 2 weeks ago, I had the opportunity to meet with Ambassador Barshefski during her visit to Minot. I brought the need to harmonize pesticide registrations under CUSTA to her attention. I told her that it's not free trade when Canada ships canola seed, oil, and meal into the United States that have been produced using pesticides that are not available to U.S. farmers.
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  Ambassador Barshefski agreed to look into the issue.
  All U.S. farmers need, Mr. Chairman, is a level playing field to grow canola in this country. All we ask is that the administration use the process established under the Canada-U.S. Free Trade Agreement to address this need.
  We understand the Canadian Government is interested in harmonizing registrations on several products available for use on other crops in the United States. We ask you to encourage the administration to put this issue on the agenda for the meeting of the Technical Working Group in June.
  Mr. Chairman, my farm in Rolette County runs right up against our border with Manitoba. As I farm, I look across that border and watch my neighbor using crop protection products on his canola crop that I am not allowed to use on my canola. These products increase his yields and reduce his production costs.
  They make him more competitive than me. USCA does not want to restrict imports of canola oil, seed, and meal from Canada. We only want to have access to the same tools available to Canadian farmers so we can compete on an equal basis to meet growing demand for this promising new crop. Isn't that what a Free Trade Agreement is supposed to do?
  This concludes my statement. I will be happy to respond to any questions you or members of the subcommittee may have.
   [The prepared statement of Mr. Mickelson appears at the conclusion of the hearing.]
  Mr. MINGE. Thank you. Again, in the event that the chairman has not already explained this, there are a series of votes that are occurring on the floor of the House. There is a snit over there over some statements made by different members.
  I'd like to begin with a question that Chairman Barrett handed to me and asked that we raise prior to anything else or to make sure it was included. And the question is as follows, and I would address it to whichever one of you would feel has the greatest interest in answering it.
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  As you know, the Canadians have effectively eliminated their rail subsidy causing their grain farmers to now, more than ever, look south to the United States for market opportunities as opposed to shipping to the coast and using the more expensive transportation network.
  Would dismantling the Canadian Wheat Board, as is being urged by many in this country, have a parallel impact of injecting a far greater quantity of Canadian grain into the U.S. market than we currently experience?
  And probably, just looking at those of you that are testifying, barley and canola would be crops that would be coming into this market more than corn.
  So Mr. Corbett, perhaps I could direct it to you.
  Mr. CORBETT. Yes, in our organization, we have been very careful to suggest that the Canadian Wheat Board be dismantled. But what we have said is if the Canadian Wheat Board continues to have a presence in Canada and the Government controlling that, that there need to be some sort of price discovery.
  Because, as I noted in my testimony, our market seems the only way that we can--that there is price discovery and in that barley market. And that tends to bring down a lot of production that is close to the border into our country.
  Now, as you might know, there has been a vote in Canada on whether to continue the whole board or whether to not, and that vote passed that they were going to continue the board. And as I have been in Canada and the people that I have had contact with, the people close to the border--the producers close to the border see our market as very, very attractive.
  But you get back into the country 400 miles or so, they are scared to death of what's going to happen if the board is not there because they're going to have to pay for the transportation of that product a lot further than the people near the border.
  So price discovery and how they do business, I think, has been very important to us; and we have been very, very careful not to suggest that the board be eliminated or the board stay.
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  Mr. MINGE. Would either of the rest of you like to comment on that?
  Mr. Mickelson.
  Mr. MICKELSON. At the current time, the canola industry and producers in the United States do not produce enough canola to supply the American market, so the imports of Canadian canola are not adversely affecting us.
  Mr. MINGE. I'd like to raise a separate question with respect to the experience we've had with NAFTA and what, if any, instruction that provides in negotiating on fast track with other countries.
  Each of you have recounted some rough edges at a minimum in our relationship with our neighbors to the north on a free trade arrangement. I expect in your crops there has been less concern and less attention with respect to the Mexican side of the relationship.
  Do you feel at this point that the basic architecture of the agreement needs to be revisited before we expand this agreement to cover yet other countries?
  And maybe we could start with the corn growers since you perhaps are a much larger crop domestically than the other two.
  Mr. UTLAUT. Of course, our main emphasis is to the south to Mexico.
  As I mentioned in my testimony, we have had some concerns with the Mexican Government and some of their phytosanitary regulations. They proceed to present problems with corn that we might be moving there, maybe thinking that they're trying to protect their own domestic production.
  But I would have to say probably, in all respect, that we find the trade agreement is very, very good; and I don't see that we would have any particular concerns that we would have to issue right now.
  Mr. MINGE. Mr. Corbett?
  Mr. CORBETT. Yes, in my testimony, written, and my oral testimony, I brought up a point that there's a misinterpretation of the agreement as a trilateral agreement between the United States, Canada, and Mexico, and that Canada suggested that we negotiate bilateral agreements with both Mexico and Canada.
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  And we feel that going on and--with fast track under these rules, that that does not give the Canadians any incentive to come to the table and renegotiate the CUSTA agreement which is the agreement that we believe that the flaws have occurred with the trade tensions between Canada and the United States.
  And we are very pleased with the agreement that I referred to in my testimony again with the successes we have had with Mexico.
  Mr. MINGE. Do any of your groups have a position with respect to the expansion of NAFTA to include other countries at this point, whether it be Chili, or Brazil, or Argentina, or any of the countries that are prominently mentioned?
  Mr. CORBETT. Well, Canada, to my understanding, has already got an agreement, a bilateral agreement, with Chili. And so I guess we would move on and go on with another bilateral agreement with Chili; but before we go into a trilateral agreement, somehow we need to open up the CUSTA agreement to address our concerns with the Canadians, and then I think that agreements can move on.
  Mr. MINGE. I skipped over both of you on the previous question too.
  With response to either one of these, do you have a position?
  Mr. UTLAUT. Not officially. There's nothing that I could give that would be hard information right now. I know that we have concerns about what can develop. But no, I can't give you any guidance.
  Mr. MINGE. Mr. Mickelson.
  Mr. MICKELSON. We have no official position right now.
  The thing that we are concerned with is getting some of these provisions such as this technical working group--getting them to get moving and get off center so we can realize some benefit from this trade agreement.
  Mr. MINGE. Based on your testimony and the difficulty of having the Food and Drug Administration move on the registration of certain pesticides, crop protection procedures, does your group take the position that we should not work on additional trade agreements until we can give due consideration to the problems we have already with pesticide use and registrations in this country to harmonize our standards with Canada or Mexico or any other country?
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  Mr. MICKELSON. Yes, I would think so.
  We haven't officially discussed that, but our group would like to see some action on these fronts.
  Mr. MINGE. Do either of the rest of you find that this is a competitive problem for your members in that different standards for the use of pesticides in the countries that we are currently talking about, or maybe talking about in the future, create less than a level playing field or anti-competitive environments? Mr. Corbett?
  Mr. CORBETT. Yes, we do.
  My members of the association who live close to the borders of Canada say that is a real problem in their production, that their cost is increased because they do not have access to some of the chemicals that the Canadians do that he referred to earlier.
  Mr. UTLAUT. I'm not really aware of anything that some of the other countries could be using that would put us to a disadvantage.
  But however, we have concerns. They haven't particularly surfaced with NAFTA yet, but with the countries we trade with in Europe over our genetically modified seeds and plants. And we haven't, as far as I know, heard interest or concern from Mexico in that relation to the corn growers.
  But if they're using something that puts us at a disadvantage, I'm not aware of.
  Mr. MINGE. I need to leave to vote, but I'd like to leave one question on the table. And that is, with respect to corn and high fructose corn syrup, do we have access to the Mexican market for that product so that our corn producers are receiving fair treatment in that respect?
  Mr. UTLAUT. I'm sure that there's someone on the next panel that's probably better qualified to answer that than I being a corn grower. But I know that is an issue that we do look at.
  Mr. BARRETT [presiding]. Thank you very much.
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  In my absence, the staff has indicated, Mr. Mickelson, that you expressed considerable frustration about the pesticide licensing process. And apparently, you've been somewhat aggressive in trying to get the message out.
  Mr. MICKELSON. Yes, we have.
  Mr. BARRETT. Is this not an administrative problem with the EPA?
  Mr. MICKELSON. I don't know exactly what the problem is. We've approached the EPA numerous times and we don't seem to get too much of anywhere. And we feel that this technical working group is a good opportunity to us to harmonize pesticide registrations with Canada.
  As I mentioned in my testimony, we have only eight crop protection products registered in the United States for use on canola, and the Canadians have 33.
  Mr. BARRETT. Are they telling you anything about they don't have enough personnel, the budget isn't large enough, to register these pesticide products? What are they saying to you?
  Mr. MICKELSON. It seems lately that they've been rather perplexed as what to do about this new Food Quality Protection Act. That seems to be their, should I say, excuse for not moving.
  Mr. BARRETT. This is the fall back position.
  Mr. MICKELSON. Yes.
  Mr. BARRETT. OK, thank you very much.
  Gentlemen, thank you very much for your testimony. We appreciate it. Thank you for being here.
  We recognize the final panel of the day. Mr. Stephen Dees from Farmland Industries; Kyd Brenner from Corn Refiners; and Ken Hobbie with Feed Grains Council; and from the U.S. Wheat Association, Winston Wilson.
  Welcome, gentlemen. Mr. Dees, let's start with you, please.
  Mr. DEES. Thank you.
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STATEMENT OF STEPHEN DEES, EXECUTIVE VICE PRESIDENT, FARMLAND INDUSTRIES, INC.

  Mr. DEES. Mr. Chairman, on behalf of the farmer-owned Farmland Industries system, I'd like to thank you and this committee for holding these hearings on NAFTA, and also for inviting us to participate.
  I'm Steve Dees, executive vice president, headquartered in Kansas City, MO. Previously, from 1993 to 1995, I lived in Mexico. I opened our first office there. So I lived the Chinese curse ''May you live in interesting times.''
  Farmland Industries is the largest farmer-owned North American cooperative with over 1,500 local cooperatives serving 500,000 farmer families throughout 22 midwestern States, Canada, and Mexico. We also have 13,000 livestock producers who are direct members of Farmland and market their hogs and cattle through us.
  We have, for the last few years, recognized the importance of international marketing to ourselves and our members. And we have particularly felt this with the Freedom to Farm Act of last year and the basis for that, with which we understand and agree, that we need to find markets for our products; we need to market effectively our products, which means we need to go global.
  American agriculture is global. Farmland, for example, has gone from $200 million in international sales 6 years ago to $4.1 billion last year.
  As I see it, the two important questions that we are considering, that you are considering in this committee, first are agreements like NAFTA in the best interest of the United States and U.S. agriculture; and two, should the administration be granted authority under conditions similar to those used to negotiate NAFTA to begin talks regarding new or expanded trade agreements?
  We think Farmland's farmer ownership and our focus on international markets give us a unique perspective on the impact of NAFTA on American agriculture. With respect to Farmland's own experience, as I said, we opened our office down there in 1993.
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  We had been doing business in Mexico before, but NAFTA definitely had an impact on our decision to go down, even though that was before NAFTA was implemented. Since we've been down there, in 1993, we sold some 300,000 tons of grain to Mexico.
  And last year, 1996, fiscal 1996 for Farmland, which was--by the way, a terrible year for Mexico. In 1995, their economy virtually went off the radar screen. 1996 was a very tough year as well. And we still sold 1.9 million tons of grain and oilseeds to Mexico.
  This year, barring something strange, we should sell well over 2 million tons of grain.
  With respect to our value-added products, we went from $14 million of sales of beef products, mainly beef byproducts, in 1994 to $28 million in 1996. We should do much better as the Mexican economy comes back.
  Our pork products, which we consider to be a great potential market for American agriculture, has gone from $1.7 million in 1993 to $3.5 million last year. And this year, we're just barely halfway through, and we're already at $3 million. Those markets should expand tremendously for us.
  We're also--because of our experiences down there, one thing that's happened is that we now have Mexican members. We have Canadian members. We are--because of the importance of that market, we are participating in infrastructure investments in distribution, in building feed plants; and in this way, we see increasing our business very substantially.
  Our success in Mexico is not unique. I think we've heard some testimony today of other areas--the corn growers, for example. Since NAFTA started until now, I think our sales of grain have been anywhere between 8 million tons and 11 million tons. Eight million has been the smallest.
  From our standpoint, we think NAFTA has been a large success for us.
  Is it perfect? No.
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  But is it important to agriculture and is open trade, more open trade, important to agriculture? Absolutely.
  One point we would like to make, that as we are speaking, the rest of the world is moving quickly towards more open trade. Other countries are positioning themselves in what should be our markets to have advantages we don't have.
  One of the points that was made by Mr. Schumacher today that I think's important is that, even during the crisis in Mexico, our market share in the Mexican market went up. And the reason for that was NAFTA. We had the agreement in place.
  I think we need to move forward with respect to other agreements with other counties, with the Pacific Rim of South America and Central America and the Caribbean, as quickly as possible, carefully making the right decisions, considering the issues we've heard today, but without delaying.
  Thank you very much for your time.
  [The prepared statement of Mr. Dees appears at the conclusion of the hearing.]
  Mr. BARRETT. Thank you.
  Mr. Brenner.
STATEMENT OF KYD D. BRENNER, VICE PRESIDENT, CORN REFINERS ASSOCIATION

  Mr. BRENNER. Thank you very much, Mr. Chairman.
  I'm Kyd Brenner, vice president of the Corn Refiners Association based here in Washington, DC. Our association is the representative of the corn wet milling industry in the United States, producers of starches, sweeteners, corn oil, animal feed ingredients, and bioproducts.
  We appreciate very much your invitation to be with you today. And one of the joys of being on the last panel is most of the things which can be said have been said, so I can promise you to be brief.
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  Our association was and remains a strong supporter of NAFTA. The association and its members, individually and through the ''Ag. for NAFTA'' coalition, supported the negotiation and congressional approval of the agreement for several reasons.
  First, we believe continued trade liberalization is of utmost importance to U.S. agriculture producers and processors. Second, we believe that negotiation of regional free trade agreements such as NAFTA can serve as a springboard to press for even further global trade agreements.
  And finally, our industry saw substantial new business opportunities arising from the NAFTA.
  I'd like to share just a few figures with you today which illustrate those opportunities for the corn industry. In 1992, before completion of the NAFTA negotiations, the United States exported approximately $87 million of primary processed corn and starch products to Mexico.
  These products would include corn brans, flours, starches, sweeteners, oils, and animal feeds; but do not include the high-value ready-to-eat foods, packaged and processed foods. We also benefit very much from expansion of trade in those products as our food additives and ingredients are used in their formulation here in the United States.
  In 1996, those primary products which we exported accounted for approximately $145 million of exports. While not all of this growth can be attributed directly to the NAFTA agreement, the tariff reductions were important, and are certainly responsible for a new interest in a trading relationship among commercial partners.
  In addition to our exports to Mexico, members of the corn processing industry have made substantial investments within Mexico in infrastructure plant and equipment for processing U.S. grown corn for the Mexican market.
  Our purpose in coming before you today is to urge both Congress and through you, the administration, to continue to keep their eye on the long term benefits of the NAFTA agreement. Over the past year, the trade and political relationship between the United States and Mexico has deteriorated.
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  We believe that some of these minor disagreements, if not handled properly, could spill over into more serious conflicts involving major items of agricultural trade.
  And neither the United States or Mexico is blameless in this situation; however, we believe that a very high level of commitment to restoring good trade relations would be useful in ending the ''tit for tat'' atmosphere which has emerged in some of the trade relationships.
  Presidents Clinton and Zedillo will be meeting shortly, and we have urged the USTR, the USDA, Treasury, and other departments involved in trade issues to use this opportunity to seek a renewed commitment at the very highest level toward the spirit of free trade which was embodied in the NAFTA.
  And we'd urge members of the subcommittee to seek the same sort of commitment from the administration as well.
  Thank you, and I'll be glad to answer any questions when that time comes.
  [The prepared statement of Mr. Brenner appears at the conclusion of the hearing.]
  Mr. BARRETT. Thank you, sir.
  Mr. Hobbie.
STATEMENT OF KENNETH HOBBIE, PRESIDENT AND CEO, U.S. FEED GRAINS COUNCIL

  Mr. HOBBIE. Mr. Chairman and members of the committee, thank you for inviting me to testify today.
  My name is Ken Hobbie, and I am the president and CEO of the U.S. Feed Grains Council. As the sole organization dedicated to developing export markets for U.S. sorghum, corn, and barley, we have practical and ongoing experience with the role NAFTA plays in opening our trade with Mexico.
  The U.S. Feed Grains Council is a private, nonprofit organization. We are proudly one of the original cooperator groups that was organized originally under Public Law 480 to develop export markets for U.S. agricultural products.
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  Our funding today comes from producer groups, producer check offs, and over 70 agribusiness members; and in addition to that, we receive funds from the Department of Agriculture's Foreign Market Development Program and MAP programs, and also from third party cooperators in overseas markets to carry out our work.
  We operate market develop programs in approximately 80 countries, creating market demand to improve profitability of U.S. agriculture and to strengthen United States and world economies.
  With the changes in our traditional farm payment programs, U.S. producers today must rely on the marketplace for an ever increasing portion of their income. The U.S. population is expected to grow at less than 1 percent per year for the next decade. Food and fiber consumption are linked to population growth in mature markets like ours.
  This means that we will not see the kind of growth in domestic feed grain use that producers need to be totally profitable in the future. U.S. producers and the agribusinesses who depend on a healthy farm economy for their own success must depend on growing export demand to support profitability in the next 10 years.
  That means that the market in Mexico is important now, and probably more important in the future.
  In the last marketing year, Mexico was our fourth largest U.S. corn market, the third largest barley market, and the second largest sorghum market that we had. All told, Mexican consumers bought over $1.3 billion worth of U.S. coarse grains in fiscal year 1996, plus over $400 million worth of higher value products like sweeteners, vegetable oils, corn gluten meal, livestock feed, breakfast cereals, and snack foods.
  What's even more significant is what this market can become. The council's world feed grains demand model forecasts impressive growth over the next decade: Average population growth of 1.7 percent, average real GDP of around 5.5 percent, and a 43 percent increase in the production of meat by the year 2005 to 2006.
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  And the most critical for our industry is that coarse grain imports are projected to increase from 6.8 million metric tons to roughly 9.5 million metric tons by the year 2005. That's a growth of over 40 percent in a country where we supply almost all of the coarse grains.
  And actually, we believe, those of us who work there on a full time basis, that Mexico offers serious growth potential even beyond those projected levels.
  This brings me to the NAFTA. On the Canadian side, we still have problems with limited market access, especially for U.S. barley; and you certainly heard about that today from one of our members. The council has asked the administration to support creation of a bilateral producer and industry consultative committee to help address this cross border issue.
  But in Mexico, NAFTA has scored major success. Even more important is the fact that it underpins Mexico's opportunity to achieve its growth potential in the future. Loss of NAFTA would make the exciting projections that I've cited into a dead letter. We would lose current markets for U.S. feed grains in the higher valued grain products.
  And I fear, even worse, we would lose one of the remarkable potential markets of the coming decade as Mexico would surely return to its self sufficient policies of the past.
  Mexico's trade reforms now make it legal for private sector to import grain for livestock feed, and that's fueling growth across the entire livestock sector. We are seeing growth in wet milling, including plant expansion; and as Mr. Brenner mentioned, cooperative alliances with U.S. companies.
  The dry milling, or tortilla, industry is also growing. And we have to remember that in Mexico, this is the single largest use sector for corn. And Mexican customers are seriously interested in higher valued options such as high oil corn purchases from the United States, as was certainly evidenced by the huge Mexican delegation that we entertained in February at our Value Enhanced Grain Conference.
  Our Mexican customers tell us that NAFTA gives them the confidence to invest in their operations and expand production because they know that they can obtain U.S. grains when they need it. This kind of growth has played a critical role in Mexico's repeated decisions to increase the quotas for U.S. grains while going beyond levels required by the NAFTA in the phase-in schedule.
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   Certainly there's still issues to be worked out under NAFTA, just as there are in any trade agreement. Old, entrenched trade distortions do not disappear overnight. But NAFTA's success to date is so evident in an emerging market like Mexico that the council supports extending such agreements to gain market access in other developing markets of South America as soon as possible.
  I thank you for your attention and would be happy to answer any questions you may have.
  [The prepared statement of Mr. Hobbie appears at the conclusion of the hearing.]
  Mr. BARRETT. Thank you, sir.
  Mr. Wilson.
STATEMENT OF WINSTON WILSON, PRESIDENT, U.S. WHEAT ASSOCIATES

  Mr. WILSON. Thank you, Mr. Chairman.
  I'm Winston Wilson, president of U.S. Wheat Associates which is an organization very similar to Mr. Hobbie's organization, U.S. Feed Grains Council. We promote agriculture wheat exports for U.S. wheat producers around the world.
  I think it's very fitting that you've called this hearing today because certainly I think we're all interested in looking at what the future of trade agreements will be, and I think it's extremely important at this particular time to do a check up on how we're doing.
  Certainly we feel in the wheat industry that the original U.S.-Canadian Free Trade Agreement has some serious flaws, which unfortunately have pretty much been continued in the NAFTA; and we think prior to further expansion, that these issues ought to be looked at and some action taken.
  In terms of our view of the success of the NAFTA as is currently constituted--we feel that it's been reasonably successful in the case of Mexico and frankly almost a dismal failure in the case of Canada. I remind you that I'm speaking in terms of the wheat trade and not other areas.
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  Since the implementation of NAFTA, U.S. wheat producers have enjoyed new marketing opportunities in Mexico which were not available prior to the NAFTA and the abolishment of the Mexican state trading monopoly, CONOSUPO.
  The privatization of wheat trade has made a real difference in the potential for U.S.-Mexican wheat trade in the future. Since the enactment of NAFTA, U.S. wheat sales to Mexico have risen from about 300,000 metric tons back in 1990 to about 1.2 million tons last year.
  There's been minor border problems or skirmishes from time to time in terms of many of the cross border issues that were mentioned earlier in terms of inspection and sometimes phytosanitary questions that didn't make a lot of sense. I think from our point of view, it's very fair to say that the wheat trade between the United States and Mexico has probably worked out very well for both.
  Unfortunately, the record of the third NAFTA partner, Canada, has not been very satisfactory at all from our point of view. Canada has maintained a state monopoly for both the import and export of wheat. By the way, no imports of wheat from the United States to Canada have been permitted since the U.S.-Canada Free Trade Agreement went into effect in 1989.
  At the same time, the Canadian Wheat Board has exported significant quantities of wheat to the United States ranging from half a million tons in 1989 to 2.6 million metric tons in 1994. And certainly, we have the same sentiments as were expressed by the barley growers, is that the Canadian Wheat Board does a lot of things that have no place in a free-trade agreement.
  Frequently, the CWB is offering prices well below the U.S. market price. Current Canadian exports to the United States are almost twice the levels of a year ago. And I think our producers are extremely concerned with the ability of the Canadian Wheat Board to almost at will lower U.S. prices when they offer large quantities at below current price levels.
  This has become a major concern now that we have no safety net in terms of a farm program. At the same time, in recent days, we've seen basically that there's not going to be an Export Enhancement Program. So in some cases, the U.S. wheat producer feels that he has absolutely no defense against whatever actions may be taken by the Canadian Wheat Board in the U.S. markets.
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  We're somewhat concerned about this because they are very behind on their export shipping this year, and we suspect that a lot of this is going to find itself--find its way into the U.S. market. It is a matter of real concern.
  At the same time, U.S. producers feel very strongly that further expansion of NAFTA to include all of the Americas is very necessary. With the proliferation of trade agreements occurring in the American continents, particularly the Andean Pact and the Mercosur, which have already, in some cases, disadvantaged U.S. producers in many Latin American countries as a result of special treatment regarding taxes and surcharges which do not apply to trade agreement members.
  And certainly we've seen during the past year that Argentines are ready and can be very able competitors for wheat exports in the Americas. And we certainly need to be able to compete on an even level with the Argentines who are members of these other trade agreements.
  However, at the same time, we believe that any expansion of trade agreements in the Americas must include provisions that exclude state trading, as has been discussed here at length in terms of the actions of the Canadian Wheat Board, or any other monopoly or seller for that point.
  We think the use of export subsidies by members as well as non-members in free-trade zones should be totally banned. Our concern about the operations of the state trading organizations such as the Canadian and Australian wheat board is that this is something that needs to be dealt with in the WTO, but certainly needs to be dealt with in any further expansion of NAFTA.
  In summary, we think the expansion to include Mexico has been very successful. At the same time, we struggle a lot with the dichotomy of free-trade zones and monopoly sellers. We just don't really see that they fit together very well, and it's something that needs to be dealt with certainly in the next round of talks in the WTO.
  I think that we do need to be very careful about phytosanitary issues. This has been discussed earlier. In a lot of cases, it's quite clear there are basically non-tariff trade barriers under another guise.
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  We need a better dispute settlement mechanism under the NAFTA or the Treaty of the Americas or whatever we end up having to deal with; these issues must be dealt with on a very scientific basis and we must establish a mechanism which will conclude deliberations in a timely fashion because we find that many of these issues tend to go on and on and on. Meanwhile, we lose market share.
  We do welcome the opportunity to discuss our views. I think when we look at world trade, 96 percent of our customers live outside the United States. We're going to have to deal with exports. And certainly we want to be involved in any trade agreements that we can in order to not be disadvantaged in our world markets.
  And it's something that I think the committee needs to look at, and we need to do it on a timely fashion. At the same time, we need to make sure that we've taken care of some of the flaws that are in our current agreements.
  Thank you very much.
  [The prepared statement of Mr. Wilson appears at the conclusion of the hearing.]
  Mr. BARRETT. Thank you, sir.
  Our ranking member needs to be excused to make a few remarks at a luncheon. Let me conclude by perhaps asking a question or two.
  Mr. Dees, it appears that the bottom line of your organization's been enhanced certainly. As we proceed with the treaty, what would be the biggest concern that your company might have as we proceed down the road?
  Mr. DEES. That's a hard one to answer.
  I think as we generally view the NAFTA treaty, there have been items, issues, that have arisen, that have caused difficulties.
  Well, I guess my answer would be to the extent both sides can remove the non-tariff barriers, I think that's probably the largest challenge we have in trade all over the world; not just the NAFTA treaty, but everywhere.
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  Those are difficult issues to deal with. We're not going to be able to remove all of those issues, and we're not going to honestly be able to deal with all of those issues. But I think the advantage of a treaty like NAFTA is that we have substantially reduced the barriers on both sides, and it has paid off.
  There are still issues. There are still problems. There are still relative imbalances. But now we have structures to deal with those as well. We may not win them all, but we have structures to deal with them.
  I guess the only thing I could say in going forward is that we be as careful as possible in dealing with those issues up front, but that we no allow too many of the trees to get in the way of seeing the forest.
  Mr. BARRETT. Are sanitary and phytosanitary issues of concern to your company?
  Mr. DEES. Very much so.
  We have not--I've been amazed at how well we've been able to deal with them, and they have been frustrating in our trade with Mexico. I've suffered that pain of having the train stopped on the border and having to deal with it.
  But generally, both sides--it's usually some misunderstanding, some--or maybe it's just a quid pro quo of--but they're generally handled very quickly. We've suffered the same thing in trade with China, for example, TCK. And it was a Lola Paluza. I think one factor there is that there really wasn't a procedure for addressing the issue, and it lingered and lingered and lingered.
  Mr. BARRETT. Thank you.
  Mr. Brenner, I was particularly interested in the one paragraph in your prepared testimony on page two. You called attention to something that perhaps some of us don't think about enough. You were talking about over the past year the trade and the political relationship between the United States and Mexico had regrettably deteriorated.
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  ''We believe these disagreements, if not resolved, could spill over into serious conflicts involving other major items of agriculture commerce.''
  Could you elaborate just a bit on that paragraph?
  Mr. BRENNER. Yes.
  Mr. BARRETT. What specifically are you talking about?
  Mr. BRENNER. There are few minor irritants that were mentioned before that I'm familiar with. I think many others were alluded to by other members of other panels. We've had disputes on tomatoes, disputes on avocados, disputes on trucks; and all of those need to be properly addressed.
  There has been, in our view, somewhat of a deterioration of the spirit in which the two parties have addressed those issues. And that is why we have, without reference to any particular dispute, urged the administration to step back and the Mexican authorities to also step back and take a little deeper look at the trade relationship in the case of the corn industry in particular.
  We have been caught up in a tiff, if you will, over the broom corn case which the corn growers representative alluded to and which the United States, acting under safeguard authority, instituted unilaterally a tariff-rate quota on broom corn brooms from Mexico.
  In fairly immediate and direct response to that action, the Government of Mexico increased or froze tariffs on a number of U.S. agriculture and manufactured items including fructose from corn, glass products, paper products, a number of alcoholic beverage products.
  And all of those industries, not just the agricultural side, believe that there potentially was a way to avert that kind of retaliatory effect through a little better relationship and negotiation.
  Mr. BARRETT. Well, you touched on political disagreements as well, and I wondered if you were also referring to perhaps disagreements with--regarding immigration or perhaps the misunderstandings or disagreements with regard to drugs?
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  Mr. BRENNER. Yes, clearly those spill over a little bit into the relation even among the trade officials.
  Mr. BARRETT. OK, thank you.
  Mr. Hobbie, superior, right?
  Mr. HOBBIE. How did you know that? [Laughter.]
  Mr. BARRETT. My scouts did some good work.
  Mr. HOBBIE. Oh, my goodness.
  Mr. BARRETT. Glad to have you.
  Mr. HOBBIE. Thank you.
  Mr. BARRETT. According to your testimony, Mexico's been a big success for you folks, but Canada's been a problem particularly with regard to--I think it was barley, wasn't it?
  Is this primarily due to the Canadian Wheat Board, or to some other problems or policies regarding barley or other issues?
  Mr. HOBBIE. I'm sure that there are probably a lot of issues that go into it, but I would say that the Canadian Wheat Board has been the major problem.
  And I've had the opportunity over the last 5 or 6 months to meet with the Canadians many times, and I've actually come to the conclusion that what we've tried to do is put a mouse and an elephant together, and they're just--the two trading structures are so entirely different that one has to lose in order for the other one to be successful.
  I think Mr. Wilson has cited many of the problems that we've had in our organization recently has in the process of preparing for the next round of the WTO, put price transparency and the issue of bringing to clarification the straight, new rules--the state trading entity process that we experience not only from the Canadians, but also from the Australians and others to put it on a more fairly based competitive process for the future.
  And we really see that as probably the best approach for trying to deal with this. But it clearly is the main problem. In order for it to operate, it has to have a number of regulations to allow it to maintain this monopolistic practices.
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  Mr. BARRETT. Would you favor the elimination of the Canadian----
  Mr. HOBBIE. I certainly would. I have no problem with that. [Laughter.]
  Mr. BARRETT. We had an interesting hearing along the border 2 years ago. And we had some very interesting testimony at that point in time, both pro and con.
  Mr. Wilson, your testimony was very precise regarding the monopoly of the wheat board. I believe you are suggesting that the Canadian Wheat Board being a monopoly and some of the other trading enterprises as well.
  Does the loss of the rail subsidy in Canada potentially change the dynamics now as far as you're concerned?
  Mr. WILSON. To a certain extent, it's, I think, made a difference in terms of where wheat is grown in some areas. Because once the subsidy was gone, it just didn't work, and they had to shift to higher value products.
  But at the same time, we still have the attractiveness of the U.S. border, and it's not quite as worrisome when a few farmers ship across the border because, unlike the Canadian Wheat Board, they take the prevailing price.
  When the wheat board sells, they usually drop the price a little bit so they can move as much as they want in the U.S. market. They even go down to North Carolina in 1994 and it was a pretty amazing period.
  But I frankly think the only solution to this is for free enterprise to break out in Canada and get rid of Government monopolies. There are only two of those left really. And this just doesn't work. As Ken Hobbie said, you can't put the two together and make it work.
  Mr. BARRETT. Another one, New Zealand?
  Mr. WILSON. Well, in terms of wheat----
  Mr. BARRETT. Canadian, OK, all right.
  Mr. WILSON [continuing.] This is basically Australia and Canada.
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  Mr. BARRETT. And you would agree with Mr. Hobbie about the eventual demise of a wheat board?
  Mr. WILSON. Well, we've spent a lot of time and effort to bring that about, but they're still there.
  Mr. BARRETT. I understand.
  Thank you very much.
  Gentlemen, thank you very much for your testimony. We appreciate it very much.
  The record will stay open for 10 days for any further comments, discussions, that anyone wants to enter.
  I would also suggest that for the record I am entering for the gentleman from North Dakota, Mr. Pomeroy, an item regarding marketing years June 1991 to June 1995 with reference to wheat trade between Canada and the United States between those 2 years.
  [The information appears at the conclusion of the hearing.]
  Mr. BARRETT. With that, thank you again. This hearing is adjourned.
  [Whereupon, at 12:10 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
  [Material submitted for inclusion in the record follows:]
STATEMENT OF AUGUST SCHUMACHER, JR., ADMINISTRATOR, FOREIGN AGRICULTURAL SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. Chairman, Members of the Subcommittee, I am pleased to appear before you today to discuss agricultural trade under the North American Free Trade Agreement (NAFTA). I welcome this opportunity to review the results of NAFTA to date and to discuss some important NAFTA-related trade issues that currently occupy our attention.
Let me preface my remarks with an unambiguous statement of where this Administration stands with regard to NAFTA and agriculture. It is short and simple: Promises made must be promises kept.
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NAFTA was approved by the Congress after a long and emotional debate. Many questions continue to be raised about the agreement. Both this Administration and the previous one, under which these negotiations began, pledged that either we would strike a good deal for agriculture, or there would be no NAFTA. Promises were made, and expectations were raised. By and large, agriculture embraced these expectations and rallied to support the agreement.
It is necessary to continually monitor and review the results of the agreement. trade liberalization cannot proceed without the support and the confidence of the Congress and the American people, including those who produce the Nation's food and fiber.
For NAFTA to be a success, it must be a success for American agriculture. I know you share this view, and I want to take a moment to thank personally those members who were part of the recent congressional delegations that visited Mexico and Canada--delegation leader Congressman Bob Smith, Congressman Stenholm, Congressman Lucas, and Congressman Chambliss, among others. Our agricultural officers in both countries reported to me how helpful these visits were in reinforcing U.S. concerns on key trade issues, from tariff reductions and grain trade problems to sanitary-phytosanitary barriers and border delays. The message is getting through loud and clear to our NAFTA partners that we expect progress and that the different voices of the U.S. government speak from the same playbook on these issues.
In my statement today, I hope to answer the question of whether NAFTA is working and fulfilling its promise for agriculture. I will review the trends in agricultural trade within North America and with each of our NAFTA partners. I will also address a few trade issues of particular interest to this Subcommittee. Before I turn specifically to NAFTA, however, I would like to set the stage by providing some perspective on the importance of exports, the role of market-access agreements, and the overall agricultural trade picture.
Growing Global Markets Become Agriculture's New Safety Net. When Secretary Glickman appeared before the Committee a month ago, he said that exports represent the ultimate safety net for America's farmers and ranchers. To thrive and prosper in the current policy and fiscal environment, U.S. agriculture must continue to look beyond relatively mature domestic markets to the expanding global marketplace. In world markets, we see the means by which producers of our basic commodities can earn more income from overseas sales as they become less dependent on government support.
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Exports are the crucial safety net, and they are more. Looking ahead, we see the potential for strong and sustainable growth in sales and incomes as America's producers, processors, and exporters respond to rising global demand. Our obligation is to make sure these markets are there and that they are open to U.S. products. It is an obligation that places a major responsibility on government, which must undertake the trade policy actions and initiatives to break down the import barriers and ensure a fair and level playing field for U.S. agriculture.
This Administration is committed to developing long-term growth markets for U.S. agriculture, and we recognize that one of the best ways to do this in today's world is through market-opening agreements. Market access allows our greatest asset--the competitive strength of American agriculture and the U.S. economy--to work to full advantage. When other governments hold the authority to determine what, whether, when, how much, and from whom they import, nearly everything else becomes irrelevant. Competitiveness, efficiency, and productivity count for little without the assurance of market access and without rules of conduct for fair trade.
Mr. Chairman, just a few years ago, the benefits of freer trade represented little more than a future promise. Many of the arguments for forward-looking, outward-looking U.S. trade policies to meet the challenges of the new global economy relied on economic theory, historical experience, and the potential for gains.
Today, we can begin to measure the real benefits of U.S. leadership in setting the trade liberalization agenda and writing the rules of the game. We can see doors opening here in our hemisphere and around the world as traditional trading partners and newly emerging markets roll back many longstanding access barriers. We can see U.S. producers, processors, and exporters capitalizing on growing opportunities abroad--opportunities that other countries have long enjoyed in the U.S. marketplace. We can see that our confidence in U.S. agriculture's versatility, adaptability, and competitiveness was justified as countries begin to play by the same basic rules.
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Today, we can point not just to potential future benefits, but to hard-earned results, and the results are impressive. Let's take a brief look at the numbers. For consistency throughout my statement, all trade data I present here will be on a calendar-year basis.
As you know, U.S. agricultural exports set another record last year, topping $60 billion for the first time ever. Exports climbed more than $4 billion above 1995's level, which had also set a record. These strong sales to foreign markets, and strong prices, contributed to a new high of around $200 billion in total farm cash receipts. Since the beginning of this decade, we have seen the value of our exports grow by close to $21 billion or more than 50 percent.
The 1996 list of record markets is long and diverse. Among others, it includes Japan, South Korea, Taiwan, the Russian Federation, the Philippines, Indonesia, Israel, Colombia, Turkey, Malaysia, and Saudi Arabia. Near the top of this list of record-breakers stand the two markets that are the topic of this hearing, Canada and Mexico.
Today, the United States is the world's leading exporter of farm and food products, now commanding a 21 percent share of global agricultural trade. Our agricultural trade surplus in 1996 reached $27 billion, the largest farm trade surplus in history. Among U.S. industry sectors, agriculture is now the leading positive contributor to the U.S. balance of trade. The $27 billion surplus in agricultural trade paid for virtually all the cars this nation imported last year from Japan and Germany combined.
I am not suggesting that all these accomplishments are directly and entirely attributable to recent trade agreements. This is not the case. Clearly, we must credit the efficiency of U.S. producers and processors, our infrastructural advantages, the world's need for U.S. products, our export and market promotion programs, and greater international involvement by U.S. producers, processors, and exporters as they respond to the new opportunities being created. A winning strategy in the global marketplace is built upon many things and requires concerted efforts in many areas.
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But without any doubt, trade liberalization and new market access agreements--multilateral, regional, and bilateral--are playing a pivotal role in making agriculture one of the Nation's greatest success stories in international trade. It is a success story built on a shared vision of the opportunities in world markets, shared confidence in the competitiveness of U.S. agriculture, and shared recognition that market access is the master key. It is a success story, I might add, made possible only through a decade of bipartisan support for aggressive trade policy efforts to open up new markets and level the global playing field.
NAFTA Reflects Bipartisan Partnership in Growth-Oriented Trade Policy. Like U.S. foreign policy, U.S. trade policy has a long history of bipartisan cooperation, continuity, and partnership between the Executive Branch and the Congress. This is particularly true when we look back at the most forward-looking and far-reaching trade policy accomplishments of this and previous eras. NAFTA is part of this proud tradition. It is one of the landmark accomplishments in the bipartisan quest to bring global markets home to U.S. agriculture.
The agreement built on two important accomplishments of the Reagan Administration: the trade and investment framework established between the United States and Mexico in 1987, and the U.S.-Canada Free-Trade Agreement (FTA), which took effect in 1989. NAFTA negotiations were launched and the bulk of the agreement was completed and signed under the Bush Administration. The final agreement, as it now stands, was concluded by the Clinton Administration and approved by the Congress, with implementation beginning on January 1, 1994.
NAFTA was designed to open markets, expand trade, stimulate economic growth and investment, and boost the overall strength and competitiveness of North America's economies and producers. When fully implemented, it will remove most of the previously existing barriers to trade and investment among the United States, Mexico, and Canada, including barriers to trade in agricultural products. In essence, it puts U.S. producers and exporters in the center of what is envisioned as the world's largest free-trade zone.
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As part of NAFTA, both the United States and Canada negotiated separate agricultural market access agreements with Mexico. In U.S. cross-border trade with Mexico, import licenses, import bans, and most other nontariff barriers were removed or converted to tariffs and tariff-rate quotas when NAFTA first went into force. All agricultural tariffs will be phased out by 2008, and many have already been eliminated.
With regard to our northern neighbor, the agricultural provisions of the FTA were incorporated into NAFTA. As we all know, restrictions in a few product areas remain in place in both our countries. These are the exceptions. For most agricultural products traded between us, the planned phaseout of tariffs is on or ahead of schedule, and the process in nearly complete. Tariffs not already eliminated will drop to zero in 8 1/2 months, on New Year's Day 1998.
Three years into NAFTA implementation, tariffs between the United States and Canada have now declined about four-fifths, and tariffs between the United States and Mexico have been reduced about one-fifth overall. Based on consultations with U.S. commodity groups, we will continue working with Mexico to accelerate the scheduled tariff reductions, wherever possible and wherever it's in our interest. In the first effort that concluded last month, the progress on agricultural products was very limited, primarily because of Mexico's reluctance to move forward on more of these products. We hope to begin a second round of accelerated tariff reductions in the very near future.
In addition to reducing tariffs, NAFTA was the first major trade agreement to establish principles on the use of sanitary and phytosanitary standards in trade. Its provisions requiring a scientific basis for such measures have helped to curb the unjustified use of such restrictions as disguised import barriers. A dispute-settlement process was also created as part of NAFTA, and a number of ongoing committees were established, including Committees on Agricultural Trade and on Sanitary and Phytosanitary Measures to promote cooperation in these areas.
Finally, I would note that the President has stated his intention to ask Congress for a renewal of fast-track negotiating authority so that, among other things, formal talks on a trade agreement can begin with Chile. Both Canada and Mexico have already concluded separate bilateral trade agreements with Chile.
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Growth in North American Agricultural Trade Under NAFTA. NAFTA was conceived with an ambitious vision of the benefits of open markets within our own hemisphere. It was conceived with a commitment to create an environment that would foster and stimulate opportunities for long-term growth in trade and investment for the U.S. economy and U.S. agriculture.
In assessing whether NAFTA is fulfilling its promise, we must begin by acknowledging that it is still early for a conclusive evaluation. Economists remind us that it takes time for markets and market participants to structurally adjust to a new trade environment. Historically, when markets have opened up, economic and trade gains tend to gather momentum over time, almost like the compounding of interest on a money market account as the balance rises. With regard to Mexico in particular, we are still several years away from full implementation of the agreement, when all import duties will disappear.
While benefits tend to accelerate over time, many of the greatest obstacles and frustrations are often encountered in the initial years as agreements are being phased in. This is when differences in implementation and interpretation are most likely to surface. Lessons are learned and precedents are set that can guide future actions and build stronger agreements. So, whether we are assessing benefits or weaknesses, we must recognize that the final verdict on NAFTA is not yet possible.
Nevertheless, we have now completed three years under NAFTA. This is time enough to judge whether the agreement is on track and is beginning to deliver the benefits of increased access and expanded trade for the U.S. agri-food sector. It is time enough to judge whether, so far, promises made are promises being kept.
Canada and Mexico are, respectively, the third and fourth largest markets for U.S. agricultural products, after Japan and the 15-member European Union. Together, they account for nearly one-fifth of total U.S. agricultural exports worldwide, and both markets hold the potential for substantial further growth.
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In trying to measure the results that have been achieved under NAFTA, we might apply some of the performance measures commonly used in business. A business firm might look at trends in sales, market share, and profits. How do our two NAFTA markets rate by these measures? First, let's look at North America as a single regional market.
Last year, U.S. agricultural exports within North America reached a record $11.6 billion, or nearly $32 million a day. Since 1993, the year before NAFTA, these exports have increased by $2.6 billion or an average of 9 percent a year. Coarse grains (mainly corn), soybeans, wheat, cotton, vegetable oils, and planting seeds accounted for more than two-thirds of this $2.6 billion gain. The story for corn has been particularly dramatic--more than a five-fold increase in U.S. export volume and nearly a nine-fold increase in value since 1993--although NAFTA is only one factor in this growth.
The U.S. share of total agricultural imports by both markets combined in 1996 is estimated at around 70 percent. We've gained market share in Canada since the FTA, and we've reversed a downturn in market share in Mexico since NAFTA. In Mexico, particularly, we have seen rather substantial increases in the U.S. market share for several products.
Under NAFTA, imports of agricultural products from Canada and Mexico have increased along with exports, as we anticipated they would. Trade is a two-way street. Yet the overall agricultural balance remains strongly in our favor. The American economy is profiting from NAFTA.
With both Canada and Mexico, the U.S. agricultural trade balance was positive in two of last three years. Last year, our agricultural trade surplus with both NAFTA partners together exceeded $1 billion. This positive result was achieved despite the recession in Mexico, despite the weak Canadian dollar, despite the large appetite of American consumers for imported foods, and despite market conditions that encouraged a spike in U.S. imports of certain products.
I will now turn my attention to each of these markets individually, beginning with Canada, and examine how U.S. agricultural exports are faring.
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Canada: A Steadily Expanding Market. Canada, with fewer than 30 million people, is the largest U.S. agricultural export market in this hemisphere. What it lacks in population, it more than makes up for in consumer purchasing power, proximity, and generally parallel tastes. U.S. food and farm product exports to Canada reached a record $6.1 billion last year, up 45 percent since 1990. Fresh and processed fruits and vegetables, snack foods, and other consumer-oriented products accounted for close the three-fourths of these sales, so this is primarily a value-added market.
The United States is the dominant supplier to Canada. Under the FTA/NAFTA, the U.S. market share has trended gradually upward at the collective expense of several competing suppliers. Before 1989, U.S. products generally accounted for less than 60 percent of total Canadian agricultural imports. In 1996, U.S. products made up nearly two-thirds of total import value. Since NAFTA went into effect, Mexico has also registered an increase in its market share in Canada. Preferential access under NAFTA provides a clear advantage.
Among bulk agricultural commodities, U.S. wheat and barley continue to face serious barriers in entering Canada. Overall, however, U.S. exports of bulk products, such as corn, cotton, rice, and peanuts, have increased 41 percent in value since 1990, reaching a record $490 million last year. The gain was similar for value-added intermediate products, such as vegetable oils and meals, animal feeds, live animals, and hides and skins. U.S. exports of these products climbed to a record $1.2 billion in 1996, up 42 percent since 1990.
The greatest growth under the FTA/NAFTA came in the largest category of U.S. agricultural exports to Canada--consumer foods. U.S. exports of these products rose 47 percent, from $3.0 billion in 1990 to a record $4.4 billion last year. Although Canada has so far refused to eliminate its high tariff protections for some high-value products, including poultry, dairy, and egg products, the reduction and elimination of import duties in most sectors has given many U.S. producers and exporters the access they need to respond to growing Canadian demand.
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Weakness in the Canadian dollar has slowed the rate of growth in U.S. agricultural exports in the last few years. Nevertheless, the growth continues, and part of the reason is the FTA/NAFTA. Declining duties have helped offset the negative impact of the changes in currency exchange rates. Since 1992, the Canadian dollar has lost more than 12 percent of its value against the U.S. dollar, making U.S. products relatively more expensive for consumers there, while lowering the price of many Canadian products here in the United States.
We are all aware of the trade policy issues we continue to face with Canada, and I will discuss a few of them later. However, we should also note that a number of issues have been satisfactorily resolved. Under U.S. pressure, for example, Canada finally recognized its obligation to provide ''national treatment'' as required under the FTA/NAFTA for U.S. processed horticultural products packaged for the food service sector. Until 1995, U.S. processed horticultural products in institutional-size packs faced unfair and prohibitive labeling and package-size restrictions that did not apply to Canadian processors.
More recently, we saw some progress on access for U.S. durum wheat to the St. Lawrence Seaway. On March 25, the Canadian government removed the prohibition on entry of durum wheat from those states where no Karnal bunt has been detected. Technical negotiations continue on Canada's unnecessary testing requirements and its current policy of prohibiting grain from entire states.
Despite the many issues that cloud our current trade relationship, we must also recognize that, under the FTA/NAFTA, Canada has been a steadily growing market for U.S. agriculture. Since 1990, our farm and food exports to this market have increased an average of 6.5 percent a year, and the prospects for continued growth are very promising, especially for value-added products. Imports from Canada have also risen, and at a faster rate, although a good part of this reflects the weaker Canadian dollar.
Our agricultural trade balance with Canada was positive in six of the last seven years, with last year being the one exception. It is too early to tell whether this portends any longer term shift in the trade balance, which will be heavily influenced by macroeconomic factors, weather and other market developments from year to year, and the outcome of current efforts to further reduce or eliminate the remaining Canadian barriers to trade in agricultural products.
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NAFTA Gives U.S. Products Winning Edge in Mexican Market
With Mexico, NAFTA began with a boom. The $1-billion increase in U.S. agricultural exports to this market in the very first year (1994) was extraordinary even within the context of the long-term pattern of growth in sales to Mexico. This dramatic gain, however, was just as quickly wiped out the very next year in the wake of Mexico's peso devaluation and the deep recession that immediately followed. Optimism was replaced by disappointment and uncertainty over future trade prospects. Persistent critics of NAFTA seized upon Mexico's misfortunes with the zeal of a Cassandra gloating over a prophecy of doom come true.
We heard a lot of ''I told you so's,'' but once again the pessimism proved to be short-sighted and short-lived. Although sales in several product categories are still below earlier highs, total U.S. agricultural exports to the Mexican market staged a remarkable comeback last year. Exports surged by $1.9 billion to reach $5.4 billion in 1996, the highest value ever and the second record in three years under NAFTA.
Mexico's latest economic crisis was not without precedent, nor were the fears of another severe and prolonged sales slump entirely unjustified. In fact, 1995 marked the second time since 1980 that U.S.-Mexican trade was hard hit by a major peso devaluation. In the previous economic shock beginning in 1982, U.S. agricultural exports to Mexico plunged more than 50 percent the first year. In that instance, it took a full seven years for export value to recover to the pre-devaluation level.
But history does not always repeat itself. The overall decline in U.S. agricultural export value in 1995 came to 23 percent--less than half the percentage drop of 1982. And the numbers didn't stay down for long. Instead of seven years, it took only one year for U.S. exports to make up for lost ground and set a new record. Weather developments helped make a difference, as did some other factors. But perhaps the single most important difference with the latest Mexican economic crisis was NAFTA. NAFTA cushioned the immediate impact on U.S. sales and helped speed the recovery.
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During that earlier crisis, Mexican officials were not bound by NAFTA, or by the GATT. As a consequence, they were free to impose strict licencing requirements and prohibitively high duties on American products. This is exactly what they did. Import restrictions are often one of the first actions taken by countries in response to economic troubles at home. There are examples within our own history.
Mexico's response to the late—1994 peso devaluation and the severe recession that followed could not have been more different. Instead of raising barriers to U.S. products during its latest economic crisis, Mexico continued to adhere to its NAFTA commitments and reduce tariffs on schedule. NAFTA kept Mexican markets open to U.S. products despite the worst economic crisis in Mexico's modern history. But there is still more to this story.
Because of preferential access for U.S. products under NAFTA, the initial blow of the crisis fell more on other countries that compete in the Mexican market. In 1995, the U.S. share of Mexico's total agricultural imports actually increased slightly, as imports from other suppliers fell more than imports from the United States. In addition, as Mexico's financial situation began to stabilize and its economy slowly gained strength, U.S. exports were not impeded by a new set of trade restrictions but instead benefited from progressively increased access, including two new rounds of tariff cuts.
After only a slight dip in 1995, U.S. exports of bulk commodities to Mexico registered their best year ever in 1996. Record-high values were set for U.S. corn, soybeans, wheat, cotton, and rice shipments. Last year, U.S. corn exports exceeded 6 million tons. Since NAFTA took effect, Mexico has imported more than the duty-free amount of corn each year and has not applied the high over-quota tariffs permitted under its corn tariff-rate quota. Overall, U.S. bulk commodity exports last year added up to nearly $3 billion.
The impact of Mexico's weakened economy was also relatively small for many U.S. intermediate and semi-processed products. Seed exports, for example, were off 15 percent in 1995, but then doubled to a new record of over $200 million in 1996. The steady upward trend in U.S. exports of animal fats continued uninterrupted in 1995 and 1996.
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The one major category of U.S. exports that suffered a significant setback in 1995 was consumer foods, which are extremely income sensitive and were therefore hit hardest by the peso devaluation and the sharp decline in personal incomes in Mexico. Sales of many of these products, however, were already bouncing back in 1996--particularly those, such as meats, with greatly improved access under NAFTA. The advantage of preferential access is evident in a growing market share for U.S. products even as total Mexican imports of high-value consumer products have declined during the recession.
With pork, for example, NAFTA has squeezed virtually all competitors out of the Mexican market except the United States and Canada. And while Canada's share of Mexican pork imports fell sharply, the U.S. market share increased from 77 percent in 1994 to more than 95 percent last year. In the case of beef, U.S. exports to Mexico between 1993 and 1996 increased nearly 50 percent by volume, while total Mexican beef imports fell by more than a third over that same period.
I think the numbers speak for themselves. Even with the 1995 setback and its lingering aftereffects, total U.S. farm and food exports to Mexico have increased some 50 percent since 1993, the year before the agreement. The United States currently supplies around 75 percent of the country's total agricultural imports. Imports from Mexico have increased along with U.S. exports, but not nearly as much. The U.S. agricultural trade surplus was close to $1.7 billion last year, nearly double the 1993 surplus.
Moreover, we are confident that the opportunities for U.S. products will only increase as the Mexican economy continues to recover. Economic projections for the next few years suggest that Mexico is likely to return to relatively strong rates of real GDP growth. A stronger Mexico economy, combined with continued population growth and progressively greater U.S. access, will generate rising import demand for U.S. products.
In fact, the long-term ''baseline'' projections of USDA's Economic Research Service indicate rather substantial potential for growth in the Mexican market for both bulk and value-added consumer products. According to these projections, for example, Mexican imports of corn and soybeans, by volume, may each increase more than 50 percent between 1996 and 2005. By 2005, Mexico's total beef and pork imports could be 3 1/2 times their 1996 level.
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As in Canada's case, a number of irritants have emerged in trade with Mexico. Technical differences over sanitary and phytosanitary issues have become more prominent as tariffs are being reduced. But NAFTA established a process for settling such disputes based on sound science, and we have already had a number of successes in resolving technical issues that limited or threatened to limit access for U.S. products.
In 1995, for example, we succeeded in persuading Mexico on scientific grounds to drop its proposed zero-tolerance regulation on salmonella in ground and processed meats. In February of this year, we formalized a technical agreement that opened the Mexican market to sweet cherries produced in Washington, Oregon, and California. This access is worth several million dollars to U.S. sweet cherry producers.
All in all, I think implementation of NAFTA with Mexico has gone relatively smoothly. The import barriers that existed prior to NAFTA continue to drop. At the beginning of this year, we marked the fourth round of tariff cuts with Mexico, and all tariffs are to be eliminated by 2008. Cooperation on resolving the issues that emerge has largely been positive. Meanwhile, and most important, we have seen some significant increases in sales and the market share held by U.S. producers, and the prospects for continued export growth are very encouraging.
Continued Efforts To Deal with Trade Issues in NAFTA. Any assessment of NAFTA must weigh both the good and the bad, the strengths and the weaknesses, the successes and the shortcomings. I usually find there is no shortage of attention to the latter--the shortcomings and unresolved issues--so I have devoted most of my statement to reviewing the successes and the growth in trade within NAFTA. I now want to turn to the other side of the coin and touch on a few of the trade issues and problems that still exist.
We continue to face a number of challenges in NAFTA that require our attention, and I will be glad to discuss specific issues in greater detail during the question period. For the moment, I will limit myself to a few comments on three very troublesome issues.
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Canadian wheat and barley exports to the United States. The United States continues to monitor Canadian wheat and barley exports to the United States. Although the 1-year MOU with Canada that limited these imports has, of course, expired, the administration has made it clear that the United States will not sit idly by and permit another surge in imports, such as that which occurred in 1994. In a meeting with North Dakota farmers a few weeks ago, USTR Barshefsky reinforced the U.S. position. Her message to the Canadians, she said, is that the United States is not going to be the dumping ground for Canada's large grain supplies.
We are concerned that wheat imports from Canada as of early April were above the guidelines established for the monitoring year, and we are closely watching both wheat and barley imports. Grain consultations with the Canadians are scheduled for next week. We are also continuing to monitor the operations of the Canadian Wheat Board (CWB). With regard to the CWB, we have seen little progress to date in implementing the policy recommendations of the U.S.-Canada Joint Commission on Grains, but we are giving a great deal of attention to the practices of state trading enterprises such as the CWB in a number of international fora.
NAFTA panel decision on Canadian tariffs. As the Secretary told the full Committee last month, we were deeply disappointed with last December's NAFTA dispute settlement panel regarding Canadian tariffs on U.S. exports of barley and dairy, poultry, and egg products. Although the panel decision is not open to appeal, Secretary Glickman has pledged to do everything possible to seek the elimination of Canada's exorbitantly high duties. The decision does not reduce U.S. access to the Canadian market because we had only limited access for these products before. Nonetheless, these tariffs are not consistent with the spirit of NAFTA, and we will continue working for full and comprehensive access.
Mexican sanitary and phytosanitary barriers. With Mexico, as I noted earlier, sanitary and phytosanitary issues are arising with some regularity, often without a solid scientific basis. One of our current concerns involves border delays for U.S. wheat related to the additional fumigation requirements Mexico has imposed because of the U.S. Karnal bunt problem. We are also looking for improved inspection services for U.S. grain and livestock on the Mexican side, with longer hours and more crossing points to reduce delays.
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I can tell you that Secretary Glickman is committed to making some real progress on a number of outstanding sanitary-phytosanitary issues at the U.S.-Mexico Binational Commission meeting scheduled for early May. Technical-level discussions with Mexico also continue on a wide range of issues, including Mexican requests for greater access for some of its products. In addition, we will be opening a new Foreign Agricultural Service border office this summer at the U.S. consulate in Nuevo Laredo, Mexico. The office will review border-crossing procedures and formalities, with the goal of reducing the cost and time involved in shipping U.S. products across the border. The staff will also work with Texas and other border states to help them expand their trade with Mexico.
Mr. Chairman, it should not be surprising that a wide range of trade issues have emerged within NAFTA. We could hardly expect otherwise. But we cannot overlook the fact that Combined U.S. agricultural exports to our two NAFTA partners are now on a par with Japan and are substantially greater than sales to the EU.
I would ask this Subcommittee to take a moment to imagine with me a far different scenario. Let's imagine that all those within the agricultural community, within the Congress, and within the last three Administrations who were determined that agriculture play a central role in trade liberalization initiatives had lost that battle. Let us assume for a moment that the bipartisan support for including agriculture in NAFTA, the WTO, and other agreements had not been there. Assume that some of our trading partners had prevailed, and that agriculture had been exempted from these agreements, as it had so often been exempted in the past.
Does anyone believe that either the Mexican or Canadian market would be as open and accessible today to U.S. farm and food products without NAFTA? Can anyone imagine what might have happened without NAFTA when Mexico devalued its peso and was plunged into a deep recession? Does anyone seriously believe that the agricultural trade issues we now face would never have arisen, or that these issues would be easier to resolve without NAFTA?
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I think we need only look to the past for the answers. After all, whether we are talking about Mexico or Canada, many of these issues of export access or import competition pre-date NAFTA. Other issues might not be on the trade agenda without NAFTA, but only because many U.S. products had little or no access prior to this agreement. It is worth remembering that the U.S. market was already largely open to imports before NAFTA. The difference today is that most U.S. products now have equal access into the Canadian and Mexican markets. The difference is that their markets must remain open and will soon be duty free. The difference is that we now have trade rules and a dispute-settlement mechanism.
As trade problems arise, we may not win every skirmish. We may not resolve every issue on our terms or as quickly as we would like. NAFTA is not the complete and final answer to all past, present, and future problems that U.S. agriculture encounters in trade with Mexico and Canada. But it clearly is a major part of the answer and better than anything we had before.
Where problems exist and we do not immediately succeed, I can promise you it is not for the lack of trying, and we intend to keep at it. Secretary Glickman and USTR Barshefsky are working closely together and are determined to continue pressing aggressively for solutions to the as-yet unresolved issues on the agenda. In the meantime, the Congress has not only the right but also the obligation to hold our feet to the fire to make sure that the agreement lives up to its promise and delivers the opportunities, the sales, the jobs, and the benefits to our economy and U.S. agriculture.
Assessing the Bottom Line: Is NAFTA Fulfilling Its Promise to Agriculture. I began my testimony with a statement of where this Administration stands with regard to NAFTA and agriculture: For NAFTA to be considered a success, it must also be a success for American agriculture. Promises made must be promises kept.
In any honest attempt to assess NAFTA, we must recognize that the agreement is only one of several factors that have influenced U.S. trade with our neighbors in recent years. Certainly, we cannot attribute all the growth in trade to NAFTA. Agricultural trade was trending upward before NAFTA. In addition, all three countries have undertaken fundamental domestic agricultural policy reforms in recent years, although these reforms were certainly influenced by trade liberalization agreements, including NAFTA. Weather and other factors have played an important role from year to year. For example, drought in northern Mexico sharply boosted U.S. corn exports last year.
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In the same way, we cannot hold NAFTA responsible for every unfavorable shift in trade. Weather developments in both the United States and Canada were the primary reason for the surge in U.S. imports of wheat from Canada in 1993 and 1994. No doubt, a weaker Canadian dollar has reduced our recent exports to that market below what they otherwise might have been, and has also given a boost to Canadian exports. Of course, the peso devaluation and its aftermath had an impact on trade flows. Every indication, however, suggests that the negative impact of the Mexican recession on U.S. exports would likely have been much more severe and long-lasting in the absence of NAFTA.
Economic analysis largely supports the contention that NAFTA has been a positive factor in economic growth, and has contributed to the gains in agricultural trade. We believe the evidence will become even more compelling over time that NAFTA is helping to build stronger economies and stronger markets in this hemisphere.
Trade problems have always been with us, and they will arise under any agreement. Not all concerns can be addressed as easily, as quickly, or as favorably as we might hope. But we cannot measure progress or success under an agreement by the issues or concerns still on the table. We measure progress by those that are satisfactorily resolved. We measure success for American agriculture by growth in access, growth in sales, and growth in market share.
By these measures, NAFTA is working. Even at this relatively early stage in its implementation, it has increased access for a broad range of U.S. farm and food products going into Canada and Mexico, boosting U.S. sales and U.S. market share. It kept Mexican markets open to U.S. products during that country's recent economic crisis and helped spur a rapid recovery in our exports. It is creating opportunities right across our borders that U.S. producers need if they are to compete and prosper in world markets.
I think those Members who participated in the recent congressional delegations to one or both of our NAFTA markets will confirm what I am saying. We are making progress. Despite the complications, the regular irritants, and the unresolved issues and concerns, NAFTA is fulfilling the promise to U.S. agriculture.
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The one major risk I see to this generally positive scenario is not NAFTA itself, but rather the reluctance and hesitation to move forward until all current trade issues are resolved. Today, new bilateral and regional trade agreements are proliferating in this hemisphere and beyond, and many are being negotiated and concluded without U.S. participation.
With both NAFTA and the WTO agreement, U.S. leadership gave us the opportunity not just to participate, but to play a major role in writing the rules of the game. If we hold back for too long, the rules for new agreements will be written by others, and we may have to adapt later or be left out. This could put U.S. producers, processors, and exporters at a substantial disadvantage in the competitive marketplace of the 21st century.
Mr. Chairman, the administration and the Congress share a commitment to agriculture's success in world markets. NAFTA is contributing to this success. It is on track. We will continue working closely with the Congress in addressing the trade policy issues that remain unresolved and any that emerge. We look forward to close collaboration and a strong partnership in building on the successes already achieved through NAFTA and other market-opening agreements in expanding global trade opportunities and ensuring a level playing field for U.S. agriculture.
TESTIMONY OF CRAIG CORBETT, PRESIDENT OF THE NATIONAL BARLEY GROWERS ASSOCIATION
My name is Craig Corbett, a barley farmer from Grace, ID serving as president of the National Barley Growers Association. I want to thank the subcommittee chairs and ranking members for the opportunity to come before you today to discuss the NAFTA agreement and U.S. trade relations with Canada and Mexico.
As the leader in free-market innovations in the past half-century, the United States has built an admirable record as a leader in market reforms. However, it seems that our historical national inclination to make the hard choices and lead the world to the next level of peace and prosperity has often been to our detriment when our trade officials are attempting to hammer out trade reform agreements on a piece-by-piece basis. In essence, our market reform leadership has inadvertently led us to give away many valuable trading points before allowing our trade officials to seek comparable action from other participants in ongoing trade negotiations.
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I mention this, not as a complaint, but as an acknowledgment of the difficulties involved in maintaining our role as the global leader in market reform while remaining cognizant of the costs in terms of the resultant erosion of our strategic position in bilateral and multilateral negotiations between nations. And, more important on the human level, to remind you of the economic pain inadvertently inflicted upon certain geographic regions and segments of U.S. industry during the ''lag time'' between our strategic ''sacrifice'' and some illusive future reward.
As U.S. negotiators prepare for another round of agricultural trade talks in the aftermath of the unilateral dismantling of the last vestiges of supply management programs in the United States, in an environment where U.S. officials have also seemingly surrendered the right to utilize our Export Promotion Program as a market maintenance and development tool, I think it is important to think about the impact currently being felt by U.S. producers.
NAFTA - The Illusion. Since the implementation of North American Free Trade Agreement in 1993, the impacts of the trade agreement has been alternately trumpeted and condemned in popular culture. Before providing the perspective of the benefits/costs of the NAFTA, I think it is important to debunk a persistent misinterpretation of the agreement. Specifically, I'd like to address the view of NAFTA as a trilateral agreement between the United States, Canada and Mexico.
The genesis of NAFTA lies in the Canada-United States Free Trade Agreement implemented in the late 80's. The biggest problem with that agreement, from the barley perspective, lies in the list of items that were left out of the final agreement, particularly including the failure to recognize and address the functional relationships between Canadian government and quasi-governmental entities, along with the pervasive amount of governmental regulations in the grain handling and distribution system. As a result of this failure, we have allowed a government-supported monopoly from the North to utilize its access to the open market system operating in the United States to practice discriminatory and predatory pricing in U.S. and global markets while maintaining its own marketing, distribution and transportation systems under lock and key.
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Yes, a minimum access window was apparently opened as a result of the Uruguay Round agreement that would allow U.S. producers to export malting barley to Canada under a small in-quota tariff but between the higher above-quota tariffs and the Canadian Wheat Board's control of the Canadian distribution and marketing systems, an effective ''storm window'' remains in place to keep even the most aggressive marketer from the United States out of Canada. For example, even if Canada Malt decided to purchase U.S. malting barley, the company would be precluded from consuming the final malt product domestically or from exporting the malt without getting an export license through the CWB. Further, when we remember that one of the supposed ''wins'' of the CUSTA was thought to be the language precluding implementation of any new tariffs on agriculture products, barley growers continue to be frustrated when seeking to find good things to say about the original CUSTA agreement.
When negotiators sat down in the early nineties to begin to put the pieces together for a trilateral agreement to include Mexico, Canadian trade officials forcefully and successfully rejected any new agricultural negotiations between the United States and Canada, insisting instead that the two parties simply negotiate bilateral deals with Mexico. Since, at least in the agriculture sector, the NAFTA is nothing more than a set of bilateral agreements, it is incorrect to assume that this document should be used as a blueprint for multilateral, hemispheric negotiations. That appears to be the illusion promulgated in recent debate over extending new fast-track authority, an illusion utilized by opponents and proponents of extending new fast-track authority to the administration.
While we are in favoring of advancing U.S. trade interests through renewed WTO agriculture negotiations and bilateral negotiations with other nations of the Western Hemisphere and Pacific Rim, the U.S. barley farmers firmly oppose inclusion of any language in fast-track legislation that explicitly provides for expansion of NAFTA.
At present, the NBGA is pleased with the new marketing opportunities we have seen in Mexico and are excited about the potential to build on early successes from implementing the bilateral agreement with Mexico. Mexico's duty-free quota has been expanded to over 545,000 MT, well above the original NAFTA commitment of 132,000 MT this year. This includes an expansion of 176,000 MT for feed barley imports above and beyond the levels reserved for malting barley and value-added malt imports needed for Mexico's rapidly expanding brewing industry. On the other hand, we are incensed that the Canadian government, in refusing to address the economic disruptions resulting from the CWB's predatory operations in our domestic market, was able to duck its responsibilities as a neighbor and trade partner in two subsequent trade policy fora (NAFTA and the Uruguay Round).
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As Congress begins in the next few months to consider new fast-track authority to negotiate trade agreements in Geneva and the Western Hemisphere, U.S. barley producers urge you to keep in mind Canada's record for refusing to address valid U.S. economic concerns arising from the CUSTA. It seems to us that it would be a disservice to U.S. agricultural interests to reward Canada for this rejection of our very real concerns by allowing negotiations to expand under the faulty formula of NAFTA. Perhaps, if the WTO negotiators can successfully establish a set of disciplines addressing the anti-competitive marketing activities of state trading enterprises during the agricultural talks slated to begin in 1999, a more suitable structure can be formed to transform bilateral agreements negotiated throughout the Western Hemisphere into a more uniform multilateral structure.
How To Get From Point A To Point B. Over the past few months, the National Barley Growers Association has attempted to develop a comprehensive picture of the impact of the Canadian grain marketing and distribution system on U.S. barley producers. This is a difficult and time-consuming effort, particularly in light of the lack of transparency within the Canadian system, stretching from broader issues involving CWB pricing practices all the way down to the layers of intra- and inter-provincial rules, regulations and subsidy schemes. Our initial efforts have nothing to dissuade U.S. barley producers from viewing the Canadian system as a giant monolith, defined by Webster's as ''an organized whole that acts as a single powerful force--with an incredible ability to wreak havoc on U.S. barley-growing regions along the United States-Canada border.
While the attached document should be viewed as a work-in-progress, the National Barley Growers Association believes that it is important to offer this study into the public record at this time to ensure that U.S. policy makers have access to the best information possible as Congress begins to consider fast-track authority in the coming months. We will continue to seek to pierce the opaque clouds overlaying the entire Canadian grain marketing structure and would love the opportunity to update your subcommittees on our findings at any time during this process.
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Thank you again for including us in your review of NAFTA. I will be happy to answer any questions you might have on the subject at this time.

A PRELIMINARY ANALYSIS OF UNITED STATES/CANADA BARLEY ISSUES
I. Less Market Certainty
A. Ending Supply Management Programs Moves Focus To The Market. Prior to passage of the FAIR Act of 1996, barley production had been in a period of decline directly linked to U.S. supply management programs that inadvertently created a bias against barley production, as seen in the use of the 0/85 program utilized in some regions to put relatively large amounts of barley acreage out of production. [As a rule of thumb, the ratio of corn acreage to barley acreage in the United States is approximately 7:1 while the ratio in terms of 0/85 participation was 1:1. This heavy utilization of the 0/85 setaside program by barley producers reflected the conventional wisdom in wheat/barley regions that, if acreage needed to be idled, barley acres returned less profit than other alternatives and should be idled first.]
FAIR's decoupled payment and the elimination of annual setaside programs (ARP's, 0/85, et al) leaves the marketplace as the key component of planting decisions. This market-based focus increases the importance of market premiums for certain grains, such as malrting barley, while exposing the producers to greater risk from outside factors beyond his control. These outside factors include the vagaries of nature (drought, flooding, disease, pestilence, etc.) as well as the marketing activities of less ''free trade'' oriented systems like the marketing monopolies employed by many of our trading partners and competitors.
A monopoly such as the Canadian Wheat Board, utilizing total control over all malting barley marketing (domestic and export) and all export marketing of feed barley, can exert a tremendous amount of influence on the market signals received by U.S. producers with little or no concern for the consequences to the producer or to prices.
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B. FAIR Muddles Signals To Canada. The CWB's marketing strategy in the United States is equally muddled by the loss of such ''signals''as acreage setaside programs, target prices and similar supply management data traditionally provided by USDA in its various planting and production reports. Prior to adoption of the FAIR Act in the United States, the board could easily predict U.S. production/supply patterns for the short (crop acreage basis minus any announced annual setaside acreage-i.e. ARP, 0/85) and long-term (CRP), thanks to the data published by our own department of agriculture.
The supply/demand information provided by USDA, in the hands of a neighboring marketing monopoly with the ability to forward contract into our markets without fear of profit loss (see Profit/Loss comments below), encouraged the CWB to develop a comprehensive marketing plan to capture a significant share of the U.S. feed and malting barley markets. This led to a steadily increasing flow of imports from the north in the late 80's and early 90's that culminated in the record importing year of 1.539 million metric tons (MMT) in 1993/94. To be fair, however, the 1993/94 import market was an anomaly that should also be considered within the context of the flooding in the U.S. Midwest and its impact on U.S. feed grain production. While imports have since dropped below this highwater mark, they remain nearly 4 times as high as the average import levels for the previous 10 years.
C. Profit/Loss Signals Muted In Canadian System. Example: Let's take a snapshot of global trading practices to provide an admittedly simplified example of the Canadian system's impact on U.S. exporters. In our example, Singapore is seeking 100K tons of barley. A U.S. exporter on the PNW would price the barley on the U.S. cash market to determine the initial cost to him/her, add in the freight from the market to the coast and the ocean freight to arrive at a 'total cost' number. The exporter would, of course, add in a certain profit margin to determine a value at which he/she can sell U.S. barley to Singapore.
Now, in the same example, the Canadian exporter (CWB) can simply seek to find out what price level would be needed to make the sale. Then, CWB subtracts the ocean freight from Singapore to Vancouver. Here, the trail gets much harder to follow. While the transportation pooling system in Canada has been reformed somewhat as a result of the Uruguay Round agreement, dramatically reducing one level of distortion in the Canadian marketing system, the transportation costs of individual shipments of grain are still based on various pooling points scattered throughout the prairies and, more importantly, the CWB continues to maintain control over railcar allocation. In addition, the government continues to provide an indirect subsidy on rail transportation by capping freight costs at a level well below market value.
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Finally, the final price paid to the producer of the barley shipped to Singapore is again subject to pooling, meaning that there is absolutely no way for that producer to know how much his barley is worth at the point when possession passes to the board, or what its value was at the destination. The ability of U.S. farmers to ''wait out the market'' to get the best price for their grain is unavailable to Canadian farmers, while the CWB's ability to undercut competitors without a concern for profit or loss, as evidenced in this example, leaves inefficiencies in its wake, inefficiencies that effectively undervalues Canadian barley grown near the U.S. border (where higher priced, cash markets are only a short truck ride away). Given this undervaluing and the close proximity to U.S. handling and processing facilities, it is little wonder that the past decade has seen an exponential growth in cattle-feeding operations in southern Alberta as cattle feeders take advantage of this distortion.
The lack of price arbitrage and the inability to factor in the timing of sales in Canada makes the U.S. market look incredibly attractive to Canadian producers, many of whom have had a taste of private sector marketing due to the advent of canola production (among others).
What does the board supply the farmers? Clearly, those farmers farthest removed from the Pacific Coast and/or the U.S. transportation system are supportive of the board's continuation, since the CWB's control over grain transportation and its pricing mechanisms at least partially offset their clear marketing disadvantage. Certainly, the horror stories of the older generation of Canadian prairie farmers (who were pretty much at the mercy of one or two buyers) remains on the minds of many farmers today. Thus, the security provided by the single-desk system should, thus, not be understated. Additionally, the pricing flexibility of a single desk seller (with no profit/loss risk) allows it to aggressively respond to the export subsidies used in selected markets by other countries, countering diminished export opportunities which would otherwise result.
Canadian barley farmers were recently asked to vote on whether to remove the board entirely from barley marketing. While this vote was supportive of the CWB's continued monopoly (based on the all-or-nothing question posed by the government), a constitutional court challenge by the Alberta government may yet force the board to give up its marketing monopoly over feed barley (while presumably maintaining its control over all malting barley marketing). These potential changes raise concerns in U.S. barley-producing regions re the potential for another import flood like that experienced in 1993.
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It is difficult to predict with any confidence what would result from an open border for barley. Clearly, in the initial stage of opening the border, farmers are almost certain to move their barley south to test the U.S. market. On the other hand, many of the grain companies operating in the United States are also involved in Canadian operations, so it would not be at all surprising to see these companies pick up the slack once the board is removed from the equation, moving the barley to its natural destination and beginning the process of developing a price arbitrage system to ''discover'' the continental price of barley.
Should this happen, there may be a chance that some sort of price equilibrium will be found fairly efficiently, meaning that there could be less of a distortion in the U.S. market as Canadian barley finds its proper price and destination. Further, some analysts predict that such a move would eventually lead to a dramatic reduction in Canadian barley production in less-competitive northern regions, presumably mirrored by an increase in production along the border to fill malting and feed needs in both countries.
But--and this is a big but--the United States and its trade officials must watch this process closely to ensure that an ''open'' barley marketing system in Canada is not shackled by the CWB. In particular, ending the CWB's participation in barley marketing will be a hollow victory for Canadian farmers (and for U.S. producers wishing to market to and/or through Canada) unless the infrastructure stranglehold of the CWB is also addressed. Specifically, U.S. officials must continue to focus on such distorting mechanisms within the Canadian system as: the capping of freight rates below market value; the CWB's control over rail car distribution; determination of elevation charges by non-economic forces; varietal licencing and distribution systems; variable grain grading regulations; and predatory use of differential pricing practices between U.S. and other export markets. For good measure, the various intra- and inter-provincial rules, regulations and subsidy schemes should also be closely monitored.
If a continental barley market ever becomes a reality and the board is allowed to continue its control of export terminals, railcar allocations, etc, the entire price arbitrage process will take place in U.S. markets, rather than allowing U.S. producers an opportunity to participate in Canadian markets (or export via Canadian export channels). Given that the board has no plans to give up the much larger wheat monopoly, it is doubtful that Agriculture Minister Ralph Goodale has given any thought to the need to reforming the transportation, handling and grading systems as well. Thus, the ''opening'' of the barley market is likely to result in a one-way flow of barley into the United States, exacerbating trade tensions that have continued unabated since the Canada-United States Trade Agreement was implemented.
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II. MARKETING DISCIPLINES
A. CUSTA/NAFTA Problems Remain. Underlying problems with CUSTA remained unchanged in NAFTA.
Canada refused to open up CUSTA when expanding the FTA to include Mexico. In the grains sector, CUSTA was a joining together of 2 marketing systems with 2 conflicting methods for attaching value to a commodity. As Canadian Agriculture Minister Ralph Goodale noted last year in defending the CWB from 'open market' reformers (a micro view), a marketing board working side-by-side with a private marketing system will inevitably lead to distortions. Not surprisingly, meshing those conflicting systems in continental (macro) trading terms has resulted in a whole range of market distortions not envisioned by the drafters of the original CUSTA agreement, including one-way access for Canadian barley into the United States due to CWB's virtual stranglehold on the infrastructure and exclusionary grading practices that block U.S. varieties of grains from moving into or through Canada.
Example: The Board has recently engaged in a predatory marketing scheme whereby a U.S. malting variety is grown in Canada for the express purpose of moving malting barley into the U.S. market in competition with U.S. growers, while preventing the malting barley from being marketed within its own system (whether produced domestically or in the United States). Canadian grading practices have classified a limited number of malting varieties of barley as ''malting varieties'', while other malting varieties (such as Robust, Excel, Foster, Stander and others grown in the United States) are technically relegated to feed barley channels. Canadian farmers are now contracting with grain companies to produce these U.S.-developed malting varieties that are not certified by the Canadian Grain Commission as a ''malting variety.'' This production is excluded from Canadian malting or non-U.S. export channels for malting barley due to this lack of certification.
Under this scheme, the CWB assigns a company as an ''agent'' to market the U.S. malting variety. The farmer buys the seeds from the company and delivers 100% of the production to the company (utilizing a ''buyback'' provision of the CWB contract with the producer), which is given the authority to sell the production to a U.S. firm (maltster) as a malting variety. This system is a boon to the Canadian farmers in that it provides higher returns through the U.S. pricing system. It's also a boon to the CWB because it pads its sales receipts figures while insulating the domestic malting marketing activities of the board from U.S. competition.
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B. New Problems Developed With NAFTA/WTO Interpretations. In last-gasp attempts to preserve the vestiges of its archaic supply management systems, Canada used the WTO's tariffication process to erect tariffs to protect its domestic dairy, poultry and barley producers. In the case of barley, a new tariff-rate quota was erected in direct conflict with the CUSTA/NAFTA commitment to not create new tariffs on commodities/products that had no prior tariffs. It is true that the United States has not even filled the quota implemented by Canada, a point the Canadian officials love to bring up when the TRQ is mentioned, but this is due mainly to the CWB's control of the infrastructure, as previously mentioned.
The incredible loss of the NAFTA dispute panel case on dairy/poultry/barley does nothing to improve the efforts to gain fasttrack authority to expand NAFTA and re-convene agricultural negotiators under the WTO auspices in 1999. Expanding NAFTA would seem to decrease the already limited leverage that the United States might have to convince Canada to go back to the CUSTA negotiating table. On the other hand, bilateral negotiations with Chile and others might help create new incentive for Canada to get involved in these expanded trading opportunities, opening the door to redressing CUSTA problems.
In addition, the underlying problems with Canada's wheat board may best be dealt with under the WTO umbrella. Thus, the NBGA has positioned itself in opposition to NAFTA expansion but in support of fasttrack authority to engage in bilateral and further WTO talks. Further, U.S. barley growers continue to seek assistance from the administration in implementing a quantifiable import monitoring mechanism to gauge the impact of barley imports on U.S. markets.
C. WTO Agriculture Negotiations In 1999. The Uruguay Round (UR) agreement failed to institute disciplines on the marketing and financing activities of state trading enterprises operating in export and domestic venues. With the UR's focus on reducing direct governmental subsidies, the next negotiations must include a focus on components of exporting STE activities, with specific emphasis on: developing pricing disciplines (basing pricing on full acquisition or replacement costs); freight pooling (market pricing undermined by failure to include full freight costs in pricing commodities to specific markets); grade pricing (ignores higher value of high bulk/low value commodities subjected to cleaning or blending processes in order to meet buyer specifications); and carrying charges/price pooling (hides producer-financed subsidy equivalents by ignoring: the ''time'' value of money, i.e. interest and carrying charges saved; the risk inherent if forward pricing when in competition with bid/offer sellers; and the premiums associated with options purchased commercially).
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Issues to be addressed regarding the activities of STE's with import/domestic monopolies would include import licensing and identity preservation requirements, along with discriminatory market access problems arising from the STE's de facto control of the domestic infrastructure, i.e. storage facilities and transportation.
STATEMENT OF KYD D. BRENNER, CORN REFINERS ASSOCIATION, INC.
Chairman Barrett and members of the subcommittee: I am Kyd D. Brenner, vice president of the Corn Refiners Association, Inc., of Washington, DC. The Corn Refiners Association is the national trade association representing the corn wet milling industry of the United States. Members of the association produce corn starches, corn sweeteners, corn oil, animal feed ingredients and bioproducts. A copy of the Association's membership roster is attached to my written statement.
We appreciate your invitation to appear before you to discuss the status of the North American Free Trade Agreement. We share Chairman Smith's observations that trade matters should be a primary concern of agriculture policy makers, and certainly NAFTA is among our major trade agreements.
The Corn Refiners Association was, and remains, a strong supporter of NAFTA. The Association and its members, individually and through the ''Ag for NAFTA'' coalition supported the administrations' negotiation and congressional approval of this agreement for several reasons: first and foremost, we believe that continued trade liberalization is of utmost importance to U.S. agricultural producers and processors. Second, we believe that negotiation of regional free-trade agreements such as NAFTA can serve as a springboard to press for even further liberalization of agricultural trade on the global level. And finally, our industry saw substantial new business opportunities arising from the NAFTA.
I'd like to share just a few figures with you today which illustrate those opportunities. In 1992, before completion of the NAFTA negotiations, the United States exported approximately $87 million of primary processed corn and starch products to Mexico. These products included brans, flours, starches, sweeteners, vegetable oil and animal feeds, but do not include high-value ready-to-eat foods. In 1996 those same commodities accounted for approximately $145 million of exports. While not all of this growth can be directly attributed to tariff reductions under the NAFTA, the agreement was certainly responsible for a new interest in increasing cross-border trade. In addition to our increased exports, corn refiners have made substantial investments in the Mexican economy in new processing plants and distribution centers.
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Our purpose in appearing before you today is to urge both the Congress and the administration to continue to keep their eye on the long-term benefits of this agreement. Over the past year, the trade and political relationship between the United States and Mexico has, regrettably, deteriorated. We believe these disagreements, if not resolved, could spill over into serious conflicts involving other major items of agriculture commerce.
Neither the United States nor Mexico is blameless in this situation. However, we believe that a high-level commitment to restoring good trade relations would be useful in ending the ''tit-for-tat'' mindset which has seemingly descended on this relationship. Presidents Clinton and Zedillo will be meeting in the near future to discuss a wide range of bilateral issues. We have urged USTR, USDA, Treasury and other Departments involved in agricultural trade issues to use this opportunity to seek a renewed commitment at the presidential level to the spirit of free-trade between the United States and Mexico, and would urge the subcommittee to seek a strong Administration commitment to this goal.
TESTIMONY OF RYLAND UTLAUT, VICE PRESIDENT, NATIONAL CORN GROWERS ASSOCIATION
Thank you Chairman Barrett. My name is Ryland Utlaut. I farm near Grand Pass, Missouri and serve as Vice President of the National Corn Growers Association. The NCGA represents almost 30,000 members in 25 affiliated states.
We appreciate the opportunity to testify today.
The National Corn Growers Association was one of the first agricultural organizations to support the North American Free Trade Agreement. Our members recognized the tremendous potential of trade with Mexico. Mexico has a growing population with unmet food and feed needs. We are happy to report that we are very optimistic about the future after the first three years of more open trade with Mexico.
Prior to the United States-Mexico agricultural trade agreement, U.S. corn exports to Mexico were limited by an import licensing system designed to protect Mexico's domestic corn industry. High price supports encouraged domestic corn production, but the benefits to Mexican consumers were limited by the size of the Mexican corn crop.
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When Mexican production met demand, imports were severely curtailed. As an example, in 1992 Mexico increased production over the previous year's level by 28 percent. Net imports for that crop year fell to 390,000 metric tons.
By contrast, when the Mexican crop was short the United States was able to fill the demand, but there was little incentive for U.S. exporters to develop markets in Mexico. Although consumption rose in Mexico, the growth in demand was limited by the import policy.
The trade agreement between the United States and Mexico changed all that. The pact converted the import licensing system to a tariff-rate quota. Mexico granted tariff-free access for the first 2.5 million metric tons of U.S. corn in the first year of the trade agreement. The quota increases 3 percent per year during a 15-year transition period. The quota for 1997 is over 2.7 million metric tons. For those more comfortable thinking in bushels--more than 107.5 million bushels.
Over-quota exports from the United States were subject to a tariff of $206 per metric ton, but not less than 215 percent during 1994. Over the first 6 years of the agreement, an aggregate 24 percent of the over-quota tariff will be eliminated; the remainder will be phased-out over the rest of the 15-year transition period.
Even though Mexico experienced a financial crisis in 1995 with negative growth and currency devaluation, the outlook for feedgrains suffered only a modest setback. The peso devaluation made it more difficult for Mexican consumers to purchase meat, poultry, eggs and dairy products. It also made it more expensive for Mexico to meet its commitment under NAFTA. Nonetheless, in 1995, U.S. corn exports to Mexico exceeded 2.8 million metric tons.
Mexico is now on the road to financial recovery, and we have every reason to anticipate that Mexico will continue to be one of our most important export markets for U.S. corn. If 1996 exports are any indication of the future, we have tremendous potential in Mexico.
It is important to note that increased imports are not expected to curtail Mexican corn production which is expected to increase steadily over the next 10 years. Expanded U.S. exports made possible by the North American Free Trade Agreement will accrue to the benefit of Mexican consumers. Increased availability of feed grains will lead to improved diets for the majority of the Mexican population. This is exactly the type of benefit that should be expected from more open trade.
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The certainty of minimum corn imports has also created the opportunity for increased corn processing in Mexico. The demand for higher value food and industrial products will continue to grow as corn processors invest in Mexico and as exports of processed corn products increase.
We still face some potential problems. First, although Mexico's financial situation has improved from the crisis of 1995, restrictions on the use of GSM credit can impede U.S. exports. We have to be responsive to the credit needs of all our customers.
Second, we must insist that phytosanitary restrictions on corn imports be based on sound science. Mexico has, on occasion, required unnecessary fumigation and costly testing for weed seeds. Mexico has every right to protect domestic corn production, but as exporters, we have the right to insist that restrictions accomplish legitimate, scientifically-based objectives.
Third, the United States must honor our commitment to free-trade. United States efforts to protect our domestic broom corn industry resulted in retaliation against fructose. The propensity to protect domestic interests will take real political resolve to curtail.
Finally, we cannot leave a trade hearing without urging Members to support further expansion of trading opportunities. We anxiously await the administration's fast-track proposal which we hope the Members of this Subcommittee will be able to support.
Thank you for taking the time to consider the views of the National Corn Growers Association.
STATEMENT OF KENNETH HOBBIE, PRESIDENT AND CEO, U.S. FEED GRAINS COUNCIL
Mr. Chairman, and members of the subcommittee. I appreciate this opportunity to testify before you on behalf of the U.S. Feed Grains Council. As the sole organization dedicated to developing export markets for U.S. sorghum, corn and barley, we have practical, ongoing experience with the role NAFTA plays in opening our trade with Mexico.
The U.S. Feed Grains Council is a private, non-profit organization--one of the ''cooperator'' groups organized originally under PL 480 to develop export markets for U.S. agricultural products. Our funding today comes from producer groups, checkoffs and over 70 agribusinesses, from USDA's FMD and MAP programs and from third party cooperators in overseas markets. We operate market development programs in approximately 80 countries, creating market demand to improve the profitability of U.S. agriculture and to strengthen U.S. and world economies.
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With the demise of traditional farm payment programs, U.S. producers must rely on the marketplace for their income. United States population is expected to grow less than one percent per year for the next decade. Food and fiber consumption are linked to population growth in mature markets like ours. That means we will not see the kind of growth in domestic feed grains use that producers need to be profitable.
United States producers--and the agribusinesses who depend on a healthy farm economy for their own success--must depend on growing export demand to support profitability in the next 10 years. That means that a market like Mexico is important now, and more important in the future.
In the last market year, Mexico was the fourth largest U.S. corn market, the third largest barley market and the second largest sorghum market. All told, Mexican customers bought over $1.3 billion worth of U.S. coarse grains in FY96, plus over $400 million worth of higher value products like sweeteners, vegetable oils, corn gluten meal, livestock feed, breakfast cereals and snack foods.
What's even more significant is what this market can become. The Council's World Feed Grains Demand Model forecasts impressive growth over the next decade: Average population growth of 1.7 percent, average real GDP growth of 5.5 percent and a 43 percent increase in meat production by 2005/06. And most critical for our industry-coarse grain imports increasing from 6.8 million metric tons to 9.5 mmt by 2005. That's 40 percent worth of growth in a country where we supply almost all the coarse grains-and we believe Mexico offers serious growth potential beyond that level.
This brings me to NAFTA. On the Canadian side, we still have problems with limited market access, especially for U.S. barley. The Council has asked the administration to support creation of a bilateral producer/industry consultative committee to help address such cross-border issues.
But in Mexico NAFTA has scored a major success. Even more important is the fact that it underpins Mexico's opportunity to achieve its growth potential in the future. Loss of NAFTA would make the exciting projections I cited into a dead letter. We would lose current markets for U.S. feed grains and higher value grain products. Even worse, we would lose one of the remarkable potential markets of the coming decade, as Mexico would surely return to its self-sufficiency policies of the past.
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Mexico's trade reforms now make it legal for the private sector to import grain for livestock feed--and that's fueling growth across the livestock sector. We are seeing growth in wet milling, including plant expansion and cooperative alliances with U.S. companies. The dry milling/tortilla sector is growing--and we have to remember that in Mexico, this is the single largest use of corn. And Mexican customers are seriously interested in higher value options like high oil corn, as evidenced by the huge Mexican delegation that came to the Council's recent Value-Enhanced Grains Conference.
Our Mexican customers tell us that NAFTA gives them the confidence to invest in their operations and expand production--because now they know they can get U.S. grain when they need it. This kind of growth has played a critical role in Mexico's repeated decisions to increase its quotas for U.S. grains well beyond the levels required by the NAFTA phase-in schedule.
Certainly there are still issues to be worked out under NAFTA, just as there are with any trade agreement. Old, entrenched trade distortions do not disappear overnight. But NAFTA's success to date is so evident in an emerging market like Mexico that the Council supports extending such agreements to gain market access in other developing regions of South America as soon as possible.
Thank you for your attention. I will be glad to answer any questions.
SUBMITTED QUESTIONS TO APHIS FROM MR. STENHOLM
As we move toward fulfillment of the free trade principles established under GATT and NAFTA, we see an increasing need to ensure that we can respond to questions of science that arise around sanitary and phytosanitary issues. On the export side, we also need to ensure that the surveillance systems that exist in the United States provide reliable data to support our responses to sanitary and phtosanitary questions. Are the USDA agencies that are responsible for providing the technical expertise in this process doing everything they can to ensure that they can keep pace with expanding trade needs?
What do those agencies see as future needs to maintain or expand the current level of expertise in this area?
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Are there impediments in the regulatory process that need to be addressed to ensure that USDA can move quickly to implement sanitary and phytosanitary agreements?