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Statement of
August Schumacher, Jr.
Under Secretary for Farm and Foreign Agricultural Services
U.S. Department of Agriculture
Before the General Farm Commodities Subcommittee
House Committee on Agriculture
Washington, DC - February 4, 1998
Mr. Chairman, members of the Subcommittee, I am pleased to appear before you today with Lon Hatamiya, Administrator of the Foreign Agricultural Service, and Christopher Goldthwait, General Sales Manager, to discuss our recent fact finding mission to Asia.
Secretary Dan Glickman asked us to make the trip to first and foremost, find out what the effect of Asia’s financial situation will be for American agricultural trade. During January 12-24, we met with over 600 importers, bankers, private sector representatives, government officials, and U.S. commodity representatives in Thailand, Malaysia, Indonesia, Singapore, Hong Kong, South Korea, and Japan. We also met with our agricultural attaches in these countries as well as those assigned to the Philippines, Taiwan, China, and Vietnam. Second, we wanted to evaluate these countries’ use of the $2 billion in Commodity Credit Corporation (CCC) export credit guarantees. Our third objective was to analyze the effect of the currency problems on the domestic food situation of the most heavily affected countries, especially South Korea and Indonesia.
GLOBAL IMPACT ON U.S. AGRICULTURAL EXPORTS
The Asian financial crisis has taught us that ours is indeed a global economy. East Asia is an important market for America’s farmers. Overall, it accounts for 40 percent of our agricultural exports, or $23 billion annually. During 1991-97, Asia accounted for 45 percent of our export growth.
In our analysis, the current Asian market can be divided into three tiers based on financial stability:
Countries in the first tier, Taiwan, Japan, China, and Singapore, will continue to show stability in most products with some softness in higher value consumer products and limited impact of the strong dollar. These countries accounted for 30 percent of our agricultural exports in fiscal year 1997.
The second tier countries, Malaysia, Thailand, the Philippines, and South Korea, account for 9 percent of our exports. We expect a softening in exports to these markets and we have targeted them through export credit guarantee initiatives totaling $2 billion . Of this, $1 billion is for Korea and $1 billion is divided among the other countries.
Indonesia, which we put into the third tier, imported $767 million of U.S. agricultural products in fiscal 1997. It will be the most seriously affected in the short term. We expect little use of GSM programming here until the effects of the stabilization program begin to take hold.
With respect to agricultural trade in Malaysia, Thailand, the Philippines, South Korea, and Indonesia, the most immediate affect has been a dramatic across-the-board slowdown in the willingness of importers and their banks to enter into new import commitments during December and early January. This is understandable, since currency fluctuations made it virtually impossible for importers to price imports in local currencies.
U.S. agricultural exports will be lower in fiscal years 1998 and 1999 compared with what they would have been without the Asian problems. The effect will be greater than the Department’s initial estimate of $500 million, but it is difficult to say how much more. The effect will depend on many things, including the use of our GSM programs, the progress in stabilization of Asian economies, and the degree to which these countries implement structural reforms and liberalize their import regimes as called for by the IMF and World Bank reform packages. USDA will release its next forecast for fiscal year 1998 agricultural exports on February 23.
It is important to keep in mind that despite financial problems, Asia remains an important market with much potential. The factors that made Asia strong economically in the past will fuel its recovery in the future. These include a high rate of savings, low inflation, a well-educated population, and economies that, for the most part, are still growing. The medium-term fundamentals will become sound with the elimination of financial restrictions, reductions in government directed investment, and elimination of monopolistic trade agencies. Ultimately, the IMF-led reforms in these countries will lead to more transparent, freer markets in which U.S. agricultural products will find it easier to compete.
This relatively optimistic outlook depends on these governments taking some tough medicine and making some difficult changes on how the business of government and the private sector is conducted. Most of the Asian officials with whom we met seem ready to grapple with this challenge. But only a few of the difficult steps have been taken. In most cases, the short-term negative economic effect of these measures has yet to be felt.
SUPPORTING THE INTERNATIONAL EFFORT
Before I go into more detail on how the Asian financial crisis will affect our exports by country and commodity, I would like to take a minute to make the extremely important point of how crucial it is that we work to support the international effort, led by the International Monetary Fund, to help countries in the region help themselves. That is very much in the interest of America’s farmers and the American people in general.
The IMF, whose mission is to promote financial stability, trade, and economic growth, is the right institution to lead the effort to help the affected Asian economies. Only if these countries have stable, growth-oriented economies will we see global trade, including agricultural trade, recover and reach new heights.
The stakes are too high for inaction. USDA is working with the Department of the Treasury, the IMF, and the World Bank to maintain the flow of U.S. agricultural products to Southeast Asia and to help our Asian customers weather their financial storms. The IMF-led financial assistance plans in Thailand, Indonesia, and South Korea are critical to our efforts. The recovery of U.S. agricultural exports will depend on the success of IMF-led efforts to stabilize the Asian economies and bring about structural reforms and trade liberalization.
In the short term, the IMF-supported trade and investment reforms are helping to steady the uncertain financial environment, which is critical to commercial trade.
In the long term, IMF-supported trade liberalizing measures will benefit U.S. agriculture by ensuring that structural reforms will allow our products greater access to these markets. Together, the IMF plans and the GSM export credit guarantees will help ensure that the United States remains a reliable supplier of agricultural products to the region. Without IMF support and reforms, we would not feel comfortable in making our large GSM-102 allocations and our GSM credit guarantees will not be used, thus reducing our exports.
COUNTRY IMPACTS
I would now like to provide you with more details on how the Asian financial crisis is expected to affect agricultural trade.
Asia is expected to account for most of the decline in exports we anticipate for the current fiscal year. South Korea, Malaysia, Thailand, the Philippines, and Indonesia are the countries where we expect to see the major part of the reduction with only limited reductions in Japan, China, Taiwan, and Singapore.
COMMODITY IMPACTS
Based on observations during this trip, high-value products, such as horticultural products, red meats, poultry, and processed foods, will be the hardest hit sector. Grain and soybean exports will be less affected.
Demand for basic food commodities and inputs for export industries will rebound more quickly since these products are critical to the healthy recovery of the economies in the most affected countries. Banks and governments will favor imports of these products over consumer-ready items for both economic and policy reasons, to ensure the basic availability of food stuffs. Therefore, U.S. exports of these products, such as wheat, corn, and cotton, will hold up better and will recover faster. Another key factor in how U.S. trade with the region preforms will be the strength of our dollar compared to the Canadian and Australian dollars.
The countries we visited can moderate the affect of currency devaluations and deal with the credit crunch by using GSM export credit guarantees. In these circumstances, export credit guarantees can be very effective in fostering and maintaining normal trade links.
In general, we found a high level of interest in using the GSM programs, particularly in South Korea. However, some countries are unfamiliar with how the program works, so while we were in Asia, our General Sales Manager, Chris Goldthwait, conducted three seminars with importers and bankers in Malaysia, Thailand, and Korea. We will send a technical team back to the region very soon. When banks and importers understand the program better, we think use of it will pick up.
TRADE POLICY IMPACTS
The imposition of IMF-supported economic reforms are resulting in strides in trade policy and import regimes benefiting U.S. agriculture. For example, Indonesia, effective February 1, reduced tariffs on imported food products from the 20- to 40-percent range to a top rate of only 5 percent. More than 500 tariff line items have been lowered. As a result, U.S. producers are more competitive.
The IMF structural adjustment package calls for BULOG (Indonesia’s sole importer of wheat, wheat flour, rice, sugar, garlic, and soybeans) to relinquish monopoly control of imports of wheat, wheat flour, soybeans, sugar, and garlic. Rice will remain under BULOG’s control. Lifting of BULOG’s monopoly of wheat imports and wheat flour distribution could increase exports of U.S. wheat. In recent years, the U.S. share of Indonesia’s wheat imports has normally not exceeded 10 percent due to competition from Australia, which has proximity and freight advantages and a monopolistic wheat board. However, two new, smaller Indonesian mills are likely to aim toward quality and specialty markets that require higher protein wheat, potentially boosting U.S. wheat sales to this growing, 4.5-million-ton market.
In addition, the Indonesian government has agreed to dissolve APKINDO, its Hardwood Plywood Marketing Board, effective February 1. This could offer increased opportunities to U.S. exporters of wood panel products over the long term. However, these opportunities may be difficult to seize in the short term, since the sharp devaluation of the Indonesian rupiah has made Indonesian wood products very competitive.
In Korea, the IMF agreement specifically requires Korea to move toward trade liberalization -- a move that would resolve several longstanding problems for the United States.
In January, Korea began to harmonize its standards with international codes, which will increase access for U.S. exporters. Korea is also moving to revise pesticide tolerance levels in harmonization with CODEX, which will allow U.S. orange shipments to enter Korea unimpeded. Korea agreed to eliminate restrictive licensing which provide Korean food industries with needed inputs at lower prices and could lead to the solution of a number of longstanding access problems for U.S. exporters of such items as corn grits, soyflakes, and peanuts.
COMPETITOR ACTIVITIES
We can expect our competitors in Australia, Canada, and New Zealand to protect their trade interests in the region. Australia has approved an additional US$300 million in export credit insurance for Korea. Beef and wool are expected to be the primary Australian agricultural products to benefit from their program. In addition, the Australian Wheat Board arranged for a US$20-million 90-day line of credit for wheat sales to Korea. Canada recently approved US$24 million in export credits for Canadian Wheat Board (CWB) sales of wheat to Korea and is exploring similar options for Indonesia and Thailand. The New Zealand Government is encouraging firms to remain involved in Southeast Asia and work to maintain their relationships.
Adding to the competitive pressure is the fact that the Australian, Canadian, and New Zealand dollars have all fallen against the U.S. dollar, which gives their exporters an obvious edge in competition with U.S. exports.
USDA’S RESPONSE
In response to our fact finding trip, USDA is exploring several options to keep the flow of U.S. agricultural products to Asia. These options include:
• Additional GSM-102 export credits for South Korea. Korean government officials and Korean importers asked us to increase the $1-billion allocation for GSM-102. Depending on the pace of utilization of the initial allocation and the stabilization of the Korean economy, we indicated that we would consider a modest increase later this fiscal year, such that might cover additional commodities.
• Increased promotion and use of the Supplier Credit Guarantee Program to support exports of high-value products. Governments and banks in the most seriously affected countries are reluctant to finance imports of non-essential products, including high-value products. Thus we are promoting use of the Supplier Credit Guarantee Program for high-value products. This program puts buyers and sellers directly together to make sales; it may be particularly helpful in mitigating the cuts that high-value product exporters are expected to face in the Asia.
• Possible extension of P.L. 480 Title I to Indonesia. Because Indonesia is the hardest hit of the economies, we are looking closely at a Public Law 480 Title I sales agreement with Indonesia. P.L. 480 resources are tight in fiscal year 1998, but we are reviewing a possible reserve allocation that might provide wheat for sale in local currency to Indonesia’s two new flour mills.
• Technical seminars on the GSM-102 program for bankers and importers in the affected countries. We intend to do more work to educate importers and banks in Thailand, Malaysia, Indonesia, and the Philippines about the workings of our GSM-102 program. FAS staff will travel to Asia to conduct additional technical briefings for bankers and importers to explain in detail how the program works to create more interest in participating in the program, and to make the program more accessible to a wider variety of users.
• Intensify market development efforts. We plan to intensify our market development efforts through the expertise of our market development cooperators and Market Access Program participants. It is particularly important that we maintain a presence in these markets, even for commodities and products that may see a downturn in sales in the short term.
As we discuss options to boost U.S. agricultural exports to these troubled markets, it is important to state USDA’s commitment to sound financial management of our programs. USDA analysts continually revise the changing creditworthiness of these overseas buyers, determine the appropriate amount of debt each can handle, and in general apply commercial standards in the GSM programs, as required by the Agricultural Trade Act of 1978, as amended. Actual credit packages are subject to inter-agency review. Overall, we will continue to achieve balance between our twin objectives of promoting U.S. agricultural exports and operating Federal programs with fiduciary responsibility to taxpayers and the Congress.
CONCLUSION
The outlook for American agriculture is closely linked to our export efforts and the overall recovery of these economies with the benefit of IMF support. Because agricultural exports are so important in terms of producer prices and, ultimately, farm income, we at USDA will be working to do everything possible to keep America’s farm trade flowing to these critical markets.
Mr. Chairman, that completes my statement. My colleagues and I would be happy to answer any questions.
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