August Schumacher, Jr.
Under Secretary for Farm and Foreign Agricultural Services
U.S. Department of Agriculture
Before the Subcommittee on International Economic Policy, Export and
Senate Committee on Foreign Relations
March 18, 1998
Mr. Chairman, members of the Subcommittee, I am pleased to appear before you today to discuss the effects of the financial situation in Asia on U.S. agricultural exports, and our support for the actions taken by the International Monetary Fund (IMF).
ASIAN PROBLEMS SLOW U.S. AGRICULTURAL EXPORTS
Overall, we export about $23 billion worth of U.S. agricultural products to the Asian region annually. This accounts for roughly 40 percent of U.S. agricultural exports worldwide. During 1991-97, this region accounted for 45 percent of our export growth. If we have learned anything from the current financial situation in Asia, it is that ours is indeed a global economy. The Asian Pacific Rim is an important market for America's farmers and ranchers, and the effects of the current financial situation are directly affecting these producers.
With such a large percentage of U.S. agricultural exports being shipped to the region, it is understandable that agriculture is being affected somewhat disproportionately by this situation. Most severely effected will be exports of high-value products, especially horticultural products, red meats, poultry, and processed foods. Nevertheless, as long as the crisis remains somewhat contained, we believe the crisis will be manageable, and not catastrophic for American agriculture.
In our analysis, the current Asian market can be divided into three tiers based on financial stability.
The first tier includes the most stable markets. Most of our exports to East Asia are bound for Japan, Greater China (Hong Kong/China), Taiwan, and Singapore, which account for 75 percent of our agricultural exports to Asia and 30 percent of our total exports. If the crisis remains confined, we expect to see limited effects on U.S. exports to these first tier countries. U.S. agricultural exports to Japan and China are projected to decline about $300 million total in FY 1998. Exports to Taiwan and Singapore will be off about $150 million total.
Exports to the second tier countries -- Thailand and Korea -- will be off substantially more. U.S. agricultural exports to Thailand are projected to decline $150 million, while exports to Korea are expected to drop $500 million as a result of financial problems.
Finally, in a third tier is Indonesia, where the economy continues to struggle and where reforms do not seem to be taking hold to the same degree as elsewhere. U.S. agricultural exports to Indonesia are projected to drop $250 million.
The reduction in import demand in Asia is lowering commodity prices around the world. This will reduce the value of U.S. exports to non-Asian markets. USDA economists estimate the value of U.S. agricultural exports will fall 1.3 percent, or $400 million in 1998. This is largely the result of lower U.S. crop and livestock prices expected from reduced demand in Asia that will affect the value of exports regardless of destination and increased pressures from Australia, Canada, and New Zealand, where currencies have fallen against the U.S. dollar in the past because of the Asian financial situation.
For fiscal 1999, the decline in U.S. agricultural exports could be greater; we may begin to see declines in exports of bulk commodities such as grain and soybeans. This will be due to three factors: the sharply slowing economies in Asia may cause more significant reductions in import demand, competitive pressures from Southern Hemisphere producers, and the appreciation of the U.S. dollar relative to the currencies of our competitors which may erode U.S. market share. However, after fiscal 1999, the trade effects will likely begin to ease as Asia's currencies, economies, and import demand fuel their recoveries.
Despite its financial problems, Asia remains an important market with much potential. Economic growth overall in Asia is continuing, but at reduced rates. 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.
SUPPORT FOR THE INTERNATIONAL EFFORT
That is why it is crucial 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, ranchers and exporters.
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 bringing about structural reforms that will allow our products greater access to these markets.
TRADE POLICY IMPACTS
IMF-supported economic reforms are making strides in reforming trade policies and import regimes to the benefit of U.S. agriculture. For example, 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. fruit to enter Korea unimpeded. Korea agreed to eliminate restrictive licensing that 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.
In Indonesia, the situation is less clear. Tariffs on over 650 food and agricultural products were recently reduced to a rate of 5 percent in an attempt to help ensure adequate food supplies at reasonable prices. Initially, implementation varied by port, but as of March 1, the new tariffs reportedly were being universally applied. However, even these reductions do not compensate for the increased rupiah costs due to the depreciation of that currency. Other changes in the IMF structural adjustment package have not progressed as far. We will continue to follow the situation in Indonesia closely and will be working with our counterparts in other U.S. government agencies, the IMF, and the World Bank to ensure compliance with the IMF letter of intent.
USDA'S STEPS TO PROTECT U.S. AGRICULTURE
As I said earlier, Asia remains an important market with much potential. So it should come as no surprise that our competitors in Australia, Canada, and New Zealand are protecting their trade interests in the region as well. Australia has approved an additional US$300 million in export credit insurance for Korea and about US$300 million for Indonesia. The Australian Wheat Board arranged for a US$20-million 90-day line of credit for wheat sales to Korea. Canada 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.
In light of these competitor pressures, USDA has moved aggressively to maintain U.S. market share in the region and to protect U.S. agricultural exporters in these unsettled markets. Steps taken include:
Use of the export credit guarantee programs in connection with exports of U.S. agricultural commodities to South Korea and other Asian markets. USDA has announced the availability of $2.1 billion in GSM export credit guarantees, with $1.1 billion allocated for exports to Korea, $400 million to Indonesia, $300 million for Thailand, $100 million for Malaysia, and $100 million for the Philippines. We are working hard to be responsive to the needs of U.S. exporters and Korean government officials and importers. For example, the initial allocation to Korea was $1 billion. We increased the available credit line by $100 million to support sales of U.S. hides and skins. Depending on the pace of use of this allocation and the stabilization of the Korean economy, we indicated that we would consider a modest increase later this fiscal year, that might cover additional commodities. We are also trying new approaches to maintain U.S. exports to the region. For example, we recently approved banks in Singapore to finance sales under our program for Indonesia and are considering approving Singapore banks for our other country programs in the region.
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, which are the products most effected by the Asian financial situation. This program encourages U.S. exporters to extend credit directly to importers by sharing the risk with them. It may be particularly helpful in mitigating the lost sales that high-value product exporters are expected to face in the Asia. In addition to countries in Southeast Asia, we recently included Korea in the $50 million Southeast Asia allocation under this program and we have sent a technical team to Seoul to conduct seminars on this new program in conjunction with one of our food shows.
Technical seminars on the GSM-102 program for bankers and importers in the affected countries. We continue to educate importers and banks in the region about the workings of our GSM-102 program. FAS staff are now working in Thailand, Malaysia, Singapore, the Philippines, and Korea to explain in detail to bankers and importers how our programs work to create more interest in participating in the programs, and to make the programs more accessible to a wider variety of users. Another team will be traveling to the region in late April.
Consideration of P.L. 480 to Indonesia. Indonesia is the hardest hit of the economies in the region. Although P.L. 480 resources are tight, we are discussing a Title I program with the government of Indonesia. Consideration of an allocation under Title II of P.L. 480, administered by the U.S. Agency for International Development, is also under active consideration.
Intensify market development efforts. We are intensifying our market development efforts through the expertise of our market development cooperators and Market Access Program participants. It is 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 review the changing creditworthiness of these overseas buyers, determine the amount of debt each can handle, and in general apply commercial standards in our export credit guarantee programs, as required by the Agricultural Trade Act of 1978, as amended. Actual credit packages are subject to inter-agency review. Overall, we will continue to achieve balance between our twin objectives of promoting U.S. agricultural exports and operating Federal programs with fiduciary responsibility to taxpayers and the Congress.
The outlook for American agriculture is closely linked to our export efforts and the overall recovery of these economies with the benefit of IMF support. We continue to monitor the situation in this region closely. Deputy Under Secretary James Schroeder and Foreign Agricultural Service Administrator Lon Hatamiya are visiting the region now, and will provide me with a first-hand update of the situation in Korea, Japan, and the Philippines.
Together, the IMF plans and our agricultural 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 export credit guarantee program allocations and our export credit guarantees would not be used, thus further reducing our exports to the region.
Mr. Chairman, let me assure you that USDA will continue to do what is necessary to keep America's farm trade flowing to these critical markets. That completes my statement. I would be happy to answer any questions. ,