United States General Accounting Office

GAO Testimony

Before the Subcommittee on Trade, Committee on Ways

and Means, House of Representatives

For Release on Delivery

Expected at

2:00 p.m., EST

Thursday,

February 12, 1998

AGRICULTURE TRADE

AGREEMENTS

Selected Implementation

Issues

Statement for the Record by JayEtta Z. Hecker, Associate

Director, International Relations and Trade Issues,

National Security and International Affairs Division

GAO/T-NSIAD-98-106

Mr. Chairman and Members of the Subcommittee:

We are pleased to have the opportunity to provide this statement for the

record for your hearing on February 12, 1998. At your request, we are

providing some observations on the implementation of certain agricultural

provisions of the Uruguay Round and North American Free Trade

Agreement (NAFTA). These observations, based on our past and ongoing

work, focus on two areas that affect U.S. agricultural trade: (1) the impact

of measures to protect human, animal, or plant life or health—referred to

as sanitary and phytosanitary (SPS) measures—and (2) the impact of state

trading enterprises (STE).1

 Our intention was to give Congress possible

avenues of inquiry in its oversight of agricultural trade issues.

Summary Both the Uruguay Round of the General Agreement on Tariffs and Trade

(GATT)2

 and NAFTA3 included provisions for reducing agricultural trade

barriers. If properly implemented, these provisions could help liberalize

global agricultural trade and provide substantial benefits to the United

States. However, several challenges exist, particularly in organizing an

effective approach on the part of the federal government to monitor and

strengthen compliance with SPS measures and to mitigate the effects of

STEs on U.S. agricultural producers. After providing some background

information on the agricultural market openings achieved by the Uruguay

Round and NAFTA, we will discuss our specific observations on SPS

measures and the use of STEs.

Significant

Agricultural Market

Openings Generally

Achieved in Both

Uruguay Round and

NAFTA

The Uruguay Round and NAFTA included significant provisions to liberalize

agricultural trade. Generally, these agreements comprised commitments

for reducing government support, improving market access, and

establishing for the first time rules on various aspects of global

agricultural trade. As the largest exporter of agricultural commodities in

the world, the United States was expected to benefit substantially from

implementation of the reforms embodied in these agreements.

1

STEs are generally considered to be governmental or nongovernmental enterprises that are

authorized to engage in trade and are owned, sanctioned, or otherwise supported by the government.

2

A conference in Punta del Este, Uruguay, in 1986 launched the most recent round of GATT

negotiations—called the Uruguay Round. The Uruguay Round Agreement was concluded in 1993, went

into force in January 1995, and resulted in the creation of the World Trade Organization (WTO).

3

NAFTA negotiations were concluded in 1992 by Canada, Mexico, and the United States. The

agreement became effective in January 1994, creating the world’s largest free trade area.

Page 1 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Uruguay Round The Uruguay Round represented the first time that GATT member countries

established disciplines concerning international agricultural trade. The

Uruguay Round agreements, including those on agriculture and SPS,

included several key measures to liberalize agricultural trade. First,

generally over a 6-year period beginning in 1995, member countries were

required to make specific reductions in three types of support to

agricultural producers: (1) import restrictions, (2) export subsidies, and

(3) internal support. Second, member countries concluded an Agreement

on the Application of Sanitary and Phytosanitary Measures that

established guidelines on the use of import regulations to protect human,

animal, and plant life and health. Third, countries established a Committee

on Agriculture that would oversee implementation of WTO member

countries’ commitments to reduce agricultural support and provide a

forum for discussions on agricultural trade policies. Fourth, the Round

provided a definition of STEs and implemented procedural measures

designed to improve compliance with GATT rules. Finally, member

countries agreed to enter a second phase of negotiations to further

liberalize agricultural trade beginning in 1999.

NAFTA Under NAFTA, the three member countries—Canada, Mexico, and the

United States—agreed to eliminate all tariffs on agricultural trade. Some of

these tariffs were to be eliminated immediately; others would be phased

out over a 5-, 10- or 15-year period. NAFTA also required the immediate

elimination of all nontariff trade barriers, such as import restrictions,

generally through their conversion either to tariff-rate quotas4

 or tariffs.

For example, Mexico’s import licensing requirements for bulk

commodities, such as wheat, were terminated under NAFTA. In addition, the

NAFTA charter’s chapter on agriculture included provisions on SPS. NAFTA

also established a joint committee on agricultural trade and a committee

on SPS measures,5

 providing a channel for discussion of member countries’

ongoing concerns, in an effort to head off disputes.

4

NAFTA tariff-rate quotas allow a certain quantity of product to enter a country duty free, while

anything over this amount will be subject to an over-quota tariff.

5

The term “SPS measures” refers to various regulations governments may adopt to protect human,

animal, and plant life or health. Although SPS measures may result in trade restrictions, governments

generally agree that in certain cases they are necessary and appropriate. However, governments may

disagree about the need for or appropriateness of particular SPS measures.

Page 2 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Challenges in

Implementing WTO

and NAFTA

Provisions on SPS

Measures and STEs

While forecasters have estimated that increases in agricultural trade would

account for a sizable portion of the Uruguay Round and NAFTA accords’

projected benefits to the United States, challenges exist for ensuring their

full implementation.6

 In particular, our work on foreign SPS measures and

STEs illustrates the complexity of the implementation challenges,

particularly in organizing U.S. government efforts to assure effective

enforcement and monitoring of member nations’ agricultural

commitments under both agreements. For example, The U.S. Trade

Representative (USTR) has found that as trade agreements begin to reduce

tariffs on agricultural commodities, the United States must guard against

the increasing use of SPS measures as the trade barrier of choice.

WTO and NAFTA SPS

Provisions

The WTO Agreement on the Application of Sanitary and Phytosanitary

Measures, and chapter 7 of NAFTA, established guidelines regarding the

appropriate use of SPS measures in relation to trade. While these

agreements are not identical, they are consistent in their guiding principles

and rules. Both agreements recognize the right of countries to maintain SPS

measures but stipulate that such measures (1) must not be applied

arbitrarily or constitute a disguised restriction on trade and (2) must be

based on scientific principles and an assessment of risk. In addition, the

WTO and NAFTA agreements provided dispute settlement procedures to help

resolve disagreements between member countries on SPS measures,

including consultations and review by a dispute settlement panel.

The WTO agreement also encourages progress toward achieving three

objectives: (1) broad harmonization of SPS measures through greater use of

international standards (harmonization), (2) recognition among members

that their SPS measures may differ but still be considered “equivalent”

provided they achieve the same level of protection (equivalency), and

(3) adaptation of SPS measures to recognize pest- and disease-free regions

(regionalization).7

6

In our 1994 review of the results of the Uruguay Round, we identified several areas of the Agreement

on Agriculture that would require ongoing monitoring: changes in other countries’ policies, changes in

U.S. policies, use of the Committee on Agriculture, and preparation of a foundation for future

agricultural negotiations. At the Singapore Ministerial meeting of the WTO in December 1996, U.S.

officials expressed concern that not all countries were carrying out their commitments to open their

agricultural markets or were implementing new, disguised, trade-distorting measures.

7

According to U.S. Department of Agriculture (USDA) officials, SPS measures typically do not

recognize that imports from part of a country may be safe even if imports from the entire country are

not.

Page 3 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Our work suggests open issues in the following areas:

• the lack of coordination of U.S. government efforts to address foreign SPS

measures;

• the adequacy of the USDA’s process for balancing its regulatory and trade

facilitation roles and responsibilities; and

• the potential benefits from WTO member countries’ progress toward

achieving the longer-term objectives concerning harmonization,

equivalency, and regionalization.

Strategy to Address Foreign

SPS Measures

Although USTR has identified some foreign SPS measures as key barriers to

U.S agricultural exports, our recent report to Congress8

 found several

weaknesses in the federal government’s approach to identifying and

addressing such measures. Because of these weaknesses, the federal

government cannot be assured that it is adequately monitoring other

countries’ compliance with the WTO or NAFTA SPS provisions and effectively

protecting the interests of U.S. agricultural exporters.

Specifically, we found that the federal structure for addressing SPS

measures is complex and involves multiple entities. USTR and USDA have

primary responsibility for addressing agricultural trade issues, and they

receive technical support from the Food and Drug Administration (FDA),

the Environmental Protection Agency (EPA), and the Department of State.

Our review demonstrated that the specific roles and responsibilities of

individual agencies within this complex structure are unclear and that

effective leadership of their efforts has been lacking. During our review,

USTR and USDA implemented certain mechanisms to improve their handling

of SPS issues, but the scope of these mechanisms did not encompass the

overall federal effort. In addition, we found that the various agencies’

efforts to address foreign SPS measures have been poorly coordinated and

they have had difficulty determining priorities for federal efforts or

developing unified strategies to address individual measures. Finally, we

found that goals and objectives to guide the federal approach and measure

its success had not been developed.

We believe that a more organized, integrated, strategic federal approach

for addressing such measures would be beneficial. Therefore, we

recommended that USTR, USDA, and the other concerned agencies, such as

FDA and EPA, work together to develop coordinated goals, objectives, and

8

See Agricultural Exports: U.S. Needs a More Integrated Approach to Address Sanitary/Phytosanitary

Issues (GAO/NSIAD-98-32, Dec. 11, 1997).

Page 4 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
performance measurements for federal efforts to address foreign SPS

measures.

Outstanding questions derived from our work include the following:

• What steps have USTR and USDA taken to address the weaknesses found by

our study, such as the lack of a process to prioritize federal efforts to

address foreign SPS measures?

• How do USTR and USDA plan to improve coordination of their activities to

address SPS measures?

• How do USTR and USDA plan to work more closely with other relevant

agencies, such as FDA and EPA, in determining which SPS measures to

address and how to address them? Specifically, at the executive branch

level how does the administration intend to balance its trade facilitation

and regulatory roles and responsibilities?

USDA Agencies’ Balancing of

Regulatory and Trade

Facilitation Roles

Absent a coordinated approach for addressing foreign SPS measures, the

specific role of USDA regulatory and research agencies in resolving SPS has

not been clearly defined. Some of these regulatory agencies, such as the

Animal and Plant Health Inspection Service and the Food Safety

Inspection Service, whose primary responsibilities are to safeguard

human, animal, and plant life or health, have increasingly assumed a role

in efforts to facilitate trade. Several trade authorities and industry officials

have expressed frustration that these regulatory agencies (1) seem to lack

a sense of urgency regarding trade matters and (2) are sometimes willing

to engage in technical discussions regarding foreign SPS measures for

many months and even years. These groups expressed concerns that

regulatory authorities lack negotiating expertise, which sometimes

undermined efforts to obtain the most advantageous result for U.S.

industry regarding foreign SPS measures. U.S. regulatory officials, in turn,

believe that at times trade authorities and industry groups fail to

appreciate that deliberate, and sometimes lengthy, technical and scientific

processes are necessary to adequately address foreign regulators’

concerns about the safety of U.S. products.

Government and industry officials have stated that regulatory and

research agencies’ responsibilities for dealing with foreign SPS measures

have not been clearly defined. The tension in balancing the regulatory and

trade facilitation activities of some USDA agencies underlines the need to

more clearly define their role in addressing SPS measures.

Questions resulting from our work include the following:

Page 5 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
• What steps has USDA taken to use its strategic planning process for

integrating disparate agency efforts to address SPS measures?

• What progress is USDA making in using the Working Group on Agricultural

Trade Policy to strengthen USDA’s SPS efforts? Has this initiative, or any

other, begun to deal with the tensions that have arisen over the dual roles

of some USDA agencies as both regulatory and trade facilitation entities?

• Has USDA provided guidance to regulatory agency officials to assist in

promoting a more consistent effort to balance their competing goals and

policies?

• Is there outreach to agricultural producers to clarify the new roles that

increased foreign trade has required these regulatory agencies to adopt?

Potential Benefits of Long-Term

SPS Objectives Versus

Immediate Resolution of

Disputes Over SPS Measures

WTO and USTR officials suggest that member countries appear to have

focused on implementing provisions of the SPS agreement that enable them

to resolve SPS disputes as they arise, such as the requirement that SPS

measures be based on scientific evidence, but have paid less attention to

other key provisions. Specifically, member countries have been less

concerned with provisions regarding harmonization, equivalency, and

regionalization of SPS measures. The practices these principles encourage

are not currently widespread.

Progress in implementing harmonization, equivalency, and regionalization

could be time consuming. For example, the United States and the

European Union negotiated for 3 years before reaching a partial

agreement about the equivalence of their respective inspection systems for

animal products. Nevertheless, these provisions could help minimize trade

disputes in the long run by creating a more structured approach to SPS

measures.

Our work raises the following questions regarding the SPS agreement’s

long-term objectives:

• Is there a sufficient balance in efforts to implement the Uruguay Round SPS

agreement so as to promote the goals of harmonization, equivalency, and

regionalization as envisioned in the framework of the agreement?

• What factors limit cooperation among WTO member countries in pursuit of

these three long-term objectives?

• How are USDA and USTR working to promote international harmonization of

SPS measures based on U.S. standards that would facilitate U.S. industry

access to foreign agricultural and agriculture-related markets?

Page 6 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
WTO Provisions on STEs The agricultural and SPS agreements of the Uruguay Round9

 were intended

to move member nations toward establishing a market-oriented

agricultural trading system by minimizing government involvement in

regulating agricultural markets. Some member nations continue to use

STEs10 to regulate imports and/or exports of selected products. For

example, STEs have long been important players in the international wheat

and dairy trade.

As a result of the Uruguay Round, the WTO officially defined STEs and

addressed procedural weaknesses of GATT’s article XVII by improving the

process for obtaining and reviewing information. In the past, GATT required

that STEs (1) act in a manner consistent with the principles of

nondiscriminatory treatment,11 (2) make purchases and/or sales in

accordance with commercial considerations that allow foreign enterprises

an opportunity to compete, and (3) notify the WTO secretariat about their

STEs’ activities (for example, WTO members who have STEs are required to

report information on their operations). Subsequently, the Uruguay Round

established an STE working party which is now incorporated into the WTO

framework. In addition, STEs that engage in agricultural trade are also

subject to the provisions in the Uruguay Round Agreement on Agriculture,

that define market access restrictions, export subsidies, and internal

support.

Our work suggests open issues in two areas: (1) a lack of transparency in

STE pricing practices and (2) the extent of U.S. efforts to address STEs.

Lack of Transparency in STE

Pricing Practices

In the absence of complete and transparent information on the activities of

STEs, member countries are hindered in determining whether STEs operate

in accordance with GATT disciplines and whether STEs have a

trade-distorting effect on the global market. In 1995, we reported12 that

compliance with the Uruguay Round STE reporting requirements or

notifications had been poor.13 Since then, STE notifications to the WTO have

9

Although NAFTA contains provisions on STEs that are similar to those in GATT, it does not include

certain provisions such as the STE reporting requirement.

10Since GATT was first drafted in 1947, STEs have been recognized as legitimate trading entities in

world markets.

11Under WTO, nondiscriminatory treatment generally encompasses most-favored nation and national

treatments. (For further information, see State Trading Enterprises: Compliance With the General

Agreement on Tariffs and Trade [GAO/GGD-95-208, Aug. 30, 1995] p. 2, fn. 6.)

12See State Trading Enterprises: Compliance with the General Agreement on Tariffs and Trade.

13While STEs encompass all types of trade, multilateral concerns historically have focused almost

exclusively on agricultural STEs.

Page 7 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
improved, including reporting by countries with major agricultural STEs.

However, because they are not required to do so, none of the notifying STE

countries have reported transactional pricing practices—information that

could provide greater transparency about their operations.

U.S. agricultural producers continue to express concern over the lack of

transparency in STE pricing practices and their impact on global free trade.

In 1996, we reported14 that our effort to fully evaluate the potential

trade-distorting activities of STEs, including pricing advantages, could not

be conducted because of a lack of transaction-level data. Without this data

and the more transparent system it would create, the United States finds it

difficult to assess the trade-distorting effects of, and compliance with, WTO

rules governing reporting on STE operations.

Our work on STEs raises the following questions with regard to the lack of

transparency:

• What progress has the WTO working party on state trading enterprises

made in studying STEs and improving the information available about their

activities?

• What steps, if any, can be taken within the WTO framework, or otherwise,

to increase the pricing transparency of import- and export-oriented STEs?15

U.S. Efforts to Address STEs U.S. agricultural interests have expressed concern regarding the potential

of STEs to distort trade, and USDA officials have said that a focused U.S.

effort to address STEs is vitally important. Although, under the WTO, STEs

are recognized as legitimate trading entities subject to GATT rules, some

U.S. agricultural producers and others are concerned that STEs, through

their monopoly powers and government support, may have the ability to

manipulate worldwide trade in their respective commodities. For example,

some trade experts and some WTO member countries are concerned about

STEs’ potential to distort trade due to their role as both market regulator

and market participant. Further, the U.S. agricultural sector competes with

several prominent export STEs in countries such as Canada, Australia, and

New Zealand and import STEs in other countries such as Japan.

14See Canada, Australia, and New Zealand: Potential Ability of Agricultural State Trading Enterprises to

Distort Trade (GAO/NSIAD-96-94, June 24, 1996).

15Export STEs include those STEs where the primary role of the enterprise is to sell a particular

commodity in a foreign market. Import STEs’ primary role is to control and market foreign goods

coming into the host country.

Page 8 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Questions from our work regarding the U.S. effort to address STEs include

the following:

• How are USTR and USDA monitoring STEs worldwide to ensure that member

countries are meeting their WTO commitments?

• Given the limited transparency resulting from STE notifications to the WTO,

how can the United States be assured that STEs are not being operated in a

way that circumvents other WTO agriculture commitments, such as the

prohibition on export subsidies or import targets?

Mr. Chairman and members of the Subcommittee, this concludes my

statement for the record. Thank you for permitting me to provide you with

this information.

Page 9 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Page 10 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Related GAO Products

Agricultural Exports: U.S. Needs a More Integrated Approach to Address

Sanitary/Phytosanitary Issues (GAO/NSIAD-98-32, Dec. 11, 1997).

Assistance Available to U.S. Agricultural Producers Under U.S. Trade Law

(GAO/NSIAD-98-49R, Oct. 20, 1997).

North American Free Trade Agreement: Impacts and Implementation

(GAO/T-NSIAD-97-256, Sept. 11, 1997).

U.S. Agricultural Exports: Strong Growth Likely, but U.S. Export

Assistance Programs’ Contribution Uncertain (GAO/NSIAD-97-260, Sept. 30,

1997).

World Trade Organization: Observations on the Ministerial Meeting in

Singapore (GAO/T-NSIAD-97-92, Feb. 26, 1997).

International Trade: The World Trade Organization’s Ministerial Meeting in

Singapore (GAO/T-NSIAD-96-243, Sept. 27, 1996).

Canada, Australia, and New Zealand: Potential Ability of Agricultural State

Trading Enterprises to Distort Trade (GAO/NSIAD-96-94, June 24, 1996).

International Trade: Implementation Issues Concerning the World Trade

Organization (GAO/T-NSIAD-96-122, Mar. 13, 1996).

State Trading Enterprises: Compliance With the General Agreement on

Tariffs and Trade (GAO/GGD-95-208, Aug. 30, 1995).

Correspondence Regarding State Trading Enterprises (GAO/OGC-95-24,

July 28, 1995).

The General Agreement on Tariffs and Trade: Uruguay Round Final Act

Should Produce Overall U.S. Economic Gains (GAO/GGD-94-83A&B, July 29,

1994).

General Agreement on Tariffs and Trade: Agriculture Department’s

Projected Benefits Are Subject to Some Uncertainty (GAO/GGD/RCED-94-272,

July 22, 1994).

North American Free Trade Agreement: Assessment of Major Issues

(GAO/GGD-93-137, Sept. 9, 1993) (two vols.).

Page 11 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
Related GAO Products

CFTA/NAFTA: Agricultural Safeguards (GAO/GGD-93-14R, Mar. 18, 1993).

International Trade: Canada and Australia Rely Heavily on Wheat Boards

to Market Grains (GAO/NSIAD-92-129, June 10, 1992).

(711324) Page 12 GAO/T-NSIAD-98-106 Agriculture Trade Agreements
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