Agricultural Trade in the Free Trade Area of the Americas
Released: 2003-10-31T00:00:00

Background

In 1994, at the first Summit of the Americas, the leaders of the 34 countries in the WesternHemisphere agreed to negotiate a Free Trade Area of the Americas (FTAA). FTAA's statedobjective is to reduce and eliminate barriers to trade in goods (including agricultural commoditiesand food products) and services, and facilitate cross-border investment, allowing all countries totrade and invest with each other under the same rules. (1) At their second Summit in 1998, theyformally initiated negotiations to create a hemispheric free trade area by the year 2005. At the thirdSummit in Quebec City in April 2001, leaders assessed progress to date by nine negotiating groups,agreed to conclude the negotiations by January 2005, and to bring the FTAA into effect no later thanDecember 2005.

Following the timetable agreed upon in Quebec City, FTAA countries during 2003 have exchanged detailed offers and counteroffers designed to reduce and eliminate tariffs and quotas ontraded goods. In November 2002, trade ministers released the second draft consolidated text of anFTAA agreement covering all issue areas. Substantial differences in viewpoints continue to bereflected in the FTAA's chapter on agriculture, particularly on the issue of domestic farm subsidies. Many note that negotiating free trade in agricultural products could prove to be one of severaldifficult issues in the FTAA talks, as was the case in the negotiations between the United States andMexico on the agricultural provisions of the North American Free Trade Agreement (NAFTA).

U.S. Agricultural Trade in the Western Hemisphere

Hemispheric trade liberalization would directly affect U.S. agricultural trade with the countrieslocated in South America, Central America, and the Caribbean (except Cuba). Trade in mostagricultural products with Canada and Mexico already is, or will within a few years become, freeunder NAFTA's terms. (2) Also, a large portion of theagricultural products imported from outside theNAFTA trade bloc already enter the United States duty free under various trade preference programs. Imports from the Caribbean and Central American countries arrive under the Caribbean BasinInitiative. Those from Bolivia, Colombia, Ecuador, and Peru enter under the Andean TradePreference Act. Imports of certain agricultural products from other countries in the hemisphere areeligible to enter free under the Generalized System of Preferences (GSP). Countries that takeadvantage of these programs, though, are not required to offer tariff concessions on agricultural orother products imported from the United States.

The United States in 2002 recorded a $2.8 billion deficit in agricultural trade with the non-NAFTA countries of the Western Hemisphere. Deficits occurred in two-way trade with theSouth American and Central American countries. Agricultural trade with the Caribbean nationsgenerated a noticeable surplus (Table 1).

Table 1. U.S. Agricultural Trade Balance with FTAA Countries, by Region, 2002

Source: Derived from Tables 2 and 3

U.S. agricultural exports to the FTAA countries in the hemisphere (excluding Canada and Mexico) totaled $4.2 billion last year (Table 2). These sales represented 8% of worldwide U.S.agricultural exports, or 21% of farm exports to the region. Farm and food exports to both NAFTApartners totaled $15.9 billion (accounting for 30% of worldwide sales, or 79% of exports to the other33 FTAA countries).

U.S. agricultural imports from FTAA countries (excluding NAFTA partners) totaled $7.0 billion in 2002 (Table 3). Entries accounted for 17% of all U.S. agricultural imports, or 31% ofimports from the region. Food imports from Canada and Mexico totaled $15.9 billion (representing38% of worldwide purchases, or 69% of such imports from the other 33 FTAA countries).

Table 2. U.S. Agricultural Exports to FTAA Countries, 2002

Source: USDA

Imports of agricultural products from the hemisphere that compete with the output of U.S. domestic producers accounted for 80% of the total. Non-competitive products not produceddomestically (such as bananas and coffee) represented 20% of these imports.

Table 3. U.S. Agricultural Imports from FTAA Countries, 2002

Source: USDA

Negotiating Process and Timetable

Discussions on how to proceed to eliminate border protection and other barriers to agriculturaltrade have occurred primarily in two of the nine formal negotiating groups created for FTAAnegotiations. These are the Negotiating Group on Agriculture (NGAG), and the Negotiating Groupon Market Access (NGMA). Their focus has been on identifying the key issues and formulating therules to be followed in negotiating hemispheric free trade in agricultural and food products. Theirwork resulted in the consolidation by the end of 2000 of the first "bracketed" FTAA draftagreement. (3) Two chapters laid out text onagricultural provisions and guidelines on how marketaccess for agricultural products should be negotiated, respectively. Trade ministers released a secondconsolidated draft text in November 2002. (4) Itsagriculture chapter reportedly differs little from thetext in the first draft, continuing to reflect the wide range of positions between individual countries,or groups of countries.

Seeking to keep to the timetable adopted at the April 2001, Quebec City summit, trade ministers in August 2002 reached agreement on the "methods and modalities" (the procedures, formulas,targets, rules, and timetables used to put negotiating objectives into practical terms) to be followedto make tariff reductions (see Market Access below for background). This provided the basisforeach country to prepare for the process of exchanging tariff and other market access concessions ona product- or sector-specific basis. Trade ministers agreed that all countries (except CARICOMmembers -- comprising most Caribbean islands, Belize in Central America, and Guyana andSuriname in South America) could start tariff cuts from current applied rates rather than from thehigher bound rates that all WTO members adopted in the last multilateral negotiating round. (5) CARICOM countries will be allowed to identify those agricultural and other products where themaximum bound rate could be used as the reference point for reducing tariffs. The November 1,2002, meeting of trade ministers in Ecuador finalized the negotiating pace and process to be followedover the 2003-2004 period. These final stages of the FTAA negotiations are being co-chaired byBrazil and the United States. All FTAA countries met the February 15, 2003 deadline for presentingtheir initial tariff reduction offers (see U.S. Market Access Offer for information on what U.S.negotiators tabled). Each country was expected to respond to these in the form of market accessrequests, due by June 15, 2003. The schedule then called for revised offers to follow this"request-offer" process by July 15, 2003.

For the United States, the Office of the U.S. Trade Representative (USTR) is the lead agency involved in negotiating the FTAA. Other departments, particularly the agencies of the U.S.Department of Agriculture (USDA), provide input to USTR and have assigned staff to serve asexperts to lead negotiators. USDA representatives have also been actively involved in developingthe U.S. positions in relevant areas.

Key Negotiating Issues

FTAA trade ministers in 1998 agreed on several objectives to be followed in negotiatinghemispheric free trade in agricultural products. These have guided the work of the NGAG and theNGMA. The pertinent objectives call for:

eliminating those measures that countries use to restrict the entry of agricultural products into their markets,

developing disciplines on the use of export subsidies and other mechanisms that can distort trade in agricultural products, and

ensuring that rules to protect food safety and plant and animal health will be based on science, and not applied on a discriminatory basis or as a disguised trade restriction.

FTAA negotiators were also instructed to incorporate progress made in the current multilateral negotiations on agriculture sponsored by the World Trade Organization (WTO), (6) and the results ofthe review of WTO's multilateral agreement on the application of food safety and agricultural healthrules in international trade.

These FTAA objectives are elaborated on below, with relevant background. For each issue, the U.S. position, and the positions or views of other countries when known, are summarized. (7) TheUSTR noted in 2001 that "U.S. agricultural negotiators [participating in the NGAG] will continueto work with the agricultural community to address appropriately import sensitivities and exportinterests." These positions are reflected in USTR's October 2002 notification to congressionalleaders of the U.S. negotiating objectives in the FTAA negotiations. (8)

Market Access

Countries use tariffs and tariff-rate quotas (TRQs) to protect certain economic sectors or specific products against import competition. [TRQs allow zero or low-duty access for specifiedamounts of a commodity or product. Imports above the quota amount may still enter, but face a veryhigh tariff rate.] To address this type of border protection, one major FTAA objective is "toprogressively eliminate, tariffs, and non tariff barriers, as well as other measures with equivalenteffects, which restrict [agricultural] trade between participating countries." Trade ministers agreedthat "all tariffs will be subject to negotiation," but allow for flexibility in negotiating "different tradeliberalization timetables." Further, negotiations on market access for agricultural products are to beconducted "to facilitate the integration of smaller economies [i.e., the Caribbean and CentralAmerican nations] and their full participation in the FTAA negotiations."

The U.S. proposal called for formulating market access rules that apply similarly to both agricultural and non-agricultural products. In other words, trade in agriculture is not to be treatedany differently than trade in manufactured goods. The U.S. position is reported to advocateprocedures that "ensure that the benefits of free trade are broadly distributed," and proposed thatmost tariffs be rapidly reduced. USTR stated, with likely implications for agricultural trade, that thedetails of the U.S. position take into account "product sensitivities in a framework that is fullyconsistent" with WTO disciplines.

Average Agricultural Tariffs in FTAA Area. Average tariffs on agricultural imports are lower in the Western Hemisphere compared to many otherregions around the world. The global average tariff on such imports is 62%, compared to the U.S.average (12%). For regions covered by the FTAA, the average bound tariff is 25% for NorthAmerica, 39% for South America, 54% for Central America, and 86% for the Caribbean Islands. (9) However, applied tariffs can be considerably lower than bound rates. For example, applied tariffsfor agricultural products averaged between 11% and 17% for Central and South America during the1995-99 period. These regional averages mask the range of protection between commodities in anycountry, and do not fully reflect the use of TRQs by many countries in the Western Hemisphere(including the United States), many of which apply prohibitive tariffs on above-quota imports. Reflecting FTAA's objective, the target would be to reduce tariff levels to zero and to eliminateTRQs by the end of the agreed-upon transition period, likely to be about 2020. This part of thenegotiating process will be a difficult process, as some countries seek exceptions for specificcommodities or products that currently receive protection under restrictive TRQs.

Transition Periods. The U.S. proposal on FTAA's timetable and pace of tariff elimination is based in part on WTO rules, which requirecountries in a free trade area to eliminate tariffs and other forms of protection on most of their tradewithin 10 years. Some FTAA participants, though, acknowledge that some politically-sensitiveagricultural products may need to be allowed a transition of up to 20 years to adjust to competitionbefore tariffs or quotas disappear. They refer to the precedent set in NAFTA, which provided fora 15 year transition to free trade on the most sensitive agricultural products scheduled to enterMexico and the United States (i.e., frozen concentrated orange juice, peanuts, and sugar importedinto the United States from Mexico; and corn, dry beans, milk powder, and sugar imported byMexico from the United States).

U.S. Market Access Offer. USTR's Ambassador Robert Zoellick, on February 11, 2003, laid out the scope of the U.S. tariff reduction offer onagricultural and other products. In unveiling this offer, he said that the United States is prepared togrant immediate duty-free access on 56% of the agricultural products that enter from non-NAFTAcountries once the agreement takes effect. On politically-sensitive farm products, AmbassadorZoellick stated that the United States proposes to eliminate tariffs with specific timetables that woulddiffer between countries or regional groups. Transition periods could be 5 or 10 years, or evenlonger, depending upon a country's size and its level of economic development, and on the type ofagricultural product. He indicated all agricultural products are on the table and subject to negotiation(i.e., no exclusions), and that the United States will move forward with other countries willing totake the same position.

Export Subsidies and Other Trade-Distorting Policies

Governments use various mechanisms to support their farm sectors and to facilitate agricultural exports. The Uruguay Round's Agreement on Agriculture (URAA) lists those determined to distortagricultural trade, and requires that countries now follow some disciplines on their use. TheAgreement, among other things, spelled out commitments and a timetable for governments to reduceexport subsidies and domestic support. Other mechanisms (i.e., export credits, activities of statetrading enterprises) claimed to distort trade were identified for future trade talks, are on the agendaof the WTO multilateral negotiations now underway, and have surfaced in the FTAA debate.

Export Subsidies. Though the WTO Agreement introduced some discipline on the use of export subsidies, WTO rules still allow countries tosubsidize exports of commodity surpluses. As a result, export subsidies continue to distortinternational trade in agricultural and food products by giving a price advantage to the exporter. Though subsidized sales reduce the price an importing country pays, the price that other exportingcountries receive for the same product sold into other markets frequently is less than would beotherwise.

Two FTAA negotiating objectives agreed to by hemispheric trade ministers in their 1998 San Jose Declaration address this issue. One calls for the elimination of "agricultural export subsidiesaffecting trade in the Hemisphere." The other requires agricultural negotiators "to identify othertrade-distorting practices for agricultural products, including those that have an effect equivalent toagriculture export subsidies, and bring them under greater discipline."

The U.S. position reaffirms the FTAA's goal of eliminating the use of export subsidies within the hemisphere, and proposes that the FTAA countries at the same time "establish mechanisms toprevent agricultural products from being exported to the FTAA by non-FTAA countries with the aidof export subsidies." This is likely aimed at the European Union, which heavily subsidizes itsagricultural exports and actively promotes such sales to Latin American markets. The initial U.S.proposal states that the United States does not consider export credits, credit guarantees, insuranceprograms, and international food aid "to constitute an export subsidy." The U.S. position reflectsthe use of the same definition of agricultural export subsidies (i.e., direct subsidies) as is used in theURAA.

Domestic Support. Some South American countries have placed the issue of domestic farm support on the FTAA negotiating agenda. Thisrefers to government program spending to support commodity prices and raise incomes ofagricultural producers. These countries argue, with the United States and enactment of the 2002farm bill in mind, that such spending encourages farmers to produce commodity surpluses, that whenexported into world markets, depress the price that their producers receive for the same products. They view some forms of domestic support as more distorting of agricultural trade than tariffs orother border measures, and want to include this issue in the negotiations. The impetus behind theircall appears to be concern that the access they gain to the U.S. market under FTAA liberalization willnot result in much benefit to them, since the level of U.S. protection on agricultural imports isalready quite low. Therefore, these countries' strategy appears to be to offer to lower their higherlevel of border protection on agricultural products only if the United States agrees to reduce its levelof domestic farm support.

U.S. negotiators continue to reject this linkage. The U.S. position is to seek a recognition by other FTAA countries that commitments to reduce domestic support levels can only be achieved inthe WTO multilateral negotiations. The U.S. proposal calls for a hemispheric agreement to worktogether in the WTO arena to substantially reduce and more tightly discipline trade-distortingdomestic support.

In recent months, the United States and Brazil (now serving as FTAA co-chairs) have differed on how to address the issue of domestic farm subsidies in seeking a common position on the FTAA'send-game negotiating agenda. In responding to the U.S. market access offer, which Brazil views asdiscriminatory in the scope of duty-free access it would receive compared to other country groupsin the hemisphere, Brazil formulated a counter-proposal that has called into question what FTAA'sscope should be. It calls for: (1) the United States to negotiate market access with Mercosur (Brazil,Argentina, Uruguay, and Paraguay) as a trading bloc rather than with them as individual countries,and (2) shifting investment, government procurement, and intellectual property rights (IPR) issues,along with agricultural subsidies and antidumping rules (advocated by the U.S.) to the Doha WTOround. The United States, though, wants to include investment, procurement and IPR in acomprehensive FTAA agreement, while Brazil (seeing its priorities not being addressed) proposesto scale back the agenda to instead negotiate a "FTAA lite."

State Trading Enterprises (STEs). The United States "calls for the staged elimination of exclusive export rights granted to state trading enterprisesengaged" in agricultural exports. The aim is to "permit private traders to participate in, compete for,and transact for" exports in countries where they exist. This position appears to be aimed atchanging the character of, for example, the Canadian Wheat Board, which is that country's soleexporter of wheat to several Latin American countries. If the United States persuades other countriesto include its position in the FTAA, U.S. agribusiness and commodity exporting firms would havethe opportunity to expand operations in countries where STEs exist to compete with them in sellingagricultural commodities for export.

Sanitary and Phytosanitary (SPS) Rules

One FTAA agricultural negotiating objective adopts the WTO's SPS Agreement's principle that SPS measures not be applied "in order to prevent protectionist trade practices and facilitate trade inthe hemisphere." It declares that the use of such measures (consistent with this Agreement) toprotect "human, animal or plant life or health, will be based on scientific principles, and will not bemaintained without sufficient scientific evidence." The objective further calls for negotiations tofollow this Agreement to identify and develop measures "needed to facilitate trade."

As background, most countries have policies to ensure food safety for humans and to protect animals and plants from diseases, pests, or contaminants. The WTO agreement referred to in theFTAA objective is the WTO "Agreement on the Application of Sanitary and PhytosanitaryMeasures." It includes understandings or disciplines on how countries will establish and use thesemeasures, taking into account their direct or indirect impact on trade in agricultural products. TheAgreement requires countries to base their SPS standards on science, and encourages countries touse standards set by international organizations to guide their actions. It seeks to ensure thatcountries will not use SPS measures to arbitrarily or unjustifiably discriminate against the trade ofother WTO members or to adopt them to disguise trade restrictions.

The U.S. position calls for FTAA countries to agree to strengthen hemispheric collaboration on matters covered by WTO's SPS Committee and to work together to develop internationalstandards, guidelines or recommendations in relevant international bodies. The U.S. objective is toaccept and apply the work and findings of this WTO Committee, rather than create a separatehemispheric organization, in how FTAA countries formulate and apply SPS measures.

Other Issues Affecting Agricultural Trade

FTAA trade ministers agreed to assign to the NGMA responsibility for addressing the rules of origin, customs procedures, and technical trade barriers that apply to agricultural products. ThisGroup is also charged to develop rules for safeguards, an issue that will be monitored carefully bythose countries with import-sensitive agricultural products. (10)

The United States views the rules and disciplines that FTAA negotiators develop in these areas"critical in determining conditions for market access in agricultural products." The objective of thedetailed U.S. proposals on these issues is to ensure that sensitive products receive differentialconsideration during the transition to free trade, and that the benefits of free trade accrue to producersin the hemisphere and not to exporters outside the FTAA bloc who might seek to take advantage ofthe openings created by the new hemispheric free trade environment.

Other Issues of Interest to U.S. Farm Sector

Environmental and labor issues continue to be of concern in the wider context of the FTAAnegotiations generally, as well as to U.S. agricultural interests. Environment and labor provisionshave been included in some trade agreements, notably NAFTA and the U.S.-Jordan Free TradeAgreement, and in side agreements and decisions made relative to these agreements. However, theseissues remain contentious, with some in Congress expressing the need to include such provisions inthe FTAA. Others, though, argue that these issues do not belong in trade agreements and should beaddressed in environmental or other agreements.

With regard to agriculture, some U.S. farm groups have expressed concern about the level of environmental, health, and labor standards found in the agricultural sectors of Latin Americancountries. U.S. farmers that produce import-sensitive commodities refer to these countries' lowerproduction costs, and their minimal safety and health requirements. For this reason, theirrepresentatives are concerned that complete trade liberalization would place them in a difficultcompetitive position, due to increased imports from countries where farm workers are paid muchlower wages and environmental regulations are lax. (11) Other farm groups, though, are opposed toincluding labor and environmental provisions (such as trade sanctions to enforce such rules) in tradeagreements. They support liberalizing trade in a way that promotes sustainable agriculturaldevelopment and improves working conditions.

FTAA's Possible Impact on U.S. Agriculture

U.S. agriculture would benefit to some degree from U.S. participation in an FTAA thateliminates tariffs throughout the Western Hemisphere, according to a USDA analysis. (12) It found thaton an annual basis U.S. farm income (in 1992 dollars) would be $180 million higher (0.08%), totalagricultural exports would increase by $580 million (1%), and total agricultural imports would riseby $830 million (3%).

This study found that the impact would vary among commodities. Assuming that the United States and Canada resolve the dispute surrounding Brazil's application of restrictive phytosanitaryrules to their wheat, both countries would see their wheat market share increase in Brazil -- the U.S.share would likely increase more than Canada's given lower U.S. shipping costs to Northeast Brazil. Gains are also expected in U.S. exports of corn, soybeans, and cotton to the hemisphere. Littleimpact is seen on sales of U.S. rice, meat, and dairy products. According to this analysis, completetrade liberalization under an FTAA would mean increased competition for U.S. sugar and orangejuice. It shows that U.S. sugar prices, production, and exports "could decline significantly, andimports could increase" from lower-cost producers like Brazil and Guatemala. The study also notesthat the removal of U.S. tariffs "may create incentives to import less-expensive Brazilian orangejuice," a development that "may displace some Florida juice."

Role of Congress in FTAA Negotiations

Congress will take up any agreement that results from the FTAA negotiations under fast trackprocedures found in Bipartisan Trade Promotion Authority Act of 2002 (Section 2105 of P.L.107-210 ). This details the process that Congress must follow to consider legislation sent to the Hillby the Executive Branch to implement signed trade agreements. Other provisions state broadobjectives for U.S. negotiators to follow in negotiating agricultural provisions in trade agreements,including those included in the FTAA. (13) In themeantime, the Administration is required to consultwith Congress on specific agricultural issues as negotiations on the FTAA and other tradeagreements proceed. Interaction during the period of consultation on negotiating positions andstrategies is intended to lay the groundwork for later congressional consideration of an FTAAagreement.

Detailed provisions require the Executive Branch to follow special consultation procedures with Congress before engaging in, and during, trade negotiations that affect certain agricultural products. Section 2104 provides for extensive consultations on agricultural trade negotiations between theExecutive Branch and the House and Senate Agriculture Committees (among other congressionalcommittees and the Congressional Oversight Group). Section 2104 (b)(2) further prescribes specialconsultation procedures and a process for USTR to follow beforeundertaking agricultural tariffreduction negotiations in the FTAA and in negotiations on other trade agreements, on over 200"import-sensitive" agricultural commodities and food products. (14) It requires USTR to:

consult with the House Agriculture and Ways and Means Committees, and the Senate Agriculture and Finance Committees, on whether any further tariff reductions on anyidentified product "should be appropriate, taking into account the impact of any such tariff reductionon the United States industry producing the product," on whether any covered product faces"unjustified sanitary or phytosanitary restrictions, including those not based on scientific principlesin contravention of the Uruguay Round Agreements," and on whether countries in the negotiationsuse export subsidies or other trade-distorting measures on products that affect U.S. producers of suchproducts,

request the International Trade Commission to "prepare an assessment of the probable economic effects of any such tariff reduction on the U.S. industry producing the productconcerned and on the U.S. economy as a whole," and

upon completing these steps, notify the four above-identified congressional committees of those products identified in the first step "for which the Trade Representative intendsto seek tariff liberalization in the negotiations and the reasons for seeking such tariffreductions."

After negotiations have begun, this provision requires that if USTR identifies any other"import-sensitive" agricultural products for tariff reduction, or if a country involved in thenegotiations requests a reduction in the tariff on any other "import-sensitive" agricultural product,the Trade Representative shall notify the four committees of those products and the reasons forseeking tariff reductions.

Perspectives

Reflecting the structure of other free trade agreements, hemispheric free trade in agriculturalproducts could occur by about 2020, assuming negotiators reach agreement on an FTAA by January2005. The agricultural component of the FTAA negotiating process, however, could becomeproblematic once negotiators begin to apply negotiating parameters and timetables to specificcommodities and food products that each country historically has protected. Some Latin Americancountries, particularly Brazil, seek increased access to the U.S. market for products that wouldcompete directly with U.S. producers of citrus, sugar, and beef. U.S. commodity groups andagribusiness seek additional openings for their products in the growing Latin American market. They also seek legal assurances that all countries will abide by sanitary and phytosanitary rules withrespect to agricultural imports.

Though the United States will emphasize eliminating tariffs and other barriers to agricultural trade, Brazil and other countries have signaled they want the negotiating agenda to also address theissue of domestic agricultural support (i.e., farm price and income support). They have suggestedlinking their reduction in their higher tariffs to a concession by the United States on the domesticsupport issue. The United States has countered that this issue is not one of the agreed-upon FTAAobjectives, and should instead be addressed jointly by all FTAA countries in the ongoing WTOagriculture negotiations. These differing views over how this issue should be addressed in thenegotiations, and/or whether a compromise emerges in the next three weeks, will be a significant partof the mix influencing the outcome of the Miami FTAA Ministerial held November 17-21.

U.S. agricultural interests have had the opportunity through public comment to present their views and concerns on the FTAA negotiations to USTR officials. Some have participated in theprivate sector meetings scheduled alongside those for FTAA trade ministers. The U.S. agriculturalsector, though, appears either lukewarm about FTAA prospects or opposed to this initiative. Thereis a widely held view that U.S. agriculture expects to benefit more, or would have less to lose, froma comprehensive multilateral WTO agreement compared to an FTAA agreement,

If an FTAA agreement is reached that reflects the objectives agreed to by trade ministers in 1998, U.S. farm policymakers may have to contend with the repercussions of opening the U.S.market to import-sensitive farm products. Though final agreement and implementation of an FTAAagreement would be many years off, this outcome could prompt interest in developing alternativesto the current sugar program. Some may also explore whether there might be a need to developmechanisms to help other commodities and products that have traditionally not received governmentsupport, such as vegetables, fruit, and orange juice, to offset the effects of increased importcompetition.