Introduction

Thank you and good afternoon. I am pleased to have this opportunity to talk about the role of agricultural trade in US-China relations and its implications for U.S. national security.

I would like to cover four topics in my testimony: a description of Cargill's business, with emphasis on its China content; a survey of our commercial relations with China; a discussion of how China's concept of food security may change with economic development; and answers to the specific questions you posed.

Cargill's Business, with Emphasis on China

Cargill markets, processes and distributes agricultural, food, industrial and financial products and services. We operate with a global perspective, employing more than 80,000 people in 60 different countries and trading with many of the rest.

Conceptually, our role is to connect supply with demand over space and time. Our customers are primarily other businesses, so we strive to provide them solutions that help them succeed in their activities.

For agriculture, we sell farmers needed inputs, including feeds, fertilizers and agronomic services. We also provide them with marketing advice and merchandise the products of farms and ranches.


In food, we process basic commodities into food ingredients for manufacturers, retailers and the food service industry. That can include many items familiar to you from a food outlet like McDonalds. We supply most of the orange juice in their Japanese stores and around three-fourths of their global cooking oil needs for french fries. Our Excel subsidiary provides beef for their hamburgers while Cargill mills flour that goes into their buns. We supply liquid eggs for Egg McMuffins through a Sunny Fresh Foods subsidiary that recently was the first food company to win the Malcolm Baldrige Quality Award. And our corn milling business provides sweetener for the Coke McDonalds serves and for Pepsi and other beverages.

In industrial areas, we mine salt, produce fertilizers and manufacture steel. We also extract lubricants, ethanol and an innovative plastics resin from renewable farm products.

In financial markets, we trade currencies and energy, invest in distressed assets and provide a range of financial and risk management services to our own businesses and to customers.

What ties these many businesses together is that they are basic goods where our ability to add value helps raise living standards for the ultimate customers we serve globally. These skills and that vision took us to China 30 years ago.

Our business in China has expanded greatly since President Nixon reopened trade relations with China in 1971. Overall, Cargill's trade with China now exceeds $800 million a year ñ about $550 million in sales to China and some $250 million in exports from China. Cargill now sells grains, oilseeds, fertilizer, orange juice and other commodities to China and exports Chinese commodities such as cotton, steel and corn.

Cargill made its first on-the-ground investment in China in 1988 when we opened an oilseeds processing plant in Jinan, Shandong Province. Since then, our investments have grown substantially. We are now headquartered in Shanghai and have offices in Beijing and Hong Kong that support many of our businesses in China. In all we have operations in 15 locations throughout the country and employ about 450 people in these various locations, all but a handful Chinese.

We have built two wholly-owned feed mills, each with an annual production capacity of 250,000 metric tons, in Zhejiang and Jiangsu Provinces. We recently acquired four feed plants that operate under the Agribrands name, located in Shandong, Jiangsu, Hubei and Liaoning Provinces. And, we operate two leased feed plants in Guangdong and Sichuan Provinces to produce various animal and aquaculture feed products. Zhangwu Cargill-Renessen, a joint venture company in Liaoning Province, produces and sells high value feed corn to Chinese feed mills.


We have invested in joint venture fertilizer blending plants in Tianjin and Yantai, Shandong Province. We have opened a new branch office in Fujian Province to expand sales of the Yantai operation, and we are investing $35 million in a joint venture fertilizer production business in Kunming, Yunnan Province.

We also are integrating Dongling Trading Corporation, which we acquired when Cargill bought Continentalís grain businesses. It will enable us to import and distribute grains and other foodstuffs in China in local currency, as well as originate and export various Chinese products.

In other words, we are involved in China in basic businesses in the food chain, just as we are elsewhere in the world.

Our Commercial Experience with China

China has been a good trading partner for more than 30 years. Over that time and the many changes in Chinese policies that have occurred, the vast majority of our dealings have gone smoothly. We are respected in China for honoring our contracts and commitments. By and large, our Chinese trading partners have done the same.

But in any large, longstanding trading relationship, there will be occasional differences. We have faced occasional problems in collecting payments from Chinese state-owned agencies. We also have experienced occasional arbitrary enforcement practices ñ like the seven months we just spent wrangling with China's quarantine agency over a barley shipment that was improperly detained in two Chinese ports.

Our larger problems, however, have been with our on-the-ground asset investments, which have generally proved unprofitable. Some of the problems we have created ourselves. Some arise from Chinese actions, which can result in changes in policy or market circumstances that are unpredictable, lack a clear rationale or are taken without adequate input from affected parties.

These problems are not just in the past. For example, we felt that agriculture was making good headway under the US-China bilateral agreement when China suddenly announced a new law restricting genetically modified organisms. Announced without any implementing regulations, this action has created confusion and disrupted normal trade flows. Until the situation is clarified, U.S. suppliers following ethical business practices are excluded from supplying China's $350 million per month demand for soybeans.

These kinds of issues are not limited to China, of course. And we believe they will become less frequent and disruptive once China's accession to the World Trade Organization is completed and China develops more experience operating under rules designed to ensure a more level playing field and non-discriminatory treatment.

A range of commercial problems that is more systemic -- and more relevant to the interests of this Commission -- is China's policy of food self-sufficiency and how it has been pursued.

In 1978, President Deng Xiaoping implemented domestic reforms -- and especially agricultural reforms -- that began an economic renaissance. One of the elements of the plan was to achieve complete food self-sufficiency. The policy has to a large degree worked. It has helped lift 170 million people out of poverty in just 20 years. It also has insulated China from the vagaries of political action in the United States.

But, China's success has come at a high cost. With 22 percent of the world's people but just 7 to 9 percent of its arable land, its self-sufficiency policy has strained the country's natural resources.

The costs are economic as well. The tariffs China has imposed on food imports are as high as 45 percent. And there is another layer of value-added taxes that are then imposed in addition. Chinese consumers pay these costs in their food bills and the resulting drag on their economic growth.

The cost of supporting high crop prices also has been an albatross for the Chinese government. Last year, the quota procurement price paid to farmers in Jilin Province for their corn was about 30 percent higher than what corn farmers in the United States or Argentina were paid. Losses to China's state-owned grain enterprises were reported to have exceeded $12 billion (100 billion RMB) in the 1997-98 marketing year.

So, Chinese consumers are really being hit twice ñ once through higher prices and a second time through higher taxes to support state-owned grain enterprises.

These problems extend beyond food to inputs in the food chain, like fertilizer. China does not grant domestic trading rights to foreign fertilizer producers. Instead, we must sell to a state-owned entity like Sinochem. Then, we have to buy the fertilizer back from the SOEs to supply our blending plants. It is inefficient at best, and the Chinese farmer and ultimately the Chinese consumer must pay the added cost.

Because China is such a large factor in global food consumption, its arbitrary and uneconomic policy shifts can be highly disruptive to farmers and consumers elsewhere. That can directly affect the purchasing power of other nations and the wealth of producing nations.


In 1994-95, for example, China was a large net importer of grains. Spooked by a temporary spike in grain prices and by the appearance of Lester Brown's book , Who Will Feed China, the Chinese government backed away from some reform steps it had taken and reverted to subsidizing domestic grain production all the more. That triggered more production, reduced consumption at home and caused a swing to exports. That swing from 5-10 million tons of corn imports to comparable levels of corn exports severely depressed world prices and ballooned both U.S. and Chinese farm program costs.

For oilseeds, China had been importing soybean meal from the United States, Brazil and Argentina to go into feed rations and palm oil from Malaysia and Indonesia for cooking oil. It then decided in the mid 1990's to encourage domestic oilseed processing, boosting its own processing capacity 300 percent behind a tariff-escalation scheme that imposed 3 percent duties on raw soybeans but 13 percent on soybean products. This abruptly and arbitrarily created excess soybean crushing capacity in the Americas while depressing palm oil imports, imposing huge adjustment costs in both industries.

Similarly, China sent the world cotton market roiling when it unloaded 300,000 tons of subsidized cotton from its warehouses on the market in 1998. And then did it again about six months later. It may have reduced the price of cotton shirts at Banana Republic, but for the struggling cotton farmer in Tanzania or Uzbekistan or Turkmenistan, or even the United States, the effect was devastating.

Food Security Redefined

This leads to a critical point to be made about agricultural trade that has important implications for U.S. security considerations. It is simply this: while bilateral agricultural trade is an important commercial opportunity, the larger issue is how China decides to pursue its own food security.

As mentioned earlier, food security has long been a critical component of China's national security. This is typical of policy thinking in many developing countries: if a government cannot feed its people, its hold on power is threatened. This can make regimes more repressive to maintain political control or more aggressive to gain leverage over food supplies.

But the process of sustained economic development that began in 1978 has changed the meaning of food security for China. When people are poor, food security simply means access to food staples ñ grains, rice and root crops. As incomes begin rising, two fundamental trends redefine the food security equation. First, rising agricultural productivity decreases farm employment, both in percentage of the work force and in absolute numbers. To absorb this surplus labor, economies must diversify into manufacturing, which triggers a search for markets and leads toward exports and growing integration with the global economy. China has moved well down this path.

The second trend caused by rising incomes is a dietary shift. As people earn more money, they seek to upgrade their diets with more meat, milk, eggs, fruits and vegetables. Food security becomes less a question of supplying necessities and more an issue of providing a varied diet at reasonable cost. Comparative advantage begins to compete with self-sufficiency as the best path to food security. China has moved well into this debate.

In other words, China's progress toward economic and dietary diversification is redefining what food security really means for its future. Earlier, the Asian tigers experienced a similar shift. Taiwan, for example, cut its level of food self-sufficiency in half over the last 20 years as its per capita GDP more than doubled from about $5,000 to over $13,000. Korea nearly did the same as its per capita GDP rose from $3,000 in 1981 to $9,000 today.

China's overall per capita income is still low, probably under $1,000 today. But along its coastal regions, economic growth and urbanization are bringing hundreds of millions of Chinese to the threshold of economic and dietary diversification.

How should the United States respond to this redefining of Chinese food security? The "cold war" mentality often led to "food-as-a-weapon" thinking.

That notion probably culminated when, in response to the invasion of Afghanistan by the Soviet Union, President Carter imposed the Soviet grain embargo of January 4, 1980. That experience should have taught us that the "food weapon" was a blunt tool that did more damage at home than abroad. Other countries eagerly stepped in to pick up the food markets the U.S. abandoned, and U.S. grain exports today are 20 percent lower in volume and one-third lower in market share than prior to the Soviet grain embargo.

The alternative is to think of food as a cornerstone for economic cooperation. The member economies of the Asia Pacific Economic Cooperation (APEC) forum, for example, have endorsed the concept of an APEC Food System (AFS). AFS is a regional food security strategy, centered on four principles endorsed last year by the heads of state of the member economies:

renounce the use of food embargoes. To build more open access to markets, one must first assure open access to supplies.

abolish export subsidies. Developing countries need assurances that their farmers will be permitted to explore their comparative advantage without fear of competition that is buttressed by national treasuries.

identify impediments to expanded two-way food trade. Border protection for agricultural trade is ten times higher than industrial trade, but this is often driven by domestic farm policies. As well, apparent concerns about food quality or safety can be used to mask protectionist practices. So creating more open food markets requires not only drastic reforms of border measures but also of the internal policies that underpin them.

involve development banks in accelerating rural diversification. A constraint on agricultural reform is the fear that off-farm jobs won't be there for those people released from farming, leading to unemployment and a flight to overcrowded urban centers. Lifting this constraint requires more effective rural development strategies and the resources to implement them.

The APEC Food System has been endorsed by all regional leaders, including those from China and the United States. But it is up to those two countries to take the lead in implementing those recommendations.

They have the most to gain economically. They have the most to contribute in the way of policy adjustments needed to curb the disruptive practices that endanger a regional approach to food security. They have the ability to make it happen through their own collaboration. And, they have the ability to take the AFS global by supporting its concepts in the next WTO agricultural round.

Answers to Specific Questions

In effect, the first question is whether U.S. agricultural trade policy toward China serves U.S. national security interests. I would answer the question this way. Steps that the United States takes that encourage China to shift from defining food security as self-sufficiency to pursuing it through open regional trade serve U.S. national security interests in several ways. Such a policy shift:

promotes Chinese collaboration with its regional neighbors on one of the region's most vital issues ñ feeding its burgeoning, increasingly prosperous and urbanized population while reducing agriculture's environmental footprint and its stresses on Asia's land and water resources.

promotes more rapid emergence of a broad-based middle class in China, whose interests will be identified with closer economic integration and cooperation.

will strengthen all of the economies of the region; the U.S. Department of Agriculture estimates that three-fourths of the welfare gains to be achieved within APEC through trade liberalization come from liberalization in the agricultural sector.

will bring renewed export opportunities and economic growth to a U.S. agricultural sector that has been economically distressed and unsustainably dependent on taxpayer assistance for the last five years.

Your second question asks what accounts for China's large and growing trade surplus with the United Sates. No doubt there are many factors, but I would point to three:

The strong U.S. dollar relative to the currencies of most other developed countries has made the United States an attractive market.

The strong U.S. economy also has acted as a magnet for imports, which have helped to contain inflationary pressures and thereby prolonged our own strong economic performance.

The United Sates has been relatively more open to China's principal comparative advantage ñ labor-intensive goods ñ than has China been open to land-intensive exports from the United States, particularly grains, oilseeds and beef products.

This last factor is related to the earlier discussion about food security. China is understandably reluctant to increase its dependence upon the United States for basic foodstuffs so long as there are questions about American willingness to be a reliable supplier. A clear U.S. renunciation of food embargoes for short supply or foreign policy reasons and a clear articulation of a narrow "national security reservation" on that commitment would go a long way to inducing in China the kinds of agricultural policy changes needed to replace self-sufficiency with a trade-based approach to food security.

Your final question asks whether these differences have national security implications for the United States. In the area of food and agricultural trade, they clearly do. The United States put partial and temporary restraints on soybean exports in the summer of 1973. It limited grain sales to Poland and the Soviet Union during the tight supply period of 1974-75. And it imposed ill-considered grain export sanctions on the Soviet Union in January 1980, which were not lifted until April 1981.

This unilateral approach to food sanctions has had three damaging consequences:

As mentioned earlier, it triggered responses by competitors that have dramatically reduced U.S. agricultural export volumes and market shares.

It made importers more reluctant to abandon costly self-sufficiency approaches to food security, which has restrained the growth in trade's share of global food consumption.

It has perpetuated protectionist food regimes that, cumulatively, have had the effect of making global food markets more arbitrarily volatile, more economically depressed and less immediately responsive to changing global needs.

The United States remains the world's largest food exporter. It also has more potential to capture growth in global food markets than any other competitor. And as the residual supplier to global food trade, it shoulders a disproportionate share of the burden of distorted food trade. For all of these reasons, it has a compelling need to renounce its historical legacy of food trade sanctions and to lead the world toward commitments of reliable access to supplies as the foundation of more open bilateral, regional and global food trade.

Thank you.