Testimony on behalf of the NATIONAL CATTLEMEN'S BEEF ASSOCIATION
in regard to Permanent Normal Trading Relations with China submitted to U.S.-China Commission

George Becker, hearing Co-Chair
and C. Richard D'Amato, hearing Co-Chair

submitted by

Chuck Lambert, Ph.D.
Chief Economist
National Cattlemen's Beef Association


August 2, 2001

Thank you Mr. Co-Chairmen and Members of the U.S.-China Commission for holding this hearing to discuss the vital importance of developing long-term secure Trading trading Relations relations with China. NCBA commends your leadership and continuing efforts to examine the ongoing change and the resulting issues and concerns of cattlemen and women as we work to find ways to improve our ability to more effectively market U.S. beef.

NCBA encourages an open and honest discussion of all issues facing the cattle industry, such as is being provided by today's hearing. Such This debate is vital to the democratic policy development process -- both within NCBA and to the nation at large. NCBA has long supported a "free but equitable" trade philosophy and the opening of two-way international beef markets. We thank you for the opportunity to submit our views.

Importance of Trade: Livestock producers are constantly competing for a larger share of the domestic market and since 1999 we have seen encouraging signs that after 20 years of decline, U.S. beef demand is increasing. However, our "home" market contains only about 4 percent of the world's population. Our greatest potential for expanding market share is in international trade. As the beef industry continues to improve the its efficiency, productivity, and quality of its commodity, we are becoming increasingly dependent on the rest of the world to buy our products and ensure economic growth. The U.S. beef industry, has worked hard to promote beef exports, which now accounts for more than 12 percent of the value of wholesale beef sales. On a tonnage basis we export nearly 10 percent of what we produce.

As this reliance on international markets has grown, the effects of political and economic strife in our key export markets have contributed to the volatility of U.S. cattle prices. The 1998 calendar year -- a year of recession in most Asian markets -- was the first time that more than one million metric tons of U.S. beef and beef variety meats have been exported. New record exports were again established during 2000. Compared to 1999, exports of beef and beef variety meats during 2000 increased 7.7 percent in volume and 10.6 percent in value.

So far in 2001, recession in Japan and slow growth in the U.S. have impacted other Asian economies, especially Korea. U.S. beef exports during January through May 2001 have declined by 10.2 percent in tonnage and 15.2 percent in value compared to exports during the same periodtime in 2000. Declines in exports to Japan, Korea, Taiwan, and Hong Kong/China have contributed to the overall decline. Continued economic prosperity in Mexico, which has (with concerns about increasing unemployment there related to the slowing U.S. economy,) has resulted in the one bright spot for U.S. beef exports during 2001. U.S. beef exports to Mexico during January through May 2001 increased by 16.1 percent in tonnage and nearly 22 percent in value compared to then-record exports during the same timetime in 2000.

Beef imports also increased 5.6 percent in volume and nearly 12.3 percent in value during 2000 compared to 1999 and the increase during the first five months of 2001 is on pace to set new import levels this year. Record U.S. beef prices and improving U.S. beef demand coupled with the strengthening of the U.S. dollar relative to currencies from most major beef importing and exporting countries, have contributed to the widening trade deficit on a tonnage basis. On a value basis, the U.S. is still a net beef exporter with a $1.2 billion trade surplus.

Although increasing modestly, the current beef trade deficit on a tonnage basis is minor relative to historical deficits. Compared to deficits prior to the mid-1990s the current deficit is small. U.S. beef exports have increased more than five-fold since the 1980s when the Japan Beef-Citrus agreement was negotiated. Most of the growth in U.S. beef exports can be attributed to negotiated market access (Korea and Mexico via NAFTA) and liberalization (tariff reduction in Japan and Korea from the Uruguay Round). U.S. negotiators must be authorized to negotiate the best deal possible to have any hope of further reducing tariffs or of gaining access to the EU beef market.

The United States is currently the least restricted and largest beef import market in the world purchasing 15 percent more beef than the second largest importer, Japan. The United States also became the world's largest beef exporter in 2000. Beef markets in other developed countries remain virtually closed to U.S. beef, such as in the European Union (EU) by non-tarriftariff barriers, or protected by relatively high tariffs as is the case in Japan and Korea. A strong, clear and irrevocable message must be sent by U.S. negotiators to Cairns Group and Mercosur beef exporting countries -- major exporters of beef to the United States -- that no increased access to the U.S. beef market will be forthcoming until meaningful access and tariff reduction is achieved in other major beef importing countries.

The United States must enter all beef trade negotiations with access for U.S. beef being a top priority. NCBA realizes that for international trade to expand and work to the advantage of U.S. beef producers, it must also be equitable. NCBA is sensitive to the fact that past agreements have not always worked to the competitive advantage of America's beef cattle producers. Past agreements could have been more favorable for U.S. cattlemen, but it is easy to second-guess our predecessors with the benefit of hindsight.

While this is the hand that we have been dealt under current agreements, NCBA will continue to work to assure producers' interests are protected as we seek improvements in existing agreements, as well as in any new agreements. As an industry, we have worked to expand exports of beef and beef variety meats from approximately $500 million dollars twenty years ago to $3.6 billion in 2000 -- more than a seven-fold increase. This progress is encouraging, but also highlights the importance of taking advantage of every opportunity to move beef into international trade. Implementation of the negotiated agreement that has been negotiated with China and concluding the process of bringing China into the WTO is critical to that end.

The China Agreement: With a population of 1.2 billion and nearly 200 million consumers with middle-class incomes, China is a consumer market with enormous potential. Any market potential and any trade agreement that involves one out of every five inhabitants on planet earth is impossible to ignore just because of the sheer magnitude of the numbers. For example, NAFTA impacted the total population of Canada, Mexico and the United States -- a combined population of approximately 400 million. China has three times the population of the combined NAFTA countries.

The primary benefit of NAFTA for the U.S. beef industry was elimination of tariffs in the Mexican market. Mexico has a population of just less than 100 million and U.S. beef sales to Mexico during 2000 totaled nearly $600 million. There are estimated 400 million middle-class consumers in China -- more than four times the entire population of Mexico.

Another example: according to USDA data from 1995 through 1997 per capita beef consumption in China increased by 2.2 pounds per capita. This small increase in beef consumption per person totals to 2.64 billion pounds when multiplied across a population of 1.2 billion -- more than total 1999 U.S. beef exports.

Sales of U.S. beef and beef variety meats to the Peoples Republic of China and Hong Kong during 1999 totaled $91.5 million, with $15 million sold directly to China. By comparison, 2000 sales to other primary Asian markets included nearly $1.79 billion to Japan and $537 million to Korea. Per capita beef consumption in China during 1998 was projected at slightly more than 10 pounds compared to 20 pounds in Korea and 26 pounds in Japan. Based on the United States' success in expanding beef demand in other Asian markets, the long-term potential for increased sales of U.S. beef to China is excellent.

The agricultural agreement signed by the United States and China during April 1999 pertains to Sanitary/Phytosanitary issues. In laymen's terms specific to meat, China agreed to recognize USDA Food Safety Inspection Service (FSIS) inspection of meat exported to China. In the past a representative from China would inspect U.S. packing plants and very few plants were approved. Under the new agreement any FSIS-approved plant is supposed to be eligible to export to China.

FSIS began issuing export certificates in early December 1999 following final signature of the China SPS agreement (as a side deal) in Seattle. In the beginning there were concerns that China that Chinese port authorities would accept these certificates. NCBA and other meat organizations worked aggressively with the Administration to communicate with representatives of the Chinese government the importance of fully implementing the SPS agreement. Notification to port authorities that FSIS certificates are acceptable has been completed and the formal notification and rule-making process has begun. For the most part, port authorities and U.S. exporters have received notification regarding importers that are approved for licensed trading rights.

The U.S. beef industry (and the rest of agriculture) has the potential for huge gains in the broader trade package that was finalized with China and approved by the U.S. with the votes supporting Permanent Normal Trading Relations with China last fall. These gains will not begin until China's final WTO accession process is completed. A process that, hopefully, is concluded during the WTO ministerial this November.

Specific to the beef industry, tariffs on some major beef categories will decline by from a the current rate of 45 percent to 12 percent in 2004. For many countries beef variety meats, tariffs would decline from a current level of 23 percent to 12 percent in 2004.

The overall China trade package also includes elimination of state trading entities (STEs) that currently purchase most products imported by China. If the broader agreement is signed, STEs will no longer have a monopoly on agricultural commodities because private trade for all commodities except tobacco will be permitted. Distribution and trading rights for meat and poultry will be completely phased in at the end of three years. For the beef industry, this means that U.S. exporters will be able to sell directly to buyers (retail, food service, hotels, etc.) in China. The U.S. Meat Export Federation already has training facilities in place for Chinese retailers and chefs, and the U.S. is well positioned to participate in market liberalization.

In addition to providing huge commercial potential, the China trade agreement also sets some very important precedents as we enter the next round of WTO negotiations. It is interesting to note that as an htmiring WTO member China has agreed to much greater liberalization than is currently practiced by many long-standing WTO members and other major U.S. trading partners.

Some examples:
China has agreed to reduce beef tariffs to 12 percent as stated earlier. This establishes a very important objective for the next round as we negotiate tariff reduction with Japan (current tariff levels of 38.5 percent), Korea (current tariff levels of 40 percent), and even the U.S. (current tariff levels of 27 percent above TRQ).
China has agreed to eliminate export subsidies while the EU is by far the largest user of agricultural export subsidies. And finally;.
China has agreed to phase out STEs while some of our other strong allies, Canada and Australia, cling stubbornly to their grain-trading government monopolies.
In addition to some developing countries, the Cairns Group and Mercosur countries, China may very well be one of the strongest U.S. allies during the next round of WTO negotiations.

Response to Commission Questions:
1. Do current bilateral trade policies toward China serve the national security interests of the United States? Why or Why not?
Yes. Increased trade is an essentially constructive engagement. The U.S. and China's other major trading partners are not just exporting commodities, goods and services through commercial channels. We are also exporting ideas and the principles of democracy, capitalism, and human rights.

There is an old song that says, "no one knows what goes on behind closed doors." The same can be said about closed economies. As China's economy becomes increasingly open to world trade, it will also come more open to international visitors and investors, under closer scrutiny by international media. and as As a result, actions of its leaders will be increasingly constrained by global opinion. Long-term improvements in human rights and basic freedoms will result. With 20 percent of the world's population, China is impossible to ignore. U.S. security interests will be much better served by a China that is inter-dependant on global trading partners than a China that is not engaged and is isolated from the rest of the world.

2. What accounts for China's huge and growing trade surplus with the United States? And is U.S. bilateral trade relationship substantially different from other major trading partners?
China is not unique in running a huge and growing trade surplus with the U.S. because the U.S. trade deficit has increased with most major trading partners in recent years. The basis for these growing deficits is largely macroeconomic policy, not trade policy. The U.S-China agreement was related to changes in China and did not change U.S. policy regarding China's access to our market. The same is true with other major trading partners. U.S. trade policy did not change during the last three or four years to increase access for Japan, Europe and our other major trading partners but trade deficits also increased with those countries. Changes in trade policy are clearly not the reason for those growing deficits.

The U.S. trade deficit increased with all major trading partners, including China, during recent years because the U.S. economy experienced one of the longest periods of sustained growth in history. Sound fiscal policy resulted in balanced budgets and even budget surpluses. Fiscal policy coupled with non-inflationary monetary policy and a technological revolution in information technology allowed the economy to maintain growth for an historically unprecedented period of time with very modest inflation and low interest rates. From the first quarter of 1998 through the first quarter of 2000 real (inflation adjusted) Gross Domestic Product (GDP) grew at a rate of 3 percent to 6 percent on an annualized basis with growth in one quarter as high as 8 percent.

These macroeconomic factors resulted in a strengthening U.S. dollar relative to currencies of our major trading partners. Increasing consumer incomes during the 1990s, especially during the late-1990s, and very high levels of consumer confidence resulted in increased demand for goods and services (both domestic and imported) among U.S. consumers. The strong dollar relative to the currencies of most other trading partners resulted in more of these goods and services being purchased from international suppliers. None of this should be interpreted as a call for a weaker dollar. It isn't. It just reflects economic reality that a strong dollar, a robust economy and willing and able consumer spending have been the primary factors in record U.S. trade deficits, not distortions from trade policy.

The U.S. agreement with China is not essentially different from other by-lateral agreements negotiated by China with other WTO members. Because of to national treatment standards agreements with each of the 140 or so WTO members essentially defaults to the "best" agreement negotiated by the other countries. The U.S. agreement for agricultural commodities basically became the template for other WTO member agreements with small deviations to address unique bilateral issues with China on a country by country basis.

Another reason that the U.S. trade deficit with China has continued to grow in recent years is that the benefits for U.S. exports have not yet gone into effect -- and won't until China joins the WTO. In the case of beef, we anticipate a significant increase in exports once tariffs decline to 12 percent from current 45 percent levels and once U.S. exporters have access to wholesale and retail marketing channels in China. The same scenario will play out for many other U.S. agricultural commodities and for other non-agricultural U.S. sectors. By the end of the implementation period, U.S. exports to China will increase resulting in a smaller trade deficit. The key to reducing the U.S. trade deficit with China is to finalize the WTO accession process and have U.S. exporters begin to reap the benefits of tariff reduction and market access granted by the U.S.-China trade agreement.

3. Do any such differences have any national security implications for the United States?

As indicated above thereabove there are very few differences in the U.S.-China agreement compared to agreements with other major trading partners, at least with respect to beef. There are no identifiable no national security implications.

Views regarding China's ability to live up to bilateral trade obligations as assumed as part of its entry into the WTO.
China has admittedly assumed a very aggressive agenda for market liberalization that will result in a major restructuring of its agricultural and overall economy. The recently concluded side agreement allowing China to subsidize the agricultural sector up to 8.5 percent of net farm income may help mitigate internal political pressures that are sure to result as this restructuring continues. There are no doubt huge factions within China with a vested interest in stopping, reversing, slowing or stalling change. U.S. officials and industry must continue to work closely with Chinese leadership supporting the new trade agenda to assure that China lives up to its obligations. The price of failure is too great to not facilitate its success.

NCBA will closely monitor China's implementation of commitments embodied in the trade agreement and work with U.S. officials to assure that implementation proceeds in specified timelines. It is critical for the U.S. beef industry that China acceptance of USDA'S inspection documentation, tariff reduction and access to retail and wholesale marketing channels proceed in accordance with the agreement.

Actions the United States should take if China fails to live up to its WTO obligations.
The U.S. beef industry can speak from experience of in dealing with major trading partners that are unable to live up to their WTO obligations. It is first critical to note that once China becomes a WTO member the organized structure and processed processes of the WTO will at last be available for addressing and resolving trade disputes with China. Prior to accession no such structure existed.

The framework of the negotiation process has already facilitated implementation. In the case of Chinese port authorities failure to accept FSIS inspection documentation, NCBA and other meat organizations worked aggressively with the Administration to communicate with representatives of the Chinese government the importance of fully implementing the SPS agreement. The consultation process worked and situation was resolved. NCBA has also been successful in working with government officials to negotiate settlements regarding cattle and beef trade with other major trading partners including Canada, Mexico, and others utilizing the framework of WTO and NAFTA consultation processes.

There are other examples, however, where the consultation process has not been successful in resolving disputes. In the case of Korea, the U.S. has won a WTO case regarding beef access issues. Both countries are currently working to resolve these issues through the WTO dispute resolution and arbitration process.

The U.S.-EU beef case is probably the poster child for the WTO dispute settlement process. The beef industry has had the unique experience of having taken a case through the entire WTO dispute settlement process and won, but first, a bit of background on the case. The EU has essentially banned imports of U.S. beef since 1989. This thinly disguised trade barrier was implemented in the name of consumer protection in spite of ample scientific evidence that production technologies approved by FDA and widely used in the U.S., but prohibited in the EU were safe. The U.S. government complained in the GATT, but the EU, as was permitted at that time blocked dispute resolution.

After the WTO replaced the GATT, the U.S. filed its formal complaint in January 1996, claiming the EU beef ban was a non-tariff trade barrier. Australia, and New Zealand joined the United States in the action. Canada filed a separate case, and the final report addressed issues raised in both (U.S. and Canadian) cases. These were, in effect, test cases for the application of the Uruguay Round Agreement on the Application of Sanitary/Phytosanitary Measures.

Following a series of legal actions and appeals, a WTO arbitrator upheld all previous rulings and gave the EU until May 13, 1999 to bring regulations into compliance with WTO guidelines. Under WTO procedures the EU was then obligated to modify its regulations by May 13, 1999 to comply with the ruling or the United States could retaliate. Unfortunately the EU was unable to modify its regulations and on July 29, 1999 the U.S. began implementing retaliatory measures against exports from the EU valued at $116.8 million.

The objective of the U.S. beef industry has always been to re-gain access to the European beef market, not retaliation. Retaliation will not benefit the beef industry because duties are on products not related to beef. U.S. and EU negotiators are continuing to explore possible compensation packages that would benefit the beef industry more than current retaliation and allow trade to proceed while the EU continues to work towards compliance with their WTO obligations. The alternatives of compensation or retaliation are viewed only as a means to an end - access to the EU market for conventionally produced U.S. beef ñ not the primary objective.

Based on the criteria of market access as the primary objective, one could say that the WTO dispute settlement process has not worked -- we still do not have access to the EU beef market. However, compensation and retaliation are also possible outcomes for any WTO case and the U.S. has implemented tariffs of 100 percent on $116.8 million of EU goods consistent with alternatives provided in the WTO dispute settlement process. They provide a "burr under the saddle" to push the EU to compliance. From that perspective, the WTO dispute settlement process has worked, though the industry has not yet achieved its objective.

The point of all of this is that wherever trade exists there will be trade disputes and agricultural issues are particularly contentious. This has been the case with all other major U.S. trading partners and it will definitely be true with China. China will agree to abide by the same rules and dispute settlement processes as a WTO member that approximately 140 other countries have agreed to observe.

NCBA strongly supports continued United States participation in the WTO and we welcome China's full membership and participation. Based on the beef industry's experience, among the strengths of the current WTO system is the well-defined process for initiating a dispute case and for determining the final ruling/settlement. The current system is much improved over its GATT predecessor in this respect. The strict science-based rules established for resolving these issues is another major strength of the current dispute settlement process. We are very pleased that China is on the threshold of WTO accession and will become an equal participant in well-defined dispute settlement process.

6. Conclusions, other views and necessity and importance for the United States of building a strong, stable and lasting relationship with China.
With a population of 1.2 billion China is a consumer market with enormous potential. Any agreement that fosters improved relations with one out of every five inhabitants on planet earth is impossible to ignore. China is not just opening its markets, it is becoming more open to ideas and exposed to principles of basic rights and freedoms. As China's economy becomes increasingly open to world trade, it will also come more open to international visitors and investors, under closer scrutiny by international media and as a result, actions of its leaders will be increasingly influenced by global opinion. U.S. security interests will be much better served by a China that is inter-dependant on global trading partners than a China that is not engaged and is isolated from the rest of the world.

Building a strong, stable and lasting relationship with China and facilitating China's accession to the WTO is critical to long-term U.S. security interests. Most trading partners have disputes at some time or another and China will be no exception. As a WTO member, China has agreed to abide by the same well-defined dispute settlement process as other WTO members. The U.S. and other global trading powers must work closely with Chinese leadership to assure that China lives up to its obligations. The price of failure is too great not ensure its success.

Request for Action:
NCBA appreciates the initiatives that have been undertaken to gain access to international markets and to resolve lingering issues that restrict the ability of the U.S. beef industry to offer its products to international consumers on equal footing. I appreciate this opportunity to participate in the process of evaluating the importance of trade with China and accession of China to the WTO. NCBA stands ready to provide additional input on this and other trade issues, such as those involving the EU and approving legislation to provide trade promotion authority. Thank you for the opportunity to present this information.