Agriculture and U.S. Commercial Diplomacy in Asia

Robbin S. Johnson

Council on Foreign Relations

1996 was a watershed year for American agriculture. Congress replaced a 60-year-old regime of farm subsidies with a new approach designed to give American farmers more freedom to do what they do best: to farm.

The new program, called the FAIR Act, replaced the old, amorphous system of income support tied to production of specific commodities with a new, finite schedule of "decoupled" payments that are made independent of current commodity price levels or production decisions. This shift in domestic farm programs took the U.S. government out of the business of managing production and prices for major field crops.

Commercial Diplomacy as Export Promotion

The FAIR Act also alters in fundamental ways agriculture's role in commercial diplomacy. Prior to this change, U.S. agricultural export policy was often an extension of domestic farm policy, aimed to prop up prices and help hold down surpluses. Food aid programs, especially P.L. 480, were shaped at least as much to meet the policy goal of preventing surpluses from weighing down on domestic markets as they were to provide development assistance to recipient countries.

High price supports in the face of global crop surpluses also created pressures to subsidize exports. In the case of wheat, this often was done directly through export subsidies that covered the difference between higher domestic and lower world prices.

All major crops except oilseeds also saw the introduction of "target prices" and deficiency payments. These allowed U.S. commodity prices to fall to world market levels while farmers' incomes were protected through direct, per-bushel payments making up the "deficiency" between market and target prices on eligible production.

Another tool in agriculture's export promotion kit was credit. Qualified foreign buyers would receive financing, initially directly from the U.S. government but later through private loans "guaranteed" by the government, on purchases they made of U.S. commodities. Interest rates were generally close to commercial levels (to escape a requirement that government-assisted cargoes had to move on more expensive U.S. flag vessels). However, the length of these credits--18 to 36 months in most cases--was greater than would be commercially prudent for items that are immediately consumed.

A final export promotion tool was market development programs. These spent taxpayer dollars to help promote usage of U.S. commodities in foreign markets. Some, called "cooperator" programs, involved the use of grower check-off funds along with government funds for promotion purposes. Unlike the other promotional tools, however, market development programs funded educational efforts aimed at changing foreign production or consumption practices.

This arsenal of export promotion tools multiplied over the years as policymakers attempted to respond to domestic farm problems and related constituent pressures. With the exception of market development programs, most of these weapons were designed to make U.S. agricultural exports more competitive globally by lowering the effective price foreign buyers would have to pay. Food aid and export subsidy programs lowered transaction prices directly; "deficiency" payments and export credit programs affected transaction costs more indirectly.

Of course, this government-assisted price competition in export markets did not occur in a vacuum. Since the early 1960s, the original European Community and its successors have been restricting imports of U.S. grains and animal products and subsidizing disposal of surplus output on world markets. A number of exporting countries, and some importing nations like Japan, have dumped surpluses onto developing countries under the guise of food aid.

In addition, monopoly state and parastatal exporting entities have discriminated among foreign buyers in quoting export prices. In some cases deficits in their export budgets were covered by national treasuries, enabling them to subsidize export sales directly.

During this period, governments also attempted to manage world markets through international commodity agreements that frequently contained minimum price provisions. These price floors usually were set too high, resulting first in leakage and then in breaches. When unpredictable state buyers like the former Soviet Union emerged as major importers, major exporting countries negotiated bilateral agreements to set minimum--and, sometimes, maximum--purchase volumes.

Very simply, global agricultural trade for much of the second half of the 20th century represented a marketplace in which governments actively manipulated farm trade through direct subsidies, indirect subsidies, tied aid, dumping, commodity agreements, and other forms of discrimination.

No wonder, then, that the U.S. agricultural community developed its own elaborate kit of export promotion tools. Nor was it any wonder that U.S. taxpayers were willing to finance that kit, which they did generously. Commercial export credit guarantees by the

U.S. Department of Agriculture (USDA) have consistently run in the $4--5 billion per year range over the last ten years. P.L. 480 and other food assistance programs have averaged $1.5 billion per year since 1980.

Export subsidies started up again in 1985 after a long hiatus that began in 1973. Over $7.5 billion was spent subsidizing agricultural exports over the decade ending in 1995.

The Domestic Politics of Export Promotion

With these aggressive and often expensive subsidy initiatives also came vigorous debate about the degree to which these various tools were successful. Success was defined by some as actually expanding U.S. farm product exports--the "additionality" test. Others defined success as bringing other unfair traders to the negotiating table--the "bargaining chip" test. Though debates over additionality and bargaining leverage were often heated, they were seldom very illuminating because they depended on conjecture about what would have happened in the absence of such tools.

Without attempting to resolve those debates, it is important to make two related points. First, agricultural export promotion programs were developed in response to domestic farm policy needs--specifically, their perceived role in helping boost prices while avoiding accumulation of surpluses. The use of similar practices by some other exporting nations helped policymakers rationalize the need for these programs. Nonetheless, their origins--and their resilience in the face of growing budget pressures in the 1980s and 1990s--are deeply rooted in the domestic political constituencies that grew up to defend them.

That defense of export promotion programs was anchored in their hoped-for effects on farm programs: that they would help raise prices, reduce surpluses, and contain overall farm program costs. Agricultural export promotion, in other words, had the same domestic political rationale as did the price support, income support, and supply management farm programs from which they grew.

Second, the far-reaching 1996 changes in domestic U.S. farm programs will rapidly erode the political foundation for export promotion programs. Now that the domestic programs of which export promotion was a part are gone, spending on agricultural export initiatives increasingly must stand on its own. Only those programs and initiatives that can be shown to be cost-effective can endure. Others will fade away because they are no longer instruments of domestic market management programs and thus cannot be justified with familiar political arguments.

The Changing Global Environment

Contributing to changes in domestic U.S. farm programs were changes occurring in the export marketplace. Three deserve special mention.

First, the Uruguay Round began bringing agricultural trade under General Agreement on Tariffs and Trade--now World Trade Organization--disciplines. Various nontariff import barriers were converted to their tariff equivalents (but often at unreason-ably high levels), and a process of tariff reductions was initiated. Minimum access for imports was established, even in highly protected markets. Sanitary and phytosanitary measures were anchored in sound science. Dispute resolution procedures were strengthened. And the most egregious unfair trade practices--export subsidies--were capped in volume and value, with a commitment to gradual reduction in subsidy levels.

Second, a wave of privatization swept across many countries, with far-reaching implications for agriculture. State-buying monopolies were eliminated or at least forced to compete with newly legitimized private buyers. New price-risk management tools were developed to enable competitive markets to function more efficiently. And government-financed stockpiles largely disappeared, opening the way for greater risk-sharing based on market principles.

Finally, exports became a larger part of the global food marketplace. The 1970s witnessed the largest growth in bulk commodity exports; value-added exports grew more robustly in the 1980s. These came together in the 1990s, with strong expansion in both commodities and value-added exports, as well as diversification of import destinations, led especially by Asia.

That three-pronged onslaught--agricultural trade liberalization, privatization, and food-trade expansion--quickly overtook traditional export promotion tools and has made those tools less useful.

Food aid began losing ground as an export device as government-held surpluses shrank and understanding grew of the negative effects of food aid dependence on farm sectors in recipient countries. Growing budget pressures only added to this effect.

Export credit programs also lost their luster. Cumbersome governmental procedures for allocating credits to different countries and among different commodities burdened these programs, inserting bureaucratic rules between private buyers and sellers, which limited exporters' ability to serve their customers' diverse and changing needs. Delays, inflexibilities, and political uncertainties added costs that increasingly outweighed any price advantages that credit terms may have conferred.

Export subsidies have faded in importance, initially because tight supplies and high prices made them superfluous. But once they were discontinued in the United States, the more systematic disadvantages they presented became more evident to other countries.

Uruguay Round ceilings on the use of export subsidies mean that a growing share of export markets will no longer be subsidized. Moreover, export subsidies can backfire on the United States because two-tier markets create opportunities for state-trading entities to take business away by undercutting U.S. exports in both nonsubsidized, high-priced markets and subsidized, low-priced ones. Finally, experience has shown that export subsidies are more likely to rearrange trade flows than they are to increase exports overall.

One traditional tool has escaped the new disciplines: the large network of American agricultural attach,s and counselors stationed around the world to promote U.S. exports. This network remains a valuable resource for analyzing markets, identifying impediments to trade and supporting U.S. efforts to lower those barriers through bilateral or multilateral negotiations. And it is not nearly as expensive as other tools, costing only about $100 million per year.

But to capture that value fully, this "foreign agricultural service" needs a new approach to commercial diplomacy. The network should be refocused and reenergized as a source of intelligence on, insight into, and influence over the economic and food policies of newly emerging markets. Such an approach will meet the emerging, more stringent tests for cost-effectiveness by being both less expensive and more responsive to market needs than traditional export promotion.

A New Asian Commercial Diplomacy for Agriculture

Any program of commercial agricultural diplomacy undertaken on behalf of the U.S. food sector should advance three fundamental interests: enhance global food security; accelerate economic development; and increase environmental protection.

To accomplish these objectives for Asia, U.S. commercial agricultural diplomacy needs to promote an open global food system based on well-functioning markets, assured access to supplies, and ecologically friendly production, processing, and distribution technologies. Those goals, not export promotion per se, provide a more rewarding, enduring foundation for commercial diplomacy.

Asia presents a unique challenge to the ability of the world to eat better with less environmental stress. As world population grows from 5.8 billion today to 8 billion by 2025, 58 percent of that increase will occur in Asia. Virtually all those people will be absorbed by urban areas, creating more than 500 cities with populations above 1 million. Per capita incomes also will rise, with Asia accounting for half of foreseeable growth in economic activity.

Rising population, increasing urbanization, and higher living standards together translate into enormous growth in global food demand. And the magnitude of this demand growth will be overshadowed by the speed at which it develops. Never have world farmers had to accommodate more people more quickly.

To serve the size and speed of this demand growth, food supply lines must lengthen and branch out: Over the next 25 years food demand in North America will grow 20 percent, but it will grow 100 percent in East Asia and 150 percent in South Asia. Yet Asia already has the lowest ratio of arable land to population, one-sixth that of the Western Hemisphere. It will be to the Western Hemisphere, and especially to the rich soils in the temperate heartland of the United States, that Asia must look for food.

Meeting the Food Security Issue

The only practical way to feed Asia's growing, prospering, urbanizing population is through expanded, more open food trade. In the process, global food security is enhanced.

Freer food trade offsets local shortages here with surpluses there. It offsets Northern with Southern Hemisphere sowing and harvesting times. It gives consumers more choices, which means more ways to satisfy rising demand--but also more ways to compensate for temporary supply disruptions.

But more food security and choice through freer trade cannot happen without assured access to supplies. Importers will not trust long supply lines, and trade cannot buffer regional supply variations, unless there is multilaterally assured supply access (MASA is the acronym sometimes used).

U.S. commercial diplomacy in Asia on behalf of the food and agricultural sector therefore requires two components: barriers to imports must be broken down through trade-liberalizing initiatives; and all food-exporting countries must be convinced to join in a multilateral commitment that assures importers the same access to food supplies that domestic consumers have. The United States needs to put agricultural trade liberalization at the top of its foreign economic policy agenda and renounce the use of food sanctions for short supply or foreign policy reasons.

Meeting the Economic Development Issue

In developing countries, half or more of the population lives in rural areas, where most are dependent on farming or related activities. In these countries, half or more of each additional dollar of income goes for food.

Steps that increase agricultural productivity in these countries produce a double benefit: they kick-start economic development more effectively than would reforms in any other sector; and they lower out-of-pocket food costs, which frees up income that can be spent on other goods and services.

Effective commercial diplomacy for food, therefore, becomes a tool for encouraging countries to develop their economies and increase their prosperity by instituting market-based food and agricultural systems. That linkage has been too often overlooked in the past, when governments set food self-sufficiency goals and attempted to achieve them by isolating the food and agricultural sector from the energizing effects of competition. Time after time, the result was stunted agricultural productivity and slower economic growth.

Instead, the United States should encourage and assist developing countries in adopting agricultural systems based on private enterprise and competitive markets, including improved opportunities for foreign investment. "Marketization" of domestic food systems will lower food costs, raise productivity, stimulate growth and investment, and prepare these nations for integration into open global systems.

Meeting the Sustainable Development Issue

A look at environmental degradation in poor countries, where subsistence farmers are forced to exploit vulnerable soils carved out of virgin wildlands, can often find poverty at the root of the problem. On the other hand, market-based food systems can be instruments for sustainable development, both economic and environmental.

Market-based systems, with their inherent risks and rewards, tend to foster the technological innovations--like prescription farming or plant biotechnology--that increase output while also reducing inputs, waste, or land-endangering practices.

The same atmosphere rewards improved management practices that complement new technologies. For example, U.S. farmers have increased nitrogen efficiency by one-fifth and reduced crop protection chemical use by one-third while raising crop output by one-fourth in the last 15 years.

Finally, cost-effective, outcome-based regulatory practices can harness market incentives that reward faster introduction of resource-conserving technologies and management practices that lower costs and waste over entire product life cycles.

Effective commercial diplomacy means advocating market principles, modern technologies, and sensible regulatory practices. It also means abandoning once and for all the elitist environmental notions that tend to perpetuate poverty and peasantry by seeking to protect people in developing countries from economic reforms and technological progress.

This programmatic approach to U.S. commercial diplomacy in Asia on behalf of food and agriculture is very different from the past. It is not a self-serving front aimed at dumping surpluses or promoting dependence. It is not transaction-oriented.

Rather, this strategy for the U.S. food and agricultural sector aims at institution-building. It creates well-functioning markets and marketing institutions in Asia. It promotes market-based regulatory and environmental protection systems. It puts agriculture at the top of the foreign economic policy agenda for both trade liberalization and supply assurances.

Feeding people first in an open global food system is a worthy goal of commercial diplomacy, and U.S. agriculture will do fine in such a world.