Agriculture in the Australia-U.S.Free Trade Agreement

Agriculture in the Australia-U.S.
Free Trade Agreement
Remy Jurenas

Trade ministers for the United States and Australia on May 18, 2004, signed a comprehensive free trade agreement (FTA) that, among other provisions, will reduce or eliminate almost all tariffs and other barriers on U.S.-Australian merchandise trade. Provisions affecting agricultural trade -- mainly Australia's efforts to secure additional access for beef, dairy products, and sugar in the U.S. market -- proved to be among the most contentious issues dealt with during the last week of negotiations. U.S. negotiators succeeded in excluding sugar from the agreement, an objective that the U.S. sugar industry had sought, and in immediately eliminating Australia's tariffs on all imports of U.S. agricultural products. While Australia sought immediate and substantial openings for its beef and dairy products shipped to the United States, the agreement provides for limited access under quotas to the U.S. market over long transition periods. Quantitative limits and tariff protection on some dairy product imports will continue in place indefinitely. Analysis shows that in value terms the Australian agricultural sector will gain more under the agreement than the U.S. agricultural sector does, largely because Australia's population is much smaller and Australia is a significant agricultural exporter. The House and Senate in mid-July approved H.R. 4759 to implement the agreement. The President signed this measure into law on August 3, 2004 (P.L. 108-286). Though Australia's Parliament passed implementing legislation on August 13, the government's addition of certain pharmaceutical amendments to secure passage clouds whether this trade agreement will take effect on January 1, 2005, as initially contemplated.

Background

In 2003, U.S. agricultural and food exports to Australia totaled $611 million, and represented 1% of U.S. worldwide sales. Australia ranked 18th as an export destination for U.S. agriculture. Leading exports were purebred horses, soybean meal, mixtures for the food and beverage industries, dog and cat food, other food preparations, and flue-cured tobacco. U.S. farm exports accounted for nearly 5% of U.S. merchandise exports to Australia, and have remained flat in value terms since the early 1990s (with 2003 an exception to this trend). Australia's tariffs on the leading agricultural imports from the United States are zero or very low. Australia imposes tariff-rate quotas (TRQs) only on imports of unmanufactured tobacco and cheese, limiting the amount allowed to enter from all origins. A TRQ restricts the amount of a product that can be imported at a low or zero tariff rate (referred to as the "in-quota" quantity and tariff, respectively), and allows additional imports to enter but usually subject to a much higher, sometimes, prohibitive tariff (termed the "over-quota" tariff).
U.S. agricultural imports from Australia last year equaled $2.1 billion, and represented one-third of U.S. merchandise imports from that origin. Australia ranked 3rd as an overseas source of U.S. agricultural and food imports, supplying 4.5% of all such imports from the world. Purchases of beef, wine, lamb meat and mutton, casein, sugar, and wheat gluten led the list. Agricultural imports from Australia have more than doubled over the last decade. U.S. tariffs applied on agricultural imports entering from Australia subject only to duties averaged 2.6% in the 1997-2001 period. Imports of beef, dairy products and sugar, though, are restricted by TRQs designed to protect U.S. agricultural producers. According to USDA, beef imports are subject to an in-quota tariff of 4.9%; the over-quota tariff is 26.4%. The in-quota tariff on dairy product imports ranges from 1.5% to 14.4%; the over-quota tariff is set between 33% to 115%, depending upon the product.

Agreement's Main Agricultural Provisions

Countries that form an FTA agree at a minimum to eliminate over time tariffs and other barriers to their mutual trade in goods. Both the United States and Australia entered into negotiations in March 2003 with the objective of reaching a comprehensive FTA that covered non-tariff barriers, services trade, foreign investment, intellectual property rights, government procurement, labor, and other issues.
In this FTA, both countries agreed to immediately phase out tariffs on a substantial portion of the agricultural products traded between them. On the U.S. sensitive products, negotiators compromised on long transition periods before Australia receives almost unrestricted access to the U.S. market for its beef and dairy products. The Office of the U.S. Trade Representative (USTR) states the FTA responds to concerns expressed by some Members of Congress and by U.S. beef and dairy farmers about the potential adverse impacts of a substantial increase in imports under an agreement. Negotiators agreed to create a new mechanism to facilitate scientific cooperation between both countries to resolve bilateral sanitary and phytosanitary (animal and plant health) issues. The United States also secured a commitment from Australia to work together in the current multilateral World Trade Organization (WTO) negotiations on agriculture to develop disciplines to eliminate restrictions (such as those now exercised by the Australian Wheat Board) on the right of entities to export commodities.

Market Access for U.S. Agricultural Products to Australia's Market

According to USTR, the FTA will provide immediate duty-free access for all U.S. agricultural exports to the Australian market. Key products expected to benefit from such treatment include:

processed foods (soups, food preparation, and bakery products)

soybeans and oilseed products

fresh and processed fruits, vegetables and nuts (e.g. dried onions, juices, dried plums, potatoes, almonds, tomatoes, cherries, raisins, olives, fresh grapes, sweet corn, frozen strawberries, walnuts), and

alcoholic beverages (including distilled spirits).

USTR states that Australian food inspection procedures that pose barriers to U.S. sales of pork, citrus, apples and stone fruit "will be addressed," using the new mechanism established to resolve sanitary and phytosanitary (SPS) barriers.

Market Access for Australia's Agricultural Commodities to the U.S. Market

The FTA immediately eliminates U.S. tariffs on 20% of Australian agricultural imports, according to USTR, and phases out most other agricultural tariffs in stages over 4, 10, and 18 years, depending upon product sensitivity. Australia will receive additional access for commodities now subject to U.S. TRQs (beef, dairy products, peanuts, cotton and tobacco). Access will be in the form of preferential quotas in addition to those quotas that Australia now takes advantage of to sell into the U.S. market. Safeguard protection against import surges is triggered automatically under specified conditions for beef and specified horticultural products.
Over an 18-year period, the United States will increase the beef import quota by 70,000 metric tons (19% above Australia's current beef TRQ of 378,214 MT). Any quota increase within the first three years is conditioned upon U.S. beef exports worldwide returning to their 2003 level. This addresses the U.S. beef sector's concern that Australia not be given an opening in the domestic market as U.S. producers work to recover from the mad cow incident, which saw key foreign countries close their markets to U.S. beef imports. In-quota tariffs will disappear immediately; above-quota tariffs will be phased out over time. Initial quota increases represent an estimated $50 million in additional imports -- less than 1/4 of 1% of the value of annual U.S. beef output, and 1.6% of the value of U.S. beef imports.
Safeguards to protect against surges in beef imports from Australia will be available both during and after the transition period. Proposed implementing legislation would allow USTR to waive the application of these safeguards if determined to be in the U.S. national interest, but only after it consults with private sector trade advisory committees and the House Ways and Means and Senate Finance Committees. The Finance Committee on June 23, 2004, adopted an amendment offered by Senator Conrad during a "mock" markup on draft bill text that would have required both trade committees to first approve a USTR request to waive these beef safeguards before they could take effect. Opponents argued such a provision would be unconstitutional. Exercising its discretion, the Administration decided not to include this amendment in the legislation subsequently submitted to Congress.
Over time, the United States will slowly open up its market to additional dairy products (e.g., butter, cheese, skim milk powder) entering from Australia under various TRQs. In-quota tariffs will end immediately. After year 18, quota amounts will continue to increase between 3% and 6% in perpetuity. Current prohibitive U.S. above-quota tariffs on these dairy products subject to TRQs will remain unchanged indefinitely. USTR states that first-year quota increases will allow for imports worth $41 million -- less than 1/4 of 1% of the value of annual U.S. dairy output, and an amount that represents about 2% of the value of all U.S. dairy imports. USTR does not expect the additional imports to affect the operation of USDA's dairy price support program.
Sugar is not included in the agreement, meaning that Australia's current level of access to the U.S. market remains at 87,402 metric tons (MT) -- 8% of the U.S. sugar import quota. Some reports suggest Australia responded to this exclusion by refusing to make any changes to the export monopoly operations of the Australian Wheat Board and its Pharmaceutical Benefits Scheme.

U.S. Interest Group Reactions

The FTA received mixed reactions from agricultural and food groups. As the negotiations became much more intense in January, some feared U.S. negotiators would offer Australia too much access. Others feared the United States would receive too little in return for concessions made. Observers note that the agricultural sector for the most part is lukewarm about the agreement's outcomes.

The U.S. sugar industry "applauded the Administration's decision to exclude market access commitments on sugar," pointing out that an FTA can be negotiated without including sugar and can "serve as a template for all future FTA negotiations."

A spokesman for the Coalition for Sugar Reform representing primarily sugar-using food processors and others opposed to the U.S. sugar program "condemned the agreement as a 'political payoff' to sugar farmers ahead of this year's presidential election," as reported by Reuters.

U.S. Wheat Associates representing wheat growers expressed disappointment that this FTA "did not address the inequities inherent in the Australian Wheat Board monopoly," and claimed that U.S. negotiators "missed the opportunity to correct the trade distortions as practiced by export monopolies." Reflecting these views, it opposes this agreement.

The National Pork Producers Council initially stated it would not support the FTA until Australia implements its final risk assessment on pork imports and U.S. pork exports actually begin moving into that market. With this assessment recently completed and exports expected to begin this summer, the Council favors the FTA, forecasting $50 million in new sales.

The National Milk Producers Federation opposed the agreement because of the additional market access granted Australia's dairy sector and the loss of income to dairy producers. It acknowledges, though, the "negative impact could have been far worse" had the over-quota tariffs on dairy imports not been preserved.

The National Cattlemen's Beef Association (NCBA) expressed disappointment that negotiations did not proceed in a way that saw any increase in access to the U.S. market given to Australia matched by developing foreign market openings for U.S. beef in the multilateral WTO trade negotiations. Though viewing the FTA as "certainly not a 'win' for U.S. beef producers," NCBA is pleased that the agreement addresses its concerns about the mad cow's economic impact on U.S. beef exports and includes a permanent safeguard to protect U.S. high-quality beef against domestic market disruptions after the 18-year transition period.

The R-CALF United Stockgrowers of America anticipates long-term adverse effects on the U.S. live cattle industry as a result of the increased market access given Australia. It sees Australia as able to expand its cattle producing and feedlot capacity to take advantage of the FTA, even with a permanent price-based safeguard in place.

The Grocery Manufacturers of America announced it cannot support the agreement because it "includes no increases for imports of Australian-grown sugar and only minimal increases for beef and dairy products." Its spokesperson expressed disappointment that the Bush Administration had "strayed" from "its policy of negotiating 'no exclusions' trade pacts," and argued that "exempting certain commodities ... severely limits the positive impact of [FTAs] and will undermine the ability of the United States to establish comprehensive agreements with other trading partners."

The American Farm Bureau Federation cited the lack of movement by Australia on outstanding SPS issues as the main reason for not supporting the agreement. While acknowledging that the completion of the import risk assessment on U.S. pork is "a sign that the Australians are willing to work on these issues," unresolved SPS barriers on U.S. stonefruit, apples, citrus, and poultry must be addressed before the AFBF can support the agreement. Its analysis, though, did conclude that sales of these products could benefit from "a satisfactory streamlining" of these rules, and forecast that high-value U.S. food exports would increase by $150-200 million annually as a result. Though its analysis shows that the gains to U.S. agriculture will either cancel out or not offset losses attributable to a potential $420 million increase in Australian farm sales to the United States, the AFBF states the agreement "strikes a positive note" in setting the tone for future talks in the World Trade Organization on global farm trade reform, including working together on the issue of state trading enterprises.
The National Farmers Union expressed concern that while "trade negotiators have attempted to limit the potential damage to our beef and dairy markets, the future implications of this agreement on these sensitive markets are ominous" by setting a precedent for increasing access to the U.S. market in future FTAs.

Analysis of Agreement's Impact on U.S. Agriculture

The agreement's elimination of Australia's tariffs is projected to provide a small gain for U.S. agriculture compared to the much larger benefits the U.S. manufacturing sector is expected to receive, according to an analysis issued by the U.S. International Trade Commission (ITC). Increased U.S. agricultural exports will account for 7% of the agreement's benefits for the entire U.S. economy. For Australia, expanded quota access given its beef to the U.S. market and U.S. tariff phase-outs on other Australian meat products and processed foods provide almost two-thirds of the FTA's benefits to Australia's farm and food sectors.

Executive Branch and Congressional Roles

President Bush on February 13, 2004, notified Congress of his intent to enter into an FTA with Australia. This action initiated the timetable the President followed in submitting this trade agreement to Capitol Hill, and the steps Congress is taking to consider legislation the Administration has proposed to implement it. The Bipartisan Trade Promotion Authority [TPA] Act of 2002 (Section 2105 of P.L. 107-210) lays out this TPA process and procedures.
USTR made public the reports of the trade advisory committees on the FTA on March 15. Though the Agricultural Policy Advisory Committee acknowledges that the agreement "will improve access for certain U.S. agricultural products," its members are concerned that it is "not comprehensive, does not impose any new disciplines on [the country's] agricultural export monopolies [i.e., the Australian Wheat Board], and does not deal effectively with many non-science based SPS measures that Australia continues to use to restrict trade." The commodity-oriented agricultural technical advisory committees (ATAC) for trade expressed mixed views -- some expecting little benefit because of unresolved issues, others pleased with safeguard provisions for import sensitive products (horticultural products) or with being excluded (sugar), some opposed (questioning the special treatment or exclusion granted the U.S. dairy and sugar sectors, respectively), and others supportive.
The House and Senate on July 14 and 15, 2004, respectively approved the Administration's bill (introduced as H.R. 4759) to implement the agreement. During floor debate, some Members stated their disapproval of the FTA's beef and dairy provisions. President Bush signed the measure into law on August 3, 2004 (P.L. 108-286).

Resources

CRS Report RL32375, The U.S.-Australia Free Trade Agreement: Provisions and Implications, by William H. Cooper.
American Farm Bureau Federation, Implications of an Australian Free Trade Agreement on U.S. Agriculture (.doc), March 2004.
Australian Department of Foreign Affairs and Trade, Australia-United States Free Trade Agreement -- includes fact sheets on Agricult ure and Sanitary and Phytosanitary Measures.
Office of the United States Trade Representative, U. S.-Australia Free Trade Agreement.
U.S. Department of Agriculture. United States and Australia Free Trade Agreement. Includes commodity fact sheets on beef, cotton, dairy, fruits and nuts, grains, oilseeds, other meats, processed foods and beverages, vegetables, and wool.
U.S. International Trade Commission. U.S.-Australia Free Trade Agreement: Potential Economywide and Selected Sectoral Effects (.pdf), Publication 3697, May 2004. Chapter 3 (pp. 25-34) provides a quantitative assessment of the FTA on the U.S. economy, including changes in trade flows of key agricultural products. Chapter 4 includes qualitative analyses of the agreement's sector impacts on live cattle and beef (pp. 41-46), dairy products (pp. 47-52), citrus fruit (pp. 53-55), other fresh and processed fruit (pp. 55-60), and macadamia nuts (pp. 60-64).
CRS Contact: Remy Jurenas (7-7281)

Page last updated September 29, 2004.

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