APEC: INTERNATIONAL AGRICULTURE AND TRADE September 11, 1997 August 1997, WRS-97-4. Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- INTERNATIONAL AGRICULTURE AND TRADE is published four times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. Please note that this release contains only the text of APEC: INTERNATIONAL AGRICULTURE AND TRADE -- tables and graphics are not included. Subscriptions to the published report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #WRS, $26/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- Report Coordinator Sophia Wu Huang Tel: (202) 219-0679 Fax: (202) 219-0641 Economics Editors William T. Coyle John Dyck Sophia Wu Huang Data Coordinator Sophia Wu Huang Statistics & Graphics Wilma Davis Article Authors Chris Bolling Jeff Clark William T. Coyle Kate DeRemer Charles Handy Sophia Wu Huang Alberto Jerardo Suchada Langley Alisa Livensperger Steve Neff Gary Vocke Other Contributors Linda Bailey Lon Cesal Hunter Colby Frederick Crook Jim Stout Zhi Wang Contents Summary Regional Overviews APEC To Resume Healthy Growth U.S. Agricultural Exports to APEC Region at Another Record Special Article Emerging Import Markets in Asia Trade Environment in APEC U.S. Direct Investment in the APEC Food Processing Sector State Trading Enterprises in the APEC Region: Grain Markets The Tariff Walls of APEC Technical Barriers to Agricultural Trade in APEC Regional Data List of Tables and Figures Acknowledgments The editors gratefully acknowledge the reviews and other help provided by ERS staff members Karen Ackerman, Praveen Dixit, Rip Landes, Mark Gehlhar, Joel Greene, Alberto Jerardo, Frederic Surls, and John Wainio. We also thank Gerald Rector, David Stallings, and others at the World Agricultural Outlook Board for their reviews and assistance. Diane Decker of the ERS Information Services Division edited the manuscript and shepherded it through the production process; Wynnice Napper prepared the charts and tables. Cynthia Ray produced the camera copy layout and Vic Phillips designed the cover. The cover photographs were taken by William T. Coyle. Summary U.S. agricultural exports to the APEC region reached a record $36.7 billion in fiscal 1996, up 10 percent from the year before. 1/ The region accounted for more than 60 percent of total U.S. agricultural exports, about the same as in recent years. Mexico, the Association of Southeast Asian Nations (ASEAN), and Japan showed the biggest gains, while exports to China dropped from $2.4 billion in fiscal 1995 to $1.8 billion. U.S. exports to Mexico were back on trend after a deep recession triggered a big drop in fiscal 1995. Drought-driven demand for bulk commodities and higher bulk prices explained the increase. Growth in exports to ASEAN was also impressive, with the Philippines and Indonesia nearing the $1 billion mark. In fiscal 1996, the ASEAN market for U.S. agricultural exports totaled $3.3 billion, almost the size of the Hong Kong and China markets combined. 1/APEC stands for Asia-Pacific Economic Cooperation forum, a vast region surrounding the Pacific Ocean. Member countries include Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines, Singapore, South Korea, Taiwan, Thailand, and the United States. Non-bulk commodities accounted for more than half of total U.S. agricultural trade in the APEC region in fiscal 1996. Trade with Japan, North American Free Trade Agreement partners (Canada and Mexico), and the other high-income East Asian markets (Hong Kong, South Korea, and Taiwan) is diversified across many products. Trade with China and Southeast Asia is more concentrated in a few bulk commodities. Agricultural trade in the APEC region is strongly influenced by economic growth, though government policies and other factors, such as exchange rates and commodity prices, are also important. In 1997 the region's economic growth is expected to remain steady at 3.5 percent, the same as in 1996, and significantly above the rest of the world. The robust growth in 1996 in the region's two leading economies, Japan and the United States, was offset by slower growth in the rest of East Asia and ASEAN. Japan has long been the world's largest net importer of agricultural products. But other Asian APEC members are now emerging as important markets because of rapid economic growth and large populations. There are two categories of these markets. The first includes South Korea and Taiwan, long-time importers of agricultural raw materials, who are diversifying their purchases to include more consumer-oriented products such as meats, horticultural products, and other processed products. The second includes some of the ASEAN markets (Thailand, Malaysia, Indonesia, and the Philippines), which are more richly endowed with agricultural land resources than Taiwan or South Korea. In these countries, growth in demand for some commodities has outstripped domestic supply. Southeast Asia is emerging as a large market for raw agricultural materials and feedstuffs, as well as a few horticultural and processed products. The dynamics underlying the six emerging markets (South Korea, Taiwan, Thailand, Malaysia, Indonesia, and the Philippines) vary, but several important themes emerge. Income growth has spurred a process of westernization that has included increased consumption of meats. Livestock products are a special case because imported feedstuffs can sustain high-cost domestic producers who are shielded from competition with other countries' low-cost livestock products. Whether the United States exports feedstuffs or livestock products to these markets depends upon each market's trade policy and comparative advantage. In Taiwan and South Korea, high barriers to trade are being reduced, leading to increased meat imports. The substitution of imported meat for domestic production will slow import growth of feed grains. In the ASEAN countries, livestock industries are at a more incipient stage of development. Their international competitiveness is obscured by barriers to feedstuff imports that have raised costs of production, as well as by barriers to meat imports. Thailand, once a net exporter of corn, has become a small net importer, partly to support its expanding poultry and pork industries. Thailand's poultry exports are in doubt as domestic consumption is expanding more rapidly than its export markets. Rising wages caused by economic growth have changed the economic structure of these emerging markets, shifting comparative advantage away from labor-intensive to more capital- intensive and service-oriented production. The wealthier economies, like Japan, South Korea, and Taiwan, have moved away from the apparel and leather industries, which have shifted to lower-wage economies like Thailand, Indonesia, and South Asia. Declining U.S. exports of cotton and cattle hides to high-income East Asia have been partially offset by rising exports to ASEAN and China. Other factors affecting the APEC trade environment include the rising flow of foreign direct investment (FDI) into the APEC region's food processing sector. Sales of processed foods by U.S. foreign affiliates now exceed U.S. processed food exports to the region by about two to one, a trend observed globally. While there is some controversy over FDI displacing exports, both affiliate sales and exports are rising because of the region's strong demand for processed food. In 1996, U.S. foreign affiliate sales in APEC were greatest in Canada, Japan, Mexico, and Australia, while U.S. exports of processed products were greatest to Japan, Canada, Mexico, and South Korea. State trading in grains is widespread, with wheat ranking first in value of trade followed by rice, barley, and corn. In 1990-95, wheat exports by state trading enterprises (STEs) averaged 34 percent of the world market, while wheat imports by STEs averaged 21 percent. Rice trade under STEs in the APEC region is concentrated among major importing STEs, which accounted for 14 percent of the world rice market. Barley and corn ranked third and fourth in grain trade under STEs in the APEC region, with barley exports by STEs holding 36 percent of the world market during 1990-95. Importing countries for the four commodities show greater potential than exporters for trade distortion While tariff protection for the region's agricultural and food markets is being reduced, tariffs agreed to in the Uruguay Round Agreement indicate still unfinished business in this area. Average tariff rate bindings for food and agricultural products range from 3.5 percent in Australia to 65 percent in Korea. Net exporting countries like the United States, Australia, New Zealand, and Canada have relatively low average rates, while levels are much higher in developing Asia. City states like Hong Kong and Singapore with no agricultural base have zero or very low tariffs. While the tariff bindings do not by themselves adequately reflect the full tariff protection story, they provide an indication of relative tariff levels. They do not reflect, for example, applied rates that may be well below bindings (e.g. Chile has 26 percent bound rates, but 11 percent rates apply in most cases). Technical barriers to trade are emerging at the center of agriculture trade policy discussions as resolutions and agreements are reached on more traditional trade barriers such as quotas and tariffs. The incidence of these barriers is high in the APEC region. Based on the estimated trade impact, APEC accounted for 63 percent of the technical barriers identified by a preliminary USDA assessment in 1996. Most of the technical barriers in APEC are justified by governments as necessary to protect human and plant health. They include Japanese restrictions on imports of certain apple varieties and South Korean inspection and testing requirements for chemical residues and pests. Regional Overviews APEC To Resume Healthy Growth The APEC region experienced strong economic growth (3.5 percent) in 1996, significantly more than the rest of the world (2 percent). This healthy growth was largely due to robust performance in Japan, the United States, and Mexico. Most other APEC Asian members, however, encountered a slowdown as world demand slackened and their currencies appreciated in value against the yen. The outlook in 1997 is for continued steady growth, with lower growth in Japan and in Southeast Asia, while the United States and its NAFTA partners are expected to expand vigorously in 1997. [Alberto Jerardo (202) 219-0645 and Sophia Wu Huang (202) 219-0679] The United States, Japan, and Mexico Led APEC's Economic Recovery in 1996 ... The Japanese economy recorded a growth rate of 3.7 percent in 1996, the highest since 1991, following several successive years of low growth. The economic recovery picked up as the Japanese yen started to depreciate against the U.S. dollar after reaching its peak in the latter half of 1995 and business confidence in Japan returned. The yen fell more than 30 percent against the dollar from 80 yen per dollar in mid-1995 to 127 in March 1996. Since then the yen has remained relatively weak and is currently around 120 per dollar. The yen's depreciation was a boon to Japan's major exporting sectors such as automobiles, ships, semiconductors, and microchips. The U.S. economic performance in 1996 was relatively strong, completing its fifth year of expansion with 2.4 percent GDP growth. Moreover, this impressive expansion took place with low unemployment and inflation. The unemployment rate, 5.4 percent in 1996, was in its fourth straight year of decline. Inflation was 2 percent as measured by the GDP deflator and 2.9 percent according to the consumer price index. However, one major economic indicator--the current account deficit--is of concern. The U.S. current account deficit climbed to $164.1 billion in 1996 (2 percent of GDP), the largest in the world, reflecting steady growth in domestic income and appreciation of the U.S. dollar. The impressive turnaround of Mexico's economy was also a major contributor to APEC's overall economic improvement in 1996. Mexico's economic recovery exceeded expectations as GDP rebounded from -7.2 percent in 1995 to 5.1 percent in 1996. The improvement of Mexico's economic health also permitted it to borrow again from international financial markets. ... But Most Asian APEC Economies Experienced Slower Growth in 1996 Except for China, Asia's other emerging markets--Hong Kong, Singapore, South Korea, Taiwan, Indonesia, Malaysia, and Thailand--simultaneously experienced a slowdown in GDP growth in 1996. The slowdown was caused by sluggish import demand in Japan and Europe, the U.S. dollar's appreciation against the Japanese yen, and a slump in world prices of computer chips (the price of the most frequently used DRAM memory chip declined 70 percent in 1996). As heavy exporters of electronic components, many Asian APEC members faced lower sales to the advanced economies. Also, rising wages reduced competitiveness in these countries, especially in labor-intensive industries. These economic events hit Singapore, South Korea, and Thailand the hardest. With electronics making up 44 percent of manufacturing output and 60 percent of its non-oil exports, Singapore was especially hurt by the weakness of the world electronics market in 1996. Singapore's GDP growth dropped 2.2 points to 6.7 percent. The economic crises in South Korea and Thailand, however, were more serious and worrisome. South Korea suffered a slowdown in 1996 as most of its major industries--electronics, steel, petrochemicals, cars, and ships--suffered a drop in global demand and a fall in export prices. Because Japan and South Korea compete in many of the same export industries, the weak yen last year allowed Japan to undercut South Korean products such as cars, electronics, and ships in global markets. South Korea's GDP growth slowed to 7.1 percent in 1996 from 9 percent in the previous year, and South Korea's current account deficit swelled to a record $23.7 billion (4.7 percent of GDP), second only to the United States. A crisis of confidence in the South Korean economy started when the Korean Composite Stock Price Index fell below the psychological barrier of 700 points in December 1996, when two of the country's giant conglomerates (chaebol) collapsed, and political corruption erupted anew. Thailand's economy weakened to 6.5 percent in 1996 after a decade of more than 8 percent annual GDP growth. The slowdown was in part due to the government's unsuccessful efforts to fight inflation and reduce the current account deficit. Thai inflation in 1996 reached 5.9 percent, while the current account deficit fell only slightly to 8 percent of GDP, the same size as Mexico's before its collapse in 1994. In addition, currency speculators repeatedly battered the Thai baht. The Thai stock market lost more than 35 percent of its value between January and December 1996, and fell to a 3-year low. In contrast, the performances of the Philippines and China were not adversely affected. Five years into a reform program under President Ramos, the Philippine economy improved from near-zero growth in the early 1990's to a respectable 5.7 percent in 1996. In China, tight monetary and fiscal policies achieved a soft landing for the overheating economy, with GDP growth and inflation falling to single-digits of 9.7 and 6.1 percent in 1996, the first time since 1991. For the past 3 years, reducing inflation has been the top priority of China's economic agenda. One factor in China's success in controlling inflation was improved agricultural production. A large crop in 1995, followed by the record 1996 grain output, helped stabilize prices. Slower Growth in Japan and Other Asian APEC Members in 1997 The Japanese economy is not expected to repeat its strong performance of 1996. The recovery is not yet on a sustainable higher-growth path because it is still clouded by the sizable fiscal deficit, inefficient non-manufacturing industries protected from international competition, and bad debts on the books of financial institutions. Recent fiscal tightening, including an increase in the consumption tax and new measures to lower government spending, will lead to slower GDP growth in 1997. Concern about the budget deficit is affecting agriculture, although spending on surplus rice remains high. The government's purchase prices of domestically produced wheat and barley have been cut for the first time in years, and special subsidies supporting farm and rural infrastructure have been stretched over a longer period with no increase in total outlay. Despite these restraints, some bright spots exist, including vibrant manufacturing, a high savings rate, low interest rates, and near-zero inflation. The 1997 outlook for the other Asian APEC markets has dimmed somewhat because of the successive currency devaluations initiated by the Thai baht in July and subsequent delinking from a U.S. dollar anchor. The financial crisis in Thailand led to a $16.7 billion bailout, organized by the International Monetary Fund in late August. The size of the bailout is second only to the $50 billion earmarked for Mexico in the 1994 peso crisis. In contrast to Latin America, however, most Southeast Asian countries have stronger fiscal positions and higher savings rates. Most have manageable debt and growth is expected to remain higher than in Latin America. Led by private investment and exports, the emerging Asian markets will recover from their slowdown. Exports are expected to rebound as global industrial activity picks up, including electronics sales. Interest rates, however, will remain relatively high to counter inflationary pressures, to keep exchange rates stable, and to attract foreign funds that will help finance current account deficits. As these emerging Asian economies mature, they are unlikely to match the growth achieved during their years of economic takeoff. Nevertheless, they are expected to sustain growth rates of 5 and 7 percent, still more than double the rate in the advanced economies. China's GNP growth in 1997 is expected to remain close to last year's 9.7 percent without increased inflation. While questions have been raised over what lies ahead for Hong Kong now as part of China, Hong Kong should continue to prosper as an international financial center. Under the stipulations of the Basic Law governing Hong Kong after July 1997, the Territory will continue its commercial autonomy for at least 50 years. NAFTA Countries Maintain Momentum in 1997 The U.S. economy is expected to expand robustly in 1997, with inflation at 2.5 to 3 percent. The Federal Reserve's monetary policy will keep U.S. interest rates stable, helping the dollar react more to factors such as the trade balance and relative GDP growth. Business investment and private consumption, however, will continue to boost U.S. domestic demand even as the trade deficit widens, the delayed result of the dollar's previous strength. As APEC's biggest economy, the United States is the group's largest trader. Asia's dynamic growth significantly increased U.S. trade with Asia in recent years. For example, from 1990 to 1995, U.S. exports to Asian APEC expanded 63 percent, while U.S. imports from the region rose 58 percent. In contrast, U.S. exports to and imports from the rest of the world increased 41 percent. Canada's gross domestic investment and exports are expected to lead to stronger GDP growth in 1997 despite flat domestic consumption, partly reflecting the still high unemployment rate. Canadian economic activity in 1996 slowed because of a sharp drop in export growth. Mexico's strong export performance together with reduced inflation and interest rates should sustain economic recovery in 1997. The overall economy is gaining strength, external debt service is down, and the government deficit is small. Although Mexico's economy is recovering, job creation remains a disappointment. Domestic consumption, as reflected in retail sales, will remain weak because wages have not kept pace with inflation. References International Monetary Fund (IMF), Direction of Trade Statistics, 1996 Yearbook. IMF, World Economic Outlook--Prospects and Policy Issues, March 1997. DRI/McGraw-Hill, World Economic Outlook, Volume 3, Third Quarter 1997. The Pacific Economic Cooperation Council, Pacific Economic Outlook, 1997-1998, June 1996. U.S. Agricultural Exports to APEC Region at Another Record U.S. agricultural exports to the APEC region climbed to a record $36.7 billion in fiscal 1996, up nearly 10 percent from a year earlier, but much less than the 23-percent jump in fiscal 1995. Increased bulk commodity exports led the growth, boosted by high prices for grains and soybeans. To a much lesser degree, U.S. exports of consumer-ready food products also increased. The United States sold 61 percent of its total agricultural exports to the region in fiscal 1996, about the same as the previous year. U.S. agricultural exports to the region in fiscal 1997 are projected to decrease slightly. [Sophia Wu Huang (202) 219-0679] Sales Rise for Bulk Commodities and Consumer-Oriented Food Products U.S. bulk commodity exports to the APEC region surged 22 percent to a record $16.5 billion in fiscal 1996 (table 2). The region accounted for 58 percent of total value of U.S. bulk commodity exports, including 73 percent of coarse grains, 37 percent of wheat, and 56 percent of soybeans. A 42-percent jump in the value of U.S. soybean exports to the region led the growth, boosted by high prices and strong import demand from Mexico, China, and the Association of Southeast Asia Nations (ASEAN). The increased export value of 29 percent for U.S. wheat and 37 percent for U.S. coarse grains was due to high grain prices, since the volume of U.S. wheat and coarse grain exports to the region declined 3 and 6 percent, respectively. The gains more than offset lower export values for cotton. U.S. cotton exports to the region dropped 9 percent to $2.4 billion because of an abundant world supply and high U.S. cotton prices. In fiscal 1996, the APEC region was the destination for 80 percent of total U.S. cotton exports, used as raw material in the export-oriented textile industry. U.S. exports of consumer-ready food products to the APEC region in fiscal 1996 reached a record $14 billion or 71 percent of total U.S. consumer-ready food exports. Red meats (fresh, chilled, and frozen) contributed most to the growth, but some of the sharpest gains were in tree nuts, fruit and vegetable juices, and dairy products. Record exports were recorded for several other product groups, including processed fruits and vegetables and poultry meat. Increased exports to wealthy East Asia and, to a lesser degree, to fast economic growth countries of ASEAN were responsible for most of the growth in U.S. exports of consumer-ready food products to the region. Red meats, mainly beef and pork, have been historically the most important consumer-ready products imported by the region, which received 92 percent of total U.S. red meat exports in fiscal 1996. Total U.S. red meat exports to the APEC region increased 8 percent from fiscal 1995 to a record $4 billion. Beef was the largest component ($2.5 billion versus $1.5 billion for non-beef red meats), but pork rose at a faster rate (30 percent versus 3.9 percent for non-pork red meats). Improved competitiveness of U.S. pork, particularly in Japan, fueled a rapid increase in exports to the region. U.S. chilled pork made significant inroads on the Japanese market due to improved packing and transportation technology. U. S. pork did well in Japan's main retail chain because the United States remained the only volume supplier of specific cuts (such as loins). U.S. exports of intermediate agricultural products to the APEC region dropped 3 percent to $6 billion in fiscal 1996. A sharp drop in soybean oil exports because China diversified its soybean oil suppliers to Brazil and Argentina, as well as a smaller drop in exports of hides and skins, led to the decline. Decreased exports of U.S. hides and skins were mainly due to the restructuring of the region's leather goods industry. High labor costs, particularly in East Asia, have for years caused many East Asian firms in the labor-intensive, export-oriented leather goods industry to either close their businesses or move to other cheaper production sites such as China and ASEAN. U.S. exports of hides and skins to China, ASEAN, and Mexico increased $73.3 million to about $270 million, but exports to East Asia dropped $195 million to $1.1 billion. In fiscal 1996, 88 percent of total U.S. hides and skins exports went to the APEC region. Record U.S. Agricultural Exports to East Asia, NAFTA, and ASEAN, But Not to China U.S. agricultural exports to many parts of the region set records in fiscal 1996 (figure 1). The emerging market of ASEAN grew rapidly (30 percent) to reach a record $3.3 billion, or 5.6 percent of total U.S. agricultural exports (figure 2). With 10-percent growth, the huge East Asia market purchased a record $20 billion, or 33.5 percent, of total U.S. agricultural exports. Similarly, with 11-percent growth, the NAFTA market purchased $11 billion, or 17.6 percent, of total U.S. agricultural exports. U.S. agricultural exports to the region as a whole grew 10 percent in fiscal 1996, compared with 9 percent in the non-APEC region. Total U.S. agricultural exports to the region reached a record $37.6 billion or 61 percent of total U.S. agricultural exports in fiscal 1996, about the same as the previous year. Exports to China, however, declined 25 percent to $1.8 billion in fiscal 1996. The substantial decline was largely due to reduced soybean oil purchases (caused by diversifying to other suppliers), and reduced purchases of coarse grains, wheat, and cotton. In a drive toward self-sufficiency, the Chinese government not only tightened control on grain imports but also strongly encouraged farmers to expand grain production through increased price supports. The volume of U.S. exports to China in fiscal 1996 declined 39 percent for wheat (from 3.8 to 2.3 billion tons) and 63 percent for corn (from 4 to 1.5 billion tons). China's expansion of grain production, however, has increasingly taken land from other crops, particularly soybeans, for which demand has increased over the years, resulting in increased soybean imports. China's cotton imports decreased because of substitution of cheaper synthetic fibers and increased domestic cotton supplies. Bulk commodities accounted for 81 percent of China's purchases of U.S. agricultural products in fiscal 1996; intermediate and consumer-ready products accounted for 14 and 5 percent, respectively. East Asia is a long-term, regular, and expanding market. In particular, sales to Japan, the long-term leading U.S. customer, rose 11 percent in fiscal 1996 to $11.9 billion, after jumping 13 percent in the previous year. Strong import demand for U.S. meats caused by a continued decline in domestic livestock production, more open trade policies in compliance with Uruguay Round commitments, and, above all, rising prices for major bulk commodities raised the value of Japan's imports in fiscal 1996. The NAFTA partners of Canada and Mexico were the second and third largest single markets, respectively, for U.S. agricultural products in fiscal 1996. Trade between the United States and Canada has expanded rapidly since 1989 when the two countries implemented the U.S.-Canada Free Trade Agreement, later incorporated into NAFTA in 1994. The preferential access to the Canadian market given to U.S. agricultural products by NAFTA has been a major factor in making Canada an important destination for U.S. agricultural exports. U.S. agricultural exports to Canada reached a record $6 billion in fiscal 1996. Growth was only 2 percent, much less than the previous year's 11 percent, mainly due to decreased U.S. exports of beef and fresh vegetables. High grain prices encouraged herd liquidation in Canada, lowering demand for beef imports. Low prices pushed down the value of U.S. fresh vegetable exports to Canada despite a slight increase in volume. The most dramatic growth of U.S. sales in fiscal 1996 occurred in Mexico. U.S. agricultural exports staged a remarkable comeback after Mexico's peso crisis of December 1994 led to a deep recession and a sharp decline in U.S. agricultural exports in fiscal 1995. U.S. agricultural exports to Mexico surged $1.3 billion to a record $5 billion in fiscal 1996. In particular, high prices and sharp increases in import demand for many bulk commodities because of severe drought pushed U.S. bulk exports to Mexico to a record $2.8 billion. Record-high values were set for corn, soybeans, wheat, cotton, and rice shipments. Sales in the consumer-ready product category, however, decreased nearly 7 percent to $1.1 billion. Demand for consumer-ready products remained weak because of the lingering effect of Mexico's recent economic crisis. U.S. exports to ASEAN grew consistently at a fast pace for the past several years, even though no country in ASEAN purchased more than $1 billion of U.S. agricultural products. Growth in Malaysia, the Philippines, and Indonesia was particularly impressive, with Indonesia and the Philippines on the verge of becoming $1 billion markets. Growth was primarily from increased purchases of grains and soybeans, but trade in intermediate and consumer-ready products also increased. U.S. Agricultural Exports to APEC Region Expected To Drop Slightly in Fiscal 1997 After 2 years of record-setting U.S. agricultural exports to the APEC region, fiscal 1997 exports are projected at $36 billion, down 1 percent from 1996 though still the second highest on record. U.S. agricultural exports to East Asia and ASEAN are projected to decrease, and exports to China and the NAFTA partners to increase. Exports to Canada are expected to expand steadily, while a stronger Mexican economy will generate rising import demand. U.S. agricultural exports to China in fiscal 1997 also are projected to increase because of strong import demand for soybeans and soybean products and a whole range of high-value products, stimulated by fast economic growth. China's drive toward self-sufficiency, however, not only reduced its import demand for grains, but also is making the country a net exporter of corn again in fiscal 1997. In ASEAN and East Asia, the value of U.S. farm exports is expected to decrease slightly, mainly because of declining prices for wheat and coarse grains and the late 1996-early 1997 dollar appreciation versus the yen. The handover of Hong Kong to China in July will probably not have major effects on the trade flows of U.S. agricultural exports to the region for fiscal 1997. U.S. Agricultural Imports from the Region Reached Record High in Fiscal 1996 U.S. agricultural imports from the APEC region in fiscal 1996 grew 7.5 percent to a record $17 billion (table 3). The region provided more than half of total U.S. agricultural imports, with Canada (20 percent) and Mexico (11 percent) the dominant suppliers. Imports from Canada surged 20 percent to a record $6.4 billion. The increases were led by cattle, beef, and hogs, as high grain prices encouraged rapid herd liquidation. U.S. farm imports from Mexico dropped 1 percent, to $3.7 billion, but they were still the second highest on record. A jump of 33 percent in fiscal 1995 was largely due to favorable terms of trade following the peso's devaluation against the dollar. Together with Chile, the Western Hemisphere members of the APEC supplied a little more than one-third of total U.S. agricultural imports in fiscal 1996, consisting of a wide variety of products. U.S. agricultural imports from the Asian APEC region are mostly concentrated in a few products. In fiscal 1996, more than half of U.S. farm imports from ASEAN were rubber and allied products and tropical vegetable oils, with the former accounting for 94 percent and the latter 99 percent of U.S. imports in these categories. ASEAN supplied more than 10 percent of U.S. agricultural imports in fiscal 1996, slightly lower than the previous year. More than 70 percent of U.S. agricultural imports from Australia and New Zealand are animals and their products. Together with the tiny supplier of Papua New Guinea, the Oceania members of APEC provided 5 percent of total U.S. agricultural imports, slightly lower than the nearly 6 percent in fiscal 1995. The rest of the APEC region does not play a leading role in U.S. agricultural imports. East Asia and China supplied only 4 percent of total U.S. agricultural imports in fiscal 1996, the same as the previous year, mainly specialty products, such as garlic, mushrooms, and canned bamboo shoots. Special Article Emerging Import Markets in Asia by Gary Vocke (202) 501-5575 1/ Abstract: U.S. agricultural exports to Asia expanded rapidly in the 1990s. The six Asian countries covered here accounted for one quarter of the expansion of U.S. agricultural exports from 1990 to 1996. In the last decade, under pressure from trade partners, South Korea and Taiwan have reduced and eliminated some barriers to trade and new trade flows in high-value products have emerged. The Southeast Asian countries are emerging markets for a much wider range of imports than East Asia, bulk commodities as well as high-value products. 2/ Keywords: South Korea, Taiwan, Philippines, Indonesia, Thailand, Malaysia, agricultural imports 1/ Agricultural economist, Commercial Agriculture Division, Economic Research Service, USDA. 2/ This paper was prepared before the July 1997 financial crisis in Southeast Asia. It is premature to assess the consequences of this financial crisis for the long-term trends discussed in this paper. Asia accounts for more than half of the 1990s expansion of U.S. agricultural exports (figure A-1). U.S. exports to Japan and China have historically received much of the attention. However, as the world map (figure A-2) shows, other Asian countries are also gaining importance. This paper investigates the agricultural imports of six of these other Asian countries: South Korea, Taiwan, Philippines, Indonesia, Thailand, and Malaysia. Factors Causing Growing Markets for Agricultural Trade in Asia Important factors underlying the increased imports by these East and Southeast Asian countries are economic growth, urbanization, transportation and marketing changes, and trade policies. 3/ East Asian economic growth and urbanization since the 1970s initially created large import markets for bulk commodities for food, feed, and inputs for textile and leather industries. More recently these forces, in combination with transportation and marketing changes and trade policy shifts, are creating emerging markets for a wider range of imports. The early East Asian pattern, import markets dominated by bulk commodities, is now developing in Southeast Asia. 3/ For this paper, trade data for the six countries are summed into regional aggregates called East Asia (South Korea, Taiwan) and Southeast Asia (Philippines, Indonesia, Thailand, and Malaysia). Economic Growth and Urbanization Economic growth in the Asian region has been strong in the 1980s and 1990s (table A-1). Incomes across the six countries vary greatly, with income per person in the Philippines and Indonesia considerably below incomes in the other four economies. But, income is not distributed evenly over households in these countries. Even in the lower-income Southeast Asian countries, many households now have incomes high enough to create expanding markets for imported agricultural products. Moreover, growth among the various sectors has been uneven, with the agricultural sector growing much more slowly than the manufacturing and service sectors. Hence, job growth has occurred principally in urban areas, and wages have been rising. The outcome has been that many people have moved from rural to urban areas, drawn by new jobs and higher wages in manufacturing and services. In combination, rising incomes and urbanization explain much of the consumption increases that are outpacing East and Southeast Asian agricultural production, leading to imports. Rising incomes allow a household, whether urban or rural, to increase its consumption of more expensive food items such as meat and fruit products. A wealthier household can also save time spent in food preparation by purchasing more processed foods, such as instant noodles and fruit preparations. Urban residents have easier access to a wider variety of food choices than are available in rural areas. Hence, higher-income urban residents are consuming more meats, vegetable oils, baked products, and other processed foods. Whether these desired foodstuffs are supplied domestically or imported is partially shaped by climate, land availability and use patterns, and availability of labor and capital. Government policies are also pivotal. The climate of Southeast Asia has, so far, not supported high yields for soybeans and corn, and precludes wheat production. The paddy fields of South Korea and Taiwan are better suited for growing rice than for corn or wheat. Throughout these Asian economies, the terrain and the land use patterns do not offer abundant land to produce feeder cattle or milk cheaply, leading some economies (Taiwan, for example) to rely heavily on imports. Rising wages have also changed the industrial structure of Asian economies. The higher wages that occurred with economic growth in East Asia have caused a shift away from labor-intensive manufacturing of clothing and leather goods. Within Asia, this means that East Asia is importing less cotton fiber and cattle hides, while imports into low-wage Southeast Asia and China have increased. Food Marketing Changes The organization of food marketing has undergone significant changes in East Asia, and now in Southeast Asia. The increase in number and scale of retail food establishments, principally supermarkets and department stores, has allowed significant savings on food distribution costs. These modern outlets can display a large variety of food products, especially perishable goods. Other changes include improved refrigeration and storage that slow ripening and reduce spoilage, modular transport containers that reduce packing and unpacking, electronic tracking and organization of product movement, and many other innovations. For example, with controlled- and modified-atmosphere containers slowing the ripening process, U.S. exporters are now able to ship highly perishable horticultural products long distances by ship. Boat freight can cost as much as 60 percent less than shipping by air, making products more affordable to a wider set of consumers [Mongelluzzo, 1996]. The slowing of ripening also extends the shelf life for fruits and vegetables once they reach their destination. Advanced transportation methods have also affected the shipping of meat products, allowing fresher, better-quality meat products to reach Asia at a lower cost. These advances allow more distant suppliers, including the United States, to be more competitive with nearby suppliers. Agricultural exports, usually processed products, have followed the spread of western-style fast food outlets in Asia. Western-style fast food was introduced in Asia at the 1970 World Expo Fair held in Osaka, Japan [State Regional Trade Groups, 1994]. Kentucky Fried Chicken opened its first outlet in 1970, Mister Donut and McDonalds in 1971, and Baskin-Robbins in 1974. While Japan has been a focus of the spread of such outlets, the pattern is being duplicated across Asia, first in East Asia, and now in Southeast Asia. Industry analysts estimate that imports supply more than 70 percent of the foods in these restaurants [State Regional Trade Groups, 1994]. Major imported items are beef, wheat for buns, and french fries. Changing Trade Policies With economic growth, first in East Asia and now Southeast Asia, the manufacturing and service sectors increasingly compete with agriculture for labor and capital. At the same time, demand for more livestock products sharply increases the pressure on the agricultural system to produce large supplies of feedstuffs. Supplementing grain diets with livestock products rapidly increases crop output requirements. One kilogram of livestock product produced in an intensive production system requires 2-6 kilograms of feedstuffs. Rising demands have often outpaced domestic feedstuff production. Governments are then confronted with a political choice: either stick with their long-standing political goals of agricultural and food self-sufficiency, or allow labor and capital to be drawn away from agriculture and import the needed foodstuffs. Asian governments have often limited the competition of foreign suppliers with their own producers, raising food prices for their consumers. In East Asia, governments have developed their protectionist strategies around a few principles. One, inputs for manufacturing, like cotton fiber and cattle hides, can be readily imported. Second, domestic meat, egg, and milk production is expanded under strict import protection. Meanwhile, the inputs to animal agriculture--feedstuffs and breeding stock--are usually readily imported. Finally, these countries gave rice maximum protection from imports, propounding a doctrine of food security. However, a core aim of these self-sufficiency policies has been to support farm income by limiting foreign competition. The overall impact on consumers of this protectionist strategy has been to make food more expensive than in other countries, such as the United States. In Southeast Asia there are differences in strategy by country and over time, but there are some commonalities in policies for the livestock sector. Malaysia, the wealthiest of the four Southeast Asian economies covered here, has long depended on agricultural imports, including rice and feedstuffs. Livestock product imports are limited by tariffs. Labor shortages are a serious constraint for the agricultural sector. Thailand is a highly competitive exporter of large quantities of rice, cassava, poultry meat, and until recently, corn. The country, however, has had to protect its soybean and livestock producers from import competition. When domestic feed demand outpaced domestic corn production, Thailand initially attempted to restrict imports to promote increased local corn production. With the recent loss of poultry meat export markets to lower-cost competitors, the government has liberalized the imports of both corn and soybean meal. Labor shortages are beginning to constrain its agricultural sector. The Philippines has shifted recently from a policy of self-sufficiency, especially for rice and corn, to a policy of food security. This new policy is based on the use of imports of grain to maintain price stability. The country uses tariff rate quotas for limiting the competition of livestock product imports. Indonesia has removed feedstuffs imports from its state trading regulations (corn in 1989 and soybean meal in 1996) and is not now pressing major campaigns for self-sufficiency in rice as in the past. Imports of livestock products are strictly controlled through licensing of importers. Finally, membership of these four countries in the Association of Southeast Asian Nations (ASEAN) and participation in its regional free trade agreement are not expected to raise barriers to imports from countries outside the region (see box ). Asian Food and Feed Import Patterns The traditional mix of agricultural imports by East Asia after World War II has primarily been staple foods, feedstuffs for livestock production, and raw materials for manufacturing (cotton, hides, rubber, etc.). The composition of agricultural imports by South Korea and Taiwan from the 1960s until the early 1980s followed this traditional pattern. Since the 1980s, however, the import mix by these East Asian countries has changed rapidly. Import markets for a wider variety of agricultural products have emerged as incomes rise and trade is deregulated. The changing composition of agricultural imports by South Korea and Taiwan is reflected in the share of these products imported from the United States. The share of these emerging market products (meats, fruits, vegetables, processed foods, and beverages) more than doubled from 11 to 26 percent over the past decade (figure A-3 to A-6). Imports of staple food grains, oilseeds, and oilseed products, have also increased, but not as rapidly, thus losing share. Imports of cattle hides and cotton fiber, in contrast, have declined as textile and leather manufacturing moved to lower-wage countries. In Southeast Asia, imports from the United States are now concentrated in the staple foods, feedstuffs, and manufacturing inputs. The growing export of U.S. feedstuffs and cotton fiber is driving the rapid expansion of U.S. agricultural exports to the region. Notable, however, is the rise of U.S. horticultural exports, primarily fruits and fruit preparations, to the region. Imports of Staple Foods Rice is the traditional staple grain grown over most of Asia. Of the countries covered here, only Thailand produces a large surplus for export. Maintaining self-sufficiency in production and stability in prices are important objectives in the other countries, except for Malaysia, which is quite dependent upon rice imports. Indonesia and the Philippines are sometimes significant importers during periods of unexpected production shortfalls due to bad weather, pests, or other natural causes. However, rice's role as a staple food is changing as incomes rise. Asian consumers go for a diversified diet and prefer high-cost quality food, such as wheat products, horticultural products, fish, and meat. Wheat products are substitutes for rice in higher-income, urban populations in Asia. However, in East Asia, this substitution has probably reached its limit. Wheat consumption per person has been stable for over a decade. Rice consumption, however, is still declining in East Asia because consumers are increasing their consumption of livestock and horticultural products. In Southeast Asia, the substitution of wheat products for rice is still on-going. Wheat-based products are not traditional food staples for tropical Asia because wheat is not a tropical crop. Consumption is only possible with imports. Southeast Asian markets are expected to be fast growing wheat markets over the next few years (figure A-7). With this growth, these countries will account for 20 percent of the projected increase of world wheat trade by 2005 [Commercial Agriculture Division, 1997]. U.S. shares of Asian wheat markets vary widely, with the smallest shares in the fast growing markets of Southeast Asia (table A-2), mostly because of competition from nearby Australia. Besides being very price competitive, the noodle-making characteristics of Australia's white wheats are an important quality advantage in Asian markets (see box). For example, South Korean millers say Australia increased its market share after deregulation of South Korea's wheat imports because noodle manufacturers preferred flour from Australian white wheat [Stephens, 1997. Huo, 1997]. Prior to deregulation, the United States had a 100 percent share of that market. Now, the U.S. share is about 70 percent, and Australia has a 25 percent share. Oriental noodles are an increasingly important use of wheat in Asia. For example, in Indonesia, the largest importer in Southeast Asia, noodles' share of wheat consumption has doubled in the past decade. U.S. wheats are very competitive for breads and other uses, including wheat products for western-style, fast food restaurants. These products include hamburger buns, pizzas, and donuts. Oilseeds straddle two end-use groups: the feedstuff group (oilseed meal) and the staple foods group (vegetable oil, tofu and other processed bean products). Soybean products are a particularly important source of protein in Indonesia for about 65 percent of the population in traditional preparations of tofu, tempe (fermented soybean cake) and soy sauces. Tofu producers prefer relatively soft soybeans, thus their preference for freshly harvested domestic soybeans. Tempe producers prefer large, dry grains typical of imported soybeans. Imports of soybeans are expected to increase, for processing into food products and for soybean meal for domestic livestock production (figure A-8). Feedstuff Imports: A Policy Decision Countries with rising meat demands have a choice of strategies to fulfill consumption. A market-based strategy would allow international prices to determine whether livestock products will be imported or produced domestically. If profitable, feedstuff shortfalls for domestic livestock production can be offset through imports of corn and soybeans/soybean meal. An alternative strategy was adopted by South Korea and Taiwan. Both restricted livestock product imports and allowed feedstuffs to be readily imported to support the expansion of their sheltered domestic producers. In the late 1970s, livestock sector output was already 30 percent of agricultural output in Taiwan and South Korea. The livestock sectors of these countries expanded steadily under their government's protectionist umbrella to more than 50 percent of agricultural output in 1995 [Food and Agriculture Organization, 1997]. Consequently, South Korea and Taiwan became very dependent upon imported feedstuffs. In total, they produced only 6 percent of their coarse grain use for 1995-96. In contrast, the value of livestock output in Southeast Asia was only 15 percent in the late 1970s. This proportion was constant until the early 1990s. Livestock output growth then began outpacing crops in 1990, achieving a 20 percent share in 1995 [Food and Agriculture Organization, 1997]. These countries now must choose whether to continue using protectionist strategies against imported livestock products as demand within their countries for livestock products has started to rise. Continuation of present policies is projected to make Southeast Asia an increasingly important feedstuff importer (figures A-9 and A-10). Even though domestic corn production will increase, it will not keep pace with the region's rapidly expanding livestock sector. This trend was sharply re-enforced with the recent switch of the region's only major corn exporter, Thailand, from an exporter to importer of corn (figure A-11). To ensure adequate feedstuff supplies, these countries are also expected to give their feed manufacturers easier access to low-cost, imported feedstuffs. Their goal is twofold: raise rural incomes with a rapidly growing domestic livestock sector and to increase animal protein consumption without increasing imports. Presently, meat consumption is low in Southeast Asia (figure A-12). Consumer-Ready, High-Value Product Imports Liberalized Most agricultural imports into East Asia rarely involved products that went directly to retail shelves for consumers. Feed was processed through animals, wheat and vegetable oil were processed into various foods, and the industrial raw materials underwent transformation into clothes, shoes, and other products. However, East Asia's agricultural imports have broken through the old pattern, and a wider range and increasing volume of imports are reaching consumers more directly. These include meats, fruits, vegetables, processed foods, and beverages, in chilled, frozen, canned, and other forms. Meats dominate the value of trade in this new category. Modern meat trade in Asia developed first in Japan, and Japan remains central to the dynamics of the Asian meat trade. The opening of Japan's large market was the stimulus for the development of Taiwan's pork export industry and the poultry meat export industries of Thailand and China. Thus, Japan's meat imports also help explain the structure of the region's feedstuff trade. As Japan opened its large consumer market, foreign livestock producers proved to be very competitive with the country's high-cost domestic producers. The country is now a huge import market for animal products. While Asia accounted for 54 percent of U.S. meat export growth from 1990 to 1996, the gains were mostly due to Japanese imports. Consequently, Japanese feedstuff imports have slowed as the country's meat consumption increasingly depends on imports. Meat self-sufficiency is also expected to decline for South Korea and Taiwan (table A-3). Pressure from trade partners is expected to encourage these countries to adopt policies allowing even more import competition, which is expected to slow the expansion of their livestock production. Southeast Asia governments are projected to continue protecting their livestock producers from foreign producers while allowing the import of cheap feedstuffs. Import markets for U.S. meats in these countries will be limited mostly to supplying the hotel and restaurant sectors over the next decade. Beef and Pork Trade. Growth of the South Korean livestock sector was mostly to meet domestic demand. In Taiwan, however, sector expansion also was aimed at exporting pork to Japan. Taiwan has been supplying 30 to 40 percent of imports by Japan, its only pork export market. When Taiwan was forced to cease exporting pork in 1997 because of a disease outbreak, the United States lost some feedstuff sales to Taiwan, but, with Denmark and Canada, gained Taiwan's share of the Japanese pork market. U.S. beef is a very competitive product for high-income consumers of western-style meals. The U.S. practice of grain-feeding young steers and heifers produces tender beef that is considered a high-quality product. Beef from grain-fed cattle is more tender because grain-fed cattle reach a mature weight at an earlier age and the beef they produce has a higher degree of marbling. Canada and Japan also produce mainly grain-fed beef. Beef production in Australia, New Zealand, South Korea and Taiwan is mostly grass or forage based, though grain feeding is becoming more important in Australia and South Korea. Lower-priced, grass-fed beef exports from Australia and New Zealand have a competitive advantage in the western-style, fast food sector for hamburgers. Also, many traditional Asian beef dishes do not require a tender product because the meat is thinly sliced or ground first, and cooked for long periods. Broiler Meat Trade. Asian poultry meat trade has also been influenced by the opening of Japanese markets. Japanese preference for dark meat to white, the opposite of U.S. consumers, created export opportunities for bone-in legs from the United States and deboned leg meat first from Thailand, and now China and Brazil. Thailand has been very successful in exporting broiler meat to Japan since the late 1980s, exploiting its low-wage competitive advantage for producing deboned products, its own corn production (Thailand was a net exporter until 1994), and imported protein supplies. Thailand supplied about half Japan's frozen, processed-parts imports. Subsequently, China, with even lower wages, emerged as an exporter to Japan, surpassing Thailand in 1994. Rising labor costs for deboning and high feed costs have hampered the competitiveness of Thai poultry exports. Thailand's total costs for a ready-to-cook broiler are slightly less than the United States' and greater than China's (table A-4). Compared with the United States and China, Thailand's feed costs are high because the prices of corn and soybean meal are more expensive than in competing countries. In the United States, higher labor costs in poultry processing plants offset lower feed costs. Thailand's better feed conversion partially offsets China's lower feed costs, but China's labor costs are also lower than in Thailand [Charoen Pokphand, 1996]. Consequently, the Thai exporting firms responded by developing high-value cooked products for export; ready-to-eat meals, TV dinners, etc. Rapidly expanding cooked product exports have partially offset the loss of uncooked product exports. Also, these Thai firms have been able to increase their sales domestically with the rapid expansion of western-style, fast food restaurants. South Korea and Taiwan have not been large participants in Asian poultry trade. Both countries have protected their domestic poultry producers from import competition, so poultry imports are limited. In July of this year, South Korea freed trade by converting from a quota system to tariffs that will be steadily reduced until 2005. Taiwan will also change its policies if it joins the WTO. Horticultural Imports. Rising incomes, advancing transportation technology, and falling trade barriers are increasing Asian horticultural imports. Besides price, which tariffs have sometimes raised to high levels, horticultural exports depend upon a mix of characteristics: (1) quality, (2) exotic produce from a different climate, (3) status of branded, imported products, and (4) off-season supply. Based on these characteristics, U.S. exports, for example, apples in tropical and subtropical regions, have good prospects Asia accounted for 35 percent of the expansion of U.S. horticultural exports in the 1990s. High-income Japan, Hong Kong, Taiwan, South Korea, and Singapore are the top Asian markets. The top ranked U.S. horticultural exports are citrus, apples, frozen potatoes (mostly french fries), and almonds. These items accounted for about 30 percent of U.S. horticultural exports to Asia. These markets are opening, not because of a recent rise of income, but because of changing trade policy. For example, U.S. fresh orange exports expanded rapidly when a tariff rate quota was finally negotiated with South Korea in 1995. Orange imports from the United States increased six-fold from $1.7 million in 1995, and nearly 9-fold by 1996 The demand was always there, but it took negotiations to open the market. Although incomes are lower, Southeast Asian imports of horticultural products have also grown rapidly as tariffs have been reduced. There is an expanding middle class in each of the Southeast Asian countries that can afford imported products, especially if retail prices can be lowered by reducing tariffs. For example, fruit imports by Indonesia, with the lowest incomes of the four countries, have grown rapidly since the country dropped its restrictions on fruit imports in 1991. In addition, since dropping the restrictions, tariffs have been cut twice. Consequently, fresh fruit imports have increased more than 20-fold from 1990 to 1996. Indonesia imported nearly $44 million in fruits from the United States in 1996, primarily apples and grapes. The leading exports to Southeast Asia are apples, grapes, frozen potatoes, and citrus. Temperate-climate product imports by these tropical countries are likely to continue to expand as incomes rise. Even frozen french fry imports should continue to grow with the expansion of western-style fast-food restaurants, despite the fact that potatoes are an important crop in the region. Many Asian consumers prefer U.S. french fries (see box). Cotton Fiber and Cattle Hide Import Patterns Increasing wages can alter the comparative advantage a country might have for the export of manufactured goods. Since many processes in clothing and leather goods production use unskilled labor, these are among the first sectors to appear in newly industrializing countries. As wage rates rise, the industries move labor-intensive activities to lower-wage countries. Imports of raw materials (cotton, hides, rubber) follow the migration of the labor-intensive processes (see figures A-13 and A-14). The Asian share of the world textile and footwear markets has grown substantially since the 1970s, mostly at the expense of Europe. Within Asia, textile production has been shifting recently from East to Southeast Asia and China. These countries not only have lower production costs for producing goods for export, they also have rapidly expanding domestic markets themselves. Investments in the latest technology, often made by textile firms from East Asia, combined with low wages, enhanced Southeast Asia's export competitiveness. Now, however, the United States' two biggest markets in Southeast Asia, Indonesia and Thailand, are facing contrasting labor situations. A comparison of Indonesia's labor cost with selected countries shows that Indonesia's labor cost position has not changed much over the past decade (table A-5). Based on current labor costs, Indonesia remains very competitive. Indonesia is dependent on large cotton imports for its export-based textile industry. Recently, the Thai textile industry has been threatened by an emergence of lower-cost competitors (i.e., China, Indonesia, Pakistan, India, etc.). In response, Thailand may have to switch from "commodity" types of textile products marketed in Eastern Europe and the Middle East, which are subject to fierce low-wage competition, to development of specialty product lines that command better prices. The higher profit margin of such fashionable products can cover the cost of higher-wage employees, but are more difficult to produce. The U.S. share of the market in Indonesia, Thailand, and elsewhere in Southeast Asia, is presently about one-third. U.S. exporters face strong price competition from other suppliers for several reasons. The Southeast Asian industries use supplies from several countries to obtain the mix of cotton fiber types needed for the range of goods produced. Also, because the Southeast Asian countries are almost entirely dependent on imports and they import the year round to avoid carrying large stocks, they are importing seasonally from the Northern and Southern Hemispheres. A similar generational sequence has occurred for leather products manufacture and export in Asia. Most major exporters of leather products in Asia import much of the raw material, hides and skins or leather. Domestic availability of raw material is not essential for the successful development of a national leather goods industry. Korea, Japan, and Taiwan remain the largest importers of hides, but their demand is declining. Leather industries in these countries have transferred highly labor-intensive assembly operations to other countries with lower labor costs. Subsequently, China's imports of hides increased substantially. The increase of hide imports by Southeast Asia was about one-third of China's increase. In contrast, tanning (and, for cotton, spinning) operations have transferred much more slowly because they are less labor-intensive than assembly, and require a higher level of technical sophistication. South Korean exports of unfinished leather, therefore, are increasing rapidly. Korea's tanning industry grew rapidly in the early 1980s and peaked in the early 1990s. Hide imports account for more than 95 percent of South Korea's supply. South Korea will be a large, but declining market, as tanning gradually follows the leather goods manufacturing industry to China, Thailand, and other countries. Taiwan's use of hides is also expected to decline in the long term. The United States is the world's leading producer and exporter of cattle hides. U.S. exporters had 44 percent of the import market in East Asia, and 13 percent in Southeast Asia in 1995 [United Nations, 1997]. In contrast, the U.S. shares in 1990 were 29 percent in East Asia and only 2 percent in Southeast Asia. U.S. exporters have rapidly increased their share in Southeast Asia principally because of increased exports to Thailand. U.S. hides are both the highest quality and the most expensive, partly due to transportation costs relative to competing suppliers. As long as the hides are being imported to make high-quality products for export, the higher U.S. prices are not a problem because the return is enough to cover the extra expense [United States Hide, Skins, and Leather Association, 1997]. The domestic hides are of poor quality because they are from old, draft animals whose hides have been damaged during their long life or through inappropriate slaughtering practices. Hides from Australia and China are also exported to Thailand, but their quality is not as high as the U.S. hides. Conclusions Asia's agricultural imports expanded rapidly in the 1990s. The United States benefited from this trade growth as the six Asian countries covered here accounted for one quarter of the expansion of U.S. agricultural exports from 1990 to 1996. While the trend of individual commodity markets varies by country, the rapid growth of these economies, reenforced by policies reducing trade barriers, made the six countries some of the most dynamic markets for U.S. exporters. In the last decade, under pressure from trade partners, South Korea and Taiwan have reduced and eliminated some barriers to trade. The sectors involved in these liberalizations are the ones where new trade flows have emerged. These emerging markets are generally for consumer-ready, high-value products, including meats, fruits, vegetables, processed foods, and beverages. With continued trade liberalization, more new markets for such products can emerge. The Southeast Asian countries are emerging markets for a much wider range of imports than East Asia, as they include bulk commodities as well as high-value, consumer-ready products. As in East Asia, liberalizing trade and lowering tariffs have made a big difference in the retail price and availability of consumer-ready products. In the future, the underlying forces of income growth and urbanization will continue to change diets in predictable ways in Southeast Asia. With higher incomes, people will consume less rice and more wheat products, as well as horticultural and livestock products. This desire for more diversity in diets includes the variety and status of imported, consumer-ready items. The future of Southeast Asian bulk commodity imports is problematic because much depends upon policies toward the countries' livestock sectors. Will Southeast Asian policies follow the East Asia model of putting a protective umbrella over domestic livestock producers, but not their feedstuff producers? To date, there has been a tendency for the deregulation of imports of corn and soybean meal, albeit at an uneven pace across the region. Imports of cotton fiber and cattle hides will remain subject to the export competitiveness of each country's textile and leather product industries. Wage rates for producing these products are critical, but so are other factors, such as exchange rates. BEGIN BOX 1 ASEAN's Impact on Trade ASEAN (Association of Southeast Asian Nations) is an association of nine countries in the region: the five original members of Indonesia, Malaysia, Philippines, Singapore, and Thailand starting in 1967; Brunei Darussalam in 1984; Vietnam in 1995; and Laos and Myanmar in 1997. This regional grouping initiated the ASEAN Free Trade Area (AFTA) in 1993. Under AFTA, the ASEAN countries plan to reduce tariff and non-tariff barriers among the member countries in a preferential fashion. Because AFTA is not a customs union, individual countries are free to pursue their own independent trade policies towards non-members. In 1993 the Common Effective Preferential Tariff (CEPT) came into effect. With CEPT, members agreed to a two-stage schedule of effective tariff reductions on products originating from ASEAN states over 15 years. Members were also to eliminate all quarantine restrictions and other non-tariff barriers, with respect to products under the CEPT scheme, within 5 years. Under CEPT, manufactured products and processed agricultural products with at least a 40 percent ASEAN content are to be subject to tariff reductions and to gradual elimination of non-tariff barriers within ASEAN. CEPT is designed to be consistent with GATT requirements in that no new trade barriers are to be imposed against the rest of the world, and no existing trade barriers against the rest of the world are to be increased. In 1994, ASEAN decided to accelerate AFTA implementation from 15 years to 10 years, i.e. by 2003 instead of 2008. As a result, tariffs on manufactures above 20 percent will be reduced to this level by January 1998, and to a maximum of 5 percent by January 2003. Tariffs below 20 percent will fall to a maximum of 5 percent by January 1998. ASEAN also agreed to include unprocessed agricultural products in the CEPT/AFTA scheme. END BOX 1 BEGIN BOX 2 End Use Characteristics for Oriental Noodles Oriental noodles made from wheat can be divided broadly into white, Japanese-style noodles and yellow, Chinese-style noodles [Kansas Wheat Commission, 1997]. The Japanese-style noodles are made with low-protein flours from soft wheats, and salt. The Chinese noodles use higher-protein flours from hard wheat, and are made using a mixture of potassium carbonate and sodium carbonate. When dough is prepared with this higher-protein flour and these alkaline salts, it turns yellow, and is stronger and more elastic than Japanese style noodles. Most Asian noodle manufacturers use a flour made from a blend of wheats. The Australians have created a niche for their wheat in blends for making oriental noodles because of the color and texture characteristics imparted by their white wheats. In Malaysia and Thailand, for example, the most popular Chinese-style noodles, Hokkien and Ba-Mee, respectively, are made only using the Australian hard white wheats [Huo, 1997] U.S. soft white wheat does not have a high enough protein content for Chinese style noodles. Milling the higher protein U.S. hard red wheat at a low extraction rate produces a flour with desirable yellow color characteristics, but the low extraction rate makes U.S. wheat less price competitive. U.S. researchers have been screening U.S. hard white wheats to identify suitable varieties to grow in the United States for export to the Asian noodle market. Attention is focussed on color and starch characteristics of these hard white wheat varieties [Drynan, 1997]. END BOX 2 BEGIN BOX 3 Consumer Preferences Ensure Markets for U.S. French Fries Markets for U.S. french fries in Asia are large and growing. These markets will continue to grow, even though potatoes can be grown in Asia for french fries. Asian potato varieties produce a french fry with different characteristics than U.S. varieties. As long as Asian consumers continue to favor U.S. product characteristics, U.S. exporters will have expanding markets. U.S. french fries have unique qualities due to both genetics and production practices. A key potato producing area for high-quality french fries is the Pacific Northwest of the United States. The area's preferred variety is Russet Burbank. Producers enhance the unique quality of the fries from this variety through their production practices [Wise, 1997 #1]. Quality U.S. fries also require potatoes with a low moisture content. Producers can grow low-moisture potatoes with careful irrigating because their crop is grown on sandy soils in areas of low rainfall. END BOX 3 References Charoen Pokphand (1996). Private communication. Bangkok, Thailand. Commercial Agriculture Division (1997). International Agricultural Baseline Projections to 2005. U.S. Department of Agriculture. Agricultural Economic Report No. 750. Drynan, Robert (1997). Private communication, Wheat Marketing Center. Portland, OR. The Economist (1997). "The Asian Miracle, Is It Over?" Food and Agriculture Organization (1997). AGROSTAT. Rome. Henry, R. and G. Rothwell (1995). The World Poultry Industry. Washington, International Finance Corporation. Huo, Guotran (1997). Private communication, Wheat Marketing Center. Portland, OR. Kansas Wheat Commission (1997). Oriental Noodle Fact Sheet. Manhattan. Mongelluzzo, B. (1996). "Technology: Fountain of Youth for Produce." Journal of Commerce. State Regional Trade Groups. (1994). "Western Style Fast Food Sector." Food Market Japan. April. Stephens, Dennis G. (1997). "Changing Global Attitudes of Wheat Quality." World Grain. August. Stuart-Smith, K. (1996). "Global Textile Market Opportunity - Year 2000." Textile. United States Hide, Skins, and Leather Association. (1997). Private communication. Arlington, VA. U.S. Wheat Associates (1997). Private communication. Washington, DC. USDA. (1997). USDA Data base. Washington ,DC. United Nations (1997). UN COMTRADE. Geneva, Geneva Statistical Office. Wise, W. (1997). Private communication, Oregon Potato Commission. Portland. Trade Environment in APEC U.S. Direct Investment in the APEC Food Processing Sector Foreign direct investment has proved to be an important means for food processing firms to reach overseas markets. The United States is no exception in following this global pattern. From a cumulative investment of $10 billion, U.S.-owned affiliates in the APEC region generated sales of $40 billion, relative to the $20-billion of direct exports, in 1996. Both affiliate sales and exports are rising because of strong demand for processed food in the region. [Chris Bolling (202) 219-0668, Charles Handy (202) 219-0859, and Steve Neff (202) 501-6761] The APEC region is a $20-billion market for U.S. exports of processed foods 1/ that has increased more than 50 percent since 1990. The region is the destination for two-thirds of total U.S. processed food exports, with Japan, Canada, South Korea, and Mexico the major destinations and the principal growth markets in the 1990s. Meat, miscellaneous foods (largely processed seafoods), fruit, vegetables, and oilseed products are the leading exports of the U.S. food processing sector to the region. Most of the increase in U.S. processed food exports in 1990-96 was accounted for by meat products ($3.7 billion, a 79-percent increase), although exports of dairy products, baked goods, and beverages all doubled. 1/ Processed food is defined as the products listed in the U.S. Department of Commerce Standard Industrial Classification SIC- 20 as "Food and Kindred Products". SIC-20 includes establishments that manufacture or process foods and beverages for human consumption, as well as certain related products such as chewing gum, fats and oils, and animal feeds. Products in SIC-20 must be value-added products. Many processed food products, such as some dairy products, grain milling products, and fats and oils, serve as inputs into other manufactured foods and other goods. The major categories of SIC-20 include meat, dairy products, fruit and vegetable products, milled grain products, baked goods, sugar and confections, oilseed products, beverages, and miscellaneous foods (mostly seafood). Foreign direct investment (FDI) has proved to be an important means for U.S. food processing firms to reach overseas markets. Product sales from affiliates of U.S.-owned companies in the APEC region totaled $40 billion in 1996, 67 percent higher than in 1990, and one-third of all U.S. food industry affiliate sales abroad. Affiliate sales are supported by the U.S. cumulative foreign direct investment of $10 billion in the APEC food processing industries. FDI is defined as the book value of APEC food processing establishments in which U.S. firms have at least a 10-percent equity share. More than 50 of the United States' largest food processing companies have affiliates in the APEC region, with products ranging from cookies to fruit juice. The largest investments are in Canada, Mexico, Australia, and Japan, countries that are neighbors or have high incomes, and have relatively liberal foreign investment regimes. The biggest absolute growth in foreign direct investment (and the resulting affiliate sales) has been in these same countries since 1990. Rapid income growth and relative economic stability have also spurred foreign direct investment in a second tier of countries --Chile, China, and Thailand--where U.S. FDI has grown the fastest in 1990-96. Other Countries Participate in the APEC Region's Food Processing Industry The United States is not alone in foreign direct investment in food processing in the APEC region. Asian conglomerates from capital centers in Japan, Hong Kong, Taiwan, Korea, Thailand, and Singapore also play an important role in this expansion through FDI. In addition, Nestle (Switzerland), Grand Metropolitan (United Kingdom), and Unilever (United Kingdom and Netherlands) are examples of European companies that have extensive food processing facilities in the APEC region. In particular, Japan has an interest in other APEC food industries that is about the same level as the United States. Japan has a cumulative investment of over $1.8 billion in Asia, including $300 million each in China and Thailand, and $500 million in Singapore. Japan also has $1.5 billion in cumulative investments in Australia. Japan is not alone as an Asian exporter of capital. Charoen Pokhphand, a prominent Thai poultry company, has extensive poultry and feed milling operations in China and Indonesia, and recently opened an affiliate in the United States. Many overseas Chinese from Hong Kong (through mid-1997), Singapore, and Malaysia have also invested in China, founding joint ventures in the Chinese food processing industry. In fact, overseas Chinese have a larger stake in the Chinese food processing industry than either Japan or the United States (1, 9, 11). In addition, APEC direct investment in the U.S. food processing industry reached nearly $7 billion in 1995. Because of their roles as important capital exporting countries, Canada and Japan are important players in the inward investment in the U.S. food processing industry. Canadian investors have been the second ranking source of foreign direct investment in the U.S. food processing industry after the United Kingdom (UK) since 1994. By the late 1980's, Japan had risen to be the fourth largest investor in the U.S. processing industry after the UK, the Netherlands, and Germany. Affiliate Sales Exceed U.S. Processed Food Exports The importance of FDI is demonstrated by the fact that sales from foreign affiliates of U.S.-owned companies exceed U.S. exports of processed food by 4 to 1 globally. Affiliate sales, while large, exceed U.S. processed food exports 2 to 1 in the APEC region, mainly indicating the large role played by U.S. processed exports to Japan and the less aggressive investment in the region compared to Western Europe. There is a wide variance among APEC countries in how affiliate sales relate to U.S. processed food exports. U.S. processed food exports to Japan, Taiwan, China, and Korea exceed sales from U.S.-owned affiliates. Except for China, these same countries are also our largest export markets for processed foods. Even so, the trade represents a small share of total food sales in Japan and Taiwan, who have large domestic food processing industries. China and Korea have had formal and informal government measures that limited FDI. At the other end of the spectrum, Canada and Mexico are in the intermediate range where the ratio is 3 or 4 to 1. Both countries have seen a sharp increase in trade and investment induced by regional specialization under NAFTA. In the case of Japan, food processing became relatively expensive, particularly during the years when the Japanese yen was appreciating in comparison to other currencies. It became more economical to import some semi-processed and processed foods (sometimes from Japanese-owned affiliates abroad) than to produce them at home. In the case of China, until recently U.S. firms were not large investors in the Chinese food industry, but have increased interest as the Chinese economy has expanded and become more integrated with the global economy. Affiliate Sales from FDI and U.S. Processed Food Exports Are Both Growing While there is some controversy over FDI displacing U.S. exports, U.S. exports and affiliate sales are both growing because of the strong demand for processed foods in the region. The United States often finds that it has new markets for farm products and intermediate products because of foreign direct investment. Many companies such as CPC International and Kraft Foods are deeply involved in foreign direct investment, and their affiliate sales and direct exports have both increased (6). References 1. Bolling, Christine, Charles Handy, and Steve Neff. U.S. Foreign Direct Investment in the APEC Food Industry. Unpublished material, 1997. 2. Bureau of Economic Analysis, U.S. Department of Commerce. U.S. Direct Investment Abroad, Operations of U.S. Parent Companies and Their Foreign Affiliates, selected Annual Reports, Washington, DC. 3. Bureau of Economic Analysis, U.S. Department of Commerce. Survey of Current Business, selected issues, Washington, DC. 4. Economic Research Service, USDA. Processed food data set, based on U.S. Department of Commerce SIC-20 Export and Import Data, Washington, DC, 1997. 5. Foreign Agricultural Service, USDA. Japanese Food Market Overview. Washington, DC, July 15, 1996. Internet address: http:// fas.usda.gov/faspublications. 6. Henderson, Dennis R., Charles R. Handy, and Steven A. Neff, editors. Globalization of the Processed Foods Market. Agricultural Economic Report Number 742, USDA/ERS, Washington, DC, Sept. 1996 7. Japan Ministry of Finance. Monthly Statistical Report on Finances, selected issues. 8. Japanese External Trade Organization (JETRO), White Paper on Foreign Direct Investment, 1996, Summary. Internet address: http:/www.jetro.go.ip. 9. Johnstone, Christopher B. A Level Playing Field? U.S. and Japanese Competition in the Chinese Markets, Japan Economic Institute Report No. 33A, Washington DC, August 30, 1996. 10. Nakashima, Yasuhiro, University of Tokyo. Data set on Japanese Direct Investment in Food Industries, Inflows and Outflows for Japan, 1951-1994. Personal communication. 11. Rohwer, Jim. Asia Rising. Nicholas Brealey Publishing Company, London, 1996. 12. Yamauchi, Hiroshi, and Yasuhiro Nakoshima. Japanese Food Industry System. Unpublished material, August 17, 1993. State Trading Enterprises in the APEC Region: Grain Markets State trading in grains is widespread in APEC, with wheat ranking first in value of trade followed by rice, barley, and corn. In 1990-95, wheat exports by state trading enterprises (STEs) of APEC averaged 34 percent of the world market, while wheat import share by STEs averaged 21 percent. Rice trade under STEs in the APEC region is concentrated among major importing STEs, accounted for 14 percent of the world rice market. Barley and corn rank third and fourth in grain trade under STEs in the APEC region, with barley exports by STEs holding 36 percent of the world market during 1990-95. [Suchada Langley 1/ (202) 219-0006] STEs: a Pervasive Feature of Agricultural Trade in APEC Thirteen of the eighteen member countries of the Asia-Pacific Economic Cooperation (APEC) forum use STEs. Commodities traded under APEC's STEs are diverse, but wheat dominates with at least 34 percent of world wheat exports and 21 percent of world wheat imports during 1990-95, based on the Food and Agriculture Organization database. The General Agreement on Tariffs and Trade (GATT), which governs global trading in goods and services, recognizes state trading enterprises as legitimate participants in international trade, but establishes guidelines on their behavior. These guidelines are contained in Article XVII of GATT (1947) and require state trading enterprises to conduct their trading activities according to the principles of non-discriminatory treatment. Article XVII and the Understanding on Article XVII apply to STEs in manufactured goods as well as agricultural products. 1/ John Dyck, Linda Bailey, Gary Vocke, Dan Plunkett, Frederick Crook, Michael Speight, Agapi Somwaru, and Karen Ackerman provided input. The Uruguay Round (UR) of multilateral trade negotiations, through the Understanding on Article XVII, added a working definition of STEs to clarify existing rules on such entities. STEs are defined as "governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports." Based on this working definition, several countries have reported to the World Trade Organization (WTO) the existence of agricultural STEs in their countries. Table 6 lists STEs in the APEC countries. Not all STEs listed in the table were reported to WTO. Application to join the WTO is under review for China and Taiwan. STEs Established for Many Reasons Countries establish STEs to achieve a variety of objectives. These objectives include maximizing price received producers, maximizing quantity exported, stabilizing food prices, controlling foreign currency, increasing market share, minimizing consumer purchasing price, or maximizing total revenues. The efforts to capture economies of scale or externalities are two potential economic justifications for STE's. The emphasis that is placed on any one of these objectives affects the nature and behavior of the STE. Typically, an export STE attempts to enhance international trade and competition of its products. A private or a government-owned (or authorized) exporting firm can try various pricing and non-pricing strategies to exert market power for higher revenue. Examples of pricing strategies are price discrimination and price leadership. An example of a non-pricing strategy to increase revenue is through accentuating differences in quality. In addition to these strategies, state traders can adopt trade policy instruments such as an optimal export tax or create a producer marketing board. Importing STEs are likely to have different objectives than exporters. These state traders view protecting domestic production, food security, controlling of foreign currency, and stabilizing price as important objectives. Many importing STEs are more interested in restricting trade and increasing protection of the domestic markets. Attaining these objectives requires some form of border control. Concerns About STEs Growing The UR has improved market access, restricted export subsidies, provided some recourse against the use of safety and health standards as disguised barriers, and disciplined state trading activities for member countries in the APEC region. However, activities of STEs on both the export and import side remain in a gray area, often difficult to judge. The manner or secrecy in which STEs operate makes it difficult to determine whether those activities conform with international trade rules and regulations. Efforts are underway in the WTO to improve the reporting of STE activities. Concerns that STEs will be used to violate the WTO agreement are growing. The chief concern with export STEs is whether they violate their WTO export subsidy commitments. Concerns about import STEs focus on potential violations of WTO commitments to reduce import protection. More discussion on state traders can be found in Ackerman, Dixit, and Simone (Agricultural Outlook, June 1997). Many of the largest STEs in world grain trade are in the APEC region. Among exporters, the Canadian Wheat Board (CWB) and the Australian Wheat Board (AWB) are the two most dominant wheat export STEs in the region. The Office of Supply in the Republic of Korea (OSROK), the Japan Food Agency (JFA), the National Logistics Authority (BULOG) of Indonesia, and China's National Cereal, Oils, and Foodstuffs Import/Export Corporation (COFCO) are major STE importers in the region. Wheat Dominates Trade under STEs Commodities traded under APEC's STEs are diverse, including wheat, barley, corn, rice, dairy products, sugar, vegetable oils, soybeans, tobacco, alcoholic beverages, and livestock products (table 6). State trading in grains is widespread, with wheat being the leading grain (in value terms) followed by rice, barley, and corn (table 7). Total trade value of wheat exports and imports of five major STE countries averaged $8 billion annually during 1990-95, and accounted for nearly 28 percent of world wheat trade. The AWB and the CWB accounted for 34 percent of world wheat exports, in quantity terms, with each holding 22.3 and 11.4 percent, respectively, of world wheat exports during the period. The AWB controls 100 percent of the country's wheat exports, while the CWB handles 96-99 percent of Canada's wheat exports and issues export licenses for the remainder. 2/ 2/ The rest of wheat exports is mainly grown in eastern Canada. With an export license, the CWB also allows private sales to the United States. Ontario Wheat Producers Marketing Board (OWPMB) has jurisdiction on wheat grown in eastern Canada. OWPMB receives export licenses from the CWB. In turn, it allows other exporters to make the sales. All OWPMB sales are made through accredited exporters. On the importing side, about 21 percent of world wheat imports was bought by China, Japan, and Indonesia, with an import value of more than $3.6 billion during 1990-95. Importing state traders such as China's COFCO and Indonesia's BULOG handle almost 100 percent of their countries' wheat imports. In Japan, the Japan Food Agency (JFA) has the sole authority to import wheat within the tariff quota. It determines internal resale prices for most imported wheat. However, private firms that export wheat flour have been allowed to import wheat for their own use, with government certification required. The JFA bought about 67 percent of Japan's wheat imports in 1995. China alone accounted for nearly 12 percent of world wheat imports and Japan captured about 7 percent of the share, in quantity terms, during 1990-95. Rice trade under STEs in the APEC region is primarily done by importing STEs, and was valued at $1.2 billion during 1990-95. Importing state traders such as the JFA, China's COFCO, Indonesia's BULOG, and the Philippines' STE imported an average of more than $755 million of rice annually during 1990-95. In terms of market share, they held 14 percent of the world market, with Indonesia BULOG holding nearly 8 percent during the period. While Japan and Indonesia imported 100 percent of their countries' rice imports, China has allowed provincial governments to import rice through importing quotas since 1993. A major share of China's rice imports, however, are under China's National COFCO. Nearly 10 percent of world rice exports was marketed under APEC STEs during the period. Major rice exporters such as Thailand and the United States, both APEC members, market through the private sector. All barley ranks third in grain trade under STEs in the APEC region, with a total of $1 billion. Canada and Australia are two major barley exporters, with a world market share of nearly 20 percent and 16 percent, respectively, in quantity terms in 1990-95. While the CWB markets almost 100 percent of Canada's barley exports, the chief exporters of Australian barley are Australian state-level marketing boards. Similar to wheat, the CWB allows private sales to the United States as long as the seller gets an export license and pays the fees. China, Japan, and South Korea accounted for more than 16 percent of world barley imports, with the JFA holding 10 percent of the world market. China and South Korea market 100 percent of their countries' barley imports. Similar to wheat, Japan's Food Agency has the sole authority to import barley within the tariff quota. It determines internal resale prices for barley for nonfeed uses. Firms can also import barley for feed, with government certification required. The JFA imported nearly 73 percent of Japan's barley in 1995. The value of corn trade under APEC STEs was greater than $920 million. China accounted for more than 11 percent of world corn exports during 1990-95. A Few STEs Remain Dominant in the APEC Region STEs in the APEC region are widespread but a few remain dominant. The AWB and CWB hold major shares in world wheat trade. For China, its agricultural marketing system has gone through many changes since 1988. The central government, for example, has given provincial governments more discretion to market grains locally and in some cases export and import. Over 16 percent of grains, for instance, is traded in open domestic markets, compared to zero percent 10 years ago. Over 40 percent of vegetables is freely marketed. However, exports and imports of a few commodities such as wheat, corn, and rice, among others, are heavily influenced by STEs. In the case of rice, the provincial governments receive quotas to import; national COFCO and COFCO affiliates still have a major role in marketing rice in world markets. For Japan, imports have become freer, but the JFA retains the sole authority to import rice, wheat, and barley within the tariff quotas. Government certification is required for non-JFA imports. The Tariff Walls of APEC The tariff walls of APEC members have only begun to be dismantled. Although much progress has been made toward opening up trade throughout the Asia-Pacific region, agricultural tariff commitments under the Uruguay Round Agreement illustrate that much remains to be done in this highly political, frequently protected sector. [Jeff Clark and William T. Coyle (202) 501-8136] Post-Uruguay Round Actions Many countries, unwilling to wait for the next round of global multilateral negotiations, have continued through regional agreements to liberalize their economies beyond their Uruguay Round commitments. APEC members have pledged that "developed" economies will remove all tariffs and nontariff barriers (NTBs) by 2010, while "developing" economies will do so by 2020. Indonesia made significant progress toward achieving that goal in its Individual Action Plan (IAP) submitted at the Manila Summit of APEC in November 1996. From the relatively high tariff rates Indonesia committed to in the Uruguay Round (bound rates averaging over 40 percent on agricultural goods), it has pledged to reduce all tariffs to no more than 10 percent by 2003. China has also taken steps toward opening its economy to the international market. Singapore, already a very open market, has pledged that it will be completely duty-free by 2010. A review of the bound tariffs in APEC reveals that developing countries with significant domestic agricultural sectors have high tariffs to protect their farmers while the developed economies and net exporters have low average tariff rates. Hong Kong and Singapore, two markets with minimal agricultural sectors to protect, also have low or zero tariffs. Malaysia is the only developing economy that has an average rate below 20 percent. Variability within a single country's tariff schedule appears to follow the same pattern as the simple average rates. Net exporters and those without domestic agricultural sectors have fairly low variability, while developing economies have considerable variability. Even those economies with relatively high base rates, such as Mexico, Thailand, Indonesia, and China, have rates spread over a large range. South Korea sets the standard for greatest variability with rates from 1.8 to 887.4 percent. APEC Members Ad Valorem Agricultural Tariff Commitments Through the Uruguay Round Although most APEC economies have made commitments to reduce their tariffs and open their markets, there is still significant variability in agricultural tariffs across the region. Australia--The simple average 1/ bound rate for food and agricultural products is 3.8 percent in Australia, among the lowest in the region. Fewer than 10 percent of its agricultural tariff lines have rates greater than 10 percent, with the highest in-quota rate being 29 percent for potatoes and potato products, and dried vegetables. Other items that receive above average protection include tobacco, orange juice, and mandarin juice. 1/ The sum of all tariffs divided by the number of tariff lines. Brunei--The simple average bound rate is 23.7 percent for Brunei. It has a flat rate of 20 percent, with a few key sectors, such as poultry, dairy, rice, and various fruits and vegetables, receiving greater protection (50 percent). Canada--Canada's average bound rate is 3.5 percent. As expected of a net exporter, over 90 percent of Canada's tariff lines have rates below 10 percent. The highest duty (19.1 percent) is assessed on frozen asparagus. Chile--Chile's average rate is 25.6 percent. Chile committed to a flat rate of 25 percent for agricultural goods by 2000, except for a few sectors that will receive slightly greater protection of 31.5 percent (86 lines of exceptions). These sectors include dairy, wheat, wheat flour, oilseeds and products, and sugar. China--China's average rate is 38.1 percent. China has chosen to protect tobacco, alcoholic beverages, and some of its grains and oilseeds with tariffs. The tariff binding on rice is substantial (114 percent), but it is consistent with the rates for other major grains. Other areas with high rates are bottled water, coffee, concentrated milk, sugar, and cotton. Meat and meat products enter at 30-40 percent. Hong Kong--Hong Kong's average rate is close to zero. Hong Kong provides duty-free access for all agricultural goods, except tobacco and alcohol. Tobacco is subject to a specific rate while a 30 percent or 100 percent ad valorem rate is imposed on alcoholic beverages, depending on the alcohol content. Indonesia--Indonesia's average rate is 48.4 percent, but it has a highly variable tariff schedule. Three sectors are subjected to rates of 150 percent or greater: dairy, 210 percent; rice, 160 percent; and alcoholic beverages, 150 percent. Sugar is next at 95 percent, followed by alcoholic preparations at 70 percent. Subsequent rates are 40-60 percent. Only 24 lines, including grain flours, soybeans, and cotton, have duties of less than 40 percent. Japan--Japan's average rate is 11.4 percent. Japan has a fairly open market. It provides significant protection for sugar substitutes and other sweeteners, with rates as high as 114 percent. All other items are subject to rates of 50 percent or less. Fresh and frozen beef, offal of most animals, some prepared meats, and corn other than for feed, seed, or popping are at the 50 percent tariff level. Only a few other items have rates of at least 30 percent: prepared pineapple (46.8 percent), processed cheese (40 percent), rice crackers, fruit juices, and fruit jams and jellies with sugar added (34 percent), and fresh and preserved oranges, December through May, (32 percent). Another collection of items sharing a 29.8 percent rate includes fruit juices, dairy products, fermented fruit beverages, confections, and other processed products containing sugar or milk. Malaysia--Malaysia's average bound rate for agricultural and food products is 11.9 percent. Malaysia committed to lower rates through the Uruguay Round than most ASEAN members. With only 85 lines having rates greater than 20 percent, the country's simple average bound rate is almost as low as Singapore's. The greatest tariff protection is provided to the livestock sector. Pork is the sole product with a rate higher than 100 percent; its rates vary from 139 to 168 percent, depending on the cut. Poultry meat has rates of 57-85 percent. A few non-livestock products are also subject to high rates: wheat flour (96 percent), round cabbage (90 percent), and coffee (69 percent). Rice has a duty of 40 percent. Mexico--Mexico's simple average bound rate is 40.9 percent. Of the 885 lines with ad valorem rates, only 57 have rates below 10 percent. At the opposite end of the spectrum, seven lines have rates greater than 200 percent and 40 have rates in excess of 100 percent. Animal fats and oils are accorded the greatest protection with rates of 254 percent. Next is "other" fresh vegetables at 245 percent. Numerous sugar and sugar substitute lines have rates exceeding 100 percent, reaching as high as 210 percent. The dairy processing industry is also well protected with rates of 125 percent on powdered milk and various cheeses. New Zealand--New Zealand's average bound rate is 7.3 percent. Of the 946 agricultural tariff lines, more than 400 are duty free. Only 79 have rates greater than 20 percent. Fruits and vegetables are accorded the greatest protection with processed tomatoes at the head of the list with 35.2 percent. Prepared fruits, other than jams and jellies, containing sugar are at 32 percent. Apple and grape juice containing sugar and tomato juice without sugar share a 30.4 percent rate. The rate for dried potatoes, mushrooms, and truffles is 28.8 percent. Wines, spirits, and starches constitute the rest of the items with rates of 25 percent or higher. Papua New Guinea--Papua New Guinea joined the World Trade Organization (WTO) in June 1996, after the analyzed data were published. Philippines--Its average bound rate for agricultural and food products is 34.4 percent. Cut flowers and copra enjoy the greatest protection with a rate of 60 percent. Fifty-five lines have a rate of 50 percent, including coconuts, bananas, corn, tropical oils, canola, corn oil, sugar and molasses, chewing gum and cocoa products, fruit juices (including tomato), soy sauce, wine, meals from tropical oils, and tobacco. Singapore--Its average bound rate is 9.6 percent. Thirty of the 752 lines are duty free. All other items enter with a flat 10 percent rate. Some of the items that enter duty-free include beef, lamb and mutton, dairy products, fresh apples, artificial sweeteners, potato chips, and frozen peas and sweet corn preparations. South Korea--South Korea's average bound rate is 64.8 percent. Although a member of the "developed countries club," the OECD, it has high tariff bindings more representative of a developing country. The highest rate, on fresh or dried cassava, is almost 900 percent. Of the 1,239 lines included in the schedule, more than 100 have rates in excess of 200 percent. "Other cereals" has a tariff rate of 800 percent. Red ginseng in its various processed and unprocessed forms is protected by a rate of 754 percent. Taiwan--Taiwan is awaiting membership in the WTO and did not submit a tariff schedule. Thailand--The average rate for Thailand is 35.5 percent. The items given the greatest protection are raw silk (226 percent), onion seed (218 percent), and powdered milk (216 percent). The rates then fall below 150 percent with soyoil, palm oil, fresh or dried onions, soymeal, and potatoes all subject to tariffs of 125-146 percent. Other items with rates of 60 percent or greater include sugar, tea, coffee, soybeans, corn, tobacco, wine and spirits, and sweetened soft drinks. Rice and beef have bound tariffs of 52 percent and 50 percent, respectively. United States--Its average rate is 6.3 percent. Of the 952 agricultural tariff lines, more than a third are duty-free. Forty-two lines have rates in excess of 20 percent. The five lines that have rates greater than 30 percent are for peanuts and peanut products (131.8 to 163.8 percent). These graphs do not capture the full tariff or protectionist story in the region, however. Important caveats are: o Only the ad valorem bound rates agreed to in the Uruguay Round Agreement concluded in 1994 are used. All specific duties (e.g., a duty expressed in cents per pound) are omitted. For example, the United States protects its sugar industry via a specific tariff rate quota (TRQ), not evident in the U. S. graph, and Japan applies a specific duty to sugar. o The graphed ad valorem rates represent only the maximum tariffs a country can apply to protect its agricultural sector. Many countries use applied rates considerably lower than the bound rates. For example, Chile's applied tariff rates are 11 percent. Since each country's specific rates and applied rates are variable, an analysis of these rates would probably soon be obsolete. o Only in-quota tariff rates are used for items that have TRQ's. o Taiwan is not included in this analysis because it is not a member of the WTO. China, aspiring to be a founding member of the WTO, submitted a tariff schedule at the conclusion of the Uruguay Round. Papua New Guinea's schedule is also absent from the WTO collection because it joined the trade body after it was founded. o NTB's do not appear in this analysis. o The drive for free trade globally and regionally since these data were compiled in 1995 has encouraged some countries to reduce tariffs below their Uruguay Round commitments. Technical Barriers to Agricultural Trade in APEC Technical barriers to agricultural trade, frequently justified on the basis of protecting human health and controlling animal and plant pests and diseases, sometimes have the effect of threatening, constraining, and blocking U.S. agricultural exports. Based on the estimated trade impact, the APEC region accounts for 63 percent of the technical barriers identified by a 1996 preliminary USDA assessment. In particular, U.S. agricultural exports confront substantial technical barriers in China and East Asia (Japan, South Korea, and Taiwan). [Kate DeRemer and Alisa Livensperger (202) 501-8540] Technical barriers to trade are emerging at the center of agricultural trade policy discussions as resolutions and agreements are reached on more traditional trade barriers such as quotas and tariffs. Countries may now turn to "non-traditional" barriers such as new technical requirements to protect their domestic agricultural producers. The APEC region accounts for 63 percent of the technical barriers identified by a 1996 USDA survey. 1/ The survey estimated that technical barriers in the APEC region reduced U.S. food and agricultural exports there by about $2.6 billion that year (expansion and access categories). 1/ Roberts and DeRemer, Overview of Technical Barriers to U.S. Agricultural Exports, U.S. Department of Agriculture, ERS Staff Paper Number 9705, March 1997. In 1996, USDA's ERS and Foreign Agricultural Service (FAS) surveyed FAS field offices in 50 countries, solicited input from the private sector, and consulted experts in USDA's four regulatory agencies 2/ to gather and analyze information on technical barriers. Posts in eleven of the eighteen countries in APEC--Australia, Canada, Chile, China, Japan, Mexico, New Zealand, Philippines, Singapore, South Korea, and Taiwan--reported one or more technical barriers with an adverse impact on U.S. agricultural and food exports. 2/ Agricultural Marketing Service (AMS), Animal and Plant Health Inspection Service (APHIS), Food Safety and Inspection Service (FSIS), and Grain Inspection, Packers and Stockyards Administration (GIPSA). The three types of technical barriers identified in the inventory are ones that: Threaten current levels of trade (retention issues)--These are measures under consideration by a foreign government that threaten all or a part of established trade in a commodity. Based on the 1996 inventory, established U.S. agricultural exports amounting to $350 million could have been affected in the APEC region that year. Limit expansion--Measures that limit the amount of a U.S. product currently exported to a country. These issues include limited import bans, in which only products of a particular type and specification have access to a market, or technical requirements, in which a specific procedure limits the amount of a U.S. product entering a country by raising production and/or handling costs. The estimated trade impact of this category of barrier in APEC was $2.3 billion in 1996. Deny access--Complete bans on U.S. exports of certain commodities from entering a market. The trade impact in APEC of this category was $390 million in 1996. The estimated trade impact (ETI) of these three types of technical barriers is equal to the estimated annual value of U.S. export gains (for expansion or access issues) or the estimated annual value of export losses that were prevented (for retention issues), if the issues were resolved or the barriers eliminated. The total ETI of the three types of technical barriers that threaten, constrain, and block U.S. food and agricultural exports to APEC countries relative to the rest of the world is shown in figure 9. These estimates give an order-of-magnitude judgement by USDA field staff (as of June 1996). They are not estimated using a rigorous or uniform methodology. Dividing APEC into three subregions facilitates comparisons of the nature of technical barriers and the magnitude of their trade effect within the diverse APEC region . The subregions are: the Americas (Canada, Mexico, and Chile), East Asia (Japan, South Korea, Taiwan, and for purposes of this article, China), and Oceania and Southeast Asia (Australia, New Zealand, the Philippines, and Singapore). Technical barriers in the East Asian region have the largest impact on U.S. agricultural exports. As illustrated in figure 10, the majority of technical barriers in the East Asian region are in the expansion category, with U.S. exports likely to expand by about $2.3 billion if these technical barriers were changed or eliminated. Japan's limited import ban on apples is an example of a barrier in the expansion category. Japan imports only Red and Golden Delicious apples from the United States. The Japanese claim that each apple variety must be subjected to the same testing regime for phytosanitary reasons. This procedure is viewed by the United States as redundant and raising an unnecessary hurdle to the imports of U.S. apples such as Gala, Fuji, Braeburn, and Granny Smith. The United States has requested consultations with the World Trade Organization on the varietal restrictions, which also affect apples from other supplying countries. It is hoped that resolution of this "varietal issue" may have an impact on similar debatable varietal barriers applied by other APEC countries. A variety of U.S. agricultural products exported to South Korea is affected by another technical barrier in the expansion category. Like most countries, South Korea mandates inspection and sampling procedures of agricultural imports for chemical residues and pests. However, unjustifiable port clearance delays cause the spoilage of some products and raise the costs of doing business in South Korea. Despite commonly accepted commercial tolerances specified in the buyer-seller contracts, South Korea required that shipments of imported fresh produce be unpacked, sorted and repackaged to remove any spoiled product. This practice was officially ended in late 1996, but continues to be applied in practice for some orange shipments. This raises the financial risk for U.S. orange exporters to South Korea. Figure 11 shows that technical barriers in the APEC region threaten or constrain different products by varying degrees. Processed products, multiple products, 3/ and fruits and vegetables are those that are most affected by technical barriers in APEC. When the rest of the world is examined, grains and oilseeds are the most affected products followed by animal and multiple products. 3/ Multiple products refer to all agricultural and food commodities. Figure 12 shows the ETI of sanitary/phytosanitary (SPS) measures compared to other technical barriers in APEC. Ninety percent of the barriers identified for the APEC region in the survey are SPS measures. The remaining 10 percent are other technical barriers that address non-health related concerns, principally food quality standards not related to health. Food safety restrictions account for about 40 percent of the value of all SPS barriers in the region, compared to the world survey in which plant health restrictions dominate. The trade impact of the plant health restrictions accounts for just under 35 percent of the value of all technical barriers in the region. Third largest among the technical barriers are those designed to protect more than one type of concern, such as protection of both human and animal health. Animal health measures alone account for a mere 1 percent of the total value of SPS issues in the APEC region. List of Tables and Figures Text Tables 1. APEC is expected to recover trend growth over the long term. 2. U.S. agricultural exports to APEC by commodity, fiscal years 1995 and 1996 3. U.S. agricultural exports and import: Value by region, fiscal years 1995 and 1996 4. U.S. processed food exports, affiliate sales, and direct investments in APEC, 1990-95 5. U.S. processed food exports, affiliate sales, and direct investments in APEC, 1996 6. STE's in the APEC region 7. Grain trade under state trading enterprises in the APEC region Text Figures 1. U.S. Farm Exports at Record Highs in Most APEC Markets 2. In Fiscal 1996, 61.4 Percent of U.S. Farm Exports Went to APEC Region 3. APEC: Sales of Processed Food by U.S. Foreign Affiliates Surpass U.S. Exports of Processed Food by 2 to 1, 1995 4. Bound Agricultural Tariff Rates Among APEC Countries: Major Producers 5. The Tariff Walls in APEC: ASEAN-4 6. The Tariff Walls in APEC: East Asia 7. The Tariff Walls in APEC: Other 8. Potato Chips vs. Computer Chips 9. Technical barriers threaten, constrain, and block U.S. agricultural exports to APEC countries 10. U.S. agricultural exports to APEC face more technical barriers in the East Asian region 11. Technical barriers constrain U.S. agricultural exports of processed products to APEC more than any other category 12. Technical barriers to trade in APEC are dominated by measures to protect plant and human health Special Article Tables A-1. Economic performance and size of population A-2. U.S. wheat exports to Asia by type, average 1995-6 A-3. Meat self sufficiency; production divided by consumption A-4. Indices of broiler ready-to-cook (RTC) production costs for 1994 A-5. United States' textile labor cost index compared to selected countries for 1994 and 1995 Special Article Figures A-1. Increase in the Value of U.S. Agricultural Exports in 1996 Compared to 1990 A-2. Priority Markets for U.S. Agricultural Exports A-3. U.S. Agricultural Exports to Southeast Asia, 1994-96 Average A-4. U.S. Agricultural Exports to Southeast Asia, 1984-86 Average A-5. U.S. Agricultural Exports to East Asia, 1994096 Average A-6. U.S. Agricultural Exports to East Asia, 1984-86 Average A-7. Wheat Imports: History and Projections to 2005 A-8. Soybean Imports: History and Projections to 2005 A-9. Soybean Meal Imports: History and Projections to 2005 A-10. Corn Imports: History and Projections to 2005 A-11. Historical and Projected Corn Imports and Exports by Southeast Asia A-12. Comparison of Changes of Per Capita Meat Consumption A-13. Change in Value of U.S. Cotton Fiber Exports in 1996 Compared to 1990 A-14. Change in Value of U.S. Hides and Skins Exports in 1996 Compared to 1990 Appendix Tables 1. Summary of agricultural indicators 2. Macroeconomic data 3. Imports of principal agricultural commodities and U.S. shares 4. U.S. agricultural exports (fiscal years) 5. U.S. agricultural imports (fiscal years) 6. Agricultural production (1,000 tons) END-OF-FILE