Order Code RL32110
CRS Report for Congress
Received through the CRS Web
Agricultural Trade in a U.S.-Central American
Free Trade Agreement (CAFTA)
October 31, 2003
Remy Jurenas
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
Agricultural Trade in a U.S.-Central American
Free Trade Agreement (CAFTA)
Summary
Negotiating open market access for agricultural products in a free trade
agreement between the United States and 5 Central American countries (Costa Rica,
El Salvador, Guatemala, Honduras, and Nicaragua) has been contentious and
difficult. With December 2003 set as the target date for concluding an agreement,
both sides now face wrestling with how to transition their most sensitive agricultural
commodities and food products (protected by high tariffs, restrictive quotas, or other
barriers) towards free trade.
In their October negotiating session, both sides
exchanged market access offers on all (including sensitive) agricultural products, and
agreed on immediate access for most horticultural products. The most difficult issues
dealing with sensitive products were deferred to the December negotiations.
In 2002, U.S. agricultural exports to these 5 countries totaled $1.0 billion, and
represented 2% of U.S. worldwide sales. Leading exports were coarse grains, wheat,
rice, soybean meal, and animal fats. U.S. farm exports accounted for 11% of U.S.
merchandise exports to the region, and have grown significantly in value terms over
the last decade. Agricultural imports from these countries equaled $1.9 billion (or
4.5% of U.S. farm and food imports from the world), and represented 16% of U.S.
merchandise imports. Purchases of bananas, raw coffee, and fresh fruit led the list.
The United States and the 5 Central American countries primarily use tariffs and
quotas to protect their agricultural sectors. The average tariff applied by all 6
countries involved in these negotiations masks the high level of border protection
each provides its most sensitive agricultural products, primarily through the use of
restrictive quotas. U.S. agricultural objectives in the CAFTA negotiations are to
eliminate tariffs, quotas, and other barriers to trade, and provide adequate transition
periods and relief mechanisms for the U.S. farm sector to adjust to increased imports
of sensitive products. The Central American countries seek increased access to the
U.S. market for beef, sugar, fruits and vegetables. However, fears exist that opening
up their markets to U.S. corn and rice will undermine their small subsistence farmers,
unable to compete against subsidies U.S. producers receive under farm programs.
U.S. agricultural and food sector interests have mixed views about what CAFTA
might mean. Several organizations support the negotiating objectives, anticipating
benefits for their producers from more open markets. Some groups condition support
on the ability of U.S. negotiators to actually eliminate tariffs and address specific
issues. Others have strong reservations about CAFTA, or have requested that their
commodity be excluded from the agreement’s scope.
Congressional committee leaders have expressed concern about the “unrealistic
demands” that Central American negotiators have made to protect their sensitive
agricultural commodities. They have signaled that if CAFTA does not result in real
market access for commodities with U.S. export potential, some Members of
Congress may not support the agreement. Some Members oppose including sugar
in CAFTA, fearing increased imports would undermine U.S. sugar policy and the
viability of the domestic production sector. This report will be updated.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Agricultural Trade with CAFTA Countries . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Barriers to Agricultural Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Issues Identified by the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Issues Identified by CAFTA Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Agricultural Trade Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
U.S. Agricultural and Food Sector Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Supporters of CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Opponents of CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Other Groups’ Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Status of CAFTA Negotiations on Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Role of Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Table 1. U.S. Agricultural Trade,
and Agricultural Products’ Share of Total U.S. Trade,
with CAFTA Countries, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. U.S. Agricultural Imports from CAFTA Countries,
by Most-Favored Nation Designation and
by Trade Preference Program: 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 3. Average Tariffs and Tariff Rate Quotas on Agricultural Imports: United
States and CAFTA Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Agricultural Trade in a U.S.-Central
American Free Trade Agreement (CAFTA)
Introduction
As part of its overall trade strategy, the Bush Administration over the last year
began negotiating bilateral free trade area (FTA) agreements with four regional blocs
or countries. Negotiations on a U.S.-Central American Free Trade Agreement
(CAFTA) involving Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua
began in late January 2003 and are currently scheduled to conclude this December.
While negotiators have reportedly made progress in a number of areas, efforts to
formulate a framework for handling agricultural trade have been slow.1
Unique to free trade agreements, as illustrated by the North American Free
Trade Agreement (NAFTA), are provisions designed to liberalize trade by reducing
and eliminating tariffs, quotas, and non-tariff barriers between partners within an
agreed-upon time period (usually 10 to 15 years). FTAs are generally comprehensive
in scope, and in addition to including provisions on agricultural trade, cover trade in
all other goods and services, investment rules, and intellectual property rights, among
many other issues. While some U.S. agricultural groups and food manufacturers
welcome the market openings these prospective bilateral FTAs might provide,
producers of import-sensitive U.S. commodities will carefully monitor and seek to
shape those provisions that affect them. Closely watched will be the transition
periods that U.S. negotiators agree upon for sensitive agricultural products that enter
the U.S. market from a FTA partner. Domestic interests that see potential in free
trade in prospective FTA markets will watch to see what pace of access U.S.
negotiators can secure for U.S. agricultural products that these partners consider as
import sensitive. Other provisions negotiated in FTAs that affect agricultural trade
include rules of origin,2 safeguards against import surges, rules to address various
other trade barriers, and the terms under which rules to ensure food safety and plant
and animal health are applied. Bilateral FTAs, however, have not addressed the issue
of trade-distorting domestic farm subsidies.
1 For broader context, see CRS Trade Briefing Book entry titled U.S.-Central American Free
Trade Agreement; CRS Report RL31870, The U.S.-Central America Free Trade Agreement
(CAFTA): Challenges for Sub-Regional Integration, April 25, 2003, by J. F. Hornbeck; and
CRS Report RL31356, Free Trade Agreements: Impact on U.S. Trade and Implications for
U.S. Trade Policy, July 25, 2003, by William H. Cooper.
2 Rules of origin specify what is required for a product to be considered to have been
produced or processed in a country that is a party to a trade agreement. They are used to
implement FTAs to determine whether a product benefits from the agreement’s duty and
quota preferences.
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U.S. Agricultural Trade with CAFTA Countries
The United States in 2002 recorded an agricultural trade deficit (- $847 billion)
with the CAFTA region. U.S. agricultural exports to these 5 countries increased 74%
over the last decade (1993-2002) to just over $1.0 billion, while agricultural imports
from the region rose 28% to $1.9 billion. Guatemala and Costa Rica ranked as the
region’s top two markets for U.S. agricultural products last year; they also were the
leading suppliers of farm products to the U.S. market (Table 1).
Table 1. U.S. Agricultural Trade,
and Agricultural Products’ Share of Total U.S. Trade,
with CAFTA Countries, 2002
COUNTRY/
U.S.
AG EXPORT
U.S.
AG IMPORT
REGION
AGRICULTURAL
SHARE OF U.S.
AGRICULTURAL
SHARE OF U.S.
EXPORTS
EXPORTS
IMPORTS
IMPORTS
million $
percent
million $
percent
Costa Rica
226
7.8
803
25.5
El Salvador
212
13.2
74
3.8
Guatemala
341
17.3
687
24.7
Honduras
184
7.3
232
7.1
Nicaragua
85
20.0
97
14.3
Total, CAFTA
1,047
1,894
CAFTA SHARE
2.0 % a
11.1 % b
4.5 % c
16.0 % d
Source: U.S. Department of Agriculture (USDA), Foreign Agricultural Service; and U.S. International
Trade Commission (USITC)
a of U.S. agricultural exports of $53.1 billion to the world.
b of U.S. merchandise exports of $9.4 billion to these 5 countries.
c of U.S. agricultural imports of $41.9 billion from the world.
d of U.S. merchandise imports of $12.2 billion from these 5 countries.
Exports
U.S. agricultural exports to the 5 CAFTA countries represented 2% of all U.S.
agricultural exports in 2002, and 11.1% of total U.S. merchandise exports to the
region. Exports of bulk commodities accounted for almost half of agricultural sales.
The balance was nearly equally divided between intermediate (semi-processed)
products and consumer-oriented food products. Reflecting this composition, leading
exports were coarse grains, wheat, rice, soybean meal, and animal fats (totaling $516
million – half of all U.S. agricultural sales to CAFTA countries).
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Imports
CAFTA’s share of all U.S. agricultural imports was 4.5%, and represented 16%
of all U.S. merchandise imports from the region, in 2002. Consumer-ready food
products accounted for nearly three-quarters of agricultural imports from the 5
countries, with bulk commodities making up most of the balance. Reflecting this,
leading imports were bananas, raw coffee, and other fresh fruit (totaling $1.3 billion
– 69% of all agricultural purchases from the region).
Entries under two U.S. trade preference programs (primarily the Caribbean Basin
Initiative, or CBI) accounted for 43% of U.S. agricultural imports – meaning they
enter duty free. The share of imports covered by these preference programs varied
from 30% for Honduras to 56% for Nicaragua (Table 2).
A large portion of
agricultural imports (tropical products such as bananas and raw coffee) that are subject
to the most-favored nation rate enter duty free.
Table 2. U.S. Agricultural Imports from CAFTA Countries,
by Most-Favored Nation Designation and
by Trade Preference Program: 2002
TOTAL,
MOST-
GENERALIZED
CARIBBEAN
AGRICULTURAL
TRADE
FAVORED
SYSTEM OF
BASIN
IMPORTS, 2002
PREFERENCE
N
a
ATION
PREFERENCES
INITIATIVE
P
b
ROGRAMS
million $
percent
CAFTA, Total:
1,913
57.4
1.2
41.4
42.6
Costa Rica
820
49.0
0.5
50.5
51.0
El Salvador
74
53.0
7.4
39.6
47.0
Guatemala
688
65.6
1.7
32.7
34.4
Honduras
231
69.9
1.0
29.1
30.1
Nicaragua
99
43.7
0.0
56.3
56.3
Source: Derived by CRS from USITC data
a MFN, or Normal Trade Relations (NTR), refers to equal treatment of all countries (other than those
specifically denied it) with regard to tariff concessions.
b The United States grants primarily developing countries unilateral preferential tariff treatment under various
programs, meaning imports are eligible for lower than NTR rates (in practice, zero or very low duty) and
giving them a competitive advantage in the U.S. market.
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Barriers to Agricultural Trade
The United States and the 5 CAFTA countries use tariffs and tariff-rate quotas
(TRQs)3 to protect their agricultural sectors. The 5 countries committed under the
multilateral Uruguay Round’s Agreement on Agriculture to bind their average tariffs
on agricultural imports at relatively high levels (ranging from Nicaragua’s 73% to
Honduras’ 35%), compared to the U.S. commitment to bind its average rate at 12%
(Table 3).4 However, in practice, the Central American countries generally have
imposed much lower average tariffs on agricultural imports (with applied tariffs
ranging from 6.7% in Nicaragua to 14.6% in Costa Rica), and at times have allowed
larger amounts of commodities than spelled out in their TRQ minimum commitments
to enter duty free or at a lower duty.5 The average U.S. applied tariff on imports from
just the 5 Central American countries is considerably lower when trade preference
benefits are taken into account (Table 2). These applied tariff averages, however,
mask the range of protection provided commodities and food products in the 5
countries and the United States, and do not always reflect the full impact of the much
higher level of protection provided by specific-product TRQs.
Issues Identified by the United States
The Office of the U.S. Trade Representative (USTR) has identified market access
issues and related policies that the Central American countries use to limit or restrict
imports of U.S. agricultural products.6 U.S. negotiators have indicated they will seek
to address them in CAFTA negotiations.
USTR noted three countries that have high tariffs on sensitive agricultural
products. Costa Rica imposes a 65% rate on dairy product imports, and 150% on
poultry products. El Salvador imposes a duty of 40% on dairy products, rice and pork,
30% on beef, and 30% (plus additional taxes) on alcoholic beverages. Guatemala
imposes high protective tariffs on above-quota quantities that enter under its
agricultural TRQs.
3 A TRQ combines two policy instruments that nations use to restrict imports: quotas and
tariffs. In a TRQ, the quota component works together with a specified tariff level to
provide the desired degree of import protection. Imports entering during a specific time
period under the quota portion of a TRQ are usually subject to a lower, or sometimes a zero,
tariff rate. This “in-quota” amount represents the minimum that a country has committed
to allow to enter under multilateral or other trade agreements. Imports above the quota’s
quantitative threshold (referred to as above-quota) face a much higher (usually prohibitive)
tariff.
4 The global average bound tariff on agricultural imports is 62% (U.S. Department of
Agriculture (USDA), Economic Research Service, Profiles of Tariffs in Global Agricultural
Markets, January 2001, p. 11).
5 For example, on October 25, 2002, the Government of Guatemala temporarily eliminated
the TRQ on corn imports, and decided to impose a 15% tariff on all yellow corn imports.
6 These are detailed in the country chapters of the 2003 National Trade Estimate Report on
Foreign Trade Barriers, released April 1, 2003 by USTR.
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Table 3. Average Tariffs and Tariff Rate Quotas on Agricultural
Imports: United States and CAFTA Countries
WTO
APPLIED
BOUND
TARIFF
TARIFF-RATE QUOTAS
a
RATE
RATE
percent
United States
12.0
12.0 b
dairy products, sugar, sugar-containing
products, peanuts, tobacco, cotton, beef
Costa Rica
48.0
14.6
pork, poultry, dairy products, beef, rice, corn,
beans, sugar, tobacco
El Salvador
43.2
10.3
beef, dairy products, yellow corn, vegetable
oils, sugar, tobacco
Guatemala
58.3
9.9
corn, rice, sugar, dairy products, tobacco,
wheat, apples, pears, grapes & raisins,
sorghum, soymeal, soyoil
Honduras
35.0
11.1
None - uses a price band for grains and a
commodity absorption arrangement
Nicaragua
73.4
6.7
corn, rough & milled rice, sorghum, vegetable
oil, beans, beef, poultry, dairy products, sugar
Source: USTR and USITC; paper prepared for IADB conference (footnote 9)
WTO - World Trade Organization
a 2001 for the United States, 2000 for the Central American countries.
b Considerably lower on agricultural imports from the 5 Central American countries, reflecting trade
preference programs and the commodity/product composition of imports.
Other measures are used to limit certain agricultural imports. For example,
Honduras administers a price band on imports of yellow corn, sorghum, and corn
meal.7 Honduras (for grains) and Nicaragua (for rice and pork) support domestic
prices of important commodities through import quota schemes, sometimes called
commodity absorption agreements. These require domestic end users and processors
to purchase a certain percentage of local production at high prices before they are
issued a license to import lower world-priced commodities (e.g., yellow corn at
preferential tariffs). Such imports are sometimes also subject to high duties. El
Salvador requires licenses for imports of basic grains and dairy products.
7 Price bands serve to insulate producers and processors when the world price for any
commodity falls below a calculated reference price (e.g., a price target comparable to a
commodity support level). Protection is provided the domestic sector by levying a variable
duty on the imported commodity, which when added to the lower world price, raises the
importer's cost to the reference price.
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USTR also noted that some countries rely extensively on overly strict sanitary
and phytosanitary (SPS) rules8 to restrict agricultural imports. Honduras and El
Salvador have effectively imposed bans on U.S. poultry imports, imposing “arbitrary”
restrictions that call for zero salmonella tolerance or negative laboratory tests for
certain poultry diseases. Additional U.S. poultry sales of $15 to $20 million to these
two markets likely would occur if these bans were removed, according to USTR. El
Salvador requires that rice imports have a USDA certificate stating a shipment is free
of a disease that cannot be practically and effectively fumigated (treated). El Salvador
requires the laboratory testing of all food products destined for retail sale. Concerns
exist about the quality of this local analysis, because some processed foods approved
for sale in the United States were rejected after testing in El Salvador, thus barring
their sale.
Non-trade barriers (NTBs) also serve as impediments. Guatemala requires that
every size or form of food product sold as individual units through retail channels be
registered separately, even if the product content is of identical composition. USTR
points out that there are not sufficient trained personnel to handle the testing and
registration process, that it takes six weeks to complete irrespective of the company
or product, and that products are sometimes damaged or pilfered while the process is
being completed.
Issues Identified by CAFTA Countries
With about three-quarters of their agricultural exports to the United States
already entering duty free under trade preference programs or at MFN zero rates
(applied to bananas and raw coffee), the 5 countries are most interested in securing
additional and/or unrestricted market access for those commodities now subject to
U.S. TRQs:
sugar and certain sugar-containing products, beef, dairy products,
peanuts, tobacco, and cotton. They are also expected to press for a quick reduction
in tariffs on fruits, juices, and vegetables, some of which face high U.S. tariffs: fresh
and chilled tomatoes, head lettuce, carrots, cucumbers, peppers, sweet corn,
watermelon, cantaloupes, citrus juices, apricots, and peaches.9
Central American negotiators continue to express concerns about the adverse
impacts they see in opening up their markets to U.S. agricultural commodities
(particularly corn, rice, dry beans, and dairy and meat products), most of which
benefit from U.S. price and income support programs. This reflects widespread fear
that small subsistence farmers will not be able to compete against lower priced
imports of “subsidized” commodities from the United States. Though these countries
had earlier pressed to include the issue of U.S. farm support on the negotiating agenda,
they appear to have accepted the U.S. position that this issue should be addressed
8 Measures to protect humans, animals, and plants from diseases, pests, or contaminants.
9
Dale Hathaway, “The Impacts of U.S. Agricultural and Trade Policy on Trade
Liberalization and Integration via a U.S.-Central American Free Trade Agreement,” April
2003, p. 38. This paper was prepared for an October 2002 seminar sponsored by the Inter-
American Development Bank, and can be accessed at [http://www.iadb.org/INT/Trade
/1_english/4_SpecialInfo/Conference/2002/i_Oct202-AgricLiberal/Hathaway.pdf].
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multilaterally in the World Trade Organization’s (WTO) Doha Round.10 It remains
to be seen if the breakdown of the WTO negotiations in Cancun on September 14,
2003, and a likely delay in reaching any multilateral agriculture agreement that
addresses the domestic support issue, will affect the position of the 5 Central
American countries. This is in light of the fact that details of the market access offers
these countries tabled this summer when CAFTA negotiators met reflected much
Central American apprehension about the pace and scope of reducing border
protection on their most sensitive agricultural commodities.
The 5 countries, individual commodity groups, and others also have different
interests and views on how agriculture should be handled in the CAFTA negotiations.
Guatemala in May 2003 tabled a more aggressive proposal to open up its markets to
U.S. products, breaking off from the other four. Since then, all 5 countries have
sought to work out their differing positions to develop a common front, an objective
the U.S. side has supported. Central American rice processors and consumers have
competing interests. With milling operations benefitting from the high tariffs imposed
on imports of milled rice (considerably more than on raw rice), consumers of this
staple could benefit from lower prices paid for imported milled rice from the United
States under a trade agreement.
U.S. Agricultural Trade Objectives
Last October, U.S. Trade Representative Robert Zoellick notified Congress of
the Bush Administration’s intent to negotiate a FTA with 5 Central American
countries. In his letter, he stated negotiations would enable the United States to
address several “market access impediments in Central America” that affect U.S.
agricultural sales to the region. U.S. objectives pertinent to negotiating the FTA’s
agricultural provisions include:11
! eliminating tariffs and other duties and charges on trade between
Central America and the United States on the broadest possible basis,
subject to reasonable adjustment periods for import-sensitive
products.
! eliminating non-tariff barriers in Central America to U.S. exports,
including licensing barriers on agricultural products, restrictive
administration of tariff-rate quotas, and other trade restrictive
measures that U.S. exporters identify.
10 This Round’s objectives for agriculture are to substantially improve market access for
agricultural products, reduce and phase out export subsidies, and substantially reduce trade-
distorting domestic support.
For additional information, see CRS Report RL32053,
Agriculture in WTO Negotiations, August 28, 2003, by Charles E. Hanrahan.
11 USTR Ambassador Zoellick letter to House Speaker J. Dennis Hastert and Senate
President pro Tempore Robert C. Byrd, October 1, 2002.
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! eliminating Central American government practices that adversely
affect U.S. exports of perishable or cyclical agricultural products,
while improving U.S. import relief mechanisms as appropriate.
! developing a mechanism with Central America that will support
achieving the U.S. objective in the WTO negotiations of eliminating
all export subsidies on agricultural products, and in the FTAA [Free
Trade Area of the Americas12] negotiations of eliminating agricultural
export subsidies on trade in the Hemisphere, while maintaining the
right to provide bona fide food aid and preserving U.S. agricultural
market development and export credit programs.
! seeking to have the Central American countries reaffirm their WTO
commitments on SPS measures and eliminate any unjustified SPS
restrictions.
! incorporating a bilateral safeguard mechanism during the transition
period to allow a temporary revocation of tariff preferences if
increased imports from one or more Central American countries are
a substantial cause of serious injury, or threat of serious injury, to a
domestic industry.
U.S. officials have also made repeatedly clear that the issue of U.S. farm support
or subsidies, pressed earlier by some Central American countries, will not be part of
the CAFTA negotiations, but rather addressed in the WTO context.
U.S. Agricultural and Food Sector Views
Several commodity organizations support the Administration’s CAFTA
initiative, anticipating that a FTA agreement would further open markets for their
producers in the region.
For others, support is conditioned upon negotiators
addressing specific issues in addition to eliminating tariffs. Some commodity groups
have expressed concerns about the negotiations, or have requested that their
commodity be excluded from the agreement’s scope altogether.13
12 The 34 countries of the Western Hemisphere (excluding Cuba) in 1998 initiated formal
talks to create a regional free trade area by 2005. The FTAA’s stated objectives are to
reduce and eliminate barriers to trade in goods (including agricultural commodities and food
products) and services, facilitate cross-border investment, among others, allowing all
countries to trade and invest with each other in the region under the same rules. For
additional background, see CRS Report RL30935, Agricultural Trade in the Free Trade
Area of the Americas, May 23, 2003, by Remy Jurenas, and RS20864, A Free Trade Area
of the Americas: Status of Negotiations and Major Policy Issues, September 24, 2003, by
J.F. Hornbeck.
13 Stated positions of groups are based on: (1) their submissions to the U.S. International
Trade Commission pursuant to its investigation requested by USTR (see footnote 14) into
the probable economic effects of CAFTA in the October-November 2002 period
(Investigation No. 131-022), and (2) testimony offered at the House Agriculture
(continued...)
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Supporters of CAFTA
With Central America a net dairy importer, the National Milk Producers
Federation (NMPF), representing dairy farmers and their marketing cooperatives, sees
clear benefits for the U.S. dairy industry in a growing market for milk powder and
cheese. It views the elimination of CAFTA tariffs as possibly stimulating additional
U.S. dairy exports, by overcoming the advantages of subsidized EU sales and helping
to undercut prices of similar products from New Zealand and Australia. NMPF does
not foresee much competition from CAFTA dairy products once they receive free
access to the U.S. market, as long as such access is restricted to products produced
from milk and dairy ingredients that originate in the region. The National Cotton
Council (NCC), representing cotton farmers, ginners, warehousers, merchants,
cottonseed crushers, cooperatives and textile manufacturers, supports the negotiations,
expecting increased opportunities for U.S. cotton fiber exports as textile and apparel
products produced in the region become more competitive in the U.S. market. NCC
is concerned that unless effective rules of origin are incorporated into CAFTA, the
U.S. textile sector could experience a negative impact if third country textile products
are transhipped through Central America to take advantage of duty-free and quota-free
access to the United States. It supports a phase-out of the U.S. cotton fiber TRQ, as
long as CAFTA includes tight rules of origin and safeguard provisions.
The Northwest Horticultural Council advocates the complete elimination of all
Central American tariffs on U.S. apples, pears, and sweet cherries (ranging from 14%
to 28%). The Council views the region as a growth market for fresh fruit, particularly
Red Delicious apples. It also believes improved access to the region will help its
growers and shippers address fierce competition from Chilean fruit growers, whose
products now enter some countries duty-free under current free trade agreements. The
Western Growers Association (representing the California and Arizona fresh fruit,
vegetable, and nut sectors) recommends that U.S. negotiators provide these countries
with immediate permanent duty free access to the U.S. market, since produce from the
5 countries already enters free under the CBI trade preference program.
This
association recommends that the CAFTA countries reciprocate by offering immediate
tariff elimination on the same products. Western Growers further calls for negotiators
not to eliminate or reduce any U.S. safeguard measures that deal with phytosanitary
issues, nor to relax or eliminate antidumping or countervailing duties that protect
against the dumping of these products in the U.S. market.
The Grocery Manufacturers of America (GMA) supports duty-free treatment for
all primary commodities and food and beverage products in the shortest time frame
possible. It advocates that “under no circumstances should any exceptions be made
for U.S. imports of sugar, peanuts or dairy products,” arguing that if the TRQs that
restrict their entry are not reduced or eliminated, “the opportunities for increased trade
will be significantly reduced” and undermine CAFTA’s purpose. GMA views Central
America as a “potentially strong growth market” for processed food and beverage
products, which still face high tariffs. Its other negotiating objectives include ensuring
13 (...continued)
Committee’s hearing held June18, 2003 on “Multilateral and Bilateral Agricultural Trade
Negotiations.”
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that CAFTA’s SPS rules are consistent with WTO rules and are based on sound
science, building upon WTO technical barriers to trade provisions to require that
technical regulations and standards are not more trade-restrictive than necessary,
ensuring trademark protection for branded food products, and securing commitments
from Central American countries to eliminate discriminatory taxes on carbonated soft
drinks compared to similar beverages.
The Sweetener Users Association (industrial users of sugar and other caloric
sweeteners and the trade associations which represent them) favors including sugar
in bilateral free trade negotiations (including CAFTA), foreseeing that opening up the
U.S. market to additional imports would result in lower sugar prices that benefit them
and consumers.
Liberalizing sugar trade, it argues, would encourage product
innovation and stimulate demand, keep food manufacturing jobs in the United States
rather than see them move overseas, help maintain a viable cane refining industry with
well-paid union jobs, and stimulate competition and thus thwart excessive industry
concentration.
Opponents of CAFTA
Some commodity and food product groups oppose their inclusion in the CAFTA,
and the reduction and elimination of U.S. tariffs on competitive imports from the
region. The American Sugar Alliance (ASA) sees dangers in using FTAs to liberalize
trade in sugar, arguing that the Administration’s piecemeal approach does not address
all kinds of distortions in the world sugar market, leaves any “free trade area
vulnerable to the harmful effects of subsidies outside the region,” and undercuts
efforts to remove sugar trade distorting policies in the WTO talks. It points out that
the FTAs proposed with Central America and Australia (both major sugar exporters)
and Brazil (the world’s largest sugar exporter, and also participating in the FTAA)
would “force the United States to import more sugar than it needs” and “be a disaster
for domestic producers and for foreign suppliers.” ASA insists the only way to
negotiate global free trade in sugar is in the multilateral WTO context, where all
forms of trade-distorting practices (not just tariffs and quotas) used worldwide are
made subject to “more far reaching, disciplines.” The National Juice Products
Association (juice and juice beverage processors) opposes any reduction in U.S. tariffs
on imports of orange, grapefruit, lemon and grape juices from the 5 Central American
countries. It argues that these tariffs have allowed U.S. juice processors “to make use
of imported frozen manufacturing concentrate” when U.S. fruit output has not met
demand, and also allowed domestic fruit growers “to realize reasonable rates of return
during peak production years.” Eliminating tariffs, in its view, “would inevitably
result in increased imports of juice products” from these countries, and in turn,
adversely affect the ability of juice extractors (that supply juice processors) and fruit
growers to compete against lower-priced imports and preserve juice quality levels.
The National Watermelon Association (producers, handlers and shippers)
opposes any tariff reduction on watermelon imports from Central America. It argues
that these countries’ lower costs would “further handicap efforts to improve economic
returns” to domestic watermelon producers, who have worked to achieve a balance
in the marketplace using an industry-funded research and promotion marketing order.
The American Dehydrated Onion & Garlic Association (representing two California
firms) opposes any tariff reduction on U.S. imports of dehydrated onion and/or garlic,
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but if not possible, requests that these import sensitive products be given “an extended
tariff phase-out period (of perhaps 15 years or longer)”. It argues that eliminating
tariffs would devastate the domestic industry and the rural communities dependent
upon it. The Association points out that the GSP trade preference program and all
U.S. free trade agreements have acknowledged the import sensitivity of these
products, determining them not eligible for zero duty treatment and granting them the
longest tariff phase-out periods.
Other Groups’ Views
Some groups view favorably the Administration’s push for bilateral FTAs, seeing
the potential for market openings. However, several condition their support for
CAFTA on U.S. negotiators addressing specific issues. The National Chicken
Council and USA Poultry and Egg Export Council place poultry, particularly chicken
leg quarters, as a priority agricultural issue in CAFTA. While tariffs and quotas on
poultry trade may be reduced, these groups see sanitary and veterinary provisions as
the “critical hurdle to overcome” in these negotiations. The National Pork Producers
Council (NPPC) wants U.S. negotiators to persuade the Central American countries
to accept the U.S. meat inspection system as sufficient to ensure the food safety of
U.S. pork exports in addition to eliminating their pork tariffs. It calls these countries’
practice of sending their own inspectors to U.S. pork plants “completely
unacceptable” and having the effect of operating as a non-tariff trade barrier. The
NPPC points to Chile’s last-minute decision to accept meat from any USDA-approved
facility before the Administration submitted the U.S.-Chile FTA to Congress as an
important precedent to follow to resolve non-tariff barriers alongside tariff
negotiations in all ongoing bilateral and regional trade talks.
The National Cattlemen's Beef Association (NCBA) views efforts to increase
trade relationships with Central America as bolstering “front-line defenses against the
introduction of foreign animal diseases” from South America, and developing the
potential to export moderate amounts of high quality U.S. beef to the region for
tourism and restaurants. With this region filling only 35% of its share of the U.S. beef
TRQ in recent years, the NCBA apparently does not expect much competition under
a FTA. The U.S. beef industry believes three key aspects must be considered as
negotiations near conclusion: (1) CAFTA must not exclude any agricultural product,
(2) Central American governments “must begin to understand that congressional
ratification will be difficult and improbable without the support of U.S. agriculture on
Capitol Hill,” and (3) negotiations on tariff rate reductions should start at the current
applied tariff rates, not the much higher WTO bound rates that countries recently
reverted to, in order to negotiate reductions down from a higher level.
Though U.S. feed grain fills most of the region’s import demand, the National
Corn Growers Association (NCGA) expects to gain additional market access in
Central America with free trade under CAFTA. It calls for immediate elimination of
corn tariffs in as many of the CAFTA countries as possible, and an end to the use of
commodity absorption arrangements by El Salvador, Honduras and Nicaragua. The
NCGA also seeks agreement that the 5 countries will evaluate products derived from
agricultural biotechnology “solely on the basis of sound science.” Wheat producers
(represented by the Wheat Export Trade Education Committee, U.S. Wheat Associates,
and the National Association of Wheat Growers) view all of the bilateral FTA
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negotiations as “stepping stones” to address those concerns that are being debated in
the WTO and the FTAA, by moving “trade liberalization further than what ... can be
achieved multilaterally.” Their spokesman notes U.S. wheat exports have posted
gains in Central America, accounting for a 70% market share, with sales prospects
best in Guatemala and Costa Rica. These three groups, while acknowledging that
negotiations must provide a way to address SPS issues, do not support “holding up”
trade agreements “until every single scientific issue is resolved.”
The USA Rice Federation notes that most Central American countries protect
their domestic rice millers by prohibiting milled rice imports. U.S. rice exporters
further face high bound tariffs, non-trade barriers and SPS restrictions in these
markets. The Rice Federation recommends that negotiators seek: immediate low and
equal tariffs on all types and forms of rice, to be reduced to zero; substantial
disciplines on how TRQs operate, to make more open licensing regimes, and on how
SPS rules are enforced; and the elimination of absorption arrangements and price
bands. The American Soybean Association expects CAFTA will benefit U.S. soybean
growers and seeks the elimination of tariffs and price bands and the resolution of
outstanding SPS issues in the agreement. The Distilled Spirits Council seeks the
immediate elimination of Central American duties on imports of U.S. products (which
range from 5% to 40%), protections for Bourbon and Tennessee Whiskey as
distinctive U.S. products (included in the FTA with Chile), and addressing of
technical trade barriers that impede sales to some countries.
Status of CAFTA Negotiations on Agriculture
The details of liberalizing trade in agricultural products between the 5 Central
American countries and the United States are being negotiated in the market access
group, one of the 5 negotiating committees established for the CAFTA talks. Interest
groups and politicians on each side have continually advocated immediate access in
the export market for those agricultural products viewed as the most sensitive by the
importing country or region. Each side exchanged initial market access offers
covering all products (agricultural and manufactured goods) in their May 2003
negotiating round. Subsequent sessions in June and July involved considerable
discussion about what time periods (sometimes referred to as “baskets”) to use to
phase out tariffs and quotas on agricultural products, about each side’s views on their
“sensitive” commodities, and about different options that might be used to handle
those commodities for which each side sought the longest transition period to free
trade. Both sides reportedly agreed in June to use four different baskets to phase out
border protection. Tariffs on products placed in the first basket would be eliminated
immediately. Those falling in the second and third baskets would see their tariffs
removed after 5 or 10 years, respectively. Protection on the most sensitive agricultural
products (placed in the fourth basket) would be phased out over a longer undefined
period. Negotiators at their September session agreed upon a 15-year period for
phasing out protection for these sensitive products, and split the fourth basket into
two: one ending protection after 12 years, and another after 15 years.14
14 Based on selected articles from issues of U.S. Inside Trade and BNA’s Daily Report for
Executives.
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Differences remain on which agricultural products are to be placed in the longer-
than 10-year transition basket, and reportedly were not settled at the October 20-24
negotiating session. At this session, U.S. negotiators planned to request that sugar,
peanuts, and a few other products be placed in the longer than 10-year transition
category. Their Central American counterparts reportedly classified beef, pork, corn,
rice, poultry, dry beans, and potatoes as their sensitive agricultural commodities, and
are seeking the longest tariff phase-out transitions for these. The U.S. proposal did
not exclude any agricultural product, but for those subject to a TRQ, market openings
are “relatively modest,” according to lead negotiator Regina Vargo. She also stated
that negotiators had not finalized which products would be covered by a TRQ.15
At the October session, U.S. negotiators secured a commitment from the Central
American negotiators to provide immediate market access on several U.S.
horticultural products. These include apples, pears, grapes, cherries, peaches, sweet
corn, and limes.16
In return, the United States reportedly made permanent the
preferential duty free treatment under CBI that Central American horticultural
products now receive in selling to the U.S. market.
Even with some progress, observers note that negotiators still must address more
difficult issues and settle many details to meet the December 2003 target for
concluding a CAFTA agreement. One key issue will be to resolve which sensitive
agricultural products fall in the 12-year basket and which benefit from the longest
transition period (15 years). Another is determining whether applied or bound tariff
levels should be used as the basis from which to reduce tariffs. The Central American
countries advocate starting with the much higher bound levels reflecting their WTO
commitments (Table 3). To bolster their negotiating position, some governments
raised tariffs on key agricultural imports up toward bound levels in 2002 and 2003.
The United States favors reducing tariffs from current applied levels, reflecting its
stance in the WTO and FTAA trade negotiations, seeking to gain quicker benefits
under new market openings. Once these issues are settled, negotiators will wrestle on
a tariff line basis on the details of TRQs – setting the size of each quota and its
growth rate until phased out, and determining both the within-quota tariff level (low
or zero) and the pace at which the much higher over-quota tariff is phased out.
Other provisions applicable to agricultural trade that negotiators will work on
include developing rules of origin and special agricultural safeguards. Whether rules
of origin for an agricultural product are written to be tight or relaxed can have a
bearing on the pace at which negotiators agree to reduce border protection.
Safeguards (involving the temporary use of higher tariffs and/or quotas) allow
producers of sensitive products additional time to adjust to increased import
competition. U.S. negotiators are expected to propose to use automatically-triggered
price-based safeguards (modeled after provisions included in the U.S.-Chile FTA) to
protect U.S. producers from sudden surges in sensitive agricultural imports from the
5 Central American countries.
Similarly, Central American negotiators have
15
Inside U.S. Trade, “Controversial CAFTA Textiles, Agriculture Work Left for
December,” October 31, 2003, p. 7.
16 BNA Inc., International Trade Reporter, “International Agreements: CAFTA Negotiators
Reach Agreement on Industrial Products, Vargo Says,” October 30, 2003, p. 1801.
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reportedly raised the concept of tying tariff reductions on imports of their sensitive
products to decreases in U.S. farm subsidies provided to such commodities.
Role of Congress
The Bipartisanship Trade Promotion Authority Act (TPA) of 2002 (Section 2102
of P.L. 107-210, Trade Act of 2002) sets out broad objectives for U.S. negotiators to
follow in developing agricultural provisions in trade agreements. These are reflected
in the specific objectives USTR laid out in notifying Congress of the Bush
Administration’s intent to negotiate a CAFTA agreement (see pages 7-8). Section
2104(b) requires the President to consult with Congress on specific agricultural issues
as negotiations proceed.
This interaction during the period of consultation on
negotiating positions and strategies is intended to lay the groundwork for subsequent
congressional consideration of any CAFTA agreement. In particular, the USTR must
follow special consultation procedures with the House and Senate Agriculture, the
House Ways and Means, and Senate Finance Committees before engaging in, and
during, trade negotiations that affect more than 200 import-sensitive agricultural
commodities and food products.17 Once an agreement is signed, the President and
Congress will develop draft implementing legislation that Congress will consider on
an expedited basis according to TPA procedures.
Some Members of Congress have signaled concerns with the agricultural market
access offers and positions presented by Central American negotiators in recent
months. The Chairman and Ranking Member of the Senate Finance Committee have
charged that the Central American negotiators are making unrealistic demands on
access into their markets of U.S. farm products. These legislators called for the
elimination of tariffs and other barriers on products of interest (including beef, pork,
corn, wheat and soybeans) “as soon as possible, and preferably immediately. ...
Without real market access benefits accruing to U.S. farmers and ranchers through the
CAFTA, support for the proposed [agreement] will be subject to question.” Both
Senators also urged U.S. negotiators to make the acceptance of the U.S. beef and pork
inspection system by the Central American countries a top priority and to emphasize
the importance that these countries make their SPS policies “science-based,
transparent and predictable, and thus WTO compliant” so that U.S. exporters know
what is expected when they sell products to that region. The House Agriculture
Committee Chairman similarly stated that “countries negotiating with the U.S. must
place meaningful offers on the table ... which provide increased access to U.S.
agricultural goods, if they hope to secure passage by the U.S. Congress.” In a visit to
17 To assist in its consultations with Congress and prepare for negotiations, USTR in
September 2002 requested the U.S. International Trade Commission (ITC) to analyze the
probable economic effect of providing duty-free treatment for imports from the 5 Central
American countries on U.S. industries that produce like or directly competitive articles and
on consumers. USTR’s request specifically called for an analysis of the economic effects
of eliminating tariffs on imports of these sensitive agricultural products. The ITC was asked
to submit its confidential report to USTR by year end 2002.
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Costa Rica, he “stressed that U.S. [producers] are becoming wary of trade negotiations
for which they see no benefit for their products.”18
Eight House Members have urged USTR “to proceed with caution” in the
CAFTA negotiations, pointing out that U.S. negotiators in this and other regional
trade agreements “would immediately confront significant and troubling issues
involving sugar trade.” Concerned that the recent collapse of the WTO negotiations
in Cancun might result in a U.S. policy emphasis to negotiate FTAs that “tend to
magnify, rather than reduce, trade distortions,” they urged Ambassador Zoellick to
reassess the principles underlying this approach to ensure they serve national interests.
Their letter urged that ongoing CAFTA negotiations not undermine current U.S. sugar
program and policy, and should include strong enforcement tools to deal with labor
and environmental standards. Reference was made to Guatemala’s sugar industry –
“rife with trade-distorting labor and environmental differences that lower production
costs.”
18 Letter from Senators Grassley and Baucus to USTR Ambassador Zoellick, August 29,
2003; press release issued by Congressman Goodlatte, August 7, 2003.