Order Code RS21985
Updated April 6, 2005
CRS Report for Congress
Received through the CRS Web
The Canadian Hog Trade Dispute
Geoffrey S. Becker
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Summary
On April 6, 2005, the U.S. International Trade Commission (ITC) made a final
determination that imports of live Canadian hogs are not materially injuring the U.S. hog
industry. The ITC’s negative determination culminates investigations requested in
March 2004 by U.S. pork producers under U.S. antidumping (AD) and countervailing
duty (CVD) laws, and means that no import duty order will be imposed. The ITC’s
decision came despite an earlier U.S. Department of Commerce (DOC) final
determination that producers/exporters have sold live swine from Canada at less than
fair value. DOC also earlier announced its final CVD determination that countervailable
subsidies are not being provided to Canadian producer/exporters, ending the CVD
investigation. This report will be updated if significant developments ensue.
The Complaint
The ITC and DOC had received AD and CVD petitions March 5, 2004, from the
National Pork Producers Coalition (NPPC), a number of state pork associations, and more
than 100 individual producers. The petitions allege that the industry is materially injured
and threatened with material injury due to imports of live swine (both slaughter hogs and
feeder pigs) from Canada, where farmers receive substantial subsidies under a variety of
government programs. Petitioners allege that the subsidies have encouraged the Canadian
industry to produce too many animals, which in turn are exported to the United States and
sold at less than fair value. Pork and hogs for breeding are not covered by the action.1
Legislative Basis
U.S. trade law spells out the relatively complex process for filing and investigating
an AD or CVD petition, which is filed simultaneously with both the ITC and Commerce.
(As with this case, petitions can be filed requesting both AD and CVD relief involving
the same imports.) The agencies then follow specified steps in investigating the petitions
1 The ITC investigations were announced on March 16, 2004 (69
Federal Register, p. 12347),
and the DOC investigations on April 14, 2004 (69
Federal Register, p. 19815 and p. 19818).
Congressional Research Service ˜
The Library of Congress
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to determine whether the product has been subsidized or dumped, as the case may be,
whether U.S. producers have been injured, and the level, if any, of duties that should be
levied. The law authorizes
antidumping duties on imported goods if Commerce (more
specifically, the Import Administration of the International Trade Administration within
Commerce) determines that an imported product is being sold at less than its fair value,
and the ITC, an independent agency, determines that a U.S. producer is being materially
injured or threatened with material injury as a result. Dumping is a form of price
discrimination whereby goods are sold in one export market at prices lower than the
prices of comparable goods in the home market or in other export markets.
The law also authorizes
countervailing duties on imported goods if Commerce
determines that a foreign government is providing a countervailable subsidy for the goods,
and the ITC determines that the imports are causing or threatening to cause material injury
to a U.S. industry. The purpose of the CVD law is to offset any unfair competitive
advantage that a foreign producer or exporter might have over U.S. producers due to the
subsidies. Any U.S. AD and CVD action must conform to the terms of World Trade
Organization (WTO) agreements. In addition, the North American Free Trade Agreement
(NAFTA) allows a final dumping, subsidy, or injury determination involving imports
from NAFTA countries to be reviewed by a binational panel instead of by a court in the
country issuing the determination.2
The Investigations
The ITC issued a preliminary determination on May 3, 2004, of material injury to
the U.S. industry.3 Commerce announced on August 16, 2004, a negative preliminary
determination in the
CVD case.4 Commerce found that several of 22 Canadian programs
it had examined appeared to be “countervailable,” but the value of the subsidies provided
were less than 1%
ad valorem. Other programs were not countervailable, the DOC found.
On the
AD petition, Commerce did preliminarily determine on October 14, 2004, that
Canadian swine are being, or are likely to be, sold in the United States at less than fair
value. To determine preliminary dumping margins, the DOC compared an export price
or constructed export price during calendar 2003 with a calculated “normal value” for the
animals. The margins effectively became the provisional duties.5
2 The authority for CVD and AD actions is in Subtitle A, Title VII, of the Tariff Act of 1930, as
amended (19 U.S.C. 1671 and 1673). For an explanation of this authority and CVD and AD
procedures, see CRS Report RL31296,
Trade Remedies and Agriculture.
3 The ITC published its determination on May 14, 2004 (69
Federal Register, p. 26884), and
detailed its views in
Live Swine From Canada: Investigations Nos. 701-TA-438 (Preliminary)
and 731-TA-1076 (Preliminary), Publication 3693 (May 2004).
4 Published August 23, 2004 (69
Federal Register, p. 51800). This preliminary negative
determination by Commerce did not, however, terminate the CVD investigation.
5 Under the so-called Byrd Amendment (Section 1003 of P.L. 106-387), final duties would have
to be redistributed to the domestic industries claiming to be injured by the imports, in this case
petitioning pork producers. A WTO dispute settlement panel has determined that the Byrd
Amendment violates U.S. trade obligations.
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On March 7, 2005, DOC announced a negative CVD determination, i.e., that
countervailable subsidies are not being provided to Canadian producer/exporters,
concluding the CVD case. However, DOC ruled affirmatively in the AD case, finding
that producers/exporters have sold live swine from Canada in the U.S. market at less than
fair value. It set dumping margins for individual firms ranging from 0.53% (
de minimis)
to18.87%.6 In the final investigatory step, the ITC issued its final AD determination on
April 6, 2005. Despite the earlier affirmative Commerce ruling in the AD case, the ITC
found that a U.S. industry is not materially injured or threatened with material injury by
reason of live swine imports. As a result, no AD order will be issued.7
The North American Pork Industry8
In the United States, approximately 74,000 producers held nearly 60 million hogs
and pigs in 2003, but this aggregate number masks the industry’s evolution and current
structure. Production and inventories traditionally were located in Corn Belt states, with
access to abundant feed grain and soybean meal supplies. Twenty-five years ago, tens of
thousands of small, independent farms, many diversified crop-livestock operations, raised
hogs from birth to slaughter weight.9 These hogs were sold to dozens of small to medium,
independently owned slaughter plants.
By 2003, the commercial U.S. pork industry had changed dramatically, due largely
to the adoption of vertical production methods (i.e., contract production arrangements by
a few large integrators who also own slaughter and processing plants). Six large
producers — Smithfield, Premium Standard Farms, Seaboard, Prestage, Cargill, and Iowa
Select — together accounted for nearly 30% of U.S. hog production in 2003. Informa
Economics estimated that the hog production segment of the industry now has about 30
key firms, plus several hundred additional “significant” operators. In the packing
(slaughter) sector, less than a dozen key firms predominate, Informa reported.10 Another
trend has been the expansion of production into other regions like the Southeast.
Production improvements (lower costs of scale economies, improved genetics, and
innovative management) have enabled the United States to raise more meat with fewer
sows and to become, by 1995, a net exporter of pork products. It is now the third-largest
exporter, after the European Union (EU-25) and Canada, respectively.
6 Published March 11, 2005 (70
Federal Register, pp. 12181-12188).
De minimis means less
than 1% and therefore is disregarded.
7 “Live Swine From Canada Do Not Injure U.S. Industry, Says ITC,” press release, April 6, 2005,
accessed at the ITC website at [http://www.usitc.gov/]. The ITC said its final report with views
and findings will be available after May 9, 2005.
8 Sources for this section include the ITC’s May 14, 2004 report; USDA, Economic Research
Service (ERS),
Market Integration in the North American Hog Industries, November 2004; and
Informa Economics,
Special Report: The Changing U.S. Pork Industry, November 1, 2004, at
[http://www.informaecon.com/LVNov1.pdf]. Informa, is an economics consulting firm.
9 Such farrow-to-finish operations keep hogs until slaughter weight of 240-270 pounds. The other
specialized hog enterprises are feeder pig producers who raise them from birth to about 10-60
pounds and sell them for finishing; and finishers who buy feeder pigs and feed them to slaughter.
10 The four largest firms accounted for 56% of all hog slaughter in 2002, compared with 33.6%
in 1980. The eight largest firms accounted for 78.7% in 2002, compared with 50.9% in 1980.
Source: USDA,
2002 Packers and Stockyards Statistical Report, p. 48.
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However, the United States is a net importer of live hogs, almost all from Canada.
Imports have increased more than fivefold since 1989, to 7.4 million head in 2003,
representing 7.3% of U.S. production. The 2003 imports were 30% higher than in 2002,
and were expected to exceed 8 million in 2004. Two-thirds of the total imports are now
feeder pigs, and most of the rest slaughter hogs. By contrast, the United States exported
approximately 170,000 live hogs in 2003, many of them slaughter hogs to Mexico.
Canada’s swine industry is about one-fourth the size of the U.S. industry. Canada
relies heavily on the U.S. market, sending to the United States nearly 25% of the 29.9
million head it marketed (slaughter plus exports) in 2003. Cross-border trade reflects an
increasingly integrated North American hog-pork complex, which has been facilitated in
part by NAFTA. The agreement (and its predecessor, the U.S.-Canada Free Trade
Agreement) reduced tariffs and other trade barriers and allowed competitive market forces
to play a larger role in trade and industry trends, according to USDA.
The Canadian breeding herd expanded by 40% from 1994 to 2004, from about 1.11
million head to1.55 million. Over the same period, the U.S. breeding herd declined by
about 17%, from 7.21 million to 6 million.11 USDA analysts point to a number of factors
spurring Canadians to produce and export feeder pigs to the United States. One was a
Canadian government effort to curb subsidy expenditures in the 1990s, notably a
grain-transport subsidy. Without it, grain stayed in the Western provinces to feed
livestock. Also, lower Canadian subsidies had led to reductions in previous U.S.
countervailing duties on Canadian hogs. And, an appreciating U.S. dollar against the
Canadian dollar from November 1996 to January 2002 favored Canadian sellers. Starting
in January 2002, a steady appreciation in the Canadian dollar then helped to slow, but as
of late 2004 not yet to halt, the rate of Canadian breeding herd expansion, USDA said.
In the United States, available slaughter capacity and dependable feed supplies have
been among the factors driving construction of hog-finishing facilities in Corn Belt states,
which helped to spur demand for feeder pigs, according to USDA; Canada has been a
willing provider. USDA and others also point out that Manitoba, with a cooler climate
and vast open spaces (helping disease control), provides more attractive conditions for
siting large-scale pig farrowing facilities than Iowa and Minnesota, the primary
destinations of feeder pigs sold in the United States. NPPC has countered that numerous
areas of the United States offer similar climatic and spatial conditions. NPPC asserts that
the USDA study failed to recognize that substantial government subsidies were the prime
contributor to Canadian expansion (see next section).
Arguments for and Against the AD/CVD Action
For. NPPC asserts that Canadian swine producers have received “substantial”
subsidies from more than one dozen programs.12 Iowa State University agricultural
economist Dermott Hayes asserts that the Canadian Agricultural Stabilization Program
provided Canadian swine producers with a total of $136.6 million, which translated into
an actual “risk-reducing” benefit of as much as $4 to $6 per pig during 2000-2003. A
Quebec-specific income stabilization program provided producers there with a benefit of
11 Sources: Statistics Canada, and USDA’s National Agricultural Statistics Service.
12 These programs are described in 69
Federal Register, pp. 51800-51811.
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as much as $15 per pig, Hayes adds. NPPC argues that the DOC’s CVD investigation
erred by preliminarily determining that the federal income subsidies were not specifically
targeted at the Canadian hog industry; by finding that the benefits were “recurring” and
thus not countervailable; and by failing to investigate the Quebec program.
NPPC contends that subsidies distort markets by protecting Canadian producers from
normal economic risks. As a result, NPPC maintains, Canadian swine production has
expanded even as net market returns are negative, disrupting the normal hog cycle. Most
of this overproduction, NPPC argues, is exported to the United States, where it harms
U.S. producers by depressing domestic prices, from which Canadian producers are
“unfairly immunized.” Iowa State’s Hayes calculated that the additional pork produced
due to the Quebec subsidies alone is equivalent to 30% of U.S. exports.13
Against. Opponents, including the Pork Trade Action Coalition, contend that trade
remedy actions are unjustified because swine prices are set by the market, not Canadian
exporters. Hundreds of U.S. farmers are buying the Canadian pigs and raising them in the
United States, where they consume U.S.-grown feed, are slaughtered in U.S. plants, and
are processed into high-value pork products to meet strong domestic and export demand,
it is argued. The preliminary dumping duties are a “tax” that will make the pigs
unaffordable to these farmers, many of them NPPC members, the coalition contends,
calling the imports a “vital component in U.S. pork industry productivity and profits.”14
Informa Economics reports that the western Corn Belt has excess packing capacity
and surplus feedgrain production. To address this situation, the region imported about 20
million pigs in 2003, both from Canada and from other states. “If this flow were sharply
curtailed for some reason, plant efficiency would immediately decline and permanent
plant closures probably result,” Informa observes (see footnote 8). Small producers have
remained solvent by concentrating on finishing out feeder pigs, either under contract with
an integrator, or by independently importing them from elsewhere, including Canada. A
finishing barn involves less investment risk, labor, and management expertise, “making
these operations a better fit for farms involved in grain production as well as livestock,”
according to the Informa report.
The Pork Trade Action Coalition contends that Canadian imports account for only
3.3% of the annual U.S. market. (This figure is the live weight of the hogs, or 27 billion
pounds. USDA’s 7.3% estimate of market share is based on the number of head.) The
coalition also declares that U.S. producers currently are receiving record prices and
profits. USDA analysts confirm that strong domestic and export demand for U.S. pork
products, along with higher prices for competing beef, helped to push the average price
of hogs to an estimated $53 per 100 pounds (cwt.) in 2004, the highest since 1990.
Additional Observations
Under the WTO agreement on agriculture, countries promised to classify their farm
subsidies based on their potential to distort production and trade, and not to exceed
13 NPPC views and supporting materials are available through its website, [http://www.nppc.org].
14 The coalition says it represents Midwestern producers who are purchasing the Canadian
imports. Its website is at [http://www.porktradeaction.org].
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specified, quantifiable limits for those deemed to be the most distorting.15 In its last
notification of domestic farm support to the WTO, which was for 1999, Canada reported
that hog producers had received C$160 million in support (through provincial programs),
or the equivalent of 6.2% of the value of production. Canada counted this spending as
“amber box” — that is, defined under the WTO as potentially trade/production distorting.
Elsewhere, the Organization for Economic Cooperation and Development (OECD)
has developed its own measure of major countries’ domestic supports — both exempt and
nonexempt — and publishes them annually. OECD said its “producer support estimate”
(PSE) for Canadian pigmeat was 7% of the value of production during 2002-2002. Its
comparable PSE for the United States was 4%.16
A 2004 USDA analysis concluded that any final AD and/or CVD penalty likely
would result in a slowing of North American pork market integration, and a decline in
U.S. imports of slaughter hogs as incentives increase to finish and slaughter them in
Canada. U.S. hog prices would increase to the benefit of U.S. hog producers, but at the
expense of U.S. hog buyers; Canadian domestic hog prices would decline.17
The NPPC materials further explain that Canada lacks enough capacity to feed to
slaughter weight the feeder pigs it will produce over the next 6-12 months, so these would
have continued to be exported to the United States in the short run, assuring U.S. feeders
an adequate supply. NPPC argues that Canadian rather than U.S. producers would absorb
most of the net lower price impact of a new duty, leading to reduced Canadian output.18
USDA and other analysts have noted another possible consequence if dumping
penalties and slowing imports of Canadian swine had occurred: an increase in Canadian
pork exports to the United States in 2005. USDA expects U.S. pork imports in 2005 to
increase by nearly 10%, to about 1.2 billion pounds (December 2004 estimate).
According to some analysts, Canadian pork imports would continue to trend higher over
the long term if Canada were to add hog finishing and packing plant capacity, creating
more competition for those segments of the U.S. industry.
In a statement on April 6, 2005, NPPC said it would monitor the situation, noting
that “[t]he U.S. government plans to meet with the Canadian government to discuss the
hog subsidies in the near future.”
15 See CRS Report RL30612,
Farm Support Programs and World Trade Commitments.
16
Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2003. The OECD data
differ from that collected by the WTO for subsidy reporting purposes, and therefore are not
directly comparable. See the above CRS report for clarification.
17 ERS,
Market Integration in the North American Hog Industries; and
Livestock, Dairy, &
Poultry Outlook, November 18, 2004.
18 NPPC says that due to the duty, prices for feeder pigs will be higher in the United States
(benefitting those selling U.S. feeder pigs) but lower in Canada. Though U.S. feeder pig buyers
will have to pay more, anticipated higher prices for U.S. slaughter hogs should offset all or part
of this cost, NPPC argues.