Trading Places
Will dairy dodge double-digit tariff rates anytime soon?
by Shannon Linderoth

When Federal Reserve Chairman Alan Greenspan calls for higher interest rates, people listen. But when the much-touted U.S. economy architect called for freer ag trade this spring, did anyone hear?

Perhaps we’ll find out when Congress decides whether to grant Permanent Normal Trade Relations status for China as early as this month, paving the way for its acceptance into the World Trade Organization. Or, more likely, we’ll have to muddle through the trade maze a while longer as international negotiators continue to parry and thrust in the protectionist duel they know so well.

As anyone who has sold goods or services across U.S. borders can attest, any widening of the door to the international marketplace will be welcome, but progress will probably continue to be slow in coming. 

History Lesson
“The United States is not traditionally a major dairy trading (export) nation, not to the degree we are with soybeans, corn or wheat” says Bill Dobson, University of Wisconsin ag economist and director of the Renk Agribusiness Institute. “We’re huge traders in those commodities. We do export some dairy products, but in terms of tonnage, we’re big dairy importers.” 

That’s due, in part, to the perishability of most dairy products. Other factors include high domestic dairy utilization and significant U.S. border tariffs protecting our domestic market.  “These are supply control measures that deep the domestic bulk dairy commodity prices relatively high (in relation to world prices),” explains Dobson. “In 1999, our prices were 50% above world market prices, which means we have a difficult time exporting competitively.” The Dairy Export Incentive Program offers a limited export subsidy, but it typically doesn’t address the entire range of dairy products exported. 

To a degree, ag tariffs have dropped over the past five years. Under the trade agreement reached in the Uruguay Round (the precursor to the WTO), developed counties agreed to reduce all ag tariffs by an average of 36% between 1995 and 2000. Minimum reductions were set at 15%.  But, since countries had a great deal of flexibility in deciding how much each ag tariff would be cut, average reductions varied. “The U.S., European Union, Japan and Canada each slightly exceed the average requirement, with overall cuts of 37 to 38%,” according to an Economic Research Service’s Agricultural Outlook report. “Australia cut 75% of its ag product tariffs by levels above the 36% average, resulting in a 48% average reduction.”

Still, ag tariffs tend to be higher than those on manufactured items, and are unevenly distributed across countries and commodities. 

“Our tariff rates on dairy are high, but not as high as other countries like Canada, Japan and the EU,” notes Janet Nuzum, vice president and general counsel of the International Dairy Foods Association. “Our mission in the current negotiations is to find the most viable options in eliminating export subsidies by our competitors.  And we have to look at ways to close the gaps in how tariff rates are implemented and administered.  For example, we should have more access to the EU cheese market today, but we need to clarify the rules.” 

Horizon Skimming
Greg Rowley, vice president of Gossner Foods, Inc., isn’t holding his breath on greater foreign-market access. The Logan, Utah, business, known for its Swiss cheese and ultra-high-temperature milk products, exports goods through U.S.-based distributors with cross-border ties. 

“Right now we’re focusing on producing the best product possible and meeting our domestic marketing needs, then going through our distributors, taking whatever piece of the world market it will give us,” he says. “It’s frustrating because we (the United States) don’t have a competitive system in place to export market our high-value products. The only products to receive subsidies are those of the lowest value. 

“We’ll take our cue from how the WTO deals with the Canadian situation, with whom we compete in a couple of markets,” Rowley adds. “But we’re talking about a slow, cumbersome process to get any changes accomplished.” 

“Farmers and manufacturers need to remember our domestic consumption isn’t growing dramatically,” argues Nuzum. “Granted, we see good growth in U.S. cheese consumption, but overall, growth opportunities for the dairy industry exist elsewhere. Our potential is severely restricted as long as other countries hold to their high tariff rates. We can export now, but not as much as we could if we eliminated everyone’s export subsidies and tariff system.”

Until then, where can we expect to see much growth?

“Mexico, as a result of the North American Free Trade Agreement, holds great potential for U.S. dairy exports,” predicts Dobson. “By 2008, if things go as planned, there will be zero tariff of milk powder exported by the United States. This possibility is extremely important as Mexico becomes more prosperous.”

Once you get beyond Mexico, however, the outlook is not so favorable. China and the Pacific Rim hold tremendous potential, but are unproven as major destinations of U.S. dairy products.  We’ve seen increased purchases and are working on additional sales, but history and close proximity to Australia and New Zealand tend to give those dairy countries a marketing edge in that part of the world. 

Furthermore, “The EU is not in a position to make major trade concessions,” explains Dobson.  If they made agreements similar to ours, their quota system, which is both an economic and sociological institution, would be in jeopardy. Plus, this pressure comes at a time when the EU is already dealing with its expansion into Eastern Europe. For example, do they expand the quota system into Poland? Or is this where they begin designing their new ag policy? 

“At some point the quota system will be eliminated, but not for a while,” Dobson predicts. “The EU is slated to take a hard look at the quota system in 2005, but their domestic policy has to come in line before they make significant changes. And they are not going to give up their export subsidies without a fight.”

However, even European studies concede the U.S. dairy industry is rated as having modestly higher market growth prospects in the EU. 

“If there were completely free trade in the world -- if everyone were playing on a level field -- U.S. dairy prices would stay about the same as they are now,” concludes Dobson.  “However, that will probably not happen any time soon. Some movement is possible, but I doubt completely free trade is something I’ll see in my lifetime.”