oversight

Commitments by the European Union and the United States to Reduce Agricultural Export Subsidies

Published by the Government Accountability Office on 1999-06-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      National Security and
      International Affairs Division


      B-2830 19

      June 18,1999

      The Honorable John Kasich
      Chairman, Committee on the Budget
      House of Representatives

      Subject:       Commitments bv the Euronean Union and the United States to Reduce
                     Agricultural Exnort Subsidies

      Dear Mr. Chairman:

      Between 1985 and 1994, the European Union (EU) spent over $100 billion (in 1998 dollars) in
      agricultural export subsidies, and the United States provided over $10 billion (in 1998 dollars)
      in an effort to compete against each other’s prices for agricultural exports. Recognizing that
      such subsidies distort trade, the European Union, the United St&es, and other countries
      agreed, under the 1994 World Trade Organization’s (WTO) Agreement on Agriculture
      (“Agreement”), to a gradual reduction in the volume and value of agricultural goods receiving
      export subsidies over a 6-year period ending in the year 2000. ’ Member nations will review
      progress in achieving these reductions and discuss future commitments to lower agricultural
      export subsidies in upcoming WTO talks on agricultural trade. These talks will begin in
      November 1999 in Seattle, Washington.2

      As you requested, we have reviewed the ETJ’sand the U.S.’ agricultural export subsidy
      programs. Specifically, in this letter, we examine (1) EU and U.S. compliance with the
      Agreement on Agriculture commitments to reduce agricultural export subsidies and (2) EU
      and U.S. plans regarding the future use of agricultural export subsidies.



      SUMMARY

      To date, the European Union and the United States have complied with their WTO Agreement
      on Agriculture schedule of annual commitments to gradually reduce export subsidies for




      ’ The Agreement also provided rules on market access and domestic support.
      ’ The WTO was established on January 1,1995, as a result of the Uruguay Round of the General Agreement on Tariffs and Trade,
      which began in 1986and ended in 1994. The WTO facilitates the implementation, administration, and operation of multiple
      agreements that govern trade among its member counties.




                                                                         GAOLNSIAD-99-198RAgricultural Export Subsidies
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categories of agricultural goods.’ For most agricultural categories, the European Union and
the United States are below the maximum annual levels set by their schedules. For a few
categories, however, the European Union and the United States exceeded their annual
commitments for 1 year. According to EU and U.S. officials, in these cases, each country
carried forward unused agricultural export subsidies from previous years to maintain
compliance with their schedules.

The European Union and the United States differ on their future plans regarding agricultural
export subsidies. The European Union recently adopted a new agricultural policy that plans
further cuts in the domestic market prices of dairy products, beef, and cereals between the
years 2000 and 2007, which would facilitate reductions in its agricultural export subsidies.
The United States has announced that it will seek the elimination of all agricultural export
subsidies in the 1999 World Trade Organization talks. These two trading partners expect the
WTO negotiations to link cuts in agricultural export subsidies with changes in other trading
practices. For example, the European Union plans to tie cuts in export credit guarantee
programs with reductions in agricultural export subsidies, and both partners will seek more
transparency (openness) in the activities of state trading enterprises as part of export subsidy
reduction negotiations.



BACKGROUND

Nations use agricultural export subsidies to help their domestic commodities become more
price competitive on the world market. The EU’s agricultural export subsidy system is a
important element of Europe’s Common Agricultural Policy (CAP). The CAP is intended to
preserve farm incomes and rural economies by supporting high domestic prices for a wide
variety of agricultural commodities and products. Agricultural export subsidies enable EU
exporters to compete in world markets by refunding the difference between higher EU
market prices and lower world market prices.’ The United States currently provides
agricultural export subsidies through two programs, the Export Enhancement Program (EEP)
and the Dairy Export Incentive Program (DEIP), which are administered by the U.S.
Department of Agriculture (USDA). These programs are intended to counter foreign
 competitor practices, expand markets, and facilitate sales of agricultural surpluses abroad.
The U.S. agricultural export subsidies assist the export of a few bulk and semiprocessed
 agricultural commodities such as wheat, coarse grains, skim milk powder and cheese.
 Enclosure I provides more detail about the operation of the EU and U.S. agricultural export
 subsidy programs.




3The schedules include a list of products and their specific levels of annual reductions by budget outlays and by volume of
subsidized exports.
’ The EU calls its agricultuml export subsidies “restitutions” or “refunds,” while the United States refers to its agricultmal export
subsidies as “bonuses.”




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Twenty-five countries made commitments in the Agreement on Agriculture to gradually
reduce their agricultural export subsidies. Article 9 of the Agreement lists several types of
agricultural export subsidies that are subject to reduction, including direct payments to
exporters, sales of noncommercial agricultural stocks at prices lower than acquisition prices,
and export payments financed through levies on producers. Export credit guarantees5 and
international food aid are not specifically listed as agricultural export subsidies subject to
reduction commitments. However, the Agreement states that any agricultural export
subsidies not specifically listed shall not be used in a manner that results in, or threatens to
lead to, circumvention of the Agreement. Article 10 of the Agreement also contains specific
restrictions on the use of international food aid.

Agricultural export subsidies distort prices, production, and trade flows. These subsidies
lower world prices, lessening incentives in nonsubsidizing countries to produce agricultural
commodities. The agricultural export subsidies also cause inefficiencies and costs in the
subsidizing economy: excess product is exported and consumers pay higher prices for these
goods as well as helping finance the subsidies through tax payments.

 The European Union has consistently been by far the world’s largest user of agricultural
export subsidies and the United States has consistently ranked among the top 10 users. In
1996, the European Union reported agricultural export subsidies of $6.3 billion to the WTO,
while the United States reported $122 million in agricultural export subsidies, which ranked
fourth among subsidizing countries that year.



THE EUROPEAN UNION AND THE UNITED STATES ARE COMPLYING WITH THEIR
COMMITMENTS TO REDUCE AGRICULTURAL EXPORT SUHSIDIES

To date, the European Union and the United States are complying with their schedules of
annual commitments to reduce agricultural export subsidies over a 6-year period, according
to EU and U.S. government officials. Under the 1994 Agreement, member nations committed
to a schedule that, by the end of the implementation period (the year ZOOO),reduces their
total budgetary outlays for agricultural export subsidies by at least 36 percent6 and their total
volume of subsidized agricultural exports by at least 21 percent. The percentage reductions
are applied to a base period that averages the country’s export subsidy outlays and volumes
for 1986-90.’ See enclosure II for a comparison of EU and U.S. total export subsidy
commitments (1995-2000) and outlays to date.




5Agricultuxal export credit guarantee programs offer loan guarantees to help make iinancing available for imports of U.S.
agricultural commodities and products.
6Export subsidy commitments are set in member country currencies and are not adjusted for inflation.
’ The starting point for the first year commitments could either be the amount of the base period or the average of the subsidies
for 1991-92,whichever was higher.




3                                                                     GAOINSJAD-99-198RAgricultural Export Subsidies
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Member nations committed to schedules that reduce the maximum value and volume of
export subsidies to specified levels for different categories of agricultural exports. These
reductions occur annudly, beginning in 1995 and ending in the year 2000. For example, the
European Union has committed to specified annual reductions to the value and volume of
export subsidies for 20 agricultural categories over the implementation period, and the United
States has commitments to annually reduce to specified levels the value and volume of export
subsidies for 13 agricultural categories. The Agreement prohibits member nations from
introducing or reintroducing agricultural export subsidies that were not subsidized during the
base period. According to USDA officials, the United States currently does not use
agricultural export subsidies for some commodities; however, the commodities were
included in the schedule solely to retain their eligibility for agricultural export subsidies
under the Agreement.

For most agricultural categories, the actual budgetary outlays and the volume of subsidized
agricultural exports were below the maximum levels set each year for both the European
Union and the United States. For example, in 1996, the EU’s actual budgetary outlays for
agricultural export subsidies were only 15 percent of the maximum level for wheat and wheat
flour, the agricultural category with the largest export subsidy value. The United States used
0 percent of its annual commitment in 1996 for wheat. (See enc. III for tables that list export
subsidy commitments [maximum value and volume permitted] by agricultural category as
well as the actual subsidy levels for the years reported by the European Union and United
States to the WTO.)

High world prices in 1995 and 1996 for some products led to actual budgetary outlays for
agricultural export subsidies that were much lower than the maximum levels permitted under
their schedules. These high world prices reduced the difference between the world prices
and the internal prices in the United States and the European Union and subsequently
reduced the amount of export subsidy needed. To a lesser extent, policy reforms in the
United States in 1996 and the European Union in 1992 helped cut agricultural export
subsidies by decoupling payments to producers from production levels.’

For a few agricultural categories, the European Union and the United States exceeded their
annual commitments-the maximum amounts permitted under their schedule. But EU and
U.S. officials say they are in compliance with their annual commitments because they “rolled
over” unused agricultural export subsidies for these categories from prior years to make up
the difference.g The United States and other countries initially questioned whether this
practice is consistent with WTO commitments when the European Union first rolled over
unused ag&ultural export subsidies from 1995 to meet its 1996 commitments for rice, wine,
olive oil, and beef.” Despite its initial concerns, the United States rolled over unused

’ These policy-reforms included the Federal Agriculture Improvement and Reform (FAIR) Act (PL 104-127,Apr. 4,1996) in 1996
and the EU’s changes in its Common Agricultural Policy in 1992.

’ Three other countries also rolled over unused subsidies to meet their annual commitments. They were Israel, Poland, and
Norway.

 ” The European Union rolled over unused subsidies for volume and value for rice and wine and unused subsidies for volume for
 olive oil and beef.




 4                                                                  GAO/NSLAD-99-198RAgricuhual Export Subsidies
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agricultural export subsidies accumulated from previous years to meet its commitment to
reduce its volume of subsidized nonfat dry milk exports to a specified level in 1997.l’



THE EUROPEAN UNION AND THE UNITED STATES DIFFER ON EXTENT OF
ADDITIONAL EXPORT SUBSIDY CUTS

The European Union and the United States have different plans regarding the future use of
agricultural export subsidies. The European Union has not announced a target for future
agricultural export subsidy reductions, but the European Council has adopted reforms to the
CAP, including lower support prices for some commodities, that would facilitate further
reductions in agricultural export subsidies. The United States has stated that it will ask for
elimination of all agricultural export subsidies in the 1999 WTO trade talks. The debate on
agricultural export subsidy reductions in the trade talks will likely be linked with negotiations
to change other trading practices, according to U.S. and European officials.

EU and U.S. Views on WTO Agricultural Talks in 1999

The European Union has not published its negotiating position on agricultural export
subsidies for the 1999 WTO talks, but the European Council stated in March 1999 that the
recently reformed CAP establishes the EU’s negotiating framework for the next round of
trade talks. The European Union, in March 1999, adopted a 7-year financial plan that calls for
further cuts in the domestic support prices of cereals, beef, and dairy products, which affects
up to 6 of the 20 agricultural categories listed in the current export subsidy reduction
schedule. The gradual cuts in the domestic market prices of the agricultural products would
facilitate a gradual reduction in export subsidies because the lower domestic prices will be
closer to the world market prices. To preserve farm incomes lost by the lower internal
market prices, the CAP continues an earlier policy of offsetting price cuts (and lost export
subsidy income) with direct compensation payments to farmers, payments that are currently
permitted by the Agreement.

USDA and U.S. Trade Representative (USTR) officials were disappointed at the limited extent
of the reforms to the CAP. The officials believed the reductions in internal market prices,
which are usually related to the level of agricultural export subsidies,. were modest or not
adopted. For example, the new CAP only cut cereals and beef prices by 15 percent starting in
the year 2000 and delayed cuts of 15 percent in dairy product prices until 2005. In addition,
there were no changes made in the prices of sugar, one of the largest export subsidy
programs. The U.S. officials expected deeper cuts in the EU’s internal market prices, and
thus in agricultural export subsidies, in preparation for the 1999 trade talks and in


” The United States and other countries also have expressed concerns over the EU practice of paying export subsidies for
certain components of processed cheese, even though it is the processed cheese that is eventually exported. They claim that this
practice allows the European Union to export a larger volume of subsidized cheese than permitted under its schedule of
commitments. The European Union defends this practice by stating that it is administering its “inward processing zone”
according to well recognized international principles, and therefore does not violate its schedule of commitments.




                                                                    GAO/NSIAD-99-198R Agricultural Export Subsidies
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anticipation of increased budget pressures when the Czech Republic, Hungary, and Poland
join the European Union. The European Council said it would monitor market developments
in beef and cereals exports to determine if any other market intervention will be necessary.

The United States will call for elimination of all remaining agricultural export subsidies in the
1999 WTO talks, according to a report submitted to the WTO General Council in November
1998 and repeated in recent USDA and USTR testimony to Congress. Until the agriculturaI
export subsidies are eliminated, the United States will also seek a more restrictive
understanding of the export subsidy rules to prevent members from rolling over unused
subsidy commitments. The Cairns Group, a group of 15 WTO members that supports
agricultural free trade, has also called for elimination of agricultural export subsidies and
additional rules on agricultural export credit guarantees to counter circumvention of subsidy
reduction requ.irements.‘2

WTO Negotiations Mav Link Additional Exnort Subsidv Reductions With Cuts Elsewhere

WTO negotiations on export subsidy reductions will likely be tied to cuts in other agricultural
trade practices, according to EU and U.S. officials. For example, the Counselor for
Agriculture at the Delegation of the European Commission in Washington, D-C., said the
European Union will press for changes in the U.S. export credit guarantee program in
exchange for negotiations on agricultural export subsidies because those programs-export
credit guarantees and agricultural export subsidies -are the most important export
assistance programs from the EU’s and U.S.’ perspectives.

According to EU and U.S. government officials, the following trade practices will probably be
tied to WTO talks on export subsidy reductions.

n         Exnort credit guarantee programs. U.S. export credit guarantee programs help make
          financing available for imports of U.S. agricultural products. .Such support is often
          important in obtaining financing in foreign markets. The programs are available for
          loans with terms up to 10 years, but most loans average about 2 years. In some cases,
          the United States, a large user of export credit guarantees, also provides export credit
          guarantees on exports receiving agricultural export subsidies. l3 In fiscal year 1998,
          the United States provided export credit guarantees for about $4.3 billion in
          agricultural exports, about 8 percent of all U.S. agricultural exports. Some EU
          member countries, such as France, also operate export credit guarantee programs. l4
          The Agreement called on members to work toward the development of internationally

 ‘* The Cairns Group members are Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Indonesia, Malaysia, New Zealand,
 Paraguay, the Philippines, South Africa, Thailand, and Uruguay.
 I3See Farm Bill &oort Ootio&GAO/GGD-96-39R, Dec. 15,1995) and U.S.
                            3   . .
 Emort Assimme ~~~~~ams~on~butfon Uncem ‘$ (GAOMSIAD-97-260, Sept. 30,1997) for akxussion                 of the U.S. export
 credit guarantee program,
 ” The actual 1998budgetary costs associated with the U.S. credit guarantees committed in 1992and beyond were $259.2million.
 This amount included claims on actual defaults, estimates on potential defaults, and ilnancing costs. Siiar data on the costs of
 competitors’ export guarantee programs is not available.




 6                                                                    GAONSIAD-99-198R Agricultural Export Subsidies
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          agreed-upon rules on export credit guarantee programs. Negotiations on such rules
          were underway through the Organization for Economic Cooperation and
          Development,” but the negotiations stalled in March 1998 when members could not
          reach agreement on new rules.

n         State trading enternrises (STE). Some countries, such as Australia, New Zealand, and
          Canada, have government organizations that are monopoly sellers of specific
          products, such as wheat or dairy products. These organizations set the prices on
          export goods on behalf of the producers. The United States and the European Union
          have called for more transparency (openness) in the price-setting decisions of the
          STEs to ensure that market-distorting prices are not being established by the
          organizations and that the organizations are not conduits for government export
          subsidies. In addition, the United States is concerned about the trading practices of
          STEs in countries, such as China, that are seeking admission to the WT0.16

n         Food aid nrograms. The Agreement allowed the use of food aid programs as long as
          the donors ensured that the aid was not tied to commercial exports to recipients, that
          the aid was carried out in accordance with established international principles, and
          that the aid was in grant form or on terms that were not deemed highly “concessional”
          (low interest rates). Some WTO members have criticized the U.S. food aid programs
          for exceeding the terms of the Agreement and serving as subsidy-like support for U.S.
          farmers to assist them in selling surplus commodities.17

Several bilateral agricultural trade issues have increased the tension in the U.S.-EU trade
relationship, such as market access for agricultural products containing genetically modified
organ&n8 and EU compliance with WTO dispute settlement decisions on imported bananas
and the use of beef hormones. The EU Agriculture Counselor in Washington, D.C., said the
European Union and the United States are trying to ease the tensions through bilateral
discussions, but he would not rule out the possibility that the issues would be raised in the
1999 WTO trade talks.




” The Organization for Economic Cooperation and Development is an international forum for monitoring economic trends and
coordinating economic policy among 29 developed countries, inciuding the EU countries and the United States.

” See U.S. AWx&ural Trade Canadian Wheat Issues (GAOMSIAD-99-21, Oct. 16,1998); Canada Austra a. and h e Aeaknd
Potential Abilitv of Asricuku~al State Trading Entenxises to Distort Trade (GAO/NSLAD-96-94June 24 li96) ani S”d rad” g
F_nteroxises: Co&iance with the General Agreement on Tariffs and Trade (GAO/GGD-95-204,Aug.3d,lQQ5j for a discu&io~of
STEs.
” See Food Aid: Comaetin Coals and Reauirements Hinder Title I Prm      Results (GAWGGD-95-68,June 26, 1995) for a
discussion of food assista& issues.

” See Anricultural Exoorts : IJ_.
                               S Needs a More Intesrated Awxoach to Address Sanitarv/Phvtosanitarv Issues (GAO/NSIAD-98-32,
Dec. II, 1997) for more details.




                                                                  GAO/NSlAD-99-198RAgricultural Export Subsidies
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AGENCY COMMENTS

We discussed a draft of this letter with USDA and USTR officials. The officials agreed with
our overall observations and analysis. They also provided technical changes, which we
incorporated where appropriate.



SCOPE AND METHODOLOGY

To examine EU’and U.S. compliance with the agricultural export subsidy reduction
commitments of the 1994 WTO Agreement on Agriculture, we reviewed data on the
Agreement’s subsidy reduction commitments from the WTO annual notifications of the
European Union and United States and from USDA materials. We also interviewed and
collected documents from USDA officials in Washington, D.C.; and Geneva, Switzerland; and
USTR officials in Washington, D.C., on the extent of the EU’s and U.S.’ compliance with the
Agreement’s export subsidy reduction commitments. In addition, we interviewed an official
and collected documents on the EU export subsidy program from the EU Delegation in
Washington, D.C. We interviewed USDA and EU officials and collected documents to identify
how the United States and the European Union operate their agricultural export subsidy
programs. Finally, we talked with representatives of individual commodity groups to discuss
their concerns. about the Agreement’s export subsidy reduction commitments and the impact
on their commodities.

To examine the EU’s and U.S.’ plans for future use of agricultural export subsidies, we
interviewed USDA, USTR, and EU officials in Washington, D.C., and Geneva, Switzerland. We
reviewed USDA and USTR congressional testimony and documents on U.S. objectives
regarding agricultural export subsidies. We also reviewed EU documents on the CAP and the
March 1999 CAP reform to identify the EU’s plans for future agricultural export subsidies.
Finally, we reviewed USDA, USTR, EU, Cairns Group, and WTO documents on preparations
for the November 1999 WTO talks.

We conducted our review from January to June 1999 in accordance with generally accepted
government auditing standards.
                                             -----

As agreed with your office, unless you publicly announce the contents earlier, we plan no
further distribution of this letter until 30 days after its issue date. At that time, we will
provide copies to interested congressional Committees; the Honorable Dan Gliclunan, the
Secretary of Agriculture; and the Honorable Charlene Barshefsky, the U.S. Trade
Representative. We will also make copies available to other interested parties on request.




                                                     GAO/NSLAD-QQ-198R
                                                                     Agricultural Ekport Subsidies
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Please contact me or Phil Thomas at (202) 512-4128 if you or your staff have any questions
regarding this letter. The major contributors to this letter were Christine Broderick, Dennis
Richards, and Samantha Roberts.



Sincerely yours,




Benj&n F. Nelson
Director, International Relations and Trade Issues

Enclosures (3)




9                                                    GAOiNSIAD-99-198R Agricukural Export Subsidies
ENCLOSURE I                                                                       ENCLOSURE          I


HOW THE EUROPEAN UNION (Eu) AND THE UNITED STATES OPERATE THEIR EXPORT
                          SUBSIDY PROGRAMS



In both the United States and the European Union, the agricultural export subsidies subject to
reductions in the World Trade Organization’s (WTO) Agreement on Agriculture
(“Agreement”) are payments that compensate exporters for the difference between lower
world prices and higher domestic prices. The EU agricultural export subsidy system is an
important component of the Common Agricultural Policy (CAP) that aims to protect and
stabilize the incomes of EU farmers through price support mechanisms. The European Union
generally sets the prices of agricuhural products within the European Union at levels that are
higher than the world prices for the products. In contrast, U.S. export subsidy programs are a
less significant part of U.S. farm policy. According to officials from the U.S. Department of
Agriculture (USDA), U.S. agricultural export subsidy programs are intended to expand
markets and counter competition from subsidizing countries,‘especially the European Union.
Both EU and U.S. subsidy programs facilitate the sale of agricultural surpluses.

The EU agricultural export subsidy system is much larger than the U.S. agricultural export
subsidy programs. The European Union reported to the WTO $6.3 billion in export subsidies
in 1996 that supported a wide range of agricultural exports. In comparison, the United States
reported to the WT.0 $122 million in 1996 agricultural export subsidies that supported a few
products.

THE EU’S AGRICULTURAL EXPORT SUBSIDY SYSTEM

Agricultural export subsidies are an important component of the CAP. When designed in the
1960s the CAP was intended to stimulate increased agricultural production and productivity
in the European Union in part by setting a target price for agricultural products that EU
officials regard as the optimum price a farmer should receive. These prices were generally
higher than world prices, providing an incentive for higher EU production and a need to deter
imports. While production has risen, demand has leveled off, resulting in surplus products on
the EU market, costly programs to store the surpluses, and agricultural export subsidies to
sell the surpluses on world markets.

To stabilize domestic agricultural markets, the CAP uses three mechanisms to maintain EU
market prices of agricultural products around a tsrget price. One mechanism is the
intervention price-the minimum allowable price before the government intervenes in the
market. Producers who are unable to find buyers for their products can sell their surpluses to
the government at the intervention price. Another mechanism is import levies-tariffs on
imported agricultural products set at levels to ensure that the imports are not undercutting
EU target prices. A third market mechanism is agricultural export subsidies-payments to
exporters that are equal to the difference between the EU internal market price and market




 10                                                  GAOLNSLAD-QQ-198R
                                                                     Agricultural Export Subsidies
ENCLOSURE            I                                                                                       ENCLOSURE              I


prices outside the European Union.’ Agricultural export subsidies enable the EU exporters to
compete in world markets..

All commodities that are regulated under the CAP have this basic structure, but there is some
variation in the procedures for dete r-mining target prices, intervention prices, and subsidy
levels. For example, the market mechanisms for dairy products and cereals are slightly
different. Target prices for all dairy products are based on the target prices of just two
products, butter and dried skim milk.” By controlling the target price and availability of these
two products, the CAP also affects the prices of other dairy products, such as cheese. CAP
authorities fix the amount of the agricultural export subsidies for dairy products according to
prevailing market prices outside the European Union and the destination. In contrast, the
CAP authorities currently set only one target price for a single standard quality of cereal
grain. This price applies to all the main grains- wheat, barley, rye, maize, and sorghum. The
intervention price has been maintained at broadly ten percent below the target price, and
both the intervention and target price increase by fixed increments during the season. Unlike
dairy products, agricultural export subsidies for cereals are determined more frequently by a
competitive bidding process (tenders), in which subsidies for agricultural exports are
awarded to bidders who make the lowest subsidy request. Under certain circumstances,
fixed agricultural export subsidies without tenders on cereals may be available for grain
shipments to specific destinations.

Because agricultural export subsidies are one of the three mechanisms used to support EU
agricultural prices and farm incomes, any reductions in agricultural export subsidy levels
have been, and continue to be, dependent upon changes in the CAP. Agricultural export
subsidies for dairy, cereals, and other product categories are dependent upon the levels of
support prices-the target price and the intervention price. In 1992, the European Union
undertook reforms in the CAP market support system to reduce intervention prices and
surpluses and, thereby, lower agricultural export subsidies and help the European Union
achieve its commitment in the Agreement on Agriculture. Measures were implemented to
limit supplies through quota systems, controls on use of land, and direct income payments to
farmers. In the latest CAP reform, Agenda 2000, the European Commission approved a
reduction in the intervention price for cereals, beef, and dairy products, accompanied by
increases in direct payments to farmers to offset the price decrease. The reform of the CAP
within the framework of Agenda 2000 is viewed by the European Council as essential for
defining the Commission’s negotiating mandate for the upcoming 1999 WTO talks on
agricultural trade.




’ In the rare event that market prices outside the European Union exceed internal EU market prices, a levy is imposed on exports
out of the European Union to prevent exports from undercutdng world prices and to discourage the movement of grain out of
the European Union. During 1995/96,due to high world cereal prices, export levies were applied to wheat, barley and durum
wheat

* Dairy export subsidies change according to market conditions.   Export subsidies rise when there is an increase in intervention
stocks of milk and butter and fall when these stocks decrease.




11                                                                     GAOLNSIAD-99-198RAgricuhural Export Subsidies
ENCLOSURE I                                                                                                ENCLOSURE             I



THE U.S. EXPORT SUBSIDY PROGRAMS: EXPORT ENHANCEMENT PROGRAM {EEP)
AND DAIRY EXPORT INCENTIVE PROGRAM (DEIP).


Currently, the United States provides export subsidies for agricultural products through two
programs: EEP and DEIP.3 These programs were instituted in 1985 after several years of
declining U.S. agricultural exports, growing surplus grain stocks, and increasing competition
in traditional markets from countries using agricultural export subsidies, especially the
European Union. These programs are intended to counter the adverse affects of foreign
subsidies, expand U.S. agricuhural exports, and facilitate the sale of agricultural surpluses
overseas by compensating exporters for the difference between lower world prices and
higher domestic prices for targeted products and destinations4

Under the U.S. export subsidy programs, USDA pays cash to exporters as “bonuses,” allowing
them to sell U.S. agricultural products in targeted countries at prices lower than the
exporter’s costs of acquiring them. Before 1992, EEP subsidies were not cash rather, EEP
subsidies were in the form of certificates for government-owned commodities. The same is
true for DEIP, except that initially, subsidies were payments-in-kind from CCC-owned dairy
stocks; later, they were in the forrn of generic commodity certificates from government-
owned inventories.

Until fiscal year 1996, EEP was by far the larger of the two programs in terms of budgetary
outlays. More than 77 percent of the $1.1 billion in EEP subsidies in fiscal year 1994 were for
wheat exports. In fiscal year 1995, the last year EEP subsidies were used for wheat, the
United States awarded $339.5 million in EEP subsidies. The total value of EEP subsidies
dropped significantly in fiscal year 1996, to $5.2 million, and supported only the export of
frozen poultry. No EEP subsidies were used in fiscal year 1997. In fLsca.lyear 1998, the United
States awarded $2.1 million in EEP subsidies to support the export of frozen poultry and
coarse grains. Other commodities eligible for EEP assistance but not exported in fiscal years
 19961998 were wheat, wheat flour, rice, barley, barley malt, table eggs, and vegetable oil. ’

In fiscal year 1994, DEIP was about one-tenth the size of EEP, awarding $118 million in
subsidies to support the export of U.S. dairy products. By fiscal year 1996, the total value of


3In 1988,two other export subsidy programs were established, the Cottonseed oil Assistance Program (COAP) and the
Suntlowerseed OiI Assistance Program(SOAP); however, these programs were not reauthorized under the 1996Federal
Agriculture Improvement and Reform Act (P.L. 104127, Apr. 4,1996). Although not current& used, subsidies for the export of
UTS.agricultural commodities are also available through the direct sales of surplus stocks o&ned by the Commodity C&it
Corporation (CCC), a government-owned and -operated corporation responsible for financing major USDA programs including
price supports, domestic and foreign food assistance, and export sales programs. In the past, the CCC has sold commodities in
its inventories overseas at prices lower than the domestic purchase price, but has not done so since fiscal year 1995.
                                                                                                    . .
’ See U.S. AgricuIturaI xoorts S one G owth         e v ut U S Exoort Assistance J&g ams Contnbuuon IJncertain
(GAO/NSIAD-97-260,Sfptemb, 3!, 199Gfor a gL:on              of the U.S. export subsidy p:ogr&s’ contribution to~agricuIturaI trade.

’ In its annuai WTO notifications, the United States reports its EEP and DEIP subsidy values for the fiscal year beginning in the
WTO notification year. For example, the 1995WTO notification year used data from the 1996fiscal year, which began in October
 1995and ended in September 1996.




 12                                                                    GAO/NSIAD89198R AgricukuraI Export Subsidies
ENCLOSURE            I                                                                                      ENCLOSURE I



DEIP subsidies dropped significantly to $20 million and then in fiscal year 1997 rose to $122
million, In fiscal year 1998, the United States awarded $110 million in DEIP subsidies, an
amount 50 times larger than total EEP subsidies. Products exported under DEIP in fiscal
years 1996-1998 were butterfat, milk powder (nonfat dry and whole), and cheeses. The
United States also subsidized the direct sales of government-owned dairy products in fiscal
years 1994 and 1995 by selling the commodities overseas for prices lower than the domestic
purchase price. The total value of the direct sales subsidies in fiscal year 1994 was $10.3
million and $6.6 million in fiscal year 1995. According to USDA officials, fiscal year 1995 was
the last year that the United States used direct sales subsidies to assist the export of U.S.
dairy products. Although the legislative authority still exists, USDA has decided not to use
direct sales subsidies because of a decrease in government-owned stocks, a preference within
the dairy industry to use DEIP.

EEP and DEIP operate under a bid-bonus system in which an exporter submits bids to USDA
in order to sell eligible agricultural commodities in specific markets overseas. To begin the
process, USDA determines which commodities and countries USDA should target under the
programs by submitting various proposals to the Trade Policy Review Group’ for approval.
An approved proposal is then published in bid announcements as initiatives, detailing the
targeted country, the commodity, and the quantity approved for sale.’ Once USDA offers an
invitation for bids, it is up to agricultural exporters to contact prospective buyers in eligible
countries and negotiate a sales contract covering price, quantity, quality, delivery, and other
terms. Each prospective exporter submits a bid to USDA requesting a subsidy-or bonus-
that would allow the sale to take place at the agreed price. USDA reviews all bids for the
competitiveness of the bonus value requested and then compares the bids with offers from
other U.S. exporters and sales of competitor countries. USDA has the right to reject any or all
bids. All sales under EEP and DEIP are made by the private sector, not the U.S. government.

Farm legislation passed in 1985, and later in 1990, also brought about market-oriented
reforms in domestic agricultural policy that were designed, among other things, to reduce
agricultural export subsidies. These reforms helped reduce the market-distorting impact of
government-established price supports and diminished holding of surplus stocks. The Federal
Agriculture Improvement and Reform Act of 1996 expanded on market-oriented provisions of
previous legislation and for many commodities ended the tying of direct farm income support
to production decisions.




6The Trade Policy Review Group is an interagency body that reviews, among other things, USDA’s export EEP and DEIP
proposals to ensure compliance with U.S. national trade policy objectives. As part of its duties, the Trade Policy Review Group
reviews decisions regarding USDA export subsidy commodity allocation.
’ USDA considers four criteria to select the commodities and countries that best meet the EEP’s trade policy objectives: (1) a
trade policy effect: further U.S. ability to combat unfair trade practices in targeted markets; (2) an export effect: develop,
expand, or maintain markets for U.S. agricultural commodities that would be competitive if other suppliers did not use export
subsidies; (3) effects on nonsubsidizers: approve only those EEP initiatives that will not have more than minimal effect on
nonsubsidizing exporters in the market; and (4) subsidy requirements: maintain the overall program level at minimum levels
necessary to achieve the expected benefits of the program.




13                                                                     GAO/NSIAD-99-198R Agricultural Export Subsidies
ENCLOSURE      II                                                                 ENCLOSURE            II



                    EU AND U.S. TOTAL EXPORT SUBSIDY COMMITMENTS
                            AND OUTLAYS TO DATE, 19952000

The WTO monitors the annual export subsidy outlays and volume of subsidized exports for
each agricultural category to measure compliance with the schedules of annual
commitments. However, from a budget perspective, a comparison of the total value of
agricultural export subsidies allowed by the commitment schedule with the total actual
outlays shows the potential and actual impact of the schedules on the domestic budgets.
Figures II. 1 and II.2 illustrate this concept for the European Union and the United States.

Figure 11.1: EU Agricultural Export Subsidies: Total Value of Subsidy Commitments and
Actual Outlays, 1995-2000

(ECU in millions)




Note 1: While the report on actual agricultural export subsidies for 1997 was due in March
1999, so far the European Union has submitted reports for 1995 and 1996 only.

Note 2: The “ECU” represents the European Currency Unit. In 1999, the ECU converted to
the “euro,” with a 1:1 relationship. The exchange rate with the U.S. do&r has varied since
 1995. On April 241995, $1 equaled 1.32 ECUs, while on April 241999, $1 equaled 1.06 euros.

 Source: GAO analysis of WT.0 notifications.




 14                                                   GAO/NSLAD-99-198RAgricultural Export Subsidies
ENCLOSURE        II                                                               ENCLOSURE        II


Figure 11.2: U.S. Agricultural Export Subsidies: Total Value of Subsidy Commitments and
Actual Outlays, 1995-2000

(U.S. dollars in millions)




Source: GAO analysis of WTO notifications.




                                                  GAO/NSIAD99-198R Agricultural Export Subsidies
ENCLOSURE           III                                                                                ENCLOSURE             III


                          EU AND U.S. AGRICULTURAL EXPORT SUBSIDY DATA

Under the 1994 WTO Agreement on Agriculture, WTO members agreed to report their actual
agricultural export subsidies by agricultural categories to the WTO Committee on Agriculture
each year, starting in 1995. The format for the annual notification to the WTO includes
presenting the maximum level of agricultural export subsidies allowed in the schedule of
annual commitments and the actual agricultural export subsidies, in value and volume for
each commodity category. As of June 3,1999, the European Union has reported its use of
export subsidies to the WTO for 1995 and 1996 and has yet to report its export subsidies for
1997, due March 1999. The United States has reported its use of export subsidies for 1995,
1996, and 1997.’
The following tables present annual export subsidy commitments by agricultural categories
(the maximum levels listed in the schedule) and actual agricultural export subsidies for the
European Union and the United States.

n        Tables III. 1 and III.2 show the agricultural export subsidy reduction commitments and
         actual subsidy data, by value and volume, for the European Union for 1995 and 1996.
         The actual budgetary outlays for agricultural export subsidies were generally a lower
         percentage of the maximum levels set that year than the actual volume of subsidized
         exports. For example, the actual export subsidy outlay for pigmeat in 1996 was 26.4
         percent of the maximum level allowed, while the actual volume of subsidized pigmeat
         was 54.8 percent. The tables also show that the European Union exceeded the
         maximum level allowed on its outlays for rice and wine (table III. 1) and on volume for
         rice, olive oil, beef, and wine (table III.2) in 1996. The European Union said that it still
         complied with its schedule of annual commitments because it relied on unused
         agricultural export subsidies from 1995 to make up the difference.

n        Tables III.3 and III.4 show the agricultural export subsidy commitments and actual
         subsidy data, by value and volume, for the United States for 1995,1996, and 1997.
         Unlike the EU data, the value and volume of U.S. agricultural export subsidies cannot
         be compared because the reporting periods for outlays and volumes are different.
         The United States exceeded the export subsidy ceiling for skim milk powder in
         volume in 1997 but said that it still complied with the schedule of annual
         commitments because it drew on unused agricultural export subsidies from prior
         years.



’ The European Union and the United States use different reporting periods in their annual WTO notifications. The European
Union refers to its 199511996marketing year as the reporting period of subsidies by outlay and quantity for the 1995WI’0
notification. The 1995/1996marketing year varies by product category. For example, the 199511996marketing year for wheat
and wheat flour began July 1,1995, while the 1995/1996marketing year for olive oil began November 1,1995. For its WTO
notifications, the United States uses marketing years for reporting quantity commitments, which begins on July 1 of the
notification year, and fiscal years for reporting on subsidy outlays, which begins on October 1 of the notification year. For
example, the 1995 WTO notification for all U.S. product categories reported quantity commiQnents for the marketing year
beginning July 1,1995, and subsidy outlays for the fiscal year beginning October 1,1995. In this letter, the term “WTO
notification year” refers to the subsidies reported by the European Union for its marketing year and those subsidies reported by
the United States for its marketing year (for quantity) and fiscal year (for outlay).




 16                                                                    GAOMXAD-99-198R Agricultural Export Subsidies
ENCLOSURE III                                                                               ENCLOSURE III




Table III-l: EU Agricultural Export Subsidy Commibuents: Maximum Levels and Actual
Subsidies, by Value, 1995, 1996, and Year 2000 WTO Notification Years

(ECUs in millions)

                                                1995                        1996                 2000



                                   -~I
Alcohol
Beef meat                             1,922.6   1,506.5   78.4%   1,788.7   1,526.7     85.4%    1,253.6
Butter and butteroil                  1,392.l     256.2   18.4%   1,303.3     551.8     42.3%      947.8
Cheese                                  594.1     437.6   73.7%     543.6     271.3     49.9%      341.7
Coarse grains                         1,605.7     303.4   18.9%   1,493.g     389.0     26.0%    1,046.g
Eggs                                     60.7      12.9   21.3%      57.3       6.9     12.0%       43.7
Fruits and vegetables, fresh             77.6      70.4   90.7%      72.6      61.8     85.1%       52.8
Fruits and vegetables, processed         12.2      11.3   92.6%      11.4      10.2     89.5%        8.3
Incorporated productsa                  717.4     491.1   68.5%     656.8     565.9     86.2%      415.0
Olive oil                                79.8      62.1   77.8%      74.7      39.0     52.2%       54.3
Other milk products                   1,024.7     727.6   71.0%     959.3     732.0     76.3%      697.7
Pigmeat                                 288.8     100.5   34.8%     269.3      71.1     26.4%      191.3
Poultry meat                            136.3     115.9   85.0%     127.2      73.0     57.4%       90.7
Rapeseed                                 40.7         0      0%      38.1         0        0%       27.7
Raw tobacco                              96.6      18.2   18.8%      85.3       3.4      4.0%       40.2
Rice                                     54.6      30.3   55.5%      51.1      72.2   141.3%        36.8
Skim milk powder                        406.2     140.9   34.7%     380.1     170.1     44.8%     275.8
sugar                                   733.1     379.0   51.7%     686.3     525.0     76.5%     499.1
Wheat and wheat flour                 2,309.o     118.7    5.1%   2,105.O     317.5     15.1%    1,289.7
Wine                                     57.5      51.1   88.9%1     53.9      59.6   llO.S%l       39.2
Total                                11,750.g   4,884.g   41.6%1 10,890.l   5,565.0     51.1%1   7448.4



Note: “ECU” represents European Currency Unit. In 1999, the ECU converted to the
“euro,“with a 1:1 relationship. The exchange rate with the U.S. dollar has varied since 1995.
On April 21,1995, $1 equaled 1.32 ECUs, while on April 21,1999, $1 equaled 1.06 euros.

“Incorporated products include basic or processed items incorporated into products not
found in the other categories.

Source: WTO Committee on Agriculture.




                                                              GAO/NSIAD-94198R Agricultural Export Subsidies
ENCLOSURE III                                                                                          ENCLOSURE III


Table III.2: EU Agricultural Export Subsidy Commitments: Maximum Levels and Actual
Subsidies, by Volume, 1995, 1996, and Year 2000 WTO Notification Years

(In thousands of metric tons, except for wine and alcohol)

                                                  1995                             1996                    2000
                                                                                                          klnal
                                   laximum       Actual                Maximum Actual                    m&mum
                                     level      subsidies    % used      level subsidies      % used      level
Alcohol (1,000 hectahters)           1,401.6        450.0      32.1%      1,350.7  1,070.4      79.2%    lJ47.4
Beef meat                            1,137.0       1,019.l     89.6%      1,073.g  lJ77.4      109.6%      821.7
Butter and butteroil                   487.8         146.4     30.0%        470.1    276.0      58.7%      399.3
Cheese                                 426.5         422.3     99.0%        405.4    401.9      99.1%      321.3
Coarse grains                       13,690.2       6,596.4     48.2%     13J20.6 11,844.5       90.3%  10,843.2
Eggs                                   126.1          95.1     75.4%        120.6      67.9     56.3%        98.8
Fhits and vegetables, fresh            920.3         909.5     98.8%        886.9    874.2      98.6%      753.4
Fruits and vegetables, processed       175.1          93.6     53.5%        168.7     136.1     80.7%      143.3
Incorporated productsa              no limit                             no limit                       no limit
Olive oil                              140.5         135.5     96.4%        135.4     140.4     103.7%     115.0
Other milk products                  lJ85.4        1,156.7     97.6%      1,140.o   1,140.o     100.0%     958.1
Pigmeat                                541.8         378.2     69.8%        522.1     285.9      54.8%     443.5
Poultry meat                           434.5         418.1     96.2%        404.7     401.4      99.2%     286.0
Rapeseed                                126.8            0        0%        122.2         0         0%      103.8
Raw tobacco                             190.0         11.2      5.9%        174.1       2.0       1.1%      110.8
Rice                                    163.0         88.6     54.4%         157.1    226.5     144.2%      133.4
Skim milk powder                        335.0        241.2     72.0%        322.5     269.5      83.6%      272.5
 Sug=                                 1,555.6        856.3     55.0%      1,499.2   1,200.3      80.1%    1,273.5
 Wheat and wheat flour              20,408-l       2,768.S     13.6%     19,212.7 14j410.0       75.0% 14,438.0
 Wine (1,000 hectaliters)            2,851.4       2,161.0     75.8%1     2,742.l   3,034.g     110.7WI 2,304.7]



“Incorporated products include basic or processed items incorporate&into                               products not
found in the other categories.

Source: WTO Committee on Agriculture.




 18                                                                    GAO/NSlAD-99-198R Agricultural Export Subsidies
ENCLOSURE          III                                                             ENCLOSURE III


Table III.3: U.S. AgricuhraJ Export Subsidy Commitments: Maximum Levels and Actual
Subsidies, by Value, 1995-1997, and Year 2000 WTO Notification Years

(U.S. dollars in millions)

                                  1995                           1996                            1997              2000
                     1                                                                                            Hna.l



Bovine meat
                     I
                     I
                       Maximum Actual
                         level
                            $33.5
                                   subsidies % used
                                          ~$0     0%
                                                     Maximum Actual
                                                       level
                                                          $31.4          $0    O%l
                                                                                   Mtimum
                                                                 subsidies % used I level
                                                                                       $29.2
                                                                                                 Actual
                                                                                                subsidies % used
                                                                                                      $0     0%
                                                                                                                 maximum
                                                                                                                   level
                                                                                                                    $22.E
Butter and butteroil         44.8           0     0%       41.9       20.1    48%       39.1         8.9    23%      30.E
Cheese                         5.3        2.1 39.6%          5.0        2.5   50%         4.7        3.9 83.0%        3.E
Coarse grains                67.7           0     0%       63.4           0    0%       59.1         1.2     2%      46.1
Eggs                           7.6          0     0%         6.4          0    0%         5.2          0     0%       1.t
Live dairy cattle            17.5           0     0%       16.3           0    0%       15.2           0     0%      11.E
Other milk products          14.4         1.6 ll:l%        11.5         5.1 44.3%         8.6        8.6 100.0%
Pigmeat                        0.7          0     0%         0.7          0    0%         0.6          0     0%       0.E
Poultry meat                 21.4         5.2 24.3%        20.0           0    0%       18.6         0.9   4.8%      14.E
Rice                                                       13.0           0    0%       10.4           0     0%       2.4
Skim milk powder            121.1       16.8 13.9%        113.4       93.8    83%      105.7        88.8   84%       82.E
Vegetable oils               53.0           0     0%       45.2           0    0%       37.4           0     0%      14.1
Wheat                                                     685.2           0    0%      604.8           0     0%     363.8
Total                                                 $1,053.4      $121.5 11.5%      $938.6      $112.3 12.0%     $594.4



Note: Due to rounding the amount of other milk products in the year 2000, this amount does
not reflect the actual U.S. final commitment of $20,974 in export subsidies.

Source: WTO Committee on Agriculture.




19                                                               GAO/NSIAD-99-198R Agricultural Export Subsidies
         ENCLOSURE            III                                                                          ENCLOSURE III


         Table III.4: U.S. Agricultural Export Subsidy Commitments: Maximum Levels and Actual
         Subsidies, by Volume, 1995-1997 and Year 2000 WTO Notification Years

         (In thousands of metric tons, except for live dairy cattle and eggs)

                                       1995                         1996                            1997                 2000
                                                        I                              I                            t    Pina   I
                           Maximum Actual                 Maximum Actual                 Maximum Actual
                             level subsidies     % used II level  subsidies     % used II level  subsidies    %used ImE?
                                                                                                                    I


Bovine meat                     21.5         0        O%l    20.7          0         O%l    19.9          0        O%l       17.6
Butter and butteroil            43.0         0        0%     38.6        9.3      24.1%     34.2       15.6     45.6%        21.1
Cheese                           3.8       3.3     86.8%      3.7        3.0      81.1%      3.5        3.5    100.0%         3.0
Coarse grains                1,906.3       0.3        0%  1,837.2          0         0%  1,768.0       25.0      1.4%     1,560.6
Eggs (1,000 dozen)          30,261.B   7,565.5     25.0% 25,593.4          0         0% 20,924.g          0        0%     6,919.6
Live dairy cattle (head)      13,467         0        0%   12,978          0         0%   12,490          0        0%      11,024
Other milk products             12.5       4.5     36.0%     10.0        2.2      22.0%      7.5        7.5    100.0%           0
Pigmeat                          0.5         0        0%      0.5          0         0%      0.4          0        0%         0.4
Poultry meat                    34.2      22.3     65.2%     33.0          0         0%     31.7          0        0%        28.0
Rice                           271.7       9.9      3.6%    225.0          0         0%    178.4          0        0%        38.6
Skim milk powder               108.2      63.7     58.9%    100.2       69.9      69.8%     92.2       96.3   .104.4%        68.2
Vegetable oils                                              498.3          0         0%    409.0          0        0%       141.3
Wheat                                               2.8% 19,095.l          0         0% 17,951.B          0        0%    14,522.0



          Note: Due to rounding the amount of other milk products in the year 2000, this amount does
          not reflect the actual U.S. final commitment of 34 metric tons in subsidized exports.

          Source: WTO Committee on Agriculture.




           (711402)




           20                                                                 GAONUD-99-198R Agricultural Export Subsidies
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