Testimony of John Hardin, Jr.

On Behalf of the National Pork Producers Council

Before

The Senate Agriculture Committee

On

U.S. - CHINA FARM TRADE

March 1, 2000

Mr. Chairman and Members of the Subcommittee:

I am John Hardin, Jr., a pork producer from Danville, Indiana. I am a past President of the National Pork Producers Council (NPPC) and a past chairman of the United States Meat Export Federation. I currently serve on NPPC's Trade Committee and am a representative on the Agricultural Policy Advisory Committee (APAC) to the United States Trade Representative and the Secretary of Agriculture. I very much appreciate the opportunity to appear here on behalf of U.S. pork producers to express our views on farm trade with China.

The National Pork Producers Council is a national association representing 44 affiliated states that annually generate approximately $11 billion in farm gate sales. According to a recent Iowa State study conducted by Otto and Lawrence, the U.S. pork industry supports an estimated 600,000 domestic jobs and generates more than $64 billion annually in total economic activity. With 10,988,850 litters being fed out annually, U.S. pork producers consume 1.065 billion bushels of corn valued at $2.558 billion. Feed supplements and additives represent another $2.522 billion of purchased inputs from U.S. suppliers which help support U.S. soybean prices, the U.S. soybean processing industry, local elevators and transportation services based in rural areas.

U.S. Agriculture Benefits From Expanded Trade

International trade is vital to the future of American agriculture. As the world's biggest exporter of agricultural products we have a critical interest in the development and maintenance of strong and effective rules for international trade. This is especially true for pork, the world's meat of choice, which represents 44 percent of daily meat protein intake in the world. Notwithstanding the huge global market for pork and pork products, efficient U.S. producers were precluded from exporting significant volumes of pork in the pre-Uruguay Round Agreement, pre-NAFTA era. A combination of foreign market trade barriers and highly subsidized competitors effectively limited U.S. pork exports.

While our recent export performance is impressive, it nevertheless remains severely limited by factors such as the lack of access to many of the world's pork markets, including China, which is the largest pork consuming market in the world.

China's De Facto Ban on Pork Imports Remains in Effect

High tariff rates and a discriminatory value added tax put imported pork at a sharp competitive disadvantage to domestic pork. Moreover, complicated and non-transparent restrictions on imported pork, administered by China's State Administration of Inspection and Quarantine (SAIQ) make it virtually impossible to import pork. SAIQ contends that Chinese restaurants and hotels can obtain licenses to import pork. Unlike beef, for which licenses are available through regional SAIQ offices, SAIQ says that it disseminates pork import licenses solely through SAIQ headquarters. In reality, very few licenses have been granted by SAIQ to hotel and restaurant importers.

In 1997, SAIQ provided quotas to 11 establishments in Australia, Canada, and the United States as eligible to export meat and poultry to China for general consumption under a one year "pilot program." While in one sense this was a positive development because, as a matter of law, these imports were not limited to the hotel and restaurant sector, as a matter of fact, high tariffs and other restrictive measures kept a tight lid on imports. The pilot program was a complete failure. The prospect of failure was virtually assured by the requirements of the program.

Under the pilot program, the qualified establishments included a pork facility in Australia that received a quota of 2,000 MT, three pork facilities in Canada that received a total quota of 68,000 MT, and one pork facility in the U.S. that received a quota of 5,500 MT. The Australian and U.S. exports had to be imported exclusively by Nanjing Five-Star Hotel Corporation Ltd. and the Canadian product had to be imported exclusively by Chaoying Foodstuff Ltd. While pork is not on the formal list of state traded products in China, the appointment of these exclusive importers was troubling. Indeed, the U.S. pork industry understands that SAIQ officials were involved with the ownership/management of each of these importers. Again, the pilot program was a failure due to high duties and taxes, unfair sanitary barriers, restrictions on the number of importers, and competition from smuggled pork imports.

Despite official import restrictions, demand from the population for pork, particularly high-quality variety meats (e.g. hearts, stomachs, intestines), is so high that sizeable quantities of imported pork are being smuggled into China principally through Hong Kong. The pork is distributed to the general population mostly through local wholesale markets with a small amount distributed through supermarkets. Technically the importation and distribution of this product is illegal, a fact which is generally acknowledged by the Hong Kong importers and Chinese distributors. We believe that Chinese imports of U.S. pork would increase dramatically if China lifted its de facto ban on U.S. pork imports.

China Has Not Implemented the Bilateral Agriculture Cooperation Agreement

There are two agreements that impact U.S. pork exports to China. The first is the bilateral Agreement on U.S.-China Agricultural Cooperation, which was signed on April 10, 1999. This agreement covers citrus, meat, and wheat and concerns sanitary and phytosanitary matters. Specifically, with respect to meat, under the terms of the bilateral Agricultural Cooperation Agreement China must accept pork, beef, and poultry from any USDA-approved plant. The second is the U.S. - China WTO Agreement that was finalized in late 1999. This agreement covers many issues and sectors, including pork. For pork, tariffs on frozen pork variety meats (such as stomachs, intestines, and hearts --the predominant product currently demanded by Chinese importers) and frozen pork muscle meats, will be phased down to 12 percent. Tariffs on frozen pork carcasses and fresh and processed pork products will be set at 20 percent. Tariffs will be lowered from 20 percent to 12 percent in equal increments on the frozen products over a four-year period from the time China becomes a WTO member. Previously, in the course of negotiations with the U.S., China had agreed to lower all pork tariffs to 20 percent from rates as high as 43 percent. In order for the WTO agreement to have any effect, the bilateral agriculture cooperation agreement on meat must be implemented.

Recently, a bipartisan group of 53 Senators sent a letter to Chinese President Jiang Zemin urging "full implementation of the bilateral Agricultural Cooperation Agreement that Ambassador Barshefsky and Trade Minister Shi signed in April." The letter, which was originated by Senators Max Baucus and Pat Roberts of this Committee, properly pointed out that both sides agreed implementation would begin immediately when the Chinese language version of the agreement was signed last December in Seattle. Unfortunately, the agreement has not been implemented. Moreover, the Chinese are backing away from the agreement.

China now argues that the Chinese language version of the agreement signed in Seattle does not obligate China to accept meat from all USDA approved facilities. Now I'm not a linguistic scholar but I can tell you this, the English language version of the agreement, which was signed by both sides last April and which I understand is legally controlling, unambiguously requires China to accept pork, beef, and poultry from all USDA approved facilities. Moreover, China's recent request for further information concerning our meat inspection system underscores China's intention to disregard the agreement. Between late 1996 and early 1999, Chinese government officials made five trips to U.S. meat and poultry facilities. During this time, U.S. government officials and U.S. private sector representatives provided Chinese officials with exhaustive information on our meat inspection system. These visits and exchanges of information culminated in the signing of the bilateral Agriculture Cooperation Agreement in April 1999. As a follow-up to the April agreement, last summer USDA hosted meat industry officials from every province in China for a training seminar based on the April 1999 bilateral Agriculture Cooperation Agreement. Thus, there is absolutely no need to host another Chinese delegation or otherwise provide information to the Chinese concerning our meat inspection system. These are delaying tactics by the government of China that must not be countenanced by the U.S. government. We have an agreement and the Chinese must honor that agreement.

I want to be clear in stating that China's failure to implement the bilateral Agriculture Cooperation Agreement is through no fault of our trade negotiators. Like the overall WTO agreement, our trade officials did an excellent job in negotiating a strong bilateral agriculture deal with China. Moreover, I know that our trade negotiators have been vigilant in confronting China in recent months with its failure to implement the bilateral agriculture accord. The failure to implement this agreement rests squarely on the shoulders of the government of China.

We have raised this issue privately with the Chinese to no avail. We are now compelled to publicly speak out on this important issue as the time necessary to fully implement the bilateral agriculture agreement is rapidly slipping away. We are not alone. Our friends in the beef and poultry industries share these very serious concerns. To add insult to injury, the Chinese recently struck a deal on sanitary measures with the Canadians. According to reports we have received from our Canadian counterparts as well as from press reports, Canadian meat exports to China will soon commence.

Mr. Chairman, I can not overstate the level of concern in our industry regarding this issue. Our trade officials repeatedly have asked the Chinese to publish and publicize the bilateral accord in China. To date, the Chinese have not done so. At a minimum, China must publish regulations which explicitly provide that any importer in China can bring in meat and poultry from any USDA approved plant.

China is a Vast Pork Consuming Market

The pork package negotiated by the United States with China has the potential, if fully and fairly implemented, to transform China into the single greatest export opportunity for U.S. pork producers. In China, pork is by far the predominant source of meat protein consumed. China consumes more pork per capita than the amount consumed per capita in the United States making it a vast pork consuming market. Indeed, China consumes approximately 50 percent of the total pork annually consumed in the world. While current annual pork consumption increases in China have slowed due to the economic slump, most analysts project pork demand in China to rebound in the next few years to a growth rate of 6 to 7 percent per year. Even if pork consumption in China stagnates at the depressed, current growth rate of three percent in coming years, the annual incremental increase in demand would be 2 times greater than the total amount of current U.S. pork exports. Thus, China is not a potential market; it is a huge and growing immediate pork consumption market.

While China is the world's largest producer of pork, 85 percent of its pork comes from backyard producers. As incomes continue to rise and consumers demand higher quality pork and more of it, as well as more beef, poultry, dairy and alcohol products, commercial production of pork in China will become increasingly costly. This is because China must achieve this growth in consumption with only 9 percent of the world's arable land. According to FAO data, China must feed 13.0 people for each hectare of arable land, whereas Europe must feed 4.1 people, and the United States must feed only 1.4 people.

China is moving from having midwestern U.S. type corn prices to having Taiwanese and Japanese type corn prices. An important choice must be made, China must either import feed grains or livestock products to achieve consumer diets similar to those of the developed world. China is making the right choice in opening its market to meat imports. Meat should be produced in grain surplus countries not in grain deficit countries. Countries that import feed grains must pay a premium over world market prices and feed grains constitute over 60 percent of the cost of raising hogs. Pork producers in Japan and Taiwan pay approximately double the amount paid for feed by a midwestern pork producer. Thus, China apparently wants to avoid the mistakes made by Japan, South Korea, and Taiwan.

The cost of producing pork in China currently is higher than the cost of producing pork in the United States. By virtue of the subsidies provided to its pork industry, China has been able to suppress the demand for imported pork smuggled into the country and maintain its ability to export pork. If China were to continue to block pork imports and, instead tried to keep pace with expanding domestic demand through domestic production, Chinese pork prices would be much higher than would otherwise be the case. Further, Chinese subsidies and investment in agriculture would keep capital from flowing to more efficient and remunerative uses. The costs of this misallocation would increase over time as China tried to extract more and more pork from a limited source of supply. In time, China, like Japan and Korea, would be forced to import pork to reduce prices.

Pork Producers Continue to Support Permanent Normal Trade Relations For China

I want to make it clear that we continue to support permanent normal trade relations for China. In spite of the current serious problems, we remain optimistic that China will fully implement the bilateral Agriculture Cooperation Agreement. Mr. Chairman, we appreciate your support and the support of the members of this Committee and we look forward to working with you to make the bilateral agreement work and to get permanent normal trade relations for China passed.