Mr. Chairman and Members of the Commission, thank you for the opportunity to appear before you today. On behalf of the International Dairy Foods Association, I wish to express our support for the investigation you are undertaking of the barriers to international trade in processed foods. As you know, U.S. exports of processed foods are increasing, and dairy foods are contributing to this increase. Yet many barriers, both tariff and non-tariff, hinder our opportunities. As the United States negotiates trade agreements at the multilateral, regional, and bilateral levels, it is critical that these agreements include meaningful commitments to eliminate, or at least substantially reduce, these barriers to market access. To negotiate smart agreements, we need to have good information. That is why your investigation is so important.

My comments today will focus on the role of dairy foods in the processed foods sector. I will address three major points:

1. I will describe the U.S. dairy foods industry and why international trade matters to us;
2. Second, I will provide an overview of the current situation in international dairy markets - who our competitors are, where our primary markets are, and what some of our obstacles are;
3. Third, I will discuss some of the avenues by which the dairy industry is attempting to address these obstacles.

The U.S. dairy foods industry

The International Dairy Foods Association (IDFA) represents U.S. processors, manufacturers, marketers and distributors of dairy foods as well as suppliers to the industry. IDFA acts as an umbrella organization for three constituent associations: the Milk Industry Foundation, the National Cheese Institute, and the International Ice Cream Association. Our industry's products include consumer products such as beverage milk, cream, yogurt, dairy-based dips, cheese, ice cream and frozen novelties, as well as dairy ingredients used in food manufacture or food service.¹ The companies that process and manufacture dairy foods range from small family-run operations to large, multinational corporations. Their products are often sold under regional brand names, but also include brands marketed around the world.

International markets have not historically taken a large share of U.S. dairy product sales. This is partly due to the large size of the U.S. market for dairy products -- a $75 billion annual market. More than 95% of U.S. milk production stays in the domestic market. Nevertheless, U.S. dairy exports have been increasing in recent years, as U.S. dairy producers and processors have made greater efforts to develop foreign markets and trade agreements have improved market access. For each of the past two years, U.S. dairy exports exceeded $1 billion. On a volume basis, U.S. dairy exports slightly exceed imports, while dairy imports exceed exports on a value basis. This is because exports tend to be dominated by lower valued products such as milk powder and commodity cheese, while imports are dominated by higher valued specialty cheeses.

Why international trade matters

Unlike certain other segments of U.S. agriculture, where exports account for a quarter or more of production, the U.S. dairy industry is still largely oriented to the domestic market. Less than 5% of milk production goes into dairy products that are exported. That volume accounts for only 4% of all the dairy products traded internationally. So why, you might think, does international trade matter to us?

The answer lies largely in our opportunities for growth. The U.S. dairy industry realizes that, as large as the U.S. market might be, our opportunities for growth really lie abroad. This is so for several reasons.

Although the U.S. market is a sizeable one, 96% of the world's consumers are outside our borders. That's simply too large a customer base to ignore.

Moreover, the U.S. market is a largely mature market, where consumption of many dairy products is slowing or stable (cheese is the one significant exception). Developing and newly industrialized economies offer stronger consumption growth rates for food products generally and dairy products in particular. Studies show that, as household income increases, the consumption of value-added food products such as yogurt, cheeses, and ice cream increases as well. Diets improve with increased consumption of highly nutritious foods such as milk and dairy products. This is true for many countries in Latin America, and is an important reason for the export growth to the Mexican market. Focused marketing programs in Asian countries have also succeeeded in introducing dairy products, such as cheese toppings, into the diets in nations where dairy foods have not traditionally figured prominently on the menu.

The U.S. dairy industry is also a relatively low-cost dairy producer. We manufacture high quality, safe and nutritious products with some of the best technology and resources in the world. U.S. milk production keeps growing, even as the number of dairy farms and number of dairy cows decline. This is because of the productivity and efficiency of U.S. dairy farms and processing facilities. With elimination of trade-distorting subsidies and other barriers to trade, more U.S. dairy products would be very competitive in international markets.

Multilateral and regional trade agreements have also reduced certain dairy product tariffs and subsidy practices that impair U.S. exports. As more market barriers fall, and the gap closes between U.S. dairy prices and world market prices, competitive opportunities for U.S. dairy foods expand and more U.S. firms make inroads into foreign markets.

Finally, as U.S. dairy processors compete with foreign products both at home and abroad, they also confront the fact that protectionism at home hurts competitiveness abroad. Our milk processors, yogurt and ice cream manufacturers use sugar and other sweeteners as an ingredient in many dairy foods. These processors and manufacturers are significantly disadvantaged by the U.S. sugar program, that artificially restricts foreign supply and increases the cost of sugar in the U.S. market to two to three times the world market price. These higher costs for sweetener ingredients make it more difficult for U.S. dairy foods companies to be competitive with foreign manufacturers of milk, yogurt and ice cream who do not face such a restrictive sugar policy in their countries of manufacture.

Who are our competitors?

Accurate data on world milk production and total world trade in milk and dairy products is difficult to come by due to different methods and efforts to collect such information by different countries. However, the International Dairy Federation (IDF) does collect data from many countries with significant amounts of milk production and involvement in international trade in dairy products. IDF estimated that total world production of cows' milk in 1999 was 478 million metric tons. Two categories of dairy products of particular interest to IDFA member companies include fluid milk products and cheeses. While no trade data is available on world trade in fluid milks, total reported production by processing facilities in 1999 was 78.4 million metric tons. Very little of fluid milk products are in fact traded internationally. For cheese, reported world production in 1999 was 13.2 million metric tons, of which 9.2 percent was traded internationally.

The United States produces a little more than 15 percent of all the cows' milk produced annually in the world and accounts for 4 percent of world trade in dairy products. The largest share of world dairy trade is held by the European Union (EU), which produces around 26% of the world cows' milk and has 34% of world trade in dairy products. The next largest share of world trade is held by New Zealand, which accounts for only 2% of milk production but 30% of world trade. Another significant international competitor is Australia, also with 2% of world milk production but 15% of world dairy trade.

Although the EU has the largest share of world dairy trade, much of this share is the direct result of their extensive domestic and export subsidies for the dairy sector. The dominance of export subsidies and the price-depressing effects they have on world markets have made it very difficult for the U.S. dairy industry to make inroads into international markets. An illustration of the imbalances can be easily seen simply from an examination of the different levels of export subsidies still permitted under WTO rules for dairy products. The applicable limits for the United States, the EU and Canada are identified in the attached table. As you can see, under existing WTO export subsidy rules, the EU far outspends us in dairy export subsidies.

Elimination of dairy export subsidies is imperative for the U.S. dairy industry to have a fair chance to compete for a larger share of the international dairy market.

Where are our primary markets?

North America is the largest market for U.S. dairy exports. Mexico is currently the largest export market for our products, accounting for more than 60% of total US dairy exports in 2000. Strong income and population growth should continue to keep demand strong there, especially for high quality cheese and other processed dairy products like ice cream and yogurt. Canada is the second biggest export market for US dairy exports, with almost 15% of all dairy exports in 2000 headed there. Hong Kong, Taiwan, and Japan are small but expanding markets for US dairy food exports.

US cheese exports have been growing steadily throughout the last decade, growing to almost 104 million pounds in 2000 -- 22% more than the prior year. Mexico, Canada, and Japan account for the lion's share of those (2000) exports, but South Korea, some EU countries, Saudi Arabia, and Peru are becoming important customers as well. Cheese consumption has been greatest in the US, Europe, Argentina, Brazil, Canada, Egypt, Russia, and Japan, but has been growing steadily in all areas of the world. In the last four years, the largest cheese importers have been Japan, Russia, Australia, Canada, and Mexico.

Whey and whey proteins have become important new sources of value-added exports for our members in recent years. About 434 million pounds of US whey and whey proteins were shipped to the world last year, a 45% increase over 1999. Last year Brazil, Mexico, and Venezuela, as well as China and South Korea, accounted for much of that increase.

US exports of ice cream and yogurt have also increased steadily over the last several years. Japan is the number one destination of US ice cream exports, which have seen growth into the other Asian markets of Hong Kong, South Korea, Taiwan, and Singapore in 2000, while US yogurt goes mainly to Canada, Australia, and Mexico.

What are some of our obstacles?

Despite the important achievements of the Uruguay Round Agreements, extensive subsidies, high tariffs and numerous nontariff barriers remain in most countries, inhibiting or prohibiting competition from more efficient dairy product competitors. Comparison of tariff barriers in the dairy sector is made difficult by the fact that tariff rates are often not ad valorem rates, but rather specific or compound rates whose relative value varies depending on market prices. A table presenting foreign tariff rates in some select dairy product categories is attached. The span of tariff protection is also quite wide, with the bulk of dairy food tariffs ranging from 40% to 90%, but reaching as high as almost 300% in a few highly protected markets.

Tariff-rate quotas are prominent in many countries that are major dairy producers, and that had import quotas in force prior to implementation of the Uruguay Round agreements. In most of these countries, the over-quota tariff rate is a prohibitive rate. In addition to the size of the tariff rates, import licensing rules and procedures associated with tariff-rate quota administration often pose additional barriers to effective market access even to the limited in-quota quantities.

In addition to tariff barriers, an assortment of other regulatory barriers impede U.S. dairy exports in many markets, including unreasonable packaging and labeling requirements, pre- and post-shipment testing and inspections, mandatory recipe and manufacturing information, shipments held at port of entry for lab testing or other sanitary examinations, unreasonably short shelf-life provisions, pre-import registration and licensing requirements, and limitations on international approved colors and food additives.

Finally, trade-distorting subsidies in the EU and Canada confer substantial unfair advantages to their dairy production and exports, depressing world market prices and robbing market share in world dairy trade away from less subsidized competitors. Complete elimination of export subsidies is the first priority of the U.S. dairy industry in WTO agricultural trade negotiations.

Discussed below are some examples of the kinds of tariff and non-tariff barriers our dairy industry members have encountered in select markets.

North America
Canada's dairy market is one of the most highly protected dairy markets in the world.² Canadian imports of dairy products have been strictly controlled to protect high internal price structures. Under the Uruguay Round agreement, Canada established tariff rate quotas (TRQs) for dairy products. In-quota amounts, however, are quite small and most over-quota tariff rates on dairy product imports approach 240%. Such triple-digit tariff rates effectively close out Canada's market to imports.

For some of our members, the tariff structure on Canadian dairy products prohibits them from realizing production efficiencies that a united US-Canada market would give them. While the 251.5% over-quota tariff on yogurt products is prohibitive, our yogurt-producing members have plants in Canada and serve that market from the Canadian plant, avoiding the duties. Even so, the tariff severely restricts a company's industrial flexibility. The firm is not able to rationalize production lines among its Canadian and US plants since any product that it desires to sell in the Canadian market must be produced at the Canadian plant.

Mexico's market, on the other hand, has been significantly opened by NAFTA and U.S. dairy exports are doing very well there. Tariff rates on US dairy products entering Mexico are in the 6% - 12% range, and in 2003, US cheese will enter Mexico duty free. The success of U.S. dairy exports to Mexico is a testament to the commercial benefits that can in fact flow from removal of trade barriers to a foreign market.

Asia and the Middle East
Per capita milk consumption in Asia has risen considerably in the decade of the 1990s and dairy products are being integrated into the Asian diet. As household income increases in Middle Eastern countries, the demand for quality cheeses and specialty dairy products has increased and globally recognized brand names sell well in these markets.

Japanese cheese consumption and cheese imports increased rapidly in the late 1980s and early 1990s. US exporters have been relatively successful in gaining market share in cheese, dried whey, and lactose there through carefully planned and executed marketing campaigns. However, competition with EU processed cheese in the Japanese market is difficult since the EU product benefits from export subsidies. Promising market opportunities exist in Japan for U.S. whey protein concentrate products, however, there would be even greater sales potential exists if the quota tonnage allocations among dairy products were more flexible. Of the 137,202 MT yearly tariff-rate quota on dairy products, only 4,500 MT is allocated for whey protein concentrate.

Taiwan relies on imports of nearly all dairy products outside of fluid milk. Although European, New Zealand, and Australian exporters dominate most dairy product categories, during the last several years gains have been made by US exporters of whey and ice cream products. Competitors' exporter subsidy programs will need to be reduced further, however, before US exporters can expect a greater window of opportunity in the Taiwan market.

Despite the potential in the Israeli market for sales of high quality cheese, opportunities for US dairy exports face several obstacles. Most cheeses are subject to a 425 MT tariff-rate quota, with an over quota tariff of between 77.2 and 264.2 percent, which is prohibitive. Moreover, even the in-quota access is often beyond reach, due to a burdensome and arbitrary system of allocating import licenses.

Latin America
In various parts of Latin America, U.S. cheese exporters have encountered numerous tariff and non-tariff barriers, ranging from prohibitive 97% tariffs in Colombia, to restrictive import licensing requirements in Venezuela. The largest market in Latin America, and perhaps the largest number of barriers, however, is found in Brazil. In recent years, as the Brazilian dairy industry has made greater domestic investments and offered more products on the market, non-tariff barriers to dairy imports have been both extensive and persistent. These barriers include formal review and registration of foreign processing and plant inspection systems, greater pre-inspection of plants in exporting countries, complicated requirements for certificates of origin, laboratory product-quality tests, and product label registrations.

The issues of plant registration and inspection requirements, as well as product label registration have been particularly vexing to our cheese industry members. On the issue of product labeling, for example, labels for any shipped item must be registered with the Brazilian government. If an identical product is shipped under different brand names (thus requiring different labels on the packaging), each label must be registered separately even though the actual products may be identical. Registration procedures are complex, requiring numerous signatures and official affirmations. In practice, U.S. companies have found, even after all the necessary signatures were secured on the forms, the registration forms are repeatedly denied approval by the Brazilian government. To U.S. companies who make the good faith effort to comply with all applicable regulations, these bureaucratic rules and processes of extraordinary duration appear to be nothing more than sheer protectionist means of keeping U.S. product out of the market.

European Union (EU)
During the Uruguay Round, the EU committed to replacing its quotas with TRQs. However, the in-quota tariff rates are still high enough to effectively keep out U.S. cheese and yogurt products. In addition, import licensing rules that are impractical for building commercial relationships or very nontransparent in use and operation have effectively impeded any real market access.

Of even greater importance in terms of EU practices, however, is the extensive use of export subsidies in their dairy regime. Although EU export refunds for products destined for the U.S. market have tapered off, they have been re-directed to other emerging, target markets. EU export subsidies continue to distort world market prices and undermine opportunities for competitive bids from U.S. exporters. Elimination of agricultural export subsidies, including and especially dairy export subsidies, is our industry's highest trade policy priority in the current round of WTO negotiations on agricultural reform.

How do we address these obstacles?

The U.S. dairy industry is tackling the range of obstacles to increased international trade with a stronger commitment than in past decades to international trade negotiations. Enforcement of existing trade agreements is always the first step. We therefore pressed U.S. officials several years ago to challenge Canada's dairy export pricing regime as a violation of WTO ceilings on export subsidies, and won our case before both the WTO dispute settlement panel and appellate body panel. Continued concerns about new provincial dairy pricing regimes have forced the U.S. to take Canada back to Geneva for a compliance panel proceeding, which is now underway.

In terms of new trade agreement options, we believe that multilateral negotiations in the WTO provide the best and most important opportunity to strengthen international trade rules to remove artifical advantages or protections and truly open markets for U.S. dairy products and dairy-containing foods.

Although regional and bilateral free trade agreements can also provide important trade-opening opportunities (as we have seen from the Mexican commitments under NAFTA), until distortions from European dairy subsidies are removed from the international marketplace, competition from subsidized dairy products will continue to disadvantage U.S. dairy foods exporters. The most effective means of eliminating the trade distortions of EU subsidies is through WTO reforms.

IDFA is actively engaged in promoting ambitious negotiating objectives for the WTO agriculture talks, as well as the launch of a wider round of WTO negotiations that would enable a package of agricultural and non-agricultural reforms to provide the balance that is needed for ambitious results. The process towards launching a global round moves at a slow pace, however, and the momentum to move forward can be complemented and supplemented by bilateral and regional accords. We therefore also support the negotiation of a Free Trade Area of the Americas, as long as it includes, not excludes, commitments from Canada to open its long-protected dairy markets.

Between now and 2020, dairy product markets in developing countries alone are estimated to increase by a level more than triple the size of the current U.S. market. Exports to these markets represent a promising opportunity for growth in sales of U.S. manufactured products. A serious commitment by the U.S. government, with support from U.S. industry, is necessary to achieve enforceable trade agreements that eliminate tariff and non-tariff barriers to trade, including export subsidies, other trade-distorting subsidies, discriminatory or arbitrary technical standards and regulations, and other obstacles to free and open markets.

Thank you for the opportunity to testify today. We look forward to continuing to work with you and the USITC staff to ensure a comprehensive and valuable report.

WTO EXPORT SUBSIDY COMMITMENTS

Under the export subsidy disciplines of the WTO's Agreement on Agriculture, the quantity of subsidized exports must be reduced by 21 percent and the budgetary support for subsidized exports must be reduced by 36 percent over a six year period. These reductions are measured from a base period of averaged subsidized exports established between 1986 - 1990. However, reductions begin from the higher of the 1986 - 1990 base period, or the 1991 - 1992 average.

US Export Subsidy Commitments
Annual Quantity (metric tons)

EU Export Subsidy Commitments
Annual Quantity (metric tons)

Canada Export Subsidy Commitments
Annual Quantity (metric tons)

US Export Subsidy Commitments
Annual Budgetary Outlay (US$000)

EU Export Subsidy Commitments
Annual Budgetary Outlay (ECU$000)
$1US = ECU.85

Canada Export Subsidy Commitments
Annual Budgetary Outlay (CA$000)
$1US = $1.52 CA

Tariffs on Selected Dairy Foods (2000)

¹ Most dairy products are classified in chapter four of the US Harmonized Tariff Schedule. Dairy-based foods are also found in chapter 25 (ice cream), chapter 35 (casein), and other chapters (17, 19, 22) that provide for dairy-containing foods and beverages.

² When Canada replaced import quotas on dairy products with TRQs to comply with the Uruguay Round agreement, the US charged under NAFTA dispute procedures that Canada's limits on dairy products were in violation of Canada's NAFTA commitment to eliminate all tariffs on US-origin goods. The US felt that Canada's imposition of 290-350% tariffs on over-quota dairy was a violation of the NAFTA (no new tariffs could be imposed than agreed to in the CFTA), which Canada had signed before agreeing to the changes in the URA. The NAFTA panel supported Canada's position. So, Canada's dairy industry protection remains largely intact.