International Business : U.S. Move to Subsidize Dairy Exports to Asia Angers Australia : Trade: Country says the decision unnecessarily harms its prime overseas market. Americans say Australia has its own indirect subsidies.

The government here, one of the Clinton Administration’s closest allies on trade and defense issues in the Pacific, is hopping mad over Washington’s decision to begin subsidizing American dairy exports to Asian countries, Australia’s prime overseas market.

Sen. Bob McMullan, Australia’s minister for trade, expressed “deep disappointment” at the U.S. decision and said that “it is very hard to see any justification given the current buoyant conditions in the global dairy industry.”

The U.S. Department of Agriculture announced Jan. 20 that it would extend subsidies to U.S. dairy exporters for “previously untargeted” markets in the Pacific Rim, Mexico and South America. The Dairy Export Incentive Program, which dates from 1987, was designed to keep U.S. products competitive with world prices, which are calculated daily.

The Australians are particularly outraged that the subsidies are being introduced just six months before the historic General Agreement on Tariffs and Trade takes effect. Part of that accord aims to curtail agricultural subsidies such as the dairy program.

McMullan said the Australian ambassador in Washington has been instructed to approach American authorities and request that the subsidies not be applied to new Asian markets.

The matter may also be raised with U.S. Deputy Secretary of State Strobe Talbot when he visits Australia later this month to discuss security cooperation, McMullan said.

U.S. officials say the subsidies are intended to help build and maintain markets for U.S. goods, particularly during the transition to GATT’s lower trade barriers, and to fight unfair trade practices. They deny that the subsidies will be unfair to competitors.

“We don’t want to be below the world price,” said L.T. McElvain, director of the USDA’s Commodity Credit Corp. operations division. “We aren’t intending to use the program to undercut world markets.”

The Clinton Administration has counted on close support from Australian Prime Minister Paul Keating in groups such as the Asia-Pacific Economic Cooperation forum. But the move on dairy supports could strain these ties, since Australia’s farm lobby is as powerful as its counterpart in the United States.

Peter Gallagher, executive director of the Australian Dairy Industry Council, described the American decision as “a cynical move” and predicted gloomily that it will “kill the market for us.”

The USDA said up to 114,000 tons of milk powder, 37,650 tons of butter and 3,850 tons of cheese would be eligible for the subsidies under the dairy incentives program until June 30. Also included is a 15,000-ton allocation of milk powder to Bangladesh, China, Hong Kong, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand. Cheese and butterfat would also be subsidized to the Asia region, which has not previously received subsidized American dairy products.

Australia exports 85% of its dairy products to the Pacific region and earns $375 million in exports to Southeast Asia alone. The Philippines gets half its supply of dry milk from Australia.

Gallagher said the Asian market had been improving for Australia and New Zealand since the European Union cut its own subsidies of dairy products to conform with the GATT rules.

However, U.S. farm bureaucrats say the Australians’ complaints are hollow.

While the Australian government does not directly subsidize dairy exports, Christopher Goldthwait, USDA general sales manager, said the Australians use another mechanism that GATT identifies as an export subsidy.

With the encouragement of the Australian government, Goldthwait said, domestic dairy prices in that country are kept high--and the extra revenue is used by producers to subsidize exports. Overall, he said, U.S. and Australian dairy subsidies are roughly equal.

“From the standpoint of GATT,” Goldthwait said, “that is every bit as much a subsidy as our direct payment to the exporter.”

But Gallagher said the U.S. decision has already depressed prices in Asia because customers are expecting U.S. exports to arrive at below the world market price, meaning that other exporters will have to slash their prices to remain competitive.

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Wallace reported from Sydney, Parrish from Los Angeles.