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 at 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 “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, is supposed to keep U.S. products competitive with world prices, which are calculated daily.

The Australians were particularly outraged that the subsidies are being introduced just six months before the historic General Agreement on Tariffs and Trade pact takes effect, aimed at curtailing agriculture subsidies like the dairy program.

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

The matter may also be raised with 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 remain in new markets for U.S. goods, particularly during the transition to GATT’s lower trade barriers, and to fight unfair trade practices. But they deny that the new 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 such groups as the Asia-Pacific Economic Cooperation forum. But the move on dairy supports could strain ties because the farm lobby is as powerful in Australia as it is 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 tons of butter and 3,850 tons of cheese would be eligible for the subsidies under the dairy incentives program until June 30. It included 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 butter fat will also be subsidized to the Asia region, which had 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 Phillipines gets 50% of its milk powder from Australia.

Gallagher said the Asian market had been improving for Australia and New Zealand because the European Union has cut back its own subsidies of dairy products to bring it in line with the GATT agreement.

U.S. farm bureaucrats, however, said 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 has identified 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 revenues are 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 American decision had already depressed prices in Asia because customers were expecting U.S. exports to arrive at about $100 below the world market price, meaning that other exporters will have to slash their prices to remain competitive. “Just by making the announcement they have chilled the market,” Gallagher said. “It’s not in their interest and it’s not in our interest. We want to see higher prices, too.”

Under the GATT agreement, America will still be able to offer subsidies on dairy products, but the entire amount for a year is estimated to be the same as the package offered for the next six months.

Australian commentators speculated that the subsidy program was a sop to the American dairy industry, which had been reluctant to support the GATT agreement’s passage through Congress.

“What is very strange is that a country that claims to have a budget problem is going about doubling the subsidies it is giving,” McMullan said. “Nobody can take credibly commitments by the United States that they are serious about addressing their budget deficit if they are doubling their subsidies.”

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Wallace reported from Sydney and Parrish from Los Angeles.

International Business

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