JULY-AUGUST 1997

Reauthorization of Agricultural
Research, Extension, and
Education Programs

by John Sheeley

Congress now is taking action to reform agricultural research programs, an area that was not fully addressed in the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 (1996 farm law, P.L. 104-127). The 1996 farm law contained no significant reform of existing agricultural research programs and did not significantly expand the agricultural research mission. The FAIR Act research title provided specific program reauthorizations only through fiscal year 1997. This was followed by a more generic authorization enabling programs to be funded at the discretion of the Appropriations Committees and administered by the Secretary of Agriculture. However, this was done with the understanding that more specific action on research would be forthcoming. Indeed, conference committee managers stated:

The Managers intend that these combined actions (specific and generic reauthorizations) will provide Congress and the Executive branch a fresh opportunity to conduct a thorough and comprehensive review of the federal agricultural research, extension and education programs and authorities. Our purpose is to revise these programs and authorities as necessary to ensure that the needs of the nation, and in particular the agriculture sector, are met as we transition into a new era. The Managers intend that this review be completed and that comprehensive legislation be enacted by the end of fiscal year 1997. (FAIR Act Conference Report, H.Rpt. 104-494, p. 469.)

The Senate Takes the First Step

The Senate Agriculture Committee has reported a bill, S.1150 (S.Rpt. 105-73), to specifically reauthorize and reform the research programs of the Department of Agriculture through the capstone of the bill, entitled the Agricultural Research, Extension, and Education Reform Act of 1997, is the Initiative for Future Agriculture and Food Systems, a new system of competitive research grants aimed at future food production, environmental protection and farm income. The new program is fueled by $780 million in new mandatory funding over five years. The bill also extends the current $100 million (annual) Fund for Rural America through 2002, including specific funding for fiscal year 1998, and alters the formula for use of those funds between rural development and research programs.

The other main themes inserted into existing research programs are increased efforts on multi-state, multi-disciplinary efforts both in research and extension and increased integration of research and extension — putting new technologies and know-how to work. Significant reforms also are added to increase the accountability of research, extension and education programs by giving stakeholders input in setting priorities by adding peer and merit reviews of proposals, and by introducing even extension funding to a competitive process.

The Funding Source for Research

The major funding source for the newly authorized mandatory spending categories comes from reductions in administrative costs of the Food Stamp Program, an idea proposed during the recent balanced budget debate by Rep. Charles Stenholm (D-TX) to help pay for research and other programs but rejected on the grounds that it was an “unfunded federal mandate”. Reductions in information technology spending at USDA would provide approximately $82 million through 2002, and reforms to rules for haying and grazing Conservation Reserve Program acreage would provide approximately $25 million annually. Finally, the bill uses some of the savings achieved from the Food Stamp Program reforms to supplement the school breakfast and lunch programs, provide supplemental meals for child care centers, and help fund an information clearinghouse to assist low-income persons to become more self-reliant and move from welfare to work.

The Research Challenge

“With world population projected to double, U.S. producers may well need to triple their production in the next few decades to meet growing demand for food and spare the world's rain forests from being uprooted in a desperate effort to expand production,” said Sen. Richard Lugar (R-IN), committee chairman. “To increase future food production, our nation must devote additional resources to agricultural research. This legislation, which provides an annual increase in research funding of about 10%, for the first time sets research priorities to meet our national goals and establishes greater accountability and efficiency in the programs,” Lugar concluded.

Senate Bill Highlights Title I: Priorities, Scope and Review

Title I inserts the themes of prioritizing and reviewing research, extension, and education activities into all programs. The Secretary of Agriculture is required to set standards to ensure that agricultural research, extension or education activities conducted by the Agricultural Research Service (ARS) or the Cooperative, State, Research, Education & Extension Service (CSREES) address concerns that are high priority and have national or multi-state significance.

Priorities. The bill requires that priorities for federally funded agricultural research, extension and education activities conducted by or for USDA be established and that input and recommendations from stakeholders and the FAIR Act-consolidated National Agricultural Research, Extension, Education, and Economics Advisory Board (advisory board) must be considered in setting those priorities. The 1862, 1890 and 1994 institutions also are to establish and implement a process for obtaining stakeholder input concerning the uses of federal formula funds. Finally, the bill contains a list of management principles that are to be followed with respect to USDA funded research.

Review. Section 103 of the bill requires scientific peer review of each CSREES competitively-funded agricultural research grant and merit review of each CSREES competitively-funded agricultural extension or education grant. The advisory board must perform an annual review of USDA's agricultural research, extension and education funding portfolio in relation to the Secretary's priorities. If available, the results of this review are to be considered when formulating the request for proposals for the next fiscal year.

Procedures must be established to ensure scientific peer review by a review panel of ARS research activities and the research of each scientist employed by ARS at least once every five years. The panel must verify that the activities have scientific merit and relevance to the Secretary's priorities as well as national or multistate significance. The results of all reviews must be transmitted to Congress and the advisory board. The authority of the Secretary to withhold formula funds is repealed by the bill. Finally, the 1862 and 1890 institutions must establish and implement a process for merit review to obtain agricultural research or extension funds, and 1994 institutions must establish and implement a merit review process to receive extension funds.

Set-Asides for Multi-State Activities. The bill amends the Hatch Act to require not less than 25% of a state’s Hatch Act funds will be used for projects where its agricultural experiment station cooperates with another state or federal entity to solve multi-state problems utilizing multi-disciplinary approaches. The Smith-Lever Act also is amended to require a specific amount of funds for cooperative extension activities involving the cooperation of two or more states to solve problems that concern more than one state. Beginning in fiscal year 2000, the amount of funds dedicated to multi-state projects must be the lesser of 25% or twice the percentage determined to be spent on multi-state activities in 1997. State matching funds are not subject to this percentage requirement.

Title II: Additional Reforms of Agricultural Research, Extension and Education

Subtitle A contains a number of amendments to existing programs under the National Agricultural Research, Extension, and Teaching Policy Act of 1977. The bill inserts priorities in grants and fellowships for food and agricultural sciences education to teaching enhancement projects that demonstrate enhanced cooperation among all types of institutions and give priority to teaching enhancement projects that focus on innovative, multi-disciplinary material and curricula. The Secretary also is authorized to maintain a national food and agricultural education information system containing information on enrollment, degrees awarded, faculty and employment placement in the food and agricultural sciences.

Current grant-making authority of Policy Research Centers is amended to include grants for studies that concern the effects of trade agreements on farm and agricultural sectors; the environment; rural families, households and economies, and consumer, food and nutrition. Internationally-focused collaborative research and teaching programs are made eligible for competitive grants, and USDA is encouraged to undertake and report on efforts to coordinate international agricultural research and better link domestic and international research efforts.

In an effort to ensure that the maximum amount of scarce federal monies are expended on actual research, extension and teaching and not on overgrown bureaucracies, an indirect cost cap of 25% is placed on funds that may be used for administrative functions on those projects funded under the National Research Initiative, the Fund for Rural America, or the Initiative for Future Agriculture and Food Systems. USDA is permitted to retain up to 4% of appropriated amounts for administrative costs unless a program specifies some other amount. Finally, USDA is authorized to enter into cost-reimbursable agreements for the acquisition of goods or services, including personal services, in carrying out research, extension or teaching activities with any college or university, not just land grant colleges and universities as under current law.

Subtitle B contains amendments to the Food, Agriculture, Conservation, and Trade (FACT) Act of 1990 and projects it authorized. Under a revamped National Agricultural Weather Information System (NAWIS), the Secretary is authorized to enter into cooperative projects with and award grants to other federal, regional and state agencies to support developing and disseminating agricultural weather and climate information, to collect weather data through regional and state agricultural weather information systems; coordinate the weather activities of USDA with other federal agencies and the private sector, make grants regarding state and regional agricultural weather information systems, and to encourage private sector participation in NAWIS activities. No more than two-thirds of the funds appropriated under the NAWIS subtitle could be used for work with the National Oceanic and Atmospheric Administration (NOAA). The Secretary would be prohibited from awarding any grant funds to construct facilities, and the purchase of equipment with grants funds would be limited to no more than the lesser of one-third the award or $15,000.

The bill restructures the Plant Genome Mapping Program of the 1990 FACT Act into a broader, more comprehensive National Food Genome Strategy for the development and dissemination of information on the genetics of agriculturally important plants, animals and microbes. Grants would be awarded only on a competitive basis. A new three tiered grant program for imported fire ant control, management and eradication is established under the specialized research programs authorized by Section 1672 of the FACT Act. Minor amendments are made to the Agricultural Telecommunications Program and the Assistive Technology Program for Farmers with Disabilities (AgrAbility).

Subtitle C contains a number of miscellaneous changes to programs authorized under various laws, the most significant of which are amendments to the Smith-Lever and Hatch Acts requiring that a percentage of funds be used for integrated cooperative extension and research activities. Like the multi-state extension set-asides in Title I, by fiscal year 2000 funds dedicated to integration activities must equal the lesser of 25% or twice the percentage spent on such activities in 1997. Again, state matching funds are not subject to this set-aside requirement. Reforms are made to the Competitive, Special, and Facilities Research Grants Act involving the National Research Initiative and a new Office of Energy Policy and New Uses is established in the office of the Secretary.

Finally, subtitle C provides funding for the Fund for Rural America through fiscal year 2002 including fiscal year 1998 which, due to a technical error in the FAIR Act, had not been authorized. The percentage of the fund to be allocated among rural development programs would be increased to 50%, and the research portion would be established at 33% with the remaining 17% allocated among either the research or rural development accounts at the Secretary's discretion.

Subtitle D funds new research programs apart from the Initiative for Future Agriculture and Food Systems. The Secretary must coordinate research, economic information, market information and other activities to develop and promote biobased products. This system must include consultation with private sector biobased product producers and provide a centralized contact point to provide advice and technical assistance to individuals interested in developing biobased products.

A new competitive grant program is authorized for research, education and information dissemination projects to develop and promote precision agriculture. Another competitive grant program is authorized for the control, management and possible eradication of Formosan termites in the U.S.

Finally, subtitle E of Title II of the bill, contains provisions to both conduct a performance evaluation of federally funded agricultural research, extension, and education programs as well as conduct a National Academy of Sciences study of the role and mission of such programs.

Title III: Future Agriculture and Food Systems

Title III establishes the Initiative for Future Agriculture and Food Systems, the capstone of the Senate bill. It creates a new mandatory spending account that provides $780 million over five years for research funding. In fiscal year 1998 the amount would be $100 million and in fiscal 1999 - 2002 the amount would be $170 million per year.

This competitively awarded research funding must address critical emerging agricultural issues of primary importance to future food production, environmental protection and farm income or for activities carried out under the Alternative Agricultural Research and Commercialization Act of 1990.

First year funding is to be used for food genome; food safety, food technology and human nutrition; new and alternative uses and production of agricultural commodities and products; agricultural biotechnology, and natural resource management including precision agriculture. In fiscal 1999 - 2001, the Secretary, in consultation with the advisory board, may change or add to these priority mission areas. Priority is to be given grants that are multi-state, multi-institutional or multi-disciplinary and to grants that integrate agricultural research, extension and education. The Secretary also is directed to solicit and consider input from stakeholders in formulating the requests for grant proposals. Scientific peer review or merit review are required. Eligible grantees include federal research agencies, national laboratories, colleges or universities and private research organizations with established research capacity.

Title IV of the Senate bill reauthorizes existing research programs through 2002, repeals authority for certain programs and makes purely technical amendments to various acts.

House Research Action

The House Agriculture Committee’s Subcommittee on Forestry, Resource Conservation, and Research has held a series of hearings on the reauthorization of the research programs but has yet to act on any specific legislative proposal.

John Sheeley is an associate in the firm and has an extensive background in agriculture, trade, farm credit, tax, and crop insurance issues.

Taxpayer Relief Act of 1997

Tax Highlights, Analysis of Provisions
Effective Dates, Etc.
by Burton Eller

President Clinton signed the Taxpayer Relief Act of 1997 into law on Aug. 5. The package, overwhelmingly passed by both the House and the Senate, is the most significant business and agricultural tax cut since 1981. For agriculture, the new law represents the most friendly tax package in recent memory.. For example, the bill provides for income averaging for farmers -- a benefit available to no other segment of the economy.

Most of the new tax law changes are real relief for family businesses and agriculture. Its passage was one of the rare times in history when an attempt to balance the federal budget and provide tax relief to business and individuals were compatible in the same piece of legislation.

Details of the most important provisions that affect farmers and ranchers are explained here with the best available knowledge at this time. The discussion is based on statutory language of the new law and the legislative history that was developed during its passage. However, as the Internal Revenue Service issues guidance on these new provisions, some of the detail must be monitored. Readers are advised to consult professional tax counsel before making major recommendations or decisions on tax planning.

Estate and Gift Tax Relief

In 1981, the Economic Recovery Act contained the last estate tax relief. The 1981 act phased in estate and gift tax exemptions from $175,625 to $600,000 for years following 1986 and reduced the minimum tax rate to 50% from 70%.

The Taxpayer Relief Act of 1997 does not reduce rates, but it does increase the unified credit from the current $192,800 to $345,800 and the individual exclusion from $600,000 to $1 million by 2006 as shown in the following chart.

Increase in Unified Credit

For Decedents Dying and Gifts During	Applicable Unified Credit Amount	Applicable Estate Exclusion Amount
1997 (existing law) 1998 1999 2000 2001 2002 2003 2004 2005 2006 and thereafter	$192,800 202,050 211,300 220,550 220,550 229,800 229,800 287,300 326,300 345,800	$600,000 625,000 650,000 675,000 675,000 700,000 700,000 850,000 950,000 1,000,000

The new law includes a special exemption for family-owned businesses and farms. Beginning Jan. 1, 1998, $1.3 million is excluded from a taxable estate where the family business, farm or ranch interests make up more than 50% of the estate held by one family, 70% by two families, or 90% by three families.

Family-Owned Business
Estate Tax Exemption Amounts

Year	General Exemption Amount	Family-Owned Farm, Ranch and Business Exclusion Amount
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 and thereafter	$600,000 625,000 650,000 675,000 675,000 700,000 700,000 850,000 950,000 1 million	-0- $675,000 50,000 625,000 625,000 600,000 600,000 450,000 350,000 300,000

A farm or ranch business must meet a liquidity test which requires the value of all transfers of qualified business interests, made to qualified heirs at death plus certain lifetime transfers to family members, to exceed 50% of the value of the adjusted gross estate; qualified heirs include the decedent's family plus any individual who has been actively employed by the business for at least 10 years prior to the date of death.

The decedent must have owned and materially participated in the business for at least five of the eight years prior to the date of death; then each qualified heir must materially participate in the business for at least five years of an eight year period during the 10 years following the date of death. Material participation has been defined broadly as having the ultimate responsibility for management decisions if the person works on less than a full-time basis with the business.

Interest rates on installment payments for closely-held businesses have been reduced; the interest rate on deferred estate tax attributable to the first $1 million that is taxable has been reduced to 2% from the previous 4%.

Qualified land subject to a permanent conservation easement may be eligible to exclude 40% of the value of any land subject to such a qualified conservation easement; such exclusion will be phased in from $100,000 in 1998 to $500,000 in 2002 and beyond. Minimal commercial recreational activity such as the collection of fees for hunting and fishing should not disqualify the land from this exclusion. The exclusion can be taken in addition to the maximum exclusion for family owned business interests.

The generation-skipping transfer tax exclusion has been expanded to exempt transfers to collateral heirs provided that the decedent has no living descendents at the time of transfer.

Charitable remainder trusts have two new restrictions to meet, (1) for transfers in trust after June 18, 1997, the annual payout to the income beneficiary cannot be greater than 50% of the initial market value of the trust assets, and (2) the value of the remainder interest in a charitable remainder trust must be at least 10% of the value of the property transferred into the trust. The second restriction is effective for transfers after July 28, 1997.

Congress attempted to correct current problems with the special use valuation for farm property. An estate now will be allowed to correct certain previous elections to value farm or business property for estate purposes at a value different than for its highest and best use by submitting missing information in a timely manner to the IRS. The effective date is Aug. 5, 1997.

Estate tax cuts are cumulative! Each of the estate and gift tax relief items may be utilized without excluding another. Therefore, it is possible to qualify for the general estate tax exclusion, the family-owned exclusion, the qualified conservation easement exclusion, unified credit, special use valuation, special interest rate on installment payments, reduction in value under section 2032(a), etc.

Capital Gains

The maximum tax rate on capital net gains for individuals has been reduced from 28% to 20% after July 28, 1997, on property held for more than 18 months and on gains between May 7, 1997, and July 28, 1997, on property held more than one year.

Further, the maximum rate is reduced to 18% on property held more than five years beginning Jan. 1, 2001, and thereafter. Also, individuals may elect to treat any eligible assets held on Jan. 1, 2001, as having been sold and reacquired. Fair market value must be established, and any gain resulting from this election must be recognized.

The new law provides that any part of gain on the sale or exchange of depreciable real estate that represents prior depreciation is recaptured and taxed at a maximum rate of 25%.

There is a general exclusion from taxable income up to $500,000 for married couples filing a joint return on the sale or exchange of a principle residence. The homeowner must have owned and used the property as his or her principle residence for at least two years of the five years prior to the date of sale or exchange. This exclusion is allowed every time a taxpayer sells or exchanges a principle residence but no more than once every two years. This provision repeals the rollover rules, and repeals the once-in-a-lifetime $125,000 exclusion for taxpayers 55 and older. The new exclusion is effective for sales or exchanges after May 6, 1997. (However, there are many unanswered questions and interpretations for property sold or exchanged between May 6 and Aug. 5, 1997.)

Income Averaging

This special provision for agriculture will permit three-year income averaging for agriculture producers each of the next two years, then the provision expires. Because there are no current statutory provisions on income averaging, there is little recent precedent for the rules that IRS may promulgate regarding income averaging. The provision applies to taxable years beginning after Dec. 31, 1997, and before Jan. 1, 2001.

Health Insurance Deductibility

Self-employed individuals currently can deduct 40% of the premium cost for health insurance coverage for themselves and their families. This deduction now will increase to 100% by 2007 according to the following phase-in schedule.

Tax Year Beginning In	Deduction
1997 1998 and 1999 2000 and 2001 2002 2003 to 2005 2006 2007 and thereafter	40 percent 45 percent 50 percent 60 percent 80 percent 90 percent 100 percent

Disaster-Caused Sales of Livestock

Current rules allow farmers and ranchers using the cash-method of accounting to defer income from the sale of livestock forced to market due to drought conditions. The rules now are extended to include all weather-related conditions. This allows the producer to recognize the income in the taxable year following the year of sale. In addition, the involuntary conversion rule for the sale of livestock held for draft breeding or dairy purposes is extended to all weather-related disaster conditions, allowing the gain from the sale of such livestock to be deferred by reinvesting the proceeds of the sale into similar property within two years. These new rules apply to sales and exchanges after 1996.

Deferred Payment Contracts

The new law clarifies that producers selling commodities or personal property by deferred contract should not be subject to alternative minimum tax consequences by repealing current-law alternative minimum tax adjustments.

Home Office Deduction

A home office now can qualify as the principle place of business if it is used exclusively and regularly to conduct business activities, and there is no other fixed office of the business where substantial administrative or management activities take place. The effective date for this change is Jan. 1, 1999.

Buton Eller is a government relations professional in the firm of McLeod, Watkinson & Miller. Mr. Eller has extensive prior experience as a lobbyist and CEO, and he currently represents the interests of several trade associations before the Congress and the Administration.

Relief from Surges of Agricultural Imports

by Dale McNiel

Increasing imports of agricultural commodities and processed food products can cause considerable harm to domestic producers or processing industries. For instance, on Jan. 22, 1997, the U.S. Wheat Gluten Industry Council filed a petition with the United States Trade Representative complaining about the depressed prices of wheat gluten in the domestic market resulting from various practices of the European Union (EU). The U.S. Trade Representative commenced an investigation into whether EU subsidies affect the access into the EC of exports of U.S. modified starches but politely invited the petitioners to seek import relief elsewhere. The agreements reached under the Uruguay Round of multilateral trade negotiations under the auspices of the General Agreement on Tariffs and Trade 1994 (the "GATT 1994") have changed many avenues for protection from imports of agricultural products. This article will survey the principal mechanisms available to producers and processors to cope with unfair import competition.

Tariffs

The oldest form of import protection is the tariff or import customs duties. The U.S. Constitution confers upon the Congress the authority to lay and collect customs duties, provided that they are uniform throughout the United States. However, since 1934 most changes in tariffs, generally reductions, have been proclaimed by the President under authority delegated by Congress. This authority is generally provided and invoked to carry out the results of multilateral trade negotiations under the auspices of the GATT in which agreements have been reached to reduce tariffs.

GATT Tariff Rights and Obligations

During various rounds of multilateral trade negotiations, all tariff rates for imports of agricultural products have been subject to tariff concessions or bindings under the provisions of Article II of the General Agreement on Tariffs and Trade 1994 (the "GATT 1994"). Under these provisions, the United States cannot impose any higher duty on imported agricultural products originating in countries which are members of the World Trade Organization (WTO). In addition, the United States must accord most-favored-nation (MFN) treatment to imports from all WTO members. It thereforeis unlikely that Congress or the President could be persuaded to increase the tariff for any agricultural product above the GATT-bound rate.

However, GATT tariff bindings can be modified or withdrawn under the provisions of Article XXVIII of the GATT. Article XXVIII provides three circumstances under which a WTO member has a right to withdraw or modify a tariff concession or "binding": (1) "open season" renegotiations which apply to the withdrawal or modification of concessions to take effect on the first day of each three-year period since Jan. 1, 1958; (2) "special circumstances" (or "out-of-season") renegotiations may be authorized by the WTO General Council "at any time, in special circumstances;" or (3) "reserved" renegotiations may occur, without prior authorization, if the member initiating them had notified the General Council during the previous three-year period that it was reserving the right to modify its schedule for the duration of the following three-year period.

If any type of Article XXVIII renegotiations occurs, the "applicant" WTO member is required to negotiate with any other member with which the concession(s) being modified or withdrawn was initially negotiated (i.e., the party holding "initial negotiating rights" or "INRs") and any other member determined to have a "principal supplying interest" in the concession. The applicant also is required to consult with any member determined to have a "substantial interest" in the concession. The negotiations must "endeavor to maintain a general level of reciprocal and mutually advantageous concessions not less favorable to trade than that provided for ... prior to such negotiations.” If agreement on compensation cannot be reached with the members having negotiating rights, the applicant is nevertheless free to modify its schedule. In the event of such unilateral action, the members having negotiating rights and all members having substantial supplier interests are entitled, for the following six months, to retaliate by withdrawing substantially equivalent concessions.

There is no explicit, general legal authority for the President to enter into Article XXVIII negotiations. However, section 125(c) of the Trade Act of 1974 authorizes limited tariff increases which could be used for implementing an Article XXVIII renegotiation of certain tariff bindings made in the Kennedy or Tokyo Rounds or previously. This authority cannot be used to modify the tariff bindings made in the Uruguay Round, when concessions were made for all tariffs on imported agricultural products.

Congress can provide the authority to enter into Article XXVIII negotiations through special legislation. For example, in the Uruguay Round Agreements Act Congress authorized a renegotiation of tariff bindings on imports of tobacco as a response to the adverse findings of a GATT panel on the domestic content legislation for tobacco. Following negotiations with a number of countries, the tariff bindings for imported tobacco were modified to create a tariff-rate quota.

The United States has no GATT obligation with respect to tariff rates applied to imports originating in countries which are not members of the WTO. Generally, whether such countries receive MFN treatment will depend on whether there is a bilateral trade agreement, but some countries are denied MFN status under the provisions of the Jackson-Vanik amendment unless they are found to accord certain human rights to their citizens or are granted a waiver by the President. The Jackson-Vanik amendment generally is not designed to afford import relief, although it does have a provision authorizing the increase or imposition of import duties to prevent market disruption with respect to an article produced by a domestic industry. This provision could be used to provide import relief from imports of agricultural products from China or any other communist country.

The WTO Special Safeguards

As a result of the Uruguay Round, non-tariff barriers to imports of agricultural products were subject to "tariffication" or the conversion to tariff equivalents, usually tariff-rate quotas. The Agreement on Agriculture provides for the imposition of special safeguards with respect to imports of agricultural products that were the subject of tariffication. The safeguard provisions are quite complex and provide the option of a quantity-based safeguard or a price-based safeguard. A special safeguard may be invoked, if (1) the volume of imports of a product during any year exceeds a trigger level, or (2) the price at which imports of that product enter the customs territory of the member invoking the safeguard, as determined on the basis of the c.i.f. import price of the shipment concerned expressed in terms of its domestic currency, falls below a trigger price equal to the average 1986 to 1988 reference price for the product concerned. A quantity-based safeguard may be maintained only until the end of the year in which it has been imposed, and may be levied only at a level which does not exceed one-third of the level of the ordinary customs duty in effect in the year in which the action is taken. The level of a price-based safeguard must be set according to a complex schedule. The agreement honors contract sanctity and allows differential treatment for perishable and seasonal products. Heading 9904 of chapter 99 of the Harmonized Tariff Schedules of the United States (HTS) identifies the price-based special safeguards in detail and publishes the rate of additional duty for quantity-based safeguards, which must be announced by the Secretary of Agriculture.

Free Trade Areas

The North American Free Trade Agreement (NAFTA) establishes annual tariff reductions ultimately resulting in almost complete elimination of tariffs by Jan. 1, 1998, for all imports from Canada and by Jan. 1, 2008, for all imports from Mexico. There is no formal procedure in the NAFTA for the modification or withdrawal of tariff commitments. However, the NAFTA provides for a temporary duty snapback for imports of certain fresh fruits or vegetables from Canada. The snapback is administered by the Foreign Agricultural Service (FAS). The North American Free Trade Agreement (NAFTA) has an additional special safeguard for specified products imported from Canada or Mexico. The special safeguard must be in the form of a tariff-rate quota and the over-quota tariff rate may not exceed the lesser of the MFN rate as of July 1, 1991, or the current MFN rate. The U.S. products covered are seasonal imports of certain tomatoes (except cherry tomatoes), certain onions and shallots, eggplants, chili peppers, squash and watermelons.

The United States and Israel are also parties to a free trade agreement which provides for the elimination of all customs duties. Imports of certain perishable products are subject to a snapback administered by FAS.

Tariff Preferences

The United States grants duty-free treatment to imports under three preferential tariff regimes: the Generalized System of Preferences (GSP), the Caribbean Basin Initiative (CBI), and the Andean Trade Preferences Act.

The Generalized System of Preferences (GSP)

The Generalized System of Preferences (GSP) is a preferential tariff arrangement intended to promote the export earnings and economic development of less-developed countries by exempting their exports from the imposition of ordinary (MFN) customs duties upon the importation of such products into participating developed countries. Under the GSP, the President may provide duty-free treatment for "any eligible article from any beneficiary developing country." Subject to specified procedures, criteria, and exceptions, the President is authorized to designate "eligible articles" and "beneficiary developing countries."

The President may withdraw, suspend, or limit the application of the duty-free treatment accorded with respect to any article or with respect to any country, except that no rate of duty may be established other than the rate which would apply but for GSP treatment. In taking such action, the President is required to consider a number of statutory factors which include "the anticipated impact of [duty-free treatment] on United States producers of like or directly competitive products." The President is authorized to withdraw an agricultural product from the list of eligible articles and to withdraw duty-free treatment from a specific article from a particular country. The U.S. Trade Representative (USTR) has administrative responsibility for the GSP.

The Caribbean Basin Initiative (CBI)

The Caribbean Basin Economic Recovery Act (CBERA), was enacted to promote economic revitalization and facilitate expansion of economic opportunities in the Caribbean Basin region. Among other things, the CBERA authorizes the President to proclaim duty-free treatment for all eligible articles from any beneficiary country. Subject to specified criteria and exceptions, the President is authorized to designate beneficiary countries from a list of eligible countries. By contrast, unless excluded by statute from eligibility, duty-free treatment applies to any article which is the growth, product, or manufacture of a beneficiary country if the article is imported directly from a beneficiary country into the customs territory of the United States, and the sum of the cost or value of the materials produced in a beneficiary country or countries plus the direct costs of processing operations performed in a beneficiary country or countries is not less than 35% of the appraised value of the article at the time it is entered for customs clearance.

Under the CBERA, the President generally may withdraw or suspend the designation of a beneficiary country or withdraw, suspend or limit the application of duty-free treatment for any article of a country only if he determines that as a result of changed circumstances the country would be barred from designation under the statutory criteria. The President has no general authority under the CBERA to remove specific articles from eligibility for duty-free treatment, but if a petition is filed with the International Trade Commission (ITC) for escape clause relief with respect to a perishable product, the President may suspend duty-free treatment on an emergency basis, upon the recommendation of the Secretary of Agriculture, pending the ITC's final action.

The Andean Trade Preference Act (ATPA)

The ATPA is very similar to the CBERA in that articles originating in designated beneficiary countries are entitled to duty-free treatment. Like the CBERA, there is no procedure short of amending the legislation that could permanently withdraw duty-free treatment for a specific commodity or product, but also like the CBERA, where a petition is filed with the ITC for escape clause relief with respect to imports of a perishable product, the President, upon the recommendation of the Secretary of Agriculture, may suspend duty-free treatment on an emergency basis.

Import Quotas

Prior to the Uruguay Round, the United States maintained import quotas on a variety of agricultural products. Quotas on imports of certain dairy products, sugar-containing products, peanuts and cotton had been imposed pursuant to the provisions of section 22 of the Agricultural Adjustment Act of 1933, as amended. Section 22 provided for the imposition of fees or quantitative restrictions on imported articles whenever the President found that such articles were being imported, or were practically certain to be imported into the United States, under such conditions and in such quantities as to render or tend to render ineffective, or materially interfere with, certain United States Department of Agriculture programs or operations with respect to any agricultural commodity or product, or as to reduce substantially the amount of any product processed in the United States from a commodity or product included in such programs or operations. The United States obtained a waiver for such measures under the provisions of the GATT 1947. During the Uruguay Round, the United States agreed to convert these quotas to tariff-rate quotas and agreed to the termination of the section 22 waiver. Congress amended section 22 to preclude its application to products of WTO members.

Imports of raw and refined sugar also had been subject to an absolute quota pursuant to a "headnote" in the Tariff Schedules of the United States (TSUS) which was based on identical notes in the United States' GATT schedule. A GATT dispute settlement panel, in 1989, determined that the sugar quota was inconsistent with the GATT's general ban on quantitative restrictions. In 1990, President Bush converted the sugar quota into a tariff-rate quota to bring the United States into conformity with its GATT obligations. The tariff-rate quota was retariffied in the Uruguay Round, producing slightly different tariff rates, a commitment on a minimum quota amount, and separate tariff-rate quotas for raw sugar and refined sugar. The Meat Import Act formerly provided for the imposition of quotas on imports of beef. The quotas, which were seldom imposed, were converted to tariff-rate quotas in the Uruguay Round negotiations, and the statute was repealed.

Article 4.2 of the Uruguay Round Agreement on Agriculture prohibits WTO members from maintaining, resorting to or reverting to any of the kinds of non-tariff measures which were required to be converted into tariffs during the tariffication process. A footnote to the provision lists the prohibited measures as follows:

These measures include quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state trading enterprises, voluntary export restraints and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country-specific derogations from the provisions of the GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture-specific provisions of the GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the MTO.

The list is a comprehensive array of non-tariff barriers. Due to this provision, it is unlikely that the Congress or the President could be persuaded to resort to a listed measure to restrict imports of an agricultural product.

Antidumping Duties

The antidumping duty law has been the trade law most frequently invoked to curb "unfair" imports. Dumping has two elements: (1) the product has been sold for export to the United States at prices below home market sales prices and (2) the imports have caused, or threatened to cause, material injury to the domestic producers of the like product. If dumping is found to have caused or threatened to cause material injury, antidumping duties equal to the dumping margin are imposed on imports in addition to the normal customs duties.

Dumping cases are generally initiated by the petition of domestic producers. If the International Trade Administration (ITA) in the Department of Commerce preliminarily finds that an imported product is being "dumped" or sold at less than fair value, the matter is referred to the ITC for a determination of whether the imports have caused, or threatened to cause, material injury to the competing domestic industry. If both preliminary findings are positive, the agencies issue final determinations.

Congress recently amended the antidumping duty law to implement the antidumping agreement reached in the Uruguay Round. The amendments relate to minimum standing requirements, higher de minimis thresholds and sunset of antidumping orders. However, the Uruguay Round is not viewed as having caused a substantial change in the U.S. antidumping law or practice.

Countervailing Duties

The U.S. countervailing duty law is very similar to antidumping duty law. Countervailing duties are additional duties imposed to offset the benefits of a subsidy received by an imported product which has caused or threatened to cause material injury to the domestic producers of the like product. The countervailing duty law attempts to create a level playing field by counteracting foreign government export and domestic subsidies. The ITA and ITC perform comparable functions to their roles in antidumping duty cases, with the ITA making preliminary and final determinations on the issue of whether the imports benefitted from a subsidy and the ITC determines whether the domestic industry has suffered material injury. The Uruguay Round Agreements Act amended the countervailing duty law to make the material injury test applicable to imports from all WTO members and to make the procedural changes previously discussed with respect to antidumping duty cases.

Under the Uruguay Round Agreement on Agriculture, certain non-trade distorting domestic subsidies (i.e., those permitted policies in the so-called "green box") are non-actionable subsidies for purposes of countervailing duties. In addition, the peace clause calls for "due restraint" to be exercised in initiating countervailing duty actions against imports benefitting from domestic subsidies or export subsidies so long as the WTO member providing the subsidy is within the member's reduction commitments. The peace clause also exempts agricultural export subsidies from the ban on such subsidies in the subsidies code and exempts domestic subsidies from certain challenges under the subsidies code if the domestic support for the specific commodity does not exceed that provided during the 1992 marketing year.

The "Escape Clause”

The purpose of an escape clause is to allow a country to temporarily retreat from negotiated tariff concessions which have resulted in serious harm to its domestic industry. The U.S. escape clause authorizes the President to increase or impose duties or a tariff-rate quota or to take other actions whenever an article is being imported in such increased quantities as to be a substantial cause, or the threat thereof, of serious injury to the domestic industry producing an article like or directly competitive with the imported article. The statute authorizes provisional relief in the case of imports of a perishable agricultural product or citrus product. The escape clause is administered by the U.S. Trade Representative and the International Trade Commission. Petitioners are expected to present an adjustment plan to facilitate positive adjustment to import competition.

The escape clause rarely is invoked and even then often is not successful, generally because of the difficulty in proving that imports have caused the domestic industry's decline. In March 1995, Florida tomato growers requested provisional escape clause relief from imports of fresh winter tomatoes from Mexico. After intensive negotiations with the government of Mexico and the Mexican tomato industry, the petition was withdrawn and the investigation was terminated without any relief being imposed.

The use of an escape clause is permitted by Article XIX of the GATT 1994. During the Uruguay Round, a safeguards agreement was reached which imposes disciplines on the use of the escape clause. The most important is an obligation to negotiate trade compensation with those WTO members whose trade is affected or risk retaliation. This makes use of the U.S. escape clause even less likely in the future.

Intellectual Property Protection

Section 337 authorizes the President to ban imports of articles that infringe U.S. intellectual property rights, such as patents, copyrights, and trademarks and trade names, among other unfair practices. This law is administered by the International Trade Commission through investigations and exclusion orders, which apply to imports from all countries supplying the infringing article. In 1990 a GATT panel found section 337 to be in violation of GATT Article III:4 which requires that imported products be given treatment no less favorable than like domestic products, and the statute has been amended to bring it into conformity with the GATT. The amendments should not reduce the effectiveness of section 337 in protecting U.S. intellectual property rights and should remove the international stigma.

Section 301 of the Trade Act of 1974

Section 301 provides an administrative means for a domestic industry to challenge the laws and practices of foreign countries that are believed to be in violation of the provisions of trade agreements or is unjustifiable and burdens or restricts U.S. commerce. It generally is used as a "crowbar" to challenge foreign market access restrictions and open foreign markets, but it could be employed to challenge an unfair foreign practice, such as an export subsidy exceeding a member's reduction commitments that results in a surge of imports into the United States. Section 301 is administered by the U.S. Trade Representative, and usually results in a dispute settlement case being taken to a panel under the provisions of the WTO Understanding on Dispute Settlement. If the panel concludes that the foreign practice violates a provision of a WTO agreement, the United States can retaliate against imports from that country by imposing additional import duties.

The Agricultural Law Letter is published to highlight recent changes and developments in the law and public policy. As with any publication of this type, it is essential that before any action is taken based upon this information, competent, individualized, and professional advice should be obtained. Copyright 1997 by McLeod, Watkinson & Miller. Reproduction in part or in whole is permitted with permission from McLeod, Watkinson & Miller. Contact Suzanne Bucciarelli at (202) 842-2345, or write to One Massachusetts Avenue, NW, Suite 800, Washington, D.C. 20001. Subscriptions to the newsletter are $25 per year.