Co-ops and trade sanctions

 Co-ops defend their members’ interests in sanctions reform debate


By Alan Borst, USDA/RBS Agricultural
Economist
Marc Warman, USDA/RBS Agricultural
Economist

ooperative executives have a central mission of increasing the earnings of their farmer- owners. Initiatives to achieve this mission usually involve increasing the value of their product line to increase sales and profits. Sometimes, however, marketing initiatives to increase an individual cooperative’s sales and earnings must first overcome political barriers to market access. For other cooperatives, erecting or maintaining market barriers is critical to maintaining or increasing their sales and earnings.

Such was the case with debates over the North American Free Trade Agreement (NAFTA) in the 1990s. Most U.S. agricultural interests wholeheartedly supported NAFTA, but some firms which perceived a competitive threat from Mexico opposed the agreement – unless certain protections for their industries were included. This political pattern is repeating with regard to the issue of unilateral economic sanctions reform. This article describes the role which some cooperatives have played in recent sanctions reform debates.


The United States government has imposed unilateral trade sanctions on many different nations for a variety of reasons since World War II. These sanctions range from severe export restrictions to outright embargoes, under which no U.S. export transactions may be conducted with targeted countries. During the late 1990s, there were six countries subject to such sanctions which received particular attention from the agricultural community: Iraq, Iran, Cuba, North Korea, Libya and Sudan. In 1996, these countries imported $6.3 billion worth of agricultural products.

The USDA Foreign Agricultural Service estimates that U.S. agricultural exporters could have had at least $500 million of that trade had they been permitted to compete for it. USA Engage, a coalition representing American business and agriculture which opposes the use of unilateral trade sanctions, argues that the FAS estimate is conservative, and that this number could have been considerably higher.

In 1998, these six countries imported $7.7 billion in agricultural imports (about 2 percent of world-wide agricultural imports). The Congressional Research Service estimates that U.S. farmer income in 1996 was probably reduced by $150 million because of these unilateral sanctions. This reduced farm income would have represented about 1/4 of 1 percent of 1996 U.S. farm income.

Regardless of these sanctions’ relatively modest impact on the broad U.S. agricultural sector, their impact on specific commodity sectors or individual agribusinesses has sometimes been more dramatic. Unilateral trade sanctions are especially controversial because the targeted countries have frequently found alternative suppliers among our agricultural exporting competitors.

Large investorowned trading companies, which source and sell agricultural commodities from around the world, are generally less vulnerable to such sanctions than U.S. farmer-owned cooperatives. Co-op export marketing channels are largely dedicated to sourcing and selling their members’ commodities.

Trading companies, or their foreign subsidiaries, can more easily manage deals between foreign commodity suppliers and sanctioned importers, and thus retain a share of the targeted countries’ import markets. In spite of this, cooperatives and their investor-owned competitors have generally been united in their political support for unilateral trade sanction reforms (with the exception of some fruit and vegetable firms in Florida and California).

Impact on rice markets
The U.S. rice sector has probably suffered the most from unilateral economic sanctions. On three consecutive occasions, the U.S. imposition of unilateral trade sanctions has removed the largest import markets for U.S. rice.


In 1962, Cuba was the largest foreign buyer of U.S. rice, but on July 8, 1963, Cuban Assets Control Regulations were issued which closed that market to U.S. rice exporters. In 1989 Iraq was the largest foreign market for U.S. rice, but the Gulf War and Executive Order 12722 closed that market on Aug. 2, 1990. The largest importer of U.S. rice in 1995 was Iran, despite an executive order on May 6 of that year which closed off trade with that country.

Over the past few years, executives from two Arkansas rice milling cooperatives have aggressively courted prospective rice buyers in Iran, Iraq and Cuba. These same executives and their allies in the U.S. rice sector have been lobbying the U.S. policymakers to reform unilateral trade sanctions which restrict agricultural exports. This issue is of critical importance to the U.S. rice sector, which has been experiencing serious economic problems in the past few years.

Twenty percent of U.S. rice mills are either shut down, for sale or in bankruptcy. In Louisiana and Texas, the milling industry is running at just 20 to 30 percent of capacity. Federal payments since 1998 are all that has been keeping some producers in business. In such circumstances, securing access to one or a few new markets could significantly boost the U.S. rice sector.

One rice milling cooperative donated 20 tons of rice to Cuba last summer to help residents suffering from a drought. The shipment was sent to Havana through Mexico, in part to introduce Cubans to the cooperative’s rice product should normal trading relations become established in the future. The same cooperative planned to export rice to Iraq under the United Nations’ sanctioned oil-for-food program, and attempted negotiations with prospective Iranian buyers.

Impact on wheat markets
U.S. wheat growers and their cooperative elevators have also lost global market share because of U.S. unilateral trade sanctions. U.S. Wheat Associates estimates that growers and marketers of U.S. wheat have lost access to about 11 percent of the global wheat market because of unilateral trade sanctions in 1997-98, valued at about $353 million. The estimated average annual losses to U.S. wheat exporters from sanctions for the previous 10 years were valued at about $320 million. Iran had been a major importer of U.S. wheat, especially soft white wheat, before the imposition of sanctions. Sanctions have had less impact on corn and soybean exporters.

Executives from several large grain cooperatives have urged Congress to pass sanctions reform legislation, and argued that sanctions have: These cooperative executives further asserted that unilateral sanctions have had little positive impact on pressuring targeted countries to modify their conduct in the intended ways. They have urged U.S. policymakers to pursue a policy of constructive engagement with those countries whose conduct was deemed objectionable.

Collectively, these co-op executives called upon U.S. policymakers to: (a) review existing unilateral trade sanctions; (b) terminate sanctions found to be ineffective or no longer needed; and (c) establish a framework for evaluating the merits of future proposed sanctions. They also expressed concern that export licensing might be required on a caseby- case basis, which would considerably raise the transaction costs of dealing with importers from sanctioned countries.

Citrus co-ops support sanctions
In contrast to the grain cooperatives, Florida citrus packing cooperatives and their growers have generally opposed removing sanctions against Cuba, whose exports they fear would economically injure their sector. One Florida citrus cooperative, in testimony to the International Trade Commission, asserted that the Cuba trade embargo had been beneficial to their producers and processors. While most of Cuba’s citrus production is currently directed toward Europe, co-op members expressed concern about Cuba’s export focus dramatically shifting toward the U.S., where they would have much lower shipping costs.

During the 1990s, there was considerable political conflict—and ultimately compromise—between Florida growers threatened by Mexican competition and U.S. agricultural exporter interests over the negotiation and ratification of NAFTA. The prospect of opening up U.S.- Cuban trade has again worried Florida growers about the potential economic impact on their industry.

The political coalition favoring sanctions reform—which included the major grain cooperatives and the vast majority of U.S. agricultural interests — succeeded in securing some sanction reform. At first this was achieved through a series of executive orders. On April 28, 1999, the Clinton administration lifted prohibitions on U.S. commercial sales of most agricultural commodities and food products to three countries: Iran, Libya and Sudan. It further indicated that future sanctions would not include agricultural products.

The White House decided in May 1999 that licensed agricultural sales to Cuban private and non-governmental entities could be undertaken. In September 1999, the White House announced that U.S. agricultural exporters could sell to North Korea without securing an export license. Sanctions against Iraq are now multilateral, and remain in effect apart from any U.S. unilateral sanctions reform.

Codifying sanctions into law
On October 28, 2000, Congress passed the Trade Sanctions Reform and Export Enhancement Act of 2000, which codified the previous executive orders on sanctions reform into law. This Act exempts commercial sales of agricultural products and medical supplies from unilateral trade sanctions. This Act also requires the president to obtain Congressional approval before imposing sanctions which would restrict or prohibit the sale of agricultural or medical products, and mandates that Congress must renew any approved sanctions that extend beyond two years. This Act also broadened the exemption of agricultural exports to include nonfood agricultural commodities and fertilizers.

Currently, U.S. farm groups and other stakeholders of the sanctions reform issue are awaiting the release of the Executive Branch regulations that would implement the statutory provisions on sanctions reform. These regulations will specify export licensing requirements for U.S. exporters seeking to conduct transactions with importers from the sanctioned countries. The degree to which these rules are restrictive or more flexible will largely determine the practical effect of sanctions reform. These export licensing regulations are expected to be released soon.

Since these reforms, however, cooperative exporters have had difficulty in dealing with prospective importers in targeted countries because of resentment against the sanctions and conditions under which transactions must be conducted. Opponents of sanctions reform won some points in the policy debate, which is reflected in the Act’s tougher treatment when it comes to Cuban sanctions. The Act prohibits the use of U.S. public or private financing for export sales with sanctioned countries, requires that deals be made with private Cuban importers, and bans tourist travel to Cuba.

The combination of restrictive export licensing requirements and other high transaction costs of dealing with sanctioned importers could become prohibitive for selected U.S. exporters. The Cuban government has announced that under present conditions, Cuba will not deal with U.S. agricultural exporters. One cooperative rice milling executive made the point that with their lower shipping costs and higher quality, they can competitively enter the Cuban market whenever normal commercial relations can be established with them.

Most of the countries currently subject to unilateral trade sanctions are not major U.S. competitors in either foreign or domestic agricultural markets. Many of these countries are limited in their global competitiveness by outdated infrastructure, a lack of current production technology and equipment and a lack of knowledge about U.S. consumer preferences for their products. With a steady flow of foreign investment and technical advice, however, these conditions could be reversed eventually, especially in Cuba. Efforts in Congress to further reform trade sanctions are ongoing, particularly with regard to Cuba.

For more information, check out some of the periodically updated Congressional Research Service reports on sanctions reform by entering the word “sanctions” in their title keyword box at: http://www.cnie.org/nle/crssearch/crsse arch.cfm




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