Kal Kan Foods
Vernon, California 
May 22, 2001

Subcommittee on Trade
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

I respectfully submit comments for the Committee’s consideration on behalf of Kal Kan Foods concerning renewal of the Andean Trade Preferences Act (ATPA). While Kal Kan Foods firmly supports assistance to the Andean Community to promote trade and economic development, the Committee’s attention is also requested to the need to secure more fair and reasonable treatment by Andean Pact members for US exports.

Kal Kan Foods manufactures food for pet dogs and cats at factories in California, South Carolina, Ohio, Texas, Illinois, and Nevada for domestic consumption and for export worldwide including to Colombia and the Andean Pact countries.

I. Issue Summary

Colombia is a member of the Andean Community and is participating in the Community’s "price-band" tariff system which was implemented in 19951. Pet food (HS 2309.10) is the only multiple ingredient processed finished product that is "linked" to the price band system. In this case the linkage is to yellow corn whether or not the pet food contains corn.

Since April, 1995 Colombia’s 20% basic tariff on pet food has been increased 40 times with the increases averaging 44%. Since early 1999 the duty has varied from 53% to 88% and by the end of the year was 100%.2 A 7% IVA tax was imposed on pet food mid year but was not imposed on yellow corn.

The duty rate for the period June 1-15 will be 54%. Both the level of the tariff and the substantial, frequent fluctuations are major impediments to trade because they force retail prices beyond acceptable consumer levels (more than a 100% premium over local brands) and make it impossible for importers to predict costs and price products accordingly. As a direct result of Colombia’s high tariffs on pet food, US pet food manufacturers, including Kal Kan, who make the world’s leading brands are being forced out of the Colombian market.

Early last year, as part of negotiations at the WTO in Geneva regarding Colombia’s request for a delay in implementing the WTO Agreement on Customs Valuation, the US Government secured an agreement from Colombia to de-link wet pet food from the price-band system. However, the Government of Colombia has thus far failed to act on this commitment to the United States.

II. Background

The stated purpose of the Andean price band system is to stabilize import costs for 13 agricultural commodities whose international prices are considered by the Pact countries to be volatile or "distorted." The commodities included are rice, malting barley, yellow and white corn, soybeans, wheat, crude palm oil, crude soybean oil, raw and refined sugar, powdered milk, poultry meat, and pork meat. This protection is achieved by increasing import tariffs when prices are low and lowering them when prices are high. The price band also links 147 additional commodities and one finished product (pet food) that are considered derivatives or substitutes for the 13 "marker" commodities. For example, derivative and substitute products linked to yellow corn are poultry meat, sorghum, starches, glucose syrup, bran, and food for pet animals and livestock.

The operation of the band is based on an Andean Community Board determination of a ceiling price, a floor price, and a reference price which are then used to calculate a duty surcharge or discount to be assessed on imports of marker and linked products. The floor and ceiling prices are derived from the international fob prices and are valid for one year. The reference price is the 15day average price of the marker product adjusted by so-called "international market information." None of these prices relate to import transaction values. If the reference price is within the price band i.e. between the floor and ceiling prices, then the common external tariff (CET) will be applied to imports of the marker product. If the reference price is above or below the price band than a surcharge or discount will be calculated. The example below shows the most common situation - an import surcharge.

EXAMPLE OF A VARIABLE DUTY SURCHARGE CALCULATION

Marker or Linked Product

CET

Reference Price US$/mt

Floor Price US$/mt

Ceiling Price US$/mt

Yellow Corn

15%

117

161

192

Step 1: The difference between reference price and floor price or 161-117 = 44
Step 2: Calculate duty on the amount of difference, and add difference or 44 + [44 x 15%] = $50.60
Step 3: Convert this specific duty to advalorem or $50.60 + 117 = 43%. This is the variable surcharge component of the total duty.
Step 4: Calculate total duty by adding the CET to the variable surcharge or15% + 43%= 58%.
Step 5: This duty rate of 58% is applied against the reference price.

As of January 2000 the duty on yellow corn cannot exceed 44%.

Pet food (linked)

20%

  

Because pet food is linked to yellow corn the import duty on pet food is the CET plus the variable duty surcharge. However, because the CET on pet food is higher than the CET on corn Article 123 of Decision 371 applies which adjusts the variable duty surcharge to reflect the difference between the CET on yellow corn (15%) and the CET on pet food (20%). In this case rule (b) applies and the calculation is 43%-5% = 38%. The total duty on pet food is 20% + 38% = 58%*

This duty rate of 58% is applied against the declared value of the imported pet food.

There is no ceiling on the pet food duty.

Among the objections to the price band system are the lack of process transparency and arbitrary nature of reference price inputs. Also, the system’s use of reference prices introduces volatility to the cost of importing and makes it impossible for importers to predict costs and build markets. The arbitrary nature of the system was evidenced in 1999 when Colombia, bowing to pressure from domestic poultry producers, reduced the duty on 100,000 mt of yellow corn to 35%. However, the tariffs on pet food and other products linked to yellow corn were not reduced. Similarly, early in 2000 the government decreed the duty on yellow corn could not exceed 44% but no such maximum duties were set for linked products.

Not all members of the Pact impose the additional duties on yellow corn and linked products. Bolivia and Peru do not participate in the price band system and their tariffs on pet food are 10% and 12% respectively which provides fair market access for imported products.

III. The Linkage of Pet Food to Yellow Corn is Unjustified

The Andean price band system sets two criteria for products to be included as "linked": (1) the product includes the marker commodity as a raw material; (2) the product can be substituted for a marker commodity or a related product in industrial use. Pet food does not meet either of these two criteria.

Pet food is a highly processed product that is made to meet national and international standards for food for pet dogs and cats. Regulatory authorities4 have determined the nutrition requirements for pet animals at each stage of life, for example, from puppies to mature dogs. Pet food recipes are designed to utilize ingredients that deliver complete nutrition in a digestible form that meets national standards. Corn may be included among the many ingredients used in pet food but could not be used alone if the regulatory standards for energy and nutrition content are to be met. In the case of wet pet food which has a high water content and is packed in cans, pouches or trays, the corn content ranges from 0 to 1%.

Further, it cannot be said that pet food is in any way derived from corn or that corn is an essential ingredient in pet foods for which there is no substitute. Additionally, it has been shown that there is no correlation between the price of yellow corn and the price of pet food.

Pet food cannot readily be substituted for corn. Pet food is made to meet specific energy and nutrient targets for pet animals and is more costly to produce than the yellow corn feed meal that would be used for livestock. The cost of feeding prepared pet food to livestock would be prohibitive.

Of the 147 products linked to the 13 marker commodities, including the 27 products linked to yellow corn, pet food is the only highly processed multiple ingredient product. This singling out of pet food among all processed products for linkage is discriminatory and reveals a misunderstanding of how pet food is formulated and the international nutrition standards that influence ingredient selection.

It is for the reasons stated above that a petition was filed with the Colombian Ministry of Agriculture by to remove pet food from the price band and apply only the 20% CET to imported pet food.

Kal Kan Foods supports efforts by the Administration and Congress to advance trade liberalization among all countries of the Americas. The Andean Trade Preferences Act can be viewed as one component of this larger vision. With this in mind, it is important to build support among all US business sectors and the American public by ensuring that US exporters also have a fair opportunity to participate in all the markets of the Americas.

Sincerely,

Marietta E. Bernot
President

1 Decision 371 of the Cartagena Agreement Commission.
2 Colombia has not yet exceeded its WTO bound rates for pet food. Colombia’s 2000 bound rate for pet food is 106.6% ad valorem and the final bound rate is 97% in 2004.
3 Article 12 provides that If the CET for the linked product is greater than the CET for the marker product, then the additional variable duty of the linked product will be the greater of the following two values: (a) Additional variable duty of the market product, multiplied by the "quotient" between the CET of the marker product and that of the linked product; (b) the additional variable duty of the marker product, less the difference between the CET of the linked product and the CET of the marker product.
4 For example, the American Association of Feed Control Officials (AAFCO) has set out nutrient profiles for pet dogs and cats at each stage of life that prepared pet foods must deliver. The nutrients include crude protein, crude fat, crude fiber, Ash, Calcium, and Phosphorus.