By Lucy Craymer

To see the benefits a free-trade agreement with China can bring, look no further than cheese.

Australian exports of cheese to the country, the world's fastest-growing cheese importer, have grown in the past year, thanks largely to a trade deal between the two countries that went into effect at the end of 2015. Australia's market-share gain has come largely at the expense of U.S. cheese makers, who are starting to worry.

The plight of U.S. cheese makers serves as a reminder that as the debate over trade with China has centered on manufacturing, U.S. farmers have just as much at stake. China remains the country's largest market for agricultural goods.

Before the agreement with China, Australian and U.S. cheese were both subject to a 12% import tax. Australia had 18% of China's imported-cheese market by value in 2015, and the U.S., whose products tend to be more expensive, had 16% of the market, which totaled $348 million last year. New Zealand, which has had a free-trade agreement with China since 2008 and can export some cheese to the country tax free, controls about half of China's imported-cheese market. Its share is growing.

Australia's free-trade agreement with China reduced the taxes levied on Australian products as varied as barley and iron ore. In the case of cheese, the import tax fell to 9.6%, lowering the price for Chinese consumers.

In the 10 months since the introduction of the new tax rate, Australia's share of China's cheese imports by value rose by nearly 1 percentage point, according to Chinese customs data, while the U.S.'s contracted by more than 6 percentage points.

Compared with a year earlier, the amount of cheese China imported from the U.S. fell 28% in the 10 months to Oct. 31, in terms of volume and value, even as China's total imports of cheese rose 29% to 78,369 tons, according to the customs data.

In an open letter in early December, the U.S. Dairy Export Council and the National Milk Producers Federation urged President-elect Donald Trump to help level the international playing field for dairy farmers.

Australia and New Zealand's trade agreements give them an edge over the U.S. in China when it comes to cheese, said Jaime Castaneda, senior vice president of trade policy at the National Milk Producers Federation, a Virginia-based lobbying group. And if the U.S. fails to keep pace with the trade expansion of Oceania and Europe, it could fall further behind, he said.

As the world's second-largest economy, China is a huge consumer of everything from soybeans to pork and is the world's largest dairy importer. China has signed 13 free-trade agreements with countries across Asia, as well as in Europe, South America and the Pacific. The most recent with Australia has been credited with boosting sales to China of items including cherries and barley. Australian grape exports to China have doubled this year.

In New Zealand, the benefits of easy access to the Chinese market are evident in the tiny South Island town of Clandeboye. There, dairy giant Fonterra Co-Operative Group Ltd. just opened a $165 million factory, doubling the company's capacity to produce mozzarella and adding 100 jobs. The company is working on expanding the factory to keep up with demand.

Chinese demand for Western products is expected to grow along with its middle class. Although the country imports relatively little cheese for its size, that volume could grow 7% annually through 2025, according to the U.S. Department of Agriculture.

And in areaswhere New Zealand and Australia aren't huge players, the U.S. dairy sector is benefiting from that demand. China's imports of U.S. whey, a byproduct of cheese manufacturing, rose 24% in the 10 months to Oct. 31.

Dairy cooperative Agri-Mark Inc. sells whey proteins and other whey powders to China. But it doesn't have plans to sell cheese there, since it would have to lower prices to compete with countries whose products aren't taxed as heavily.

"Margins are low on foreign sales due to tariffs and other trade barriers," said Doug DiMento, spokesman for the Massachusetts-based food processor.

"In the U.S., consumers know our cheese and are willing to pay more for higher quality. But that is not always the case in new and emerging markets," he said.

(END) Dow Jones Newswires

December 29, 2016 05:50 ET (10:50 GMT)

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