The Trans-Pacific Partnership is being held up as a model for 21st century trade agreements. This column looks into its implications for Japan. It says that agricultural sectors such as rice and beef won’t be affected as some form of protection will remain. It concludes that while the TPP may help Japan gain access to foreign markets, Japanese agriculture has lost another opportunity for revitalisation.
By Kazuhito Yamashita*
The Trans-Pacific Partnership (TPP), the ambitious trade agreement between Pacific-Rim countries, was agreed last October. Will Japanese tariffs be eliminated for many food products? The advantage being emphasised is that imported food will be cheaper. Other than the five key items including rice and wheat, items subject to tariff elimination such as oranges and apples have been disclosed, and there are conflicting reports with some claiming that consumers will benefit while others claiming that the agricultural sector will be hit hard.
In regard to agricultural products, if we look at the number of items, 24% is already not subject to tariffs, and the tariffs on 48% of these commodities are less than 20%, so there would not be much of a benefit if the tariffs are reduced to zero. When the quantitative restrictions on oranges were abolished in the past, in addition to countermeasures being implemented, domestic farmers started developing products such as dekopon citrus to differentiate themselves from imported items, so probably only a few farmers feel threatened. Domestically-produced cherries and those imported from the US are completely different products as well.
The price of demanding exceptions
On the other hand, with the exception of beef, all of the five key items are subject to more than a 100% tariff. Rice, wheat, sugar, butter, and skim milk powder may only account for 9% of the number of the items, but they are a big part of the Japanese diet and are also used as ingredients for foodstuffs such as bread and confectionaries. The tariffs on these items will be maintained. The 38.5% tariff on beef will drop to 9%, but that will be 16 years from now.
Since many exceptions were demanded regarding tariff elimination, the US agreed to start reducing its 2.5% tariff on automobiles 15 years down the road and eliminate the tariff completely 25 years from now.
Will there be an impact on agriculture?
In regard to agriculture, there will be hardly any impact, not only for rice for which tariffs will be maintained, but also for beef and pork for which tariffs will be reduced. The opinion of the mass media and some experts that the TPP will have an impact on agriculture is incorrect. In a certain sense, I think Japanese negotiators did a fine job.
What will the impact be on beef and pork?
The current 38.5% tariff on beef will be lowered to 9% over 15 years. But this will have hardly any impact. In 1991, quantitative restrictions were abolished as the transition was made to a tariff-only system, and the tariff was 70%. The current tariff is approximately half of that. However, the approximate 180,000 tons of Japanese beef produced annually prior to deregulation has increased—when it should have decreased—to approximately 230,000 tons.
Furthermore, the value of the yen is 50% less than what it was, making the 38.5% tariff meaningless. The increase in the price of imported beef pushed up the price of domestically produced beef to close to twice of what it was between 2008 and 2012. So, there are still benefits even if the tariff is eliminated.
Over the next 10 years, the 482 yen/kg tariff on inexpensive pork will be lowered to approximately 50 yen/kg and the 4.3% tariff on expensive meat will be eliminated. However, by using the complicated gate price system, importers mix expensive selections with cheaper selections to get the lowest tariff possible on meat imports, so in reality, they are paying only the 4.3% tariff.
What will happen to rice?
The current minimum access (tax-free import limit) for rice is 770,000 tons, but in accordance with demands from the US, 100,000 tons are allowed into the Japanese market as staple. The bidding method is simultaneous buy and sell (SBS). Overseas sellers pair up with Japanese buyers to place bids, and items go to the pair with the largest difference between the buying price (equivalent to wholesale pricing in Japan) and the selling price (price of imported rice into Japan). This spread is the price difference between domestic and overseas markets. If there is a domestic and overseas price difference, there will always be someone to bid. With the exception of 2014, the fill rate of this import limit to date has been 100%.
In 2014, the fill rate was 12% and only 12,000 tons were imported. In particular, during the last bidding in March, even though the government allowed 88,610 tons to be imported, only 216 tons were bid on. The fill rate was 0.2%.
As shown in Figure 1, this is because the domestic and overseas price difference was alleviated.
In 2014, the import price of California rice was 12,582 yen/60kg. Since September 2014, the price of Japanese rice has continued to fall and was 11,921 yen/60kg in April 2015. Not only was the domestic and overseas price difference alleviated, but also a complete reversal has occurred. Some trading companies are trying to export Japanese rice to California.
New quotas of 70,000 tons for the US and 8,400 tons for Australia have been introduced as part of the TPP negotiations. But even the current 100,000 ton quota has not being completely utilised, so the addition of a new import quota will remain unfilled and have no effect.
What should Japan have negotiated for?
During the TPP negotiations, even if the rice tariff had been eliminated, it would have had no impact on Japanese rice farming. If Japan’s negotiation policy had been centred on eliminating tariffs for agricultural products, it would not have been that difficult to negotiate for automobiles.
There is a saying in economics that “the tariff is the mother of trusts.” If tariffs are eliminated, acreage reduction policies that raise domestic prices higher than international prices cannot be maintained. As a matter of fact, it will be repealed automatically.
However, since exported rice can be sold at prices higher than domestic prices if there is a reversal of the domestic and overseas price spread, it is not necessary to keep domestic prices lower than international prices by intentionally reducing the amount of acreage. If acreage reduction policies are abolished, domestic rice prices would drop to about 7,500 yen/60kg and a great deal more could be exported. And if exports increase, domestic market supply will decrease, thereby pushing up the price of rice. If the export price is around 12,000 yen/60kg, domestic rice prices will rise to around that level, thereby expanding domestic rice production.
Even if high tariffs are used as protective measures, the domestic market will shrink as a result of a decrease in population. Also, dependency on only the domestic market will lead to the slow death of the agricultural sector. If high-quality Japanese rice can be made more price competitive through the abolishment of acreage reduction policies, not only will tariffs no longer be necessary, but also markets around the world can be developed through exporting. This is the road to revitalising Japanese agriculture.
If rice tariffs could have been eliminated with the TPP, then acreage reduction policies could also have been abolished. Japanese agriculture has lost another opportunity for revitalisation. There are full-time farmers who want rice tariffs to be eliminated. Unfortunately, these opinions were not been reflected in TPP negotiations.
Are there advantages?
Of course there are advantages.
First, Japan will have more access to foreign markets. With the exception of the US automobile tariff, both agricultural and industrial products will receive the benefits of lower tariffs being imposed. We will also see an expansion of convenience stores and bank branches in those countries. The scope of access will increase regarding government procurement for public works, etc. in the US, Australia, Canada, Singapore, Peru, and Chile. And, we will gain new access to other countries.
Second, rules will be created or expanded. Regulations that surpass WTO regulations or those which cover fields not within the scope of the WTO have been implemented. The cumulative rules of origin is one such regulation that is being implemented, covering items that realise a certain amount of added value ratio by totalling all of the added value within the area. Those items which satisfy these rules of origin then are eligible for preferential tariffs under the TPP agreement. These regulations cover the protection of intellectual property rights (such as preventing transactions of forged products), prohibiting demand to transfer technology and local contents by investors, securing the same conditions for competition between state-owned enterprises and overseas enterprises, and reduction/elimination of tariffs.
Third, whereas there are advantages in entering into a free trade agreement, there are also disadvantages to not entering into them. An example of this is the decision by the leaders of Canada and Mexico to participate in the TPP in light of former Prime Minister Yoshihiko Noda’s comments about participating in the advance negotiations for the TPP. The larger the TPP is, the more new countries will want to participate. I think we will also see acceleration in the negotiations for free trade agreements between Japan, China, and Korea, and between Japan and the EU.
The TPP is advantageous to Japan as mentioned above, but we were unable to realise an agreement that completely eliminates tariffs, as what was aimed for initially. We did not succeed in creating a 21st century free trade agreement of which we can be proud.
Editor’s note: This column was reproduced with permission from the Research Institute of Economy, Trade and Industry (RIETI).
About the author:
* Kazuhito Yamashita, Research director, Canon Institute for Global Studies; Senior fellow, RIETI