Media  Global Economy  2013.03.14

Tariffs on agricultural products

English translated version of "Business Prospect" on NHK Radio Channel 1 on January 22, 2013

1. Whether or not Japan joins the Trans-Pacific Partnership Agreement (TPP) remains one of the biggest political issues in Japan even after the Liberal Democratic Party (LDP) took over the reins of government. The focal point is whether Japan will abolish all tariffs on agricultural products or whether it will continue to make exceptions. Would you explain Japan's current tariffs on agricultural products?

In Japan, while no import duties are imposed on some agricultural products, high tariffs upwards of 200% are imposed on others, such as rice or konjac (glucomannan or devil's tongue). In percentage terms, the tariff on rice is equivalent to 778% and the tariff on konjac is 1,706%.

Among all agricultural products, no import duty is imposed on 24% of products, and duties up to 20% are imposed on 48% of products. Overall, no tariffs or tariffs of less than 20% are imposed on 72% of agricultural products, while duties of more than 200% are imposed on about 8% of products. In sum, tariffs on most agricultural products in Japan are either zero or very low.

Ordinary Japanese have a tendency to associate rice with agriculture. It is true that the majority of Japanese farm products were rice until the 1960s. But nowadays, rice production accounts for as low as 19% of the total value of agricultural products in Japan. In contrast, 28% of total production value comes from vegetables, 9% from fruit, 9% from poultry, and 4% from flowers; for all of these products, which account for 50% of total production value, tariffs are either zero or very low. Some argue that abolishing tariffs upon accession to the TPP agreement could cause catastrophic damage to Japanese agriculture. But obviously this is incorrect.

2. I understand that tariffs on most agricultural products are very low while very high duties are imposed on other products. How are tariffs on agricultural products determined?

The current Japanese tariff system was established as a result of the GATT Uruguay Round negotiations concluded in 1993. Under the previous system, the importation of agricultural products into Japan was restricted in two ways: one was that goods could be imported only by paying an import duty, and the other was a quantitative restriction under which goods could not be imported if they exceeded the maximum quantity. Under this system, tariffs themselves were not very high.

It was agreed through GATT Uruguay Round negotiations that quantitative restrictions would be replaced by tariffs which would be the only acceptable way to govern imports. In return for abolishing quantitative restrictions, it would be permitted to impose a tariff equivalent to the difference between domestic and international prices on items that used to be protected by quantitative restrictions - so-called "tariffication." Some Japanese at the time were vocal that Japanese agriculture would be destroyed by "tariffication." Import restrictions on all items other than rice were replaced by tariffs in 1995 onward, while the import restriction on rice was recently replaced in 1999 onward. But the actual impact of this "tariffication" was minimal.

The Japanese government established a maximum tariff rate calculated based on the difference between domestic and international prices in order to protect the agriculture industry. Of particular note was the fact that it used the lowest international price to be compared to the domestic price. The price of rice was based on the price of Thai rice, which is long-grain with a dry, crumbly texture as opposed to short-grain with a sticky texture (like Japanese rice). A large volume of Thai rice was imported to Japan in 1993 when Japan suffered a very poor rice harvest. Japanese did not like this. The Ministry of Agriculture, Forestry and Fishery (MAFF) sold it mixed with Japanese rice but dead inventory piled up, suggesting that Thai rice was not comparable to Japanese rice. But the Japanese government used the price of Thai rice in order to set a higher tariff rate. Thus, a price of ¥402 per kilogram was fixed as the initial tariff rate on rice. The current tariff rate is ¥341 per kilogram, which was the result of the reduction by 15% in accordance with the GATT Uruguay Round agreement. The domestic rice price at the moment is about ¥230. Obviously, the tariff rate is much higher than the domestic rice price, meaning that even though the price of imported rice had been zero, it could not compete with domestic rice because of the high import duty. This is excessively protective.

Furthermore, it is not an ad valorem duty, which is usually used for tariffs and expressed as a percentage of the import price, but a specific duty, which is exceptional in that a certain duty is imposed per certain unit of weight. In the case of an ad valorem duty expressed as a percentage, the domestic sales price of imports decreases if the yen appreciates, which lowers import duties as the price of imports falls. The impact of yen appreciation on a specific duty that is not linked with an import price can be minimized because an import duty does not change even though the import price falls.

Let's look at a concrete example. Assuming that the price of imports is ¥100, the ad valorem duty is 100%, and the specific duty is ¥100, then the price of imports after clearing customs is ¥200 for both the ad valorem and specific duty. But, if the price of imports were reduced to ¥50 due to yen appreciation, with an ad valorem duty the import duty would be ¥50 and the price of imports after clearing customs would be ¥100; while with a specific duty, the import duty would remain ¥100 and the price of imports after clearing customs would be ¥150.

In any case, while the tariffs on vegetables and other items not covered by quantitative restrictions in 1993 remain lower, significantly higher tariffs have been placed on rice and other items that had been protected by quantitative restrictions before 1993. This is the reason why lower duties are imposed on some agricultural products and higher duties imposed on others.

3. Media reports say that the tariff on rice is 778% and the tariff on konjac is 1,706%. Is this wrong?

Negotiations in the Doha Round are completely bogged down at the moment. However, throughout the course of negotiations, it was once agreed among WTO members that higher tariffs must be reduced significantly. More specifically, although tariffs below 20% are to be cut only by 50%, tariffs above 75% are to be reduced by 70%. For the specific duty which is imposed on the "tariffed" items, such as rice in Japan, this must be recalculated as a percentage. MAFF recalculated the figures, arriving at 778%.

In other words, while a tariff of 778% does not actually exist, the real tariff is ¥341 per kilogram. We have seen some analyses based on a tariff rate of 778% but these are incorrect.

It is sometimes said that the reason for the extremely high tariff on konjac - nearly 2,000% - is that many past prime ministers came from Gunma Prefecture, one of the major producers of konjac. This statement is also wrong. Konjac grows naturally in Southeast Asia, where the only labor needed to produce it is to draw it out of the ground. Costs and prices are extremely low. These are then compared to the price of konjac in Japan, where konjac farmers were cultivating it when first "tariffied" by quantitative restrictions. That is why such an extraordinarily high tariff was established.

In any case, it is a fact that higher tariffs remain on some items. Consumers in Japan pay prices for agricultural products that are higher than the international prices. It is said that the consumption tax is regressive in nature. Japan's trade policy on agricultural products is also strongly regressive in nature. Japan must introduce the direct payment of subsidies to farmers, such as in the United States, and revise its trade policy for agricultural products. Doing so would obviate the need to look into reduced rates of consumption tax.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on January 22, 2013.)