Media  Global Economy  2014.06.24

What are the national interests? Japan-US negotiations for the TPP agreement

English translated version of "Business Prospect" on NHK Radio Channel 1 on April 29, 2014

1.Intensive negotiations were held over the TPP agreement between Japan and the US during President Obama's state visit to Japan in April. What was agreed by the end of these negotiations?

A joint Japan-US statement says that "we have identified a path forward on important bilateral TPP issues ...... Even with this step forward, there is still much work to be done to conclude TPP."

Mr Amari, Japan's Minister in charge of TPP stated that "we failed to settle the differences although we had considerable progress toward conclusion of the agreement." According to media sources, the possible results of the negotiations seem to be: tariffs on Japan's "five priority items" of agricultural products will not be eliminated; among these five items the current tariff rates will be maintained for rice, wheat and sugar; the import quota will be expanded for American rice and wheat; and tariff rates will be reduced on beef, pork and dairy products. However, the size of the reduction is yet to be agreed.

2.How would you analyse the possible outcome of the negotiations (if the above media reports are correct)?

First of all, American sugar is not competitive. Secondly, the US negotiators well understand the political significance of rice in Japan and the difficulty of reducing tariffs on rice. Japan's Ministry of Agriculture, Forestry and Fisheries has imported wheat under a fixed ratio of 60% from the US, 20% from Canada and 20% from Australia for the past several decades. If the tariff on wheat is to be eliminated, American wheat will have to face competition not only from Canada and Australia but also from the EU. This may damage US wheat exports. From this perspective, maintaining the import duty on wheat and expanding the quota could be beneficial to the US. In this scenario, Japan can claim a political victory by maintaining the tariff on wheat, and the US can expand its profits in wheat exports.

3.The US demands significant reduction of tariffs on beef and pork.

This is one of the key points to be resolved. I do not believe that the Japanese beef and pork industries will suffer serious damage due a lack of import duties.

The import duty on beef has been reduced from 70% in 1991 to the current rate of 38.5% - nearly half. Nonetheless, production of wagyu (Japanese cattle) beef, which occupies the biggest share of beef production in Japan, has increased in this period. In addition, due to exchange rate fluctuations, the Japanese yen has depreciated by about 35% since 2012. In 2012 beef priced 100 yen was imported with an import duty of 38.5 yen, which makes the import price 138.5 yen. Currently, the same beef is priced 135 yen due to yen depreciation before an import duty is imposed. This price is nearly the same as the import price after customs clearance in 2012.

While wagyu beef will not be affected by an elimination of tariffs, beef produced from male calves born from cows fed by dairy farmers and culled milk cows may be affected by the competition with imported beef. However, beef other than wagyu amounts to about a third of Japan's total beef production by quantity and about 50 billion yen by value, which is a ninth of the total production of 460 billion. If farmers producing these other types of beef than wagyu suffer we may consider supporting them by means of a direct subsidy from a government fund. Even if this is implemented, the amount of subsidy may be a third of the total production, which amounts to merely 15 billion yen.

Special arrangements are made for pork imports, by which importers should pay the difference between 410 yen per kilogram and the actual import price as an import duty. This means that an import price of pork is always raised to 410 yen if it is imported at a price less than that. In practice, importers prepare a package of pork meat which consists of high-class meat, such as loins and tenderloins, and low-class meat to be used for hams or sausages so that a price of the package is set near around 410 yen per kilogram. Therefore, the amount of import duty actually paid is very small. Although the total amount of imported pork reached 400 billion yen in 2010, it is reported that the import duty actually paid only amounted to 18 billion yen which was about 4.5% of total imports.

Even if Japan and the US reach an agreement on agricultural produce for the TPP agreement, it does not mean the end of negotiations for Japan. Japan should negotiate with other countries for other agricultural products: Vietnam for rice, Canada and Australia for wheat, Australia and Mexico for sugar, Canada for pork and with Australia and New Zealand for dairy products. In particular, intense negotiations on dairy products, a relatively small issue in the talks with the US, are expected with New Zealand - the most competitive country in the world in this sector.

4.What are your thoughts on the overall results of the Japan-US negotiations this time?

A Japanese high-ranking negotiator mentioned that Japan and the US fought hard for their respective national interests in the negotiations. It is understandable that the national interests of the US are to expand exports for the benefit of their domestic industry. What are the national interests of Japan? Does the Japanese government negotiate to protect the domestic agricultural industry? If it aims to protect Japan's agriculture, it does not need to defend tariffs; its goal can be achieved by paying a direct subsidy out of a government fund as the US and the EU do. This way realizes a decrease in food price which is also beneficial to Japanese consumers.

In conclusion, the national interests that the Japanese government are trying to defend seem to me to be the high price of agricultural products (and therefore high price of food) not to protect domestic agriculture. In order to maintain high prices tariffs are necessary and to protect the existing tariff rates the Japanese government needs to accommodate the demands of US industries for an expansion of import quota (with no duty) on rice and wheat. With this measure, imports will increase and food self-sufficiency will decrease. When consumption tax was raised its regressive nature was seriously discussed as poor consumers received a disproportionate burden. With the government pricing policy of agricultural products consumers in Japan are forced to pay higher prices not only of domestic produce, but also imported foodstuff. The food and agricultural policies and the agricultural trade policies in Japan are of a severely regressive nature. According to the calculations made by the OECD the additional amount paid by the Japanese consumers due to inflated food prices reached about 4 trillion yen. The National Diet of Japan as the highest institution of sovereignty must review the food and agricultural pricing policies in the same way it is currently studying the feasibility of introducing reduced rates of consumption tax on foodstuff to mitigate its regressivity.

(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 April 29, 2014.)