Media  Global Economy  2017.08.24

Is There Any Problem with Restrictions on Beef Imports?

The article was originally posted on Webronza on August 2, 2017

Concern about New Conflict

Because frozen beef has been imported 17% more than the corresponding period of the last year, an emergency import restriction (safeguard) mechanism has been triggered, and the tariff on frozen beef will increase from the current 38.5% to 50% between August 1 and the end of March 2018.

Amid this development, some concerns have been expressed by players in the food service industry that they may suffer a reduction in earnings since they are unable to pass the tariff hike on to product prices. Other observers claim that new conflicts may arise between Japan and the U.S., a frozen beef exporting country which is affected most by this safeguard.

What is safeguard?

A safeguard is a measure used to protect the relevant domestic industry from a sudden surge in imports.

In fact, there are various types of safeguard. First, the most typical and common is the one introduced in the years of GATT, the predecessor organization of the WTO (World Trade Organization), which can be applied to industrial products as well. Prior to implementing this type of safeguard measure, the country imposing it must conduct investigations and determine that increased imports have caused, or are threatening to cause, serious injury to its domestic industry. In addition, once applied to a given product, the safeguard measure may not be applied again to the same product until a specified period of time has elapsed.

As we can see above, safeguard measures may be applied under stringent conditions. However, the importing country can impose higher tariffs than what it has promised to its trading partners under the WTO agreement.

For example, even if the importing country has promised under the WTO agreement that the maximum tariff on a given product is 50%, it can raise the tariff to 80%. Furthermore, it can not only increase tariffs, but also set limits on the total amount of permitted imports.

Since the exporting country will suffer a loss as a matter of course, the importing country must provide the exporting country with some compensation (for example, by reducing its import tariff on another product). Otherwise, the exporting country is allowed to take countermeasures such as increasing its import tariff on another product from the importing country.

Agricultural safeguard agreed upon at the Uruguay Round of trade negotiations

There is a special safeguard for agricultural products.

The WTO's agreement on agriculture sets out provisions relating to a special safeguard that can only be used on products that were subjected to tariffication (tariffied) at the Uruguay Round of trade negotiations (Section 5 of its Agreements Act). "Tariffication" means replacing non-tariff import restriction measures called "non-tariff barriers" such as import quotas, with tariffs that provide more-or-less equivalent levels of protection, thereby prohibiting member countries from taking any measures other than tariff measures.

At the above negotiations, Japan tariffied agricultural products such as rice, wheat and dairy products. (Beef is not a tariffied one.) When imports of any of these products exceed a certain level, or their import prices drop below a certain level, Japan is permitted to automatically increase import tariffs on the product without conducting any investigations to determine whether increased imports have caused, or are threatening to cause, damage to the relevant domestic industry. But Japan is not allowed to apply a quantitative restriction on imports of these products. In this safeguard mechanism, the exporting countries are prohibited from taking any countermeasures.

The safeguard in question is the result of the Japan-U.S. bilateral agreement reached at the Uruguay Round negotiations. According to this safeguard, when Japan's import volume of beef and pork rises above a certain level, Japan can raise the import tariffs (38.5% on beef) to the upper limit (50% on beef) set forth under the WTO agreement.

In those days, the Japanese and U.S. governments had, separately from the Uruguay Round negotiations, several rounds of beef and citrus trade talks, where they agreed that Japan would do away with its import quotas on beef, substituting tariffs that would fall from the initial 70% to 50%.

At the Uruguay Round negotiations, the U.S. government urged Japan to further reduce its tariff on beef, but the Japanese government insisted that it would not do so. They finally reached a compromise: they agreed that Japan would cut its tariff on beef to 38.5%, but could raise it to 50% once the import volume of beef rose above a certain level. Unlike the two safeguards previously mentioned, Japan is not allowed to raise the tariff rate beyond the scope of the WTO bound rate, that is 50%.

In addition, negotiations with the U.S. government led to Japan deciding to apply the safeguard to all exporting countries concerned, when overall beef imports including those from Australia and others increase to a certain level.

Beef safeguards under the TPP and the Japan-Australia Free Trade Agreement

Under the Trans-Pacific Partnership (TPP) that is yet to come into force, Japan is permitted, in lieu of reducing its duty on beef imports to 27.5% at the enactment of the TPP, to raise it to 38.5% as a safeguard measure if the import volume of beef exceeds 590,000 tons, a quantity equivalent to 10% of total imports from the TPP member countries.

Then, in line with the reduction in the beef tariff (to 9% over 16 years), the safeguard trigger quantity is expected to be raised (to 738,000 tons over 16 years) and the safeguard tax rate, to be lowered in a phased manner (to 18% over 16 years).

Similarly, under the Japan-Australia Free Trade Agreement (FTA), the tariff on frozen Australian beef entering Japan is 27.2% in FY2017 (which will fall to 19.5% by FY2031), while the safeguard trigger quantity is 200,000 tons and the safeguard tax rate is 38.5%, the usual tariff rate for frozen beef imports.

As a result of the conclusion of the FTA between Japan and Australia, the safeguard that Japan was entitled to use through the aforementioned Uruguay Round negotiations is no longer applied to Australia. Accordingly, out of the two largest beef suppliers to Japan, the U.S. and Australia, only the U.S. is subject to the safeguard tariff recently introduced by Japan. This means that while the duty on U.S. beef imports will increase to 50%, the duty on Australian beef will remain at the current rate of only 27.2% (38.5% even if the safeguard tax rate is introduced).

Will there be any effect on the lives of Japanese people?

There are two types of imported beef: frozen beef and chilled beef, with each having both advantages and disadvantages. Frozen beef is advantageous because it keeps well, but has a problem associated with the freezing process: when water in the meat fibers freezes, it swells to form ice crystals that will damage the surrounding tissue. For this reason, frozen beef of inferior quality is cheaper than chilled beef. For chilled beef, the opposite is the case.

Due to these differences, the majority of imported beef purchased by general households through retailers such as supermarkets, as well as that provided by semi-fancy restaurants, is chilled beef. Frozen beef is, on the other hand, provided by some reasonably-priced restaurants and used as raw materials for making processed food products such as retort-pouch curry and beef patties.

The significant increase in U.S. beef imports that has prompted the Japanese government to take safeguard action was not due to rising domestic beef demand, but to last-minute buying by Japanese trading companies propelled by China's decision to lift its ban on American beef imports.

This means that Japan's stock of U.S. frozen beef has increased and it is unlikely that restaurants will face the problem of material procurement any time soon. U.S. frozen beef imports will continue in and after August. It is just that the tariff on such imports will increase by 11.5% from the current 38.5% to 50% from August.

Generally speaking, with regard to U.S. beef, a greater volume of chilled products is supplied to Japan than frozen, and the opposite is the case for Australian beef. Even though the tariff on frozen beef imports from the U.S. is raised, it is possible to substitute Aussie frozen beef for American frozen beef. Accordingly, I think the impact of the safeguard will be minor, except for that on some food service companies preferring U.S. frozen beef.

How do we cope with complaints from the U.S. government?

Following the Japanese government's announcement of the safeguard action, a newspaper asked me to comment on the issue. Hearing from some players in the food service industry that their business may be affected, and from others that the U.S. government may complain, the newspaper was expecting me to be somewhat critical about the safeguard.

However, as we have seen above, the impact of the safeguard on Japan is likely to be minor and after all, the safeguard measures were agreed upon between Japan and the U.S. through bilateral negotiations. What's more, lawmakers affiliated with farm organizations never seem to give up any of their vested interests anyway, so there is no way the Ministry of Agriculture, Forestry and Fisheries can make concessions. Moreover, if President Trump had not withdrawn the U.S. from the TPP, the U.S. could have benefited from lower tariffs and less rigorous safeguard regulations under the TPP than those under the Japan-Australia FTA. The U.S. losing its competitive edge over Australia on beef exports to Japan is thus the consequence that the country has brought upon itself. If the U.S. government does make any complaint about the safeguard, Japan should just tell them to come back to the TPP.

Unfortunately, the above comment of mine does not appear to have been adopted by the newspaper.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on August 2, 2017.)