Media  Global Economy  2019.03.06

Japan's export of rice violates the WTO rules - The actual situation of the export of farm products can hardly be called "agricultural promotion."

The article was originally posted on Webronza on February 20, 2019

As domestic markets for farm products shrank due to the aging and declining population, the central government began to put a great deal of effort into the export of farm products when Mr. Koizumi held the office of prime minister. Although other domestic markets also shrank due to population decline, perhaps this policy aimed to keep farmers supporting the Liberal Democratic Party of JAPAN (Jimin-TO) because farmers have been casting pivotal votes under the small electoral district system like the supporters for the KOMEITO.

In 2018, the value of exports of farm products and food increased by 12% on the previous year to 906.8 billion yen. It reached the highest ever for six consecutive years and is likely to reach one trillion yen, the target set by the central government. I think this is a good tendency for the central government.

In addition, the Nikkei dated February 14 carried an article titled "The value of rice exports increased tenfold in this decade," which reported that rice exports increased by 17% in volume and by 18% in value, showing some activities for enhancing rice exports.

Main exports are processed food and marine products

Although this seems outwardly good, will it really lead to agricultural promotion and development?

Among agricultural, forestry, and fishery products and food, the following ten items were exported most: alcoholic drinks (61.8 billion yen), scallops (47.7 billion yen), pearls (34.6 billion yen), source-mixed seasoning (32.5 billion yen), soft drinks (28.2 billion yen), mackerel (26.7 billion yen), beef (24.7 billion yen), sea cucumber (21.1 billion yen), confectionery (excluding rice confectionery) (20.4 billion yen), and cigarettes (18.5 billion yen).

The ten items include only one farm product: beef. The other items are processed food and marine products. If processed food is made from domestic farm products, it is possible to say that the promotion of exports leads to agricultural promotion. However, domestic material is only used for Japanese sake (22.2 billion), which is included in alcoholic drinks. Confectionery is made through processing of imported farm products, such as wheat, sugar, and cacao. Japan imported farm products from the U.S., Australia and other countries for added-profit trade. This means indirect promotion of agriculture in the U.S. and other countries.

The same is true to the top 20 items. Green tea took 13th place (15.3 billion yen) and apples took 15th place (14 billion yen). Although rice featured prominently in the Nikkei, the value of rice exports was only 3.8 billion yen and was not even included in the top 20. The volume of rice exports was 14,000 tons, only 0.2% of the total domestic production in terms of both value and volume. Even if ten times more rice is produced, it is impossible to say that this will be useful for agricultural promotion.

Hidden "subsidies for export of rice"

Moreover, rice has been exported by the use of export subsidies, which violates the WTO rules.

A PR video titled "Explanation about Rice Export" appears on the website of the Ministry of Agriculture, Forestry and Fisheries. On the website, the Ministry stresses that a special support project for export of rice and rice-processed food products with a budget of 750 million yen "supports strategic exporters seeking overseas markets in cooperation with strategic export bases, strengthening of promotion activities overseas, and the promotion of measures for responding to overseas restrictions." Although the Ministry used 750 million yen from national coffer (because the subsidy rate is 50%, the total project cost is 1.5 billion yen), the value of exports is only 3.8 billion yen.

On the other hand, the value-added for agriculture, which is calculated by subtracting expenses for inputs and costs, such as fertilizers, chemicals, machinery, and fuels, and distribution expenses from 3.8 billion yen, is almost equal to the budget and far lower than the total project cost. From the viewpoint of cost effectiveness, this is useless and a wasteful input of economic resources. However, because the Ministry of Agriculture, Forestry and Fisheries has many such projects, I would not like to be deeply involved in the problem herein.

A more serious problem is that although an export subsidy of an additional 710 million yen has been issued for export of rice (produced in 2018) in violation of the WTO rules, there is no mention of it in the video or the explanation about the support project for export of rice. The Ministry seems to have been afraid that the U.S., Australia or other countries might notice this subsidy.

Clear violation of the WTO rules

I will explain this point.

Regarding rice produced in 2018 and thereafter, the central government stopped distributing target rice production among regions (prohibiting rice production over a fixed amount). The mass media has continued to report the Abe Government's fake news of the abolition of the gentan (rice acreage reduction or production adjustment) policy (see "No More of the False Report of Abolition of the Gentan Policy!'"). However, the Liberal Democratic Party of JAPAN (Jimin-TO) and the Ministry of Agriculture, Forestry and Fisheries changed the production adjustment program in 2013 because the previous administration run by the Democratic Party of Japan (Minsyu-TO) introduced and implemented an income compensation program for individual farming households on condition that the target amount of rice production is achieved.

Income compensation under the program was paid only to farmers who fully achieved production adjustment (gentan) - that is, the target amount of rice production. For the purpose of election, the Liberal Democratic Party of JAPAN (Jimin-TO) pledged to abolish the income compensation program and, after returning to power in 2013, decided to abolish it for rice produced in 2018 and thereafter. As a result, the target amount became meaningless and was abolished because it was linked to the income compensation system.

Although the Liberal Democratic Party of JAPAN (Jimin-TO) members representing farmers, the Ministry of Agriculture, Forestry and Fisheries, and JA (Agricultural Cooperatives) changed the production adjustment program, they have not declared the abolition of the gentan policy, but have strongly denied it. Strangely, only Prime Minister Abe, who hardly participated in this policy making process, proudly stated at the Diet and the Davos Forum that he abolished the policy for the first time in 40 years, which no other prime ministers had dared to do.

In addition to the income compensation program for individual farming households, subsidies for production adjustment (crop switching) have been granted traditionally. They have been greatly strengthened, such as subsidies for animal feed rice. The production adjustment program includes another type of subsidy called "grants for producing areas." Regarding rice that was produced in or before 2017 and for which income compensation was paid, it was decided that "Grants for producing areas should be established according to the following rules," which included the rule that "No subsidy should be given for rice as staple food, rice for export, or uncultivated land, such as paddy fields for adjustment." This is because it is clear that subsidies for rice for export are export subsidies that violate the WTO rules.

However, regarding rice produced in and after 2018, it was decided under the subsidy "grants for producing areas" that 20,000 yen should be given per 10 ares for the development of a new market for rice (such as rice for export) (the amount is higher than the former income compensation payment of 15,000 yen). As a result, the rule was revised as "No subsidy should be given for rice as staple food, reserved rice, or uncultivated land," excluding rice for export.

Subsidies for production adjustment (crop switching) were not granted for rice for export produced in or before 2017. If rice was produced for export, however, the amount of such rice was not included in the target amount of production (of rice as staple food), production of such rice was not regarded as production of rice as staple food and this was substantially production adjustment (crop switching) of rice. Then farmers could receive income compensation because they observed the target amount of production or production adjustment of rice.

Although subsidies for production adjustment were not granted for rice for export, if a farmer produces rice for export, income compensation was given to the farmer. Therefore, income compensation functioned as indirect subsidies for export. This is suspected of violating the WTO rules.

The system of income compensation for individual farming households and the system for the target amount of production were abolished concerning rice produced in or after 2018. As a result, it became impossible to subsidize export of rice indirectly. Because of this, the central government began to grant direct export subsidies as a subsidy in "grants for producing areas."

This is clearly export subsidies prohibited by WTO.

Grants for producing areas are given per area (10 ares) instead of a conspicuous unit, such as per bale (60 kg) or per ton. 20,000 yen per 10 ares is equivalent to 2,200 yen per bale. Because domestic rice price is 14,000 yen (average price has been 14,146 yen in the past five years), farmers receive 2,200 yen (equivalent to 15%) as price subsidies and export rice at a price of less than 12,000 yen.

Furthermore, some local governments give farmers additional export subsidies. Japan Agricultural Newspaper dated February 24th 2019 reported that JA Miyagi Tome in Miyagi Prefecture more than doubles the rice export target from actual export last year 938 tons, one of the largest volume in Japan, to 2,000 tons in 2019. This is supported by subsidies by the national government, Miyagi Prefecture and the city of Tome which totally amount to 30,000 yen raised from 23,000 yen in the last year for a variety called "Hitomebore" and 40,000 yen newly introduced for a variety called "Tsukiakari."

If any countries such as the U.S. or Australia filed a suit with WTO, they could take countermeasures, such as raising customs duties on cars exported from Japan. To cope with this, the Ministry of Agriculture, Forestry and Fisheries stealthily dealt with this topic on its website.

Is there no other way than to request Trump to file a suit with WTO?

This is an ugly story for the Japanese people as well. If subsidies are suspended and product adjustment (gentan policy) is abolished, the rice price will plunge and consumers will receive benefits. In addition, rice could be exported without subsidies. In other words, the agricultural administration has raised the price of rice by using national tax collected from taxpayers, imposed burdens on consumers, and made it difficult to export rice.

Given that California rice was 11,464 yen (Japan's import price) in 2018, Japan's rice could be exported at a price of about 13,000 yen because of its higher quality. If production adjustment (gentan policy) is discontinued, the price of rice will fall to about 7,000 yen. If a trading company purchases it at 7,000 yen and sells it at 13,000 yen, it will make a profit without fail. As a result, the supply of rice will decline in the domestic market and the domestic rice price will soon rise to 13,000 yen. Economists refer to this as price arbitrage.

Since the price of rice rises just after the abolition of the gentan policy, rice production will increase significantly the following year. Moreover, if the abolition results in the planting of kinds of rice with higher yields per area, which has been restrained so far, rice production will be more than 15 million tons and 7.5 million tons of rice will be exported. Because the price for such an amount of rice is 1.5 trillion yen, only the export of rice will suffice for achievement of the central government's export target for all of farm and fishery products and food.

If, as in the U.S. and EU, full-time farmers who will be affected by price decline receive compensation for the gap between the existing price of 14,000 yen and the declined price of 13,000 yen (the covered quantity is 3 million tons, 40% of the current production), this requires 50 billion yen, which is far less than the 400 billion yen paid by taxpayers for acreage reduction program. Moreover, if small-scale farmers withdraw from the rice industry due to rice price decline, the size of full-time farmers will expand, resulting in lower costs and increasing profits. Therefore, the compensation is only temporary and could be abolished someday.

The export subsidies aim to export rice by lowering the price of rice that was raised by subsidies for production adjustment (crop switching). This is a so-called sock puppet. The victims are nobody other than the public, who are also taxpayers and consumers.

In spite of this, there is no politician or party who says this is odd. Japan may be a strange country. Do the Japanese people have no other way than to request Mr. Trump to file a suit with WTO?

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on February 20, 2019.)