Agricultural trade policy reform in Japan: options for achieving change
Kazuhito Yamashita
Introduction
Although Japanese agriculture has long been protected from overseas competition by border measures, the state of the country’s farming has continued to decline. Japan has established an agricultural policy dominated by price support that supports farmers’ income but places a large burden on consumers. In order to maintain high prices, Japan has to rely on tariffs. High prices have slowed down structural reform and deprived Japanese agriculture of international competitiveness. In moves to strengthen international competitiveness, the European Union (EU) has lowered prices for agricultural products and introduced a direct payment scheme. Japan should transform its agricultural policy to cease price supports backed by tariffs on products such as rice and use direct payments to compensate farming households that are affected by reduced prices. This would not only overcome immediate obstacles to trade negotiations but also reduce the burden on the Japanese public, lead to greater competitiveness in agriculture, cope with a shrinking domestic market, and offer benefits to consumers. For structural reform, it will be necessary to reduce prices and adopt direct payments limited to eligible farms. In order to adopt aggressive agriculture policy, there is a vital need to carry out structural reform and achieve strong and robust farming.
There are political obstacles which hinder the Japanese government from realizing this policy reform. In particular, most of the politicians in the Diet believe that in the latest election of the upper house rural voters showed a negative attitude towards targeting agricultural policies only at eligible farmers. On the other side, agricultural policy reform will be inevitable. Japan enters an era of major population decline. The nation’s population is estimated to fall from current 130 million to 100 million in 2050. Per-capita rice consumption has halved in 40 years. This trend will continue. This means that the domestic market is shrinking. In order to maintain agriculture, Japan has no other way than to recuperate international competitiveness so as to export rice and other agricultural products in the promising Asian market with increasing population and income.
1 International comparison of agricultural policies
The Uruguay Round negotiations established the World Trade Organisation (WTO) which encompasses trade in service and protection of intellectual property rights, in addition to trade in goods. The negotiations on agriculture also marked a watershed. It was agreed that the World Trade Organization (WTO) Agreement on Agriculture would discipline domestic agricultural support as well as market access and export subsidies. Under the WTO rules, agricultural subsidies such as direct payments are classified into three "boxes": "amber" subsidies which should be reduced and can be retaliated against; “blue” subsidies which do not require reduction but may face retaliation; and "green" subsidies which do not need to be reduced and will not be targeted for retaliation.
The European Community (EC) instituted reforms in 1992 towards the end of the negotiations, reducing its support prices for cereal and beef and compensating farmers by “blue box” direct payments which were equivalent to the amount of price reductions and linked to farmland area and livestock numbers. This policy reform with price reduction would enable the EC to reduce the volume of subsidized exports through reductions in surpluses. At present, the EU support price for cereal is lower than the Chicago Board of Trade price for wheat.
As for Japan, “rice is the most difficult item to be liberalized because of several reasons. One is its large share of agricultural production, amounting to approximately 25 percent of agricultural production. Another is the geographical location of production spreading over more or less throughout Japan. These two factors result in strong political factor.” (Urata, 2006) Japan strongly resisted tariffication of import quantity restriction of rice in the negotiations. It became one of the most important issues at the top of the Japan’s political agenda at that period. As compensation for the special treatment of tariffication of rice, the single most important agricultural product in Japan, Japan had agreed to raise the minimum access tariff quota of 5 percent of domestic consumption in the case of tariffication to 8 percent. However, in 1999 Japan ceased the application of the special treatment and introduced tariffication, because the increase in minimum access would lead to even more reductions in production. As a result of Japan’s delay in introducing tariffication, however, the minimum access rate was raised to 7.2 percent and has remained the same ever since. It is a basic rule of the General Agreement on Tariffs and Trade (GATT) and the WTO that if a country seeks exemption from general principles, then it must invariably provide compensation in return.
In 2003 the EU switched to a United States (US)-type “green box” direct payments, or decoupled payments, which were no longer linked to the type or volume of production, prices or production factors. At the same time, the EU reduced support prices on dairy products, cutting the price of skimmed milk powder by 15 percent and of butter by 25 percent. In 2005, the EU reduced the support price for sugar (previously unchanged for 40 years) by 36 percent and switched to paying the remaining 64 percent directly. For these reasons, the EU could make a commitment to eliminate export subsidies and to tolerate 100 percent tariff caps in this Doha Round of negotiations.
The US had already introduced “amber box” deficiency payments in the 1970s. Later it introduced a production limiting set-aside programme and let farmers participating in this programme eligible for deficiency payments. This payment coupled with set-aside programme along with the EU’s area or livestock payments was categorized as “blue-box” introduced by the Blair House Agreement between the US and the EU in the Uruguay Round negotiations. The 1996 Farm Bill did away with production limitation set-aside programmes and replaced deficiency payments by decoupled direct payments.
The producer support estimate (PSE) was developed by the Organisation for Economic Co-operation and Development (OECD) as an indicator of agricultural protection and was evolved into the aggregate measure of support (AMS) in the WTO Agreement on Agriculture in a legally binding form. The PSE is the sum of the taxpayer burden in the form of subsidies and payments made to farmers and the consumer burden[1] in the form of price support higher than an international price brought about by border and domestic measures (calculated as the difference between domestic and international prices multiplied by domestic production volume). According to the OECD (2007), in 2006 the PSE was US$29.3 billion in the US, US$138.0 billion in the EU and US$40.7 billion in Japan. Japan’s overall level of protection, being 39 percent higher than that of the US and less than a third of that of the EU, is not especially high.
In spite of this, Japan is criticized abroad for being protective of its farming sector by its rigid opposition to tariff reductions, while at home the government is blasted for damaging the nation's interests because its position on agricultural issues stall negotiations in the WTO and talks on free trade agreements (FTA). This criticism, however, stems from the fact that Japan uses the wrong method of protection.
If the overall PSE is broken down into its two constituent parts (the consumer burden1 and the taxpayer burden), then it can be seen that the proportion of the consumer burden declined in the US from 37 percent in the period 1986–88 to 17 percent in 2006, and in the EU it went down from 86 percent to 45 percent; in Japan, however, it changed slightly from 90 percent to 88 percent over the same timeframe. The US and the EU are moving forwards with agricultural policy reform that shifts the burden from the consumer to the taxpayer. In the face of the EU switch to a US-style agricultural policy that places the burden more heavily on the taxpayer, Japan has been left high and dry, and the battle lines have been redrawn – no longer pitting the EU and Japan against the US, but rather the US and the EU against Japan. Unlike the US and the EU, which have lowered their dependence on tariffs by switching to direct payments, Japan maintains conspicuously high tariffs on products such as rice, wheat and dairy products. For Japan, the most important issue in the WTO agricultural negotiations is thus not domestic support but maintaining tariff levels.
Table 1 Comparison between the policies of Japan, the United States (US) and the European Union (EU)
Country / Japan / US / EUDecoupled direct payments / (Partially introduced) / yes / yes
Environmental direct payments / (Partially introduced) / yes / yes
Direct payments for less favourable regions / yes / no / yes
Production limitation programme for price maintenance / yes / no / no
Tariffs over 1000% / 2 (konjac root, beans) / None / None
Tariffs of 500–1000% / 2 (rice, peanuts) / None / None
Tariffs of 300–500% / 2 (butter, sugar) / None / None
Tariffs of 200–300% / 5 (including wheat, starch flour and raw silk) / None / 2 (some dairy products such as butter, sugar) although reforms will let the EU reduce them to less than 100%
In the current Doha Round of negotiations, many WTO members favour a tariff cap of the order of 100 percent. The EU approves a tariff cap on the one hand while resisting tariff reductions on the other hand because an 80 percent reduction in its highest tariffs (relatively low at around 200 percent) would reduce them to 40 percent – that is, below the permissible 100 percent tariff level. Conversely, Japan’s tariffs are extremely high; if its rice tariff of 778 percent were reduced by 80 percent, then it would still stand at 156 percent. Since a reduction to 100 percent would lower it even further than this, Japan is opposed to a tariff cap.
It is agreed that the tariff reduction method should consist of applying a high rate of reduction to high-tariff items. Japan is seeking exceptions for as many items as possible. Japan will, however, be required to increase its low tariff-rate quota by way of compensation for the exceptions that it seeks.
2 Formation of Japanese agricultural policy and decline in international competitiveness of agriculture and food self-sufficiency
Although Japanese agriculture has been protected over the years by high agricultural prices backed by tariffs and non-tariff border measures, its decline continues unabated, with agriculture's share of gross domestic product dropping from 9 percent to 1 percent and the percentage of farmers over 65 years of age rising from 10 percent to 60 percent over the past forty years. The proportion of full-time farming households has declined from 35 percent to 20 percent, while that of part-time farming households (for which other income exceeds income from farming) has increased from 30 percent to 70 percent. Japan’s food self-sufficiency rate has declined from 79 percent to 39 percent, while most of the other developed nations have increased their food self-sufficiency rate during the same period.
Japan is now the greatest net importer of agricultural products in the world. Japan’s international competitiveness has declined markedly, as demonstrated by the 788 percent tariff on rice imports in order to protect domestic rice (which had until 1953 been cheaper than rice on the international market). Japan’s lack of international competitiveness stems from its small land mass and the fact that Japanese agriculture can no longer realize even its limited potential in the wake of failed policies such as the high rice price policy.
Countries have a comparative advantage in products that make intensive use of the factors that they possess in relative abundance, according to the Hechscher–Ohlin theorem of international economics. Japan is endowed with relatively little land and labour and with relatively abundant capital. In order to eliminate its comparative disadvantage in agriculture, Japan must first implement technological progress in a less land- or labour-intensive or a more capital-intensive way of agriculture, for which land constraints will become a less critical factor. First, in order to economize on land, per-unit crop yield should be increased through improvement in crop varieties. This will lower costs, as the per-lot production cost for agricultural products is the per-area cost divided by the per-unit crop yield. Japan should also economize on labour and encourage the use of capital for large-scale mechanization. For large-scale mechanization to be efficient, the scale of agriculture will have to be increased.
The old Agricultural Basic Law enacted in 1961 made an attempt to increase farmers’ incomes by increasing the size of Japan’s small farms while cutting costs. Income is equal to sales (price multiplied by production volume) minus cost. Even for a commodity such as rice, whose consumption and sales volume cannot be expected to rise, farm income could have been increased if costs had been reduced.
Rather than take this approach, however, the ruling Liberal and Democratic Party (LDP), whose main constituent is a group of Japanese agricultural cooperatives (JAs; the most powerful interest group along with labour union in the post-war Japanese politics with a membership of more than five million farmers), forced the agricultural administration to drive up the price of rice in order to boost farmers’ income, especially at an annual rate of 9 percent in 1960s. Even part-time “weekend” farmers, the majority of JA members, who operated on a small scale and with high costs, found it more profitable to grow rice themselves than to pay high prices to buy it and thus have not handed their farmland over to full-time farmers. Once full-time, large-scale, business-oriented farmers could be put on the expansion track, their costs would decrease and they would be able to spend more on renting land, which would fuel further expansion. However, Japan failed to embark on this virtuous circle of increasingly large-scale farming, as part-time farmers would not rent out their farmland. The costs for full-time farmers did not fall.