RIETI Report April 2012

Points of Controversy Surrounding the TPP

Public opinion is split between the pros and cons of Japan's participation in the Trans-Pacific Partnership (TPP) negotiations. However, as its preliminary consultation with the United States unfolds, all of those zombie arguments against the TPP arguments are gradually beginning to show their true nature.

To start the new fiscal year, in the April issue of the RIETI Report, we present one of our recent BBL Seminars, "Points of Controversy Surrounding the TPP," in which Senior Fellow Kazuhito Yamashita discusses the key points of the TPP situation for Japan, including the need to open up, the significance of the partnership, the faulty arguments against it, the structure of these anti-TPP arguments, and the ways and means for the development of Japanese agriculture. In the Q&A section, he provides further insight into this subject, including the expansion of farming operations and its impact on the relevant laws and regulations and investor-state dispute settlement (ISDS) clauses.

This month's featured article

Points of Controversy Surrounding the TPP

YAMASHITA KazuhitoSenior Fellow

Need to open up (liberalize) Japan

Public opinion is split between the pros and cons of Japan's participation in the Trans-Pacific Partnership (TPP) negotiations. However, as its preliminary consultation with the United States unfolds, all of those zombie arguments against the TPP arguments are gradually beginning to show their true nature.

When global grain prices tripled in 2008, some countries rushed to implement export control measures. However, it is unlikely for the United States to resort to such measures in similar situations in the future. The U.S. export embargo on soybeans in the 1970s prompted Japan to embark on farmland development and soybean production in the Cerrado, a vast savanna in central Brazil. As a result, Brazil has now become the world's second largest exporter of soybeans, a formidable rival for the United States. In other words, the imposition of an embargo on its exports of soybeans led to production expansion elsewhere in the world, putting the United States in an odd position of being challenged by its self-made rival. It is hard to believe that the United States, a country that has undergone this bitter experience, will ever again put an embargo on its grain exports.

A sharp rise in grain prices in recent years dealt a severe blow to some countries such as India and the Philippines. But the impact was limited in Japan, where consumers had been paying tariff-inflated prices for food before global grain prices shot up. Even when grain prices tripled, the Japanese consumer price index (CPI) increased only by 4% as the Ministry of Agriculture, Forestry and Fisheries (MAFF) reduced the rate of surcharge on grain imports. This indicates that having economic power that can afford grains even in times of price inflation is crucial as a contingency measure. That is, promoting economic growth through trade liberalization leads to ensuring food security.

Based on a free trade agreement (FTA) between New Zealand, Chile, Singapore, and Brunei called P4, which came into force in 2006, these four countries and five others—the United States, Australia, Peru, Malaysia, and Vietnam—are negotiating the TPP. One of the characteristics of the P4 agreement is that it calls for eliminating tariffs on almost all items and hence aiming to achieve a high degree of liberalization, as compared to the economic partnership agreements (EPAs) Japan has concluded to date, in which a series of agricultural products are listed as exceptions. Japanese agricultural cooperatives are firmly against the TPP because the elimination of tariffs reduces farm product prices and hence the commission income to agricultural cooperatives which is earned proportional to the prices.

Another characteristic is its comprehensive coverage of areas which include not only trade in goods but also trade in services, government procurement, competition policy, and investment. Indeed, a total of 21 areas are involved. In this regard, TPP opponents argue that it is not only agriculture that would be affected. However, almost all of these areas are covered in the EPAs hitherto concluded by Japan.

Significance of the TPP for Japan

In recent years, Japanese businesses have been suffering from problematic Chinese practices, namely, rare earth export restrictions, investment restrictions, and widespread copyright piracy. However, Japan lacks the power to block these practices in China. Then, what can and should it do to change the situation? Even though it cannot take forcible countermeasures against economic activities in China, Japan can turn to international rules to counter China as a major economic power in the same manner as it did in the dispute settlement mechanism under the World Trade Organization (WTO) in countering the Section 301 of the U.S. Trade Act of 1974. The TPP can be utilized as a forum for international rulemaking.

The greatest beneficiaries of Japan's participation in the TPP and resulting trade liberalization are the Japanese consumers. In this country, agriculture is being protected by means of setting artificially high prices for home-grown farm products. In order to maintain such high price levels, the government imposes import tariffs on foreign-grown farm products, forcing consumers to pay high prices. For instance, home-grown wheat accounts for only 14% of wheat consumption in Japan. However, for the sake of keeping the price for this tiny segment, Japan imposes high tariffs on foreign-grown wheat, which accounts for the remaining 86%. Replacing consumers' burden of purchasing home-grown farm products through direct subsidies borne by the fiscal budget will eliminate their burden of buying foreign-grown farm products, and there is no need to substitute with fiscal expenditures. This will benefit Japanese consumers significantly, reducing their burden by the same extent as that of tariff elimination.

With the rise of China, India, and Brazil, Japan's influence within the WTO has weakened. However, if the TPP takes a lead in the rulemaking, for instance, for investment and competition, such rules will be referenced when creating WTO rules for the same areas in the future. That is, by participating in the TPP negotiations, Japan can reflect its interest in making global trade rules under the WTO.

On the other hand, failure to participate in the TPP negotiations would bring various disadvantages. For instance, it has been pointed out that Japanese companies have been settling for being put at a competitive disadvantage in the U.S. and European markets relative to their rivals from South Korea, which has FTAs with the United States and the European Union. Similarly, when Japan announced its intention to join the TPP negotiations in November 2011, Canada and Mexico quickly followed suit. For these two countries, a TPP market composed of the nine aforementioned countries led by the United States and a new TPP market including Japan are totally different. As such, the greater the scope of a liberalized trade zone, the greater is the advantage brought by becoming part of it, and so is the disadvantage of non-participation because a country would be excluded from the supply chain spreading across the vast area.

When auto parts production in the Tohoku region was disrupted in the wake of the Great East Japan Earthquake, American automobile plants in Michigan, a destination for auto parts manufactured in the region, were forced to suspend operations. Small and medium enterprises (SMEs) not only in the Tohoku region but also across the country are integrated into extensive supply chain networks in the Asia-Pacific region. If Japan fails to join the TPP, Japanese parts manufacturers—including those in the Tohoku region—will be excluded from the supply chain networks encompassing such diverse areas. This would make the reconstruction of the region difficult. Some people say that participation in the TPP would impede the reconstruction of agriculture in the Tohoku region. However, farming households in the disaster-affected areas comprise mostly part-time farmers and their reliance on farming income is fairly low. It is surely necessary to reconstruct the region's agricultural industry. But without restoring local industries, there will be no improving the livelihood of farming households.

Faulty arguments against the TPP

If you go into a bookstore, you will see piles of books arguing against Japan's participation in the TPP, so flooded with pointless claims that even the term "zombie" would not be enough to describe them. One such argument calls it a "U.S. plot," insisting that the United States is urging Japan into the TPP for the sake of expanding its exports. But what I have been hearing from Washington is to the contrary. According to what I have been told, the Obama administration decided to join the TPP because none of the other eight countries is a major export of industrial products, and labor unions, a supporter of the administration, gave the green light. Had Japan and South Korea been in the negotiations, the Obama administration's decision could have been different. The TPP including Japan is a threat to the U.S. automotive industry and labor unions, both of which support the Obama administration, and they began to voice opposition as soon as Japan expressed its intention to join.

We have been also hearing about a "deflation argument," which warns that participation in the TPP would cause prices to decline and trigger pullbacks in consumer spending. This might be the case for durable goods such as automobiles and televisions, but not for food and food products.

Some TPP opponents say that the United States is aiming to lower the labor standards in Japan. However, if so, the United States also needs to lower its labor standards because an international agreement or treaty puts all parties under common obligations. Should Japan lower the labor standards, an array of Japanese products—those made by cheap labor—would be imported into the United States free of tariff. Would this be acceptable to U.S. labor unions? Indeed, in the course of the preliminary consultation, Washington has made it clear that the entry of unskilled labor into member countries is not on the agenda for the TPP negotiations. Thus, one of the zombies is gone.

Regarding the U.S. demand for changes to Japan's public health insurance program, a point raised in one of the zombie arguments, we have always said that the program, being operated as a governmental service, is outside the scope of the General Agreement on Trade in Services (GATS) and has never been on the agenda in past FTA negotiations. The United States has also said in the preliminary consultation that it will not take up this issue in the TPP negotiations. This is another zombie that is gone.

Some people are concerned about the possibility of the United States making a severe demand in the area of drugs and pharmaceuticals. However, what Washington is concerned about is the protection of intellectual property rights and the transparency of drug pricing. The issue of intellectual property rights will be raised vis-à-vis Vietnam and Malaysia, but not vis-à-vis Japan. Likewise, the transparency of drug pricing has been made an issue with South Korea. As it appears, however, the U.S. pharmaceutical industry has no intension to raise this issue vis-à-vis Japan probably due to the presence of Chuikyo, a governmental council on social insurance and medical affairs, and the relevant independent organ within the council as a drug pricing mechanism.

Others are worried about the possibility of Japan being forced to ease its food security regulations. However, with regard to the balance between the protection of people's lives and health and the promotion of trade liberalization, the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) allows member countries to adopt standards and measures that result in a higher level of sanitary and phytosanitary protection than would be achieved by measures based on the relevant international standards and implement them, provided that such standards and measures are firmly supported by scientific evidence or risk assessment. The United States has no intention to change this framework. Should it attempt to change this, American consumers would not remain silent.

Regarding the issue of genetically modified (GM) soybeans, it must be acknowledged that in any country or region, only those that have been duly certified as safe are allowed to be put on the market. With this premise in mind, take a look at the regulatory differences across countries and regions. While the United States imposes no labeling requirements for GM agricultural products, the EU requires that all agricultural products and processed foods containing 1.0% or more GM ingredients be labeled as such. Japan falls in between them, requiring labeling only when modified deoxyribonucleic acid (DNA) is present and detectable in finished products as is the case for tofu. No labeling requirements are imposed on those that have no quantifiable traces of modified DNA, which include soy sauce and soybean oil. The United States finds the stringent labeling requirements of the EU problematic but has not taken any full-fledged action to force it to withdraw its labeling system more than a dozen years since such regulations were first introduced. Considering this, it is unlikely for Washington to pick on Japan's more reasonable labeling requirements. Even if it does, Japan can join forces with other countries having similar regulations, such as Australia and New Zealand, to cope with the United States.

Some people are voicing concerns about the possible inclusion of an investor-state dispute settlement (ISDS) clause in the TPP, under which a foreign company may launch an investor-state dispute against the Japanese government to force regulatory changes. However, ISDS clauses are, in principle, applicable only when a plaintiff company has an investment in a defendant country and actually suffers losses as a result of regulatory changes or interventions. Thus, it is not that Japan would have to face lawsuits filed haphazardly. Furthermore, international arbitral tribunals never award an order forcing a defendant government to change its regulations, and complaining parties can only expect monetary compensation. Also, in reality, U.S. companies have been unsuccessful often in their cases against foreign governments—in the nearly two decades after the North American Free Trade Agreement (NAFTA) came into force, U.S. companies brought 16 cases, less than one per year, against the Canadian government, of which only two cases won and five lost—and in the cases in which they lost, the defendant country's government policy in question was apparently in fault. This means that there is no need to be afraid of the TPP insofar as Japan pursues decent policies.

Structure of anti-TPP arguments

Japan's participation in the TPP and the resulting elimination of tariffs would reduce domestic prices of agricultural products. Japanese farmers would be unaffected if the government makes direct subsidy payments. But agricultural cooperatives, which earn sales commissions as a percentage of sales prices, would be in big trouble. In other words, what is at issue is not "TPP and Japan's agriculture" but "TPP and Japanese agricultural cooperatives." With their vested interests threatened by the TPP, agricultural cooperatives have brought other vested interest groups, such as the medical industry, into their camp in opposition. Such is the basic structure of the problem.

As the United States has declared that it has no intention to take up Japan's public health insurance program as an issue in the TPP negotiations and that it will not see Japan's policy vis-à-vis unskilled immigrant workers as a problem, footless zombies have vanished one after another, gradually revealing the true nature of all of those zombie arguments. A recent public opinion survey conducted by the Kyodo News Service found that only 45% of those engaged in agriculture, forestry, or fisheries are against Japan's participation in the TPP, while 17% support it and the remaining 30% plus have yet to decide their stance. That is, even within the agricultural sector, some people—full-time farmers in particular—are beginning to disbelieve "false propaganda."

In the TPP negotiations, which are carried out under a multilateral framework, participating countries can form coalitions with different countries for different areas of negotiations or on different issues. On such issues as drug pricing, food security regulations, and GM labeling, Japan can ally with Australia and New Zealand to confront the United States. Meanwhile, in the area of investment rules, copyright piracy, government procurements, and industrial tariffs, Japan can team up with the United States to urge developing countries to remove regulatory barriers, strengthen control over illegal activities, and open markets. Unfortunately, however, there is a case in which Japan will be isolated, namely, when it asks for making certain agricultural items exceptions to tariff elimination. We will be able to avoid this situation if the government shifts its policy from the current high tariff protection to direct subsidy payments, a measure used in the United States.

Given the way things appear at present, the Japanese government, being regardful of agricultural organizations, will probably make a plea for an exceptional treatment "just for rice at the very least" in the TPP negotiations that call for the elimination of tariffs without exceptions. But then, Japan will be forced to expand rice import quotas in return for keeping high tariffs, resulting in a further shrinkage in domestic rice production, a decline in domestic rice production, and a drop in the ratio of food self-sufficiency.

Ways and means for the development of Japanese agriculture

Japan's rice consumption per capita has halved in the past 40 years, while its annual rice production decreased by one-third in less than 20 years from 12 million tons to eight million tons. Going forward, the Japanese domestic market is bound to shrink further due to its aging and declining population. Therefore, it is necessary for Japanese farmers to export their products to countries with growing populations, cultivating new market opportunities. This is to say that if Japan is to maintain or promote agriculture as a viable industry, it is crucial to become part of the TPP and other FTAs, which are instrumental to lowering tariffs imposed by importing countries.

Some people say that Japan should focus its efforts on a trilateral FTA with China and South Korea, rather than on the TPP. However, the elimination of rice tariffs under a Japan-China-South Korea FTA would not lead to a significant boost in Japan's rice exports to China. As a matter of fact, Japan is already exporting rice to China at zero tariff through the tariff rate quota (TRQ) or minimum access commitment under the WTO. Nevertheless, Japanese rice that can be purchased at 500 yen per kilogram in supermarkets in Japan is sold at 1,300 yen per kilogram in those in Shanghai, which is tantamount to China imposing 800 yen tariff per kilogram of rice imported from Japan. This is occurring because state-owned enterprises set high prices for Japanese rice in order to prevent a collapse in domestically produced high-grade rice. Unless Japan can stop such practice by Chinese state-owned enterprises, the elimination of tariffs would not provide free access to the Chinese market.

In the TPP negotiations, the United States is seeking to create trade and investment rules that can achieve a high level of liberalization. In the belief that China will eventually join the TPP, the United States intends to make these rules serve as an instrument to impose discipline on China's problematic practices, particularly, on those of state-owned enterprises. In order to secure free access to the Chinese rice market, Japan should join the TPP negotiations and work together with the United States.

Despite the government's persistent efforts to protect domestic farmers by imposing high tariffs on imports, Japanese agriculture has been continuing to decline. This means that reasons for the decline lie not in the United States, Australia, or China, but in Japan. An international comparison of agricultural policies shows that Japan's tariff on rice imports remains very high because the country continues to rely on price support through acreage reduction in combination with direct subsidy payments, i.e., an income support program for farming households, whereas both the United States and the EU have shifted to protection by means of direct subsidy payments to farmers from fiscal expenditures. High rice prices and acreage reduction allow small subsistence farmers to stay on the market, preventing the expansion of farming operations and suppressing yield per unit area. Indeed, Japan's rice yield per unit area is 1/1.4 of that of California.

Japan should abandon its acreage reduction program. If it does so, yield per unit area will increase, which in turn will lead to declines in prices thereby compelling small subsistence farmers to lease out their farmland. Furthermore, direct subsidy payments should be made only to those farmers operating at a size above a threshold level and comparable to farming enterprises. This would raise eligible farmers' financial capacity to pay rent for farmland, which would enable them to expand the scale of operation, improve operating efficiency, and reduce costs. An increase in farmers' revenue would also lead to an increase in the amount of rent paid to farmland owners. Even today, the cost of production for rice growers with a farm size of 15 hectares or greater is as low as 6,000 yen per 60 kilogram of rice. If their yield per unit area is raised to a level comparable to that of Californian rice, this can be reduced to 4,300 yen, which is one-third of the average domestic rice price and less than half the prices of Chinese and Californian rice imported into Japan. If we can transform the Japanese rice growing industry into an export industry, there will be no need to scale down Japanese agriculture.

In an era of declining population, the promotion of trade liberalization—thereby seeking to reduce high tariffs in other countries and facilitate agricultural exports from Japan—is what provides the foundation for national food security. The question facing us today is not whether or not to protect domestic agriculture but which to choose between the price support policy and direct subsidy payments.

Question and Answer

Q:

Facilitating the expansion of farming operation would probably require revising laws and regulations pertaining to farmland. What prospects do you see in this regard?

YAMASHITA Kazuhito:

The Agricultural Land Act is based on the philosophy of "owner=cultivator," whereby joint-stock companies are allowed to enter the agricultural business by leasing farmland from farmers but prohibited from acquiring or owning it. This should be changed to allow small joint-stock companies with capital below a certain threshold to acquire farmland so as to pave the way for young people to enter the agricultural business by setting up a joint-stock venture and raising funds.

As both the Agricultural Land Act and the Act on Establishment of Agricultural Promotion Regions, a law that regulates the zoning of farmland, are toothless, farmland continues to be converted to non-agricultural use in Japan. If zoning regulations are strictly enforced, the Agricultural Land Act will not be necessary. In Europe, farmland is maintained only by means of zoning regulations. Japan should be able to shift to a system that allows anyone—whether individuals or joint-stock companies—to acquire farmland so far as the zoning requirements are met.

Q:

Are not ISDS clauses identical across different treaties and agreements?

YAMASHITA Kazuhito:

No, they are not. There is no such a thing as a universal ISDS clause. If Japan has certain concerns, it can negotiate to have the ISDS clause of the TPP include provisions to address them. In fact, the United States is seeking to make changes to the model clauses in a way to exempt certain regulations, such as environmental regulations equally applicable to U.S. and foreign companies, from the ISDS clause.

* This summary was compiled by RIETI Editorial staff.

>> Original text in Japanese

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