The Five Mysteries of WTO Agricultural Negotiations
Senior Fellow, RIETI
Following the annual ministerial meeting of the Organisation for Economic Co-operation and Development (OECD) in May, the long-stalled World Trade Organization (WTO) negotiations - particularly those concerning agriculture, the most contentious area of WTO talks - finally began to move forward. The WTO members are to have agreed on a framework by the end of July to set the stage for concrete talks on farm trade and other key areas of the Doha Round of negotiations. I was engaged in the Uruguay Round negotiations held under the General Agreement on Trade and Tariffs (GATT), the predecessor of the WTO. In light of my experience with the previous round, however, I am puzzled with the current negotiations as there are many moves that just do not make sense to me. What I am talking about is not moves made by any foreign government but those by the Japanese government.
Mystery 1: Export subsidies
In response to new developments in the WTO farm talks, the Japanese government announced in late May a set of "guideline policies" for agricultural negotiations. At that time, a major Japanese newspaper gave substantial coverage to this, running the story with big headlines which said that the Japanese government had shifted onto the offensive, insisting for the elimination of export subsidies. But I wonder who the target is that Japan supposedly intends to attack. This is the first mystery.
At the time of the Uruguay Round negotiations, Japan, which was providing no export subsidies, demanded that export subsidies - a policy of the most trade-distorting kind - be abolished. In the current round of negotiations, however, Japan initially called for reducing - not abolishing - export subsidies. Japan did so out of consideration for the European Union, a major provider of export subsidies and Japan's key ally in the agriculture negotiations. Meanwhile, Japan has been calling for lowering the "minimum access" quota of rice - a guaranteed volume of import subject to a relatively low tariff rate - from the current 7.2% of total domestic consumption to 5%. The 7.2% rate - instead of ordinary 5% - has been applied to Japan because it had asked for the application of "special treatment provisions" to restrict rice imports, under which Japan was allowed to avoid the introduction of "tariffication" or the conversion of nontariff barriers to tariffs in exchange for promising minimum market access for foreign suppliers. The EU, however, did not try to support Japan's position, saying that such a move would run counter to liberalization efforts. This came despite the fact that the EU itself is falling short of establishing 5% minimum access. As such, Japan-EU cooperation has been an unequal, one-sided alliance in which Japan would extend support to the EU but not vice versa. In this regard, it is quite approvable that Japan has returned to its original position of demanding the abolition of export subsidies.
The WTO ministerial conference, held in Cancun, Mexico in September 2003, broke off because of, among other things, the intense confrontation between developing countries and the EU. Developing countries demanded the elimination of EU export subsidies, but the EU said it would only agree to cut them back. In May this year, however, the EU changed its stance and agreed to abolish export subsidies. With this, the focal point of the negotiations shifted from the issue of export and other subsidies to the issue of market access, that is, how to reduce import tariffs. The battle over export subsidies was virtually ended when the EU, the provider of almost all export subsidies in the world, agreed to their elimination.
If Japan's decision to revive its demand for the removal of export subsidies is meant to be a shift to the "offensive," as reported by the media, who on earth is supposed to be the target after the EU have left the battle field? To the eyes of developing countries, Japan's about-face may appear to be the behavior of a coward who has moved to the winning side after the battle is over.
Mystery 2: Tariff Caps
Despite the fact that the main battle is now on the issue of market access, Japan remains opposed to the introduction of tariff caps, which would set the maximum tariff rates that WTO members may impose on imports from other members. This is the second mystery. The United States and the EU agreed on the introduction of this scheme on Aug. 13, 2003. Also, the idea has been included in the chairperson's statement presented at the Cancun Trade Ministerial. Although member countries have yet to negotiate specific figures, the capping rates would be no more than 200%, the maximum rate applied by the EU. Given the current level of U.S. tariffs and the pace of tariff reduction in the EU, the maximum rates adopted by the WTO will most likely fall in the range between 100% and 150%. Reducing Japan's rice tariff rate - currently set at 490% - to the expected level would be a catastrophe for Japanese agriculture. It is based on this prospect that Minister of Agriculture, Forestry and Fisheries Yoshiyuki Kamei, in his statement issued on Aug. 29, 2003, called for reviewing the government's Basic Plan for Food, Agriculture and Rural Areas "with an eye on the possibility of introducing direct payment (of domestic support) to farmers such as that practiced by other countries."
Japan-EU alliance in the agriculture negotiations failed because the two sides - though taking the same stance in advocating for the "multifunctionality of agriculture" - have been pursing different policy goals; Japan's emphasis has been on retaining the high tariffs on rice imports whereas the EU has been trying to maintain extensive direct payments to farmers. The EU's policy is to protect the agricultural sector by means of income support or other forms of direct payments to farmers while letting the market decide prices, thereby reducing the domestic prices of farm products and thus dependence on tariff protection. This is closer to the U.S. agricultural policy than to Japan's. It is therefore not without reason that the EU (which was supposed to be in alliance with Japan) turned its back on Japan and struck a deal with the U.S. on the introduction of tariff caps, a scheme under which extremely high tariff rates such as the one imposed on rice imports to Japan would not be allowed. All these developments considered, however, I wonder why Japan continues to oppose the capping rates after its farm minister unveiled a plan to introduce direct payments to farmers. What Japan should be doing now is studying what forms of direct payments are desirable for improving the international competitiveness of Japan's agriculture and then design them in a way that is consistent with the rules under the WTO.
At the time of the Uruguay Round, Japan was a core member of the agriculture negotiation group along with the U.S., the EU and Australia. In the current Doha Round negotiations, however, Japan has been excluded from the core group, after persistently opposing the abolition of export subsidies - an issue which would not affect Japan's interests - and taking a negative stance with regard to tariff reductions. Instead, India and Brazil are now included in the core group. On June 13, these five core members will be joined by New Zealand Ambassador Tim Groser who is the chairman of the agriculture negotiations to launch substantive discussion. Japan, however, will be kept out of the loop. I am afraid that it may become even more difficult for Japan to get involved in the negotiations on critical issues if it keeps its stance unchanged.
Mystery 3: Tariff quotas
In its "guideline policies" announced in May, the Japanese government expressed its opposition to the uniform expansion of market access covering all products. Japan's guaranteed market access is mostly greater than those offered by the EU and the U.S. Why can Japan not use this to its advantage in negotiations? This is the third mystery. Under a formula agreed to in the Uruguay Round, WTO members are to provide import quotas, in principle, based on actual import volumes in the base period of 1986-88. With regard to items whose import volume during the base period is less than 5% of total domestic consumption, they need to offer "minimum access" opportunities in the form of import quota equivalent to 5% of total domestic consumption. For all items but rice, Japan has adopted actual import figures as a pledged market access because the actual imports of farm products exceeded 5% of their respective domestic consumption in the base period. What is characteristic of Japan is the large scale of promised quotas or market access. For instance, Japan's pledged import quota for wheat accounts for 90% of total wheat consumption in the country. Therefore, a uniform expansion of market access - for instance, increasing the quota-to-consumption ratio by 20% - would have a significant impact on Japan. In the case of wheat, Japan would have no choice but import the total volume of consumption, leaving no room for domestic production. In line with the new Basic Law on Food, Agriculture and Rural Areas, the government has been calling for raising Japan's food self-sufficiency ratio from 40% to 45%. There are, however, only a limited number of agricultural products that can be counted on to make a sizable contribution to achieving the goal. In order to raise the self-sufficiency ratio by 1 percentage point, wheat production must be increased by1.7 times from 580,000 tons in 1999 to 1 million tons. On the other hand, if wheat production falls to zero, Japan's food self-sufficiency ratio will drop by 1 percentage point, making it impossible to attain the targeted self-sufficiency ratio.
Situations in the U.S. and the EU are in sharp contrast with the situation of Japan. In the case of the U.S., market access levels for major tarifficated items - those for which nontariff barriers have been converted to equivalent tariffs - remain low; 5.6% for beef, 5% each for dairy products and peanuts, 14.3% for sugar, and again 5% for cotton as measured in the quota-to-consumption ratio. Unlike in the case of Japan, a uniform 20% increase would push the current ratio of 5% to only 6%.
Market access levels are even lower in the EU. Furthermore, the EU has even been circumventing the 5% minimum access requirements, pledging import quotas for minimum access items only at a volume equivalent to 5% of domestic consumption net of actual imports in the base period (1986-88), instead of straightforwardly applying the 5% ratio. (Moreover, the EU aggregated meat products including pork and chicken as a meat sector and allocated the total amount of 5% of meat consumption arbitrarily to each tariff line in the meat sector; a great deal of amount to less sensitive products and little or no amounts to sensitive products such as pork.) As a result, under the Uruguay Round agreement, the EU committed itself to importing only 160,000 tons of beef instead of 370,000 tons, a figure that is equivalent to 5% of the EU's domestic beef consumption during the base period. Likewise, EU quotas for cheese and wheat were respectively set at 120,000 tons and 300,000 tons (raised to 2.98 million tons in 2002 in exchange for increasing the tariff rate), instead of 210,000 tons and 2.96 million tons based on straightforward calculation. With regard to pork, the EU's committed access represents mere 0.4% or so of its domestic consumption.
The largest weakness that would undermine the EU's bargaining ability lies in the low levels of committed access measured against domestic consumption. If access levels are to be elevated and subsidized exports reduced, the EU and some other WTO members that offer subsidies to export excessive agricultural products would have no choice but cut back on production. The U.S. also has low access levels vis-a-vis domestic consumption, though not as low as in the EU. Therefore, both the U.S. and the EU opposed the proposal put forward by Stuart Harbinson, chairperson of the WTO agriculture negotiations, in March 2003 that called for raising the minimum access to 10% (8% for certain items including Japan's rice import) of domestic consumption. Then, in their agreement in August 2003, the U.S. and the EU tactfully played up tariff issues while treating the issue of access volume discreetly only as a secondary matter.
I wonder why Japan has not extended support to the Harbinson proposal concerning minimum access expansion, rather than taking an antiliberalization stance by opposing the uniform expansion of committed access. The Harbinson proposal (including the handling or rice) does not present any problem to Japan, where the actual levels of import access exceed 10% of domestic consumption for most agricultural products. By advocating to more than doubling the minimum access from the current levels below 5% to 10% in the U.S. and EU, both of which offer little import access, Japan would be able to garner strong support from developing countries that are hoping to expand agricultural exports to industrialized countries. I believe this is the way that Japan's "offensive" is supposed to be. Also, there is no need for Japan to worry about the EU at a time when its own interests are in danger. I do believe that any Japanese negotiators would know the fact that the access levels of the U.S. and the EU remain extremely low.
Mystery 4: Export tax and export restrictions
The fourth mystery is the disappearance of the stance of discipline over the use of export tax and export restriction measures from the Japanese government policies as judged from the recently announced "guideline policies" on agricultural negotiations.
At the time of the Uruguay Round negotiations, the EU justified its export subsidies by asserting that EU countries, by maintaining export subsidies, would be able to offer cheap food to developing countries. When international grain prices rose from 1995 through to 1997, however, the EU suspended export subsidies. Furthermore, in order to ensure lower domestic prices for its consumers and food processing companies, the EU virtually banned grain exports by imposing export tax (at an amount equivalent to gaps between high international prices and low domestic prices). Thus, by means of export tax, the EU rejected the provision of food to developing countries when international prices went up and it became difficult for developing countries to secure food supply. The GATT and WTO do not provide for restrictions or discipline over the use of export tax. However, export tax are a problem that is far more serious than export subsidies because arbitrary use of the measure would impede the food security of developing countries.
Also, while restrictions over import volumes were subjected to tariffication in the Uruguay Round negotiations, export restrictions have been maintained. Thus, under the current situation, exporters and importers are far from being equal in terms of their rights and obligations. Against this backdrop, Japan, in 2000, proposed that all the export restrictions be converted into export tariffs and then such tariffs be reduced, following the tariffication scheme for other products under the Uruguay Round agreement.
In case of grains and soy beans, industrialized countries plus China, Thailand, Argentina and Brazil together account for almost a 100% share of the world exports, while exports from backward developing countries that are industrially underdeveloped are almost zero. Most developing countries are poor food importers that are in need of but cannot buy sufficient food. A proposal to impose strict discipline over the use of export tax and restrictions would receive substantial support from developing countries as a measure that contributes to their food security. Making such a proposal is also effective in showing Japan's willingness to participate in the trade liberalization talks. Indeed, Japan's proposal in 2000 did emphasize these points. I wonder why this assertion, which I believe would stand up well internationally, is nowhere in the government "guideline policies."
Mystery 5: Multifunctionality
The fifth mystery is the disappearance of arguments concerning the "multifunctionality" of agriculture, a point upon which Japan, after exerting so much energy and effort, has managed to build a certain international consensus.
The multifunctionality of agriculture is now being internationally acknowledged. A communique adopted at the OECD meeting of agriculture ministers in March 1998 states: "Beyond its primary function of supplying food and fiber, agricultural activity can also shape the landscape, provide environmental benefits such as land conservation, the sustainable management of renewable natural resources and the preservation of biodiversity, and contribute to the socioeconomic viability of many rural areas."
Being a rainy country whose terrain is mostly covered with precipitous mountains, Japan is susceptible to natural disasters. Farmlands and forests, through agricultural and forestry activities, have been helping prevent disasters such as floods, soil erosion and mudslides, while contributing to the maintenance and replenishment of water resources and the purification of the atmosphere. If all the Japanese paddy fields are subjected to double-cropping to produce rice and wheat), the amount of oxygen produced through photosynthesis would be nearly equal to that of the rain forests. Furthermore, the verdurous farmland scenery in the rural areas has been contributing to the health and welfare of the Japanese people. Such "multifunctional roles" of agriculture have external economy effects that are not traded in the market.
In its proposal in 2000, Japan clearly highlighted the importance of the multifunctionality of agriculture. Because the multifunctional roles of agriculture are closely and inseparably linked with agricultural production, particularly with production factors (the water retention capability of paddy fields, for instance, helps replenish water resources and prevent floods), Japan called for reviewing the principal "green box" requirement, under which direct payments to farmers are regarded as a green box policy - a measure that is deemed to have minimal impact on trade and thus can be used freely - only when they are decoupled from production. Japan's assertion is sufficiently founded on the theory of economics because it is appropriate to provide subsidies to production when economic externalities are linked with production activities.
The amendment to the green box requirement from the viewpoint of multifunctionality would be welcomed by nongovernmental organizations (NGOs) all across the world that have been calling for eliminating the negative impacts of globalization on the environment. In compiling its proposal in 2000, the Japanese government had gone through a due process to form a national consensus, for instance, by presenting its ideas and seeking public comments. Furthermore, the assertion of multifunctionality was the core of the proposal. (Indeed, government officials involved in the preparation of the proposal were proud of the final document which they say resulted through the due process of national consensus. Also, an influential lawmaker said that he was rereading the text many times as he found it excellent.) This viewpoint - despite the likelihood of making a persuasive appeal to the international community - was not included in Japan's proposal on "modalities," a set of general objectives and ways to achieve them, submitted in November 2002, and has since been absent from Japan's arguments. It remains unknown what kind of consensus-building process has been taken for this, though.
Up until now, studies made at the OECD have been reflected in the GATT and WTO negotiations. Japan, which used to be devoted to defending its position in past negotiations, has since departed from that stage. Specifically, Japan launched a study on the multifunctionality of agriculture at the OECD with a clear strategic intention to have the study result enter the WTO negotiations. Just as intended, this OECD study was compiled into a report in 2003. Japan, therefore, should be able to take full advantage of this OECD report to back up its proposal focusing on the multifuncationality of agriculture. Mysteriously, however, the multifunctionality proposal itself has disappeared.
Instead of belatedly calling for the elimination of export subsidies and turning to negativities by opposing the proposed introduction of tariff caps and uniform expansion of minimum access, Japan should be making the kinds of arguments that are both viable and appreciated internationally. Specifically, Japan can call for expanding the minimum market access to 10% of total domestic consumption, imposing discipline on the use of export tax and export restriction measures, having its argument concerning the multifunctionality of agriculture reflected in the WTO agreement on agriculture. By doing so, Japan would be able to win the respect and support of developing countries and environmental NGOs thereby regaining its position as a core member of the WTO agriculture negotiations.
The WTO negotiations have a wide range of fields and member countries generally justify their compromise in one field by gaining in another. This is often said to be a major factor enabling the conclusion of otherwise difficult agreements. In the case of the agriculture negotiations, there are three major fields, namely, market access, domestic support (subsidies), and export competition (export subsidies, export tax). What gains is Japan going to achieve in the ongoing agriculture negotiations? Has Japan abandoned its proposal made in 2000?
Would Japan be content with securing special treatment for rice at whatever cost? Retaining extremely high tariffs only on rice imports, however, means nothing but maintaining high domestic prices only for rice. Expanding market access (import volume under a tariff quota) under such a situation, where huge gaps exist between domestic and foreign prices, would result in the curtailment of domestic production. This is tantamount to repeating the failed rice policy under which the government forced rice growers to cut back on production while keeping artificially high prices. The old policy - a combination of artificial price maintenance and production adjustment - hampered the improvement of Japan's agricultural productivity, ie the expansion of farm scale by promoting liquidity of farmland and the subsequent increase in unit crop yields improvement. The policy also resulted in the lowering of Japan's food self-sufficiency ratio by discouraging the production of other products such as wheat and soy beans. Japan's choice in the ongoing WTO negotiations concerns more than just farm trade issues. It is going to be a critical decision involving the agricultural administration as a whole in which Japan is to choose between a new policy aimed at nurturing new players to realize "competitive agriculture" and the old-fashioned convoy-system policy to protect farmers including Category 2 part-time farmers for whom farming is secondary work. There must not be any discrepancy between external and internal policies. Also, it must be remembered that Japan will have to pay a cost for asking for special treatment for a certain item as has been the case with the special treatment of rice under the Uruguay Round agreement. That is the way in which the GATT and WTO rules have been designed. If Japan continues to cling solely to its stance of securing high tariffs on rice imports, it may end up paying a very high price by agreeing to such measures as expanding the minimum import access for rice, further reducing tariff rates or expanding import access for wheat, dairy products and more.
Even if Japan manages to maintain high tariffs in the current round of negotiations, the presence of conspicuously high tariffs will no doubt become a target in the next round. In the Uruguay Round negotiations, Japan strived and succeeded in capturing special treatment for rice, vigorously opposing the principle of comprehensive tariffication. Thus, it can be said that the negotiations went successfully for Japan. But the outcome of its successful negations was not necessarily good for Japan and this is exactly why Japan gave up the special treatment of rice in 1999 and shifted to a tariffication regime. Although it may be politically important to protect domestic rice production, sober discussion must be made which gives full consideration to the outcome of the special treatment of rice under the Uruguay Round agreement. It should be noted that Japan was able to win the most favorable condition for dairy products as a result of losing in the negotiations and thus agreeing to their tariffication. Keeping to a defensive stance in the field of agriculture also weakens Japan's bargaining power in the overall negotiations under the WTO. Indeed, "investment," one of the most important issues for Japan, has been dropped from the negotiation agenda. I wonder what gains Japan intends to achieve in the ongoing Doha Round negotiations as a whole.
Protecting agriculture and how to protect agriculture are two different issues. Protection by means of full-fledged direct payments to farmers, not by maintaining high tariffs, is what Japan should be doing now. That way, Japan will be able to better cope with the tariff reduction requirements. This is exactly how the EU has been coping with the liberalization of agriculture trade.
What I have written above is meant to be questions raised by an amateur observer who is not necessarily up-to-date on the current state of the WTO negotiations. I have heard of an interesting episode involving two renowned economists: when Mitsuharu Ito, professor emeritus at Kyoto University, tried to criticize a vulgar economist, he was chided by another professor emeritus, Shigeto Tusuru of Hitotsubashi University, who said that a true professional should not criticize an amateur. But it would not be irreverent for an amateur to put questions to professionals. Of course, those engaged in the actual negotiations must be going through all sorts of hardships unknown to others. I count on each of them to endeavor for the continuation and development of Japan's agriculture.
June 15, 2004
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