Agricultural Negotiations: A Role for Japan in Breaking the Deadlock

HONMA Masayoshi
Faculty Fellow, RIETI

The new multilateral negotiations (or, new round) of the World Trade Organization (WTO) have met with difficulty in the area of agricultural framework. There has been a strong reaction from developing nations against the development of negotiations led by Europe and North America, creating an opportunity for Japan to exhibit its leadership. Japan must revive the draft by Chairman Stuart Harbinson and help advance agricultural negotiations.

Dissatisfaction with the compromise draft among developing nations.

The new round faces difficulties. Carlos Perez del Castillo, chairman of the WTO General Council, included an agricultural modality (framework) in the draft for the Ministerial Declaration that was to be adopted at the WTO Ministerial Conference held in Cancun, Mexico; agricultural issues are the greatest point of focus of the new round of negotiations. This modality was based on the compromise draft agreed to between the United States and the European Union in August. However, beginning with the developing nations, the dissatisfaction of several countries led to an effective abandonment of the idea of reaching an agreement at this Ministerial Declaration, resulting in the general postponement of the matter. This paper will attempt to examine the background of this situation and Japan's response.

The agricultural negotiations began in 2000, before the start of the new round at Doha, Qatar, as a built-in agenda item (one approved in the previous round as a matter for negotiation), together with the service sector issue. The negotiations were to establish a modality by the end of March 2003.

A modality refers to a basis for a pact that must be agreed upon. Establishment of a modality indicates the conclusion of actual negotiations for determining methods for tariff reductions, figures that will form the basis for such reductions, and other matters. Although Chairman Harbinson of the Special Session of the WTO Committee on Agriculture presented the first draft for this modality in February of this year and a revised version in March, these could not be finalized because they were opposed both by exporter nations, which seek major reductions in trade protections, and by importer nations, which are trying to keep such reductions to a minimum.

The pillars of the agricultural negotiations are the following three areas: market access, export competition, and domestic support. Each of the major nations made a case in each of these areas. Let's review the debate concerning market access, a matter in which Japan has a significant stake.

First, the United States and the Cairns Group nations, such as Australia, made an appeal for a major opening of markets, insisting on the Swiss formula of tariff reductions, in which the higher the tariff, the larger the reduction. Specifically, they proposed that tariffs be reduced over five years to the point where all tariffs would be less than 25%. Thereafter, all tariffs would be reduced to zero by a certain deadline. On the other hand, the E.U. and Japan insisted on maintaining a balance between trade and non-trade concerns, proposing reductions of no less than 15% and averaging 36%, similar to the previous Uruguay Round approach.

The tariff reduction methods presented by Chairman Harbinson included these compromise proposals. Tariffs currently exceeding 90% would be reduced by a minimum of 45% and by 60% on average; tariffs in the 15% - 90% range would be reduced by a minimum of 35% and an average of 50%; and tariffs of 15% or less would be reduced by a minimum of 25% and an average of 40%. However, these figures were given as examples only.

Although this is not the Swiss formula, which would keep all tariffs below a certain level, it is an attempt to achieve equality by applying higher rates of reduction to goods with high tariffs, instead of bundling all goods together as under the Uruguay Round approach. It has incorporated an insistence on the reduction of tariff peaks (prominently high tariffs), one of the points of contention in these negotiations.

This Harbinson draft was opposed by exporter nations such as the United States and the Cairns Group nations, who deemed it inadequate. It was also opposed by Japan and the E.U., who deemed it too extreme and feared that it would lead to destruction of their domestic agricultural industries. Then, in August the United States and the E.U., which had formerly been in polar opposition, sought a new plan of compromise and agreed upon a joint draft. Based on this draft, General Council Chairman Castillo incorporated thinking on an agricultural modality into the draft for the Cancun Ministerial Declaration. The Declaration draft calls for adopting one of the following tariff reduction methods: the Uruguay Round approach, the Swiss formula, or the removal of tariffs. In other words, tariffs would be classified into the following three groups and reduced accordingly: (1) tariffs to be reduced by setting minimal and average reduction rates; (2) tariffs to be reduced to below a fixed uniform level; and (3) tariffs to be removed.

In addition, maximum tariff levels would be set, and tariffs exceeding these levels would be reduced to the maximum levels. If tariffs were not reduced, measures for expansion of imports (such as expansion of the tariff quota limit) would be adopted for the relevant or other goods. This is only a proposed framework and does not include figures such as distribution ratios of goods to each group and rates of tariff reduction.

However, many nations expressed dissatisfaction with this draft. Developing countries such as India and Brazil were particularly outspoken. First of all, this reaction occurred because special measures for developing nations were not as clear as in the Harbinson draft, and reductions in protection of developed nations, which would be likely to lead to expansion of exports from developing nations, were insufficient. At the same time, these countries were markedly suspicions of the negotiations, which advanced under the guidance of Europe and the United States.

Support for the Harbinson framework

The previous Uruguay Round resulted in the conclusion of the two-party, Blair House accord between the United States and the E.U. However, this was merely an arrangement composed of measures that would benefit the two parties. Other member nations, particularly developing nations, felt strongly that they had been left out of the negotiations. In fact, many expressed dissatisfaction with the Uruguay Round Agreement, claiming developing nations enjoy no benefit from it. The negotiations were once again concluded by Europe and the United States, but in the current situation, with three of four WTO members being developing nations, it seems clear that the same method of reaching an agreement will not work.

Japan must now demonstrate its leadership. The draft from Europe and the United States is at a standstill in the face of opposition from developing nations. This is an excellent chance for Japan to take its place in bringing the negotiations to a conclusion. This does not mean Japan should revert to its previous position or that it should support the draft from Europe and the United States. Its efforts should be based on reviving the Harbinson draft.

This does not mean the draft should simply be accepted "as is". Japan must first support the framework, and then develop a new draft incorporating Japan's own figures for rates for tariff reductions and other matters. The figures in the Harbinson draft are only examples. Although these figures themselves are vital, the approval of the Harbinson framework is more important as the first step toward breaking the deadlock. Japan should actively support the Harbinson framework.

Promoting structural reforms through successful negotiations

More than any other proposal, the Harbinson draft reflects the course of agricultural negotiations up to this point. Since Chairman Harbinson led the negotiations, it is also a balanced proposal. For Japan, it is very likely to become a basis for negotiations, even if based on the example rates of tariff reduction.

For example, at present the tariff equivalents (secondary rate) on rice are given as 490%. If the minimum rate of tariff reduction of 45% (for tariffs currently 90% or higher) were applied to this draft, this figure would be reduced to 270% over five years. Since American rice of the same type as Japanese domestic rice (nonglutinous, polished, short-grain rice) is imported at a price of approximately 100 yen per kilogram, the price in Japan after application of tariffs would be about 370 yen per kilogram. Since the price of domestic Japanese rice averages approximately 300 yen per kilogram, domestic rice would likely remain protected by high tariffs. However, the price of rice from China and other sources, which is imported for approximately 80 yen per kilogram, would likely reach parity with the price of domestic Japanese rice.

In addition, since the minimum access commitment could increase by only 8% under the Harbinson draft, and calculation could be based on the most recent three years' average domestic consumption, minimum access for rice would not increase dramatically from current levels.

At present, the world is dividing into trading blocks, such as those formed by regional free trade agreements (FTAs), a development that threatens to weaken the WTO structure. Maintaining the WTO structure and promoting free trade are the lifelines of the Japanese economy. In addition, expectations are high for Japan to make this new round a success.

To begin with, the WTO is an international institution whose mission is to achieve economic prosperity through free trade. The introduction to the Agreement on Agriculture includes the following as a long-term objective: establishment of "a fair and market-oriented agricultural trading system." Article 20 of the Agreement on Agriculture states that the objective of agricultural negotiations is the continuation of "fundamental reforms" through reductions in "support and protection." It is vital for Japan to link agricultural negotiations to structural reforms in agriculture.

Today, structural reforms resulting in a single management structure overseeing all the agricultural land of each city, town, and village are necessary for Japanese agriculture to survive in the face of international competition. Japan must consider various measures to promote the investment of capital from outside the field of agriculture and the accumulation of new human capital. Through market competition, production resources must be promptly concentrated in efficient farms and farm businesses, through various developments in management, instead of adherence to family-farming.

The draft from Europe and the United States, or the Harbinson draft? If neither is agreed upon, will negotiations break down? If agricultural negotiations end in failure and the WTO is weakened or rendered impotent, the damage not only to Japan's economy but to the world economy will be great, with costs beyond measure.

>> Original text in Japanese

* Reprinted from the Keizaikyoshitsu column of the Nihon Keizai Shimbun, September 3, 2003. No reproduction or republication without written permission of the author and Nihon Keizai Shimbun.

September 3, 2003 Nihon Keizai Shimbun

October 20, 2003

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