Toward a Globally Competitive Agricultural Sector: Leveraging quality to generate exports

Senior Fellow, RIETI

In some farming districts in the Tohoku region, the ridges between rice fields were swept away by the tsunami. In such districts it will probably be difficult to restore land divisions and difficult for elderly farmers to purchase new machines and resume farming.

However, this presents an opportunity to improve agricultural efficiency. If large plots are established in farming districts, production costs would fall due to higher work efficiency and the introduction of new technology that allows seeds to be sown directly on rice paddies. And if large plots are allocated to young farmers, a transfer to a new generation can be achieved. In addition, if elderly farmers lease their land, they can earn rental income.

Before the disaster, the government had been aiming to make a decision on whether to join the Trans-Pacific Partnership (TPP) by June. However, some are arguing that it is unforgivable to consider participating in the TPP, which would deal a further blow to Tohoku agriculture, which is already suffering due to the impact of the disaster. It also appears that the government is moving in the direction of delaying its decision on whether to join.

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The Ministry of Agriculture, Forestry and Fisheries (MAFF) has published estimates of the impact of the abolition of tariffs (including levies on imports) following participation in the TPP. Agricultural output, which is currently worth 8.5 trillion yen, will decline by 4.1 trillion yen (including a drop in rice production of 2 trillion yen), and Japan's food self-sufficiency rate will fall from 40% to 14%. Agriculture also performs various other functions, referred to as multifunctionality (such as preventing flooding and replenishing water resources), and such functions worth 3.7 trillion yen will be lost.

It is said that the biggest impact of participation in the TPP will be on rice. A policy of reducing the acreage under cultivation has restricted supply and enabled high prices to be charged for rice. Just as they are with other farm products, tariffs are essential to keep rice prices higher than international levels. In reality, though, this policy of maintaining prices to protect farmers has, despite claims to the contrary from MAFF, failed to raise the food self-sufficiency rate or enable agriculture to properly perform its multifunctionality.

Acreage reduction has reduced output, and reduced the self-sufficiency rate. During agricultural negotiations with the World Trade Organization (WTO), Japan has tried to maintain high tariffs on rice, dairy products, and so on in exchange for significantly expanding the tariff rate quotas subject to low tariffs. It negotiates based on the view that a lower self-sufficiency rate is acceptable as long as domestic prices can be maintained. Even though paddy fields perform almost all of the multifunctional roles of agriculture, acreage reduction resulting in fields not being used as paddies has continued for 40 years.

As can be seen in the case of wheat, of which 90% consumed is imported, Japanese consumers have been forced to buy not only domestic produce but also imported farm products at prices higher than international levels, due to the imposition of tariffs on the latter. This is a regressive policy that places the cost burden of agricultural protection on low-income consumers. High rice prices also result in lower rice consumption, which hurts agriculture.

Overseas, both the U.S. and the European Union (EU) have shifted away from price support and moved in the direction of giving direct payments to farmers as a means of protecting agriculture. If Japan also maintains farm output by eliminating tariffs in favor of direct payments to farmers, food safety and security and the multifunctionality of agriculture can be ensured. If the consumer burden concerning domestic farm produce is replaced with direct payments, the consumer burden concerning imported farm produce would also disappear. In other words, the consumer burden can be reduced at a lower cost to the taxpayer.

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The Japanese agricultural sector claims that it is too small to compete with those of other countries. Scale is certainly advantageous when other conditions are equal, but there are large differences among countries in terms of the crops they grow, the fertility of their soil, crop yields, and quality. Scale can therefore not be the only criterion for comparison. Even the average farm size in U.S., the world's largest exporter of farm products, is only 1/19th that of Australia.

Just as there are sizable price differences among various types of cars, so too are there price differences among various types of rice, reflecting the quality of rice (see the graph). In Japan, Koshihikari rice grown in the Uonuma district of Niigata Prefecture sells for a price 1.7 times higher than that produced in other areas. Large quantities of the Thai rice imported following the poor harvest of 1993 were left unsold. It is therefore a mistake to argue that high-grade rice cannot compete with rice of inferior quality because it is so much more expensive.

Graph: Evaluation of rice in Hong KongGraph: Evaluation of rice in Hong Kong

Another argument put forward by the agricultural sector concerning a switch to direct payments is that it would cost the taxpayer a huge amount of money. However, this ignores differences in quality, and comes across as an admission that the current system is placing a massive burden on consumers.

The data from MAFF referred to earlier deliberately inflates the impact of participation in the TPP. It puts the price difference between domestic and foreign rice at four times by comparing the prices of rice imported from China 10 years ago with current prices for Japanese rice. In other words, it uses the former as an indicator of prices of imported rice without tariffs. Given current levels of quality, however, the domestic/foreign price differential has shrunk to 1.3 times, and if the acreage reduction policy was ended, domestic rice would probably end up cheaper than rice imported from China.

The current tariff of 341 yen per kilo of rice is far higher than the current price of domestically produced rice, which is around 210 yen per kilo. Even following participation in the TPP, tariffs need not be eliminated immediately. They can be reduced in phases over a 10-year period. Even assuming that prices stay at the current level, it will not be until the sixth year after tariff reductions begin before prices of imported rice subject to tariffs fall below those of domestic rice. This is true even in the case of Thai rice, the cheapest of all.

Given the quality of Japanese rice, the fact that prices of domestic rice have fallen by 30% over the last 10 years, and the fact that Chinese rice prices are increasing due to rising wages in rural areas and the revaluation of the yuan, even if tariffs are completely eliminated after 10 years, the impact is likely to be nil. The impact can be mitigated even further if the acreage reduction policy is ended.

The value of necessary direct payments after 10 years, if limited to compensation to full-time farmers for lower rice prices following the end of the acreage reduction policy, is likely to amount to about 150 billion yen. With an additional 250 billion yen in payments related to non-rice farm products, the amount is likely to total about 400 billion yen. This cost can easily be covered by abolishing subsidies tied to acreage reduction, which amounts to 200 billion yen, and scrapping the 400 billion yen paid to supplement the incomes of rice farming households (income compensation), which has been criticized as a waste of public money, as the total savings from these measures would total 600 billion yen.

Moreover, if costs are reduced during the 10-year time frame, the amount of direct payments required would be even less. About 100 years ago, Kunio Yanagida, who went on to study folkloristics after joining the Ministry of Agriculture and Commerce, rebuffed the argument from the land-owning classes that Japan's agricultural sector, which was much smaller than that of the U.S., should be protected with tariffs. He said that agriculture should be developed by raising productivity in order to reduce costs.

The cost of producing one unit of farm output is the cost per unit of cultivated land divided by the yield, so it can be reduced by cutting the cost per unit of cultivated land or increasing the yield. If consumption is constant, however, rising yields reduce the amount of land needed for rice production, which increases subsidies under the acreage reduction policy. This has resulted in efforts to curb increases in yields, to the extent that yields in Japan are 30% lower than they are in California.

If the acreage reduction policy is abandoned, yields would increase and the price of rice would fall. If full-time farmers with farms of a certain size or larger are given direct payments such that their ability to pay rent increases, high-cost farmers would be driven out of agriculture by the falling prices. Production would be concentrated among full-time farmers, and farm sizes would increase.

Moreover, because the impact of tariff reductions will not be felt until sometime after joining the TPP, if the income compensation paid to farming households is limited to households with farms of a certain size, a portion of the budget for restoring the disaster-hit areas can be covered. Income compensation should not be paid to part-time farmers with high incomes. Limiting eligibility for the income compensation, both in the disaster-affected areas and in other areas, would result in a concentration of corporate farmers in agricultural regions. This would likely work to increase the size of farms and make Japanese agriculture as a whole more efficient.

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If Japanese rice, which in terms of quality is among the best in the world, is made more competitive in terms of costs and price, it will become even more competitive in the global market. Far from creating an unfavorable and frightening situation, the elimination of tariffs overseas will enable Japanese exports to be expanded further. Milk from Hokkaido is already being transported to other prefectures, so it can also be exported to other nearby countries. Any country that limits imports without any scientific rationale after claiming, for example, that they could be contaminated with radioactive material, should be referred to the appropriate WTO committee or dispute settlement procedures should be pursued on the grounds that the country has violated the WTO agreement on SPS (sanitary and phytosanitary) measures.

Even though the domestic market has been protected by high tariffs, agriculture has declined. Moreover, as the domestic market has been shrinking due to an aging and declining population, Japanese agriculture will have no future unless the export market can be tapped. To expand exports, tariffs imposed by trade partners should be low. More than any other, the agricultural sector, should be responding positively to free trade negotiations such as those concerning the TPP, which will eliminate the tariffs of Japan's trade partners and make farm products easier to export.

Participation in the TPP is on the verge of being shelved. Meanwhile, the world, and the countries participating in the TPP negotiations in particular, are unlikely to wait until Japan is finished with its rebuilding following the disaster. If participation is delayed, debate through the WTO in key areas for which rules have yet to be codified, such as investment, competition, trade and the environment, will end up moving forward without the views of Japan being reflected.

Although the emergence of countries such as China has left Japan with a smaller voice at the WTO, in the case of the TPP, it will be able to air its views as the second largest economy after the U.S. If that success is brought to the WTO, Japan's opinions can be incorporated into WTO rules, which are applicable worldwide. For agriculture, and for the sake of restoring the economy following the disaster, this opportunity should not be missed.

>> Original text in Japanese

* This article first appeared in the June 10, 2011 edition in the "Economy Classroom" column of the Nihon Keizai Shimbun.

June 10, 2011 Nihon Keizai Shimbun

July 12, 2011

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