Policy Update 021

Push Forward Agricultural Reform and Take the Offensive in the WTO Negotiations

Senior Fellow, RIETI

Evaluation of the latest agricultural reform

Late last month, the government decided to change the nature of subsidies for wheat and soybean growers from price support to farmer income support. Specifically, the current scheme designed to compensate for the gap between government-guaranteed prices and domestic market prices will be replaced by another scheme called direct payment. Subsidies under this new scheme would not have to be reduced in amount under the World Trade Organization. At the same time, the government will limit the scope of subsidy recipients to farmers above a certain scale of operation from the viewpoint of promoting structural reform. The new policy marks a major policy shift that will introduce selective, rather than universal, support to farmers -- a measure vigorously opposed by agricultural cooperatives, but highly appreciated by the media.

However, there are some critical points that the media has failed to focus on. Domestic market prices are protected by high tariffs -- 800% for rice, 250% for wheat and 1,700% for konjac root -- that shield the domestic market from overseas markets. Put the other way around, this means that tariffs cannot be lowered unless prices are reduced. The European Union reduced institutional support prices for farm products in introducing a direct payment scheme. The Japanese government, however, decided that no direct payments will be made as a means to reduce farm prices. Agricultural cooperatives are resistant to tariff and price reductions as they want to maintain high prices for farm products so they can continue to sell fertilizers and pesticides to farmers at high prices. Structural reform of the Japanese agricultural sector is most notably delayed in the area of rice. If the government lets rice prices fall by abolishing a production limitation program which is output-restricting cartel for price maintenance, small-scale farmers would begin to offer their farmland for lease. And then, if the government implements a direct payment scheme in a way to alleviate the fulltime farmer's burden of renting farmland, farm plots would be put to concentrated use by full-time farmers. This would enable cost reduction by economies of scale, accelerate structural reform and increase fulltime farmers' incomes. Unlike their counterparts in the prewar period, present-day small-scale farmers are part-timers. Their average combined farm and non-farm income exceeds that of wage earners. On the other hand, the average income of full-time farmers is falling below the level of wage earners. That is, large-scale farmers are poor farmers. The government will be able to win the understanding of the general public for its new subsidy policy to provide direct financial supports to fulltime farmers because such a scheme is expected to reduce prices for farm products. The latest reform, however, is problematic both in that it failed to cut into the rice problem, the core issue that should have been addressed at all costs, and in that it will not make any contribution to price reductions that will initiate structural reform.

Agricultural reform in the EU

In 1992, the EU substantially reduced support prices for crops and beef while at the same time providing farmers with direct payments as compensation for the resulting loss of income. Furthermore, support prices for butter were cut by 25% in 2003, followed by the European Commission's proposal to the member states of a 33% reduction in support prices for sugar. Consequently, the EU will be able to lower tariffs on both sugar and butter -- which have been the highest among those imposed on agricultural imports into the EU -- to 100%. This will likely be designated as the upper limit for tariffs in the ongoing WTO negotiations. In the meantime, EU crops have grown competitive enough to go up against U.S. wheat in the global market even without export subsidies. The EU carried out agricultural reform a step ahead of the WTO negotiations. Thus, in the current WTO negotiations, the EU has been taking a proactive stance, for instance proposing further tariff reductions and the abolition of export subsidies. With the EU agricultural administration having shifted into one based on direct payments, as in the U.S., the pattern of the WTO negotiations is now characterized by a confrontation between the U.S. and the EU on one side and Japan on the other.

Japan in the WTO negotiations

In the Uruguay Round of negotiations on agriculture, Japan, along with the U.S., the EU and Australia, formed the core negotiating group. However this time around, Japan, ridiculed by former U.S. Trade Representative Robert Zoellick as a country that can only say "no" to agriculture, has been excluded from the group. Since 2003, India and Brazil have taken its place. A country that knows how to say "no" would be considered respectable, but a country that can say nothing but "no" would be ignored by others. While almost all major players -- the U.S., the EU, Brazil et al. -- have already agreed to introduce a tariff cap of 100%, Japan is increasingly isolated in the negotiations, continuing to oppose setting such a ceiling. Meanwhile, on the domestic front, government officials must appear to be building public support for the continuation of agriculture, which has now been diminished to a minor industry. In reality, however, they are facing mounting criticism of not getting what they should in the negotiations, undermining national interests for the sake of protecting agriculture. [Certain among a country's designated "sensitive (farm) products" are allowed to be exempted from a tariff-cutting formula. The Japanese farm industry is upset about the prospect of these sensitive products being subject to a maximum tariff scheme. However, most countries that have already agreed to accept a tariff cap without exceptions consider that sensitive products are meant to be exceptions applicable only to a tariff-cutting formula. For them, the introduction of a tariff cap is nothing more than a matter-of-fact presupposition.]

Taking the offensive

Protecting agriculture is one thing and how to protect agriculture is another. The purpose of protecting agriculture is to promote its development and ensure food security; tariffs and prices are merely tools to achieve that end. By transforming its agricultural policy into the one based on direct payments, such as those in the U.S. and the EU, Japan will be able to take appropriate domestic steps to alleviate the impact of tariff reductions and to rejoin the core negotiation group. And this enables Japan to take the offensive in the negotiations. For the moment, it seems that Japan is so preoccupied with defending its stance that it cannot think where to strike. Both the U.S. and the EU have their weak points. Switching to an offensive mode by implementing agricultural reform is the best possible tactic in the negotiation.

Of course, Japan may opt for another tactic: keeping its current defensive stance and accepting an honorable defeat. This may sound like a do-nothing policy. However, should the rice tariff be reduced to 100%, Japan would have no choice but to reduce domestic rice prices and introduce a full-fledged direct payment scheme. Japan's postwar reform was possible because the country had experienced a complete defeat. Thinking in those terms, this do-nothing policy is somewhat attractive.

The worst-case scenario would be the one in which Japan, out of consideration for agricultural interest groups, negotiates hard and manages to make rice an exception to a tariff cap, as had been the case with the Uruguay Round negotiations in which Japanese rice was made subject to more amount of minimum access opportunities (tariff rate quota with lower tariff rates) than the case of tariffication; by opting out of the tariffication, Japan had to commit to a yearly increase in the volume of its minimum access import - i.e. mandatory rice import subject to a low tariff - in compensation for not applying tariffication of non-tariff measures on rice, thus, ultimately importing a greater volume of rice with a lower tariff than it would have been with tariffication. The realization of this scenario would mean that Japan will continue to prop up rice prices and leave the least reformed segment of Japanese agriculture unchanged. This represents a partial defeat and would not lead to structural reform. In this situation, Japan would be forced to expand low-tariff import quotas for rice in compensation for the special treatment for rice, resulting in a further reduction in the food self-sufficiency rate. This is a poor tactic.

Will Japan remain chained by what agricultural interest groups say, undermine its reputation as a trading nation in the ongoing WTO negotiations, and consequently let Japanese agriculture further deteriorate? Or will it stand up and assume a grand national strategy to protect agriculture, to ensure the stable supply of inexpensive food to its people, and to demonstrate leadership as a trading nation? I am counting on new Agriculture, Forestry and Fisheries Minister Shoichi Nakagawa, who assumed the post after serving as the Minister of Economy, Trade and Industry in the previous Cabinet, to take a decisive step.

The original text in Japanese was posted on November 4, 2005.

November 16, 2005

November 16, 2005

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