Tuesday, December 23, 2014

Does TPP Really Matter to Agricultural Reform, and Vice Versa?

Some people say that Japan will find it difficult if not impossible to sign on to TPP because it will be difficult to proceed with the requisite agricultural reform against the powerful agricultural lobby, while others think otherwise. These two schools of thought led to very different interpretations of the significance of the lower house general election. The former saw it as yet another complication for TPP because of the LDP’s reliance on the agricultural vote, while the latter are now pointing to the extra two years that the ruling coalition has secured and the lower house supermajority that it retained and claiming that this will make it easier for the Abe administration to secure a TPP agreement. These two opinions appear to be hard to reconcile, if not completely mutually exclusive. But what if the underlying assumption of a powerful link between TPP and agricultural reform does not hold much water?

The main problem with Japanese agriculture is rice. The holdings are too small, the farmers are too old, the product is too expensive (despite massive subsidies), and consumption is in perpetual decline. Fruits and vegetables have been doing just fine despite the low, largely single-digit, tariffs on imports, even when the yen hovered in the low 80s to the dollar. Meat and dairy products also pose problems, but the number of producers is much smaller and geographically concentrated. As for meat, the actual tariffs on beef and pork imports are currently much lower than the nominal headline rates because of the dipping yen.

The key element of the government’s reform efforts appears to be taking power away from the national association cooperatives association—Zenchu—and encouraging local initiatives. A special economic zone may or may not make significant changes to composition of agricultural committees there, which may make decisions regarding permission for the sale and other changes regarding agricultural land sales less arbitrary. The hope is that any successful changes will spread to other regions. But these are trivial changes compared to the inheritance and tax laws and the restrictions on agricultural corporations that keep agricultural land in the hands of aging owners who in many cases are rice farmers in name only. Moreover, much of the subsidies used to encourage farmers to shift away from rice will be directed toward animal feed, consisting largely of—rice!

Unfortunately, TPP is likely to do little to push that reform process, even in the limited form that the Abe administration appears to be proceeding with. Rice is not the main focus for the United States, which is likely to be satisfied with minor adjustments, including a minimum import carve-out.

How about meat? With only Yomiuri sticking with its what seems to have been a premature diagnosis that the Japan-US deal was “effectively concluded,” it is likely that the two sides are still at odds with regard to the actual tariff rates that will be applied and, more importantly, the safeguard mechanism that will kick in when imports surge. But the bottom line has been drawn by the Japan-Australia FTA. The United States will get a better deal than that, at which point it is likely that Canada and New Zealand secures similar deals and Australia has its bilateral deal upgraded. The result is that each exporter will have a relatively stable portion of the Japanese market carved out at a very low tariff rate with the remainder coming in at higher rates depending on the actual import prices. The Japanese government will make up with direct income subsidies or other fiscal means for losses incurred by cattle owners despite the eventual safeguard mechanism.

I have no feel for what is going to happen to dairy farmers. Consolidation is likely to be a major part of the remedy for TPP, but that will merely hasten a process that has been going on for decades without any significant policy push from the national government. Here again, fiscal nostrums appear to be in store within a TPP environment.

To sum up, TPP is unlikely to have a significant impact on the Third-Arrow reform process, which so far does not appear to be addressing the main challenges facing Japanese agriculture.

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