Implications For Japan Of The July 2008 Draft Agricultural Modalities

September 2008

ICTSD Programme on Agricultural Trade and Sustainable Development

Implications for Japan of the July 2008 Draft Agricultural Modalities

By Kazuhito Yamashita Senior Fellow, Research Institute of Economy, Trade and Industry, IAA

September 2008 l ICTSD Programme on Agricultural Trade and Sustainable Development

Implications for Japan of the July 2008 Draft Agricultural Modalities

By Kazuhito Yamashita Research Institute of Economy, Trade and Industry, IAA

ii

Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

Published by International Centre for Trade and Sustainable Development (ICTSD) International Environment House 2 7 chemin de Balexert, 1219 Geneva, Switzerland Tel: +41 22 917 8492 Fax: +41 22 917 8093 E-mail: [email protected] Internet: www.ictsd.org Chief Executive: Programmes Director: Programme Team:

Ricardo Meléndez-Ortiz Christophe Bellmann Jonathan Hepburn, Marie Chamay and Ammad Bahalim

Acknowledgements: This paper has been produced by the International Centre for Trade and Sustainable Development (ICTSD). ICTSD wishes to gratefully acknowledge the author of the paper, Kazuhito Yamashita. This paper has been produced by the International Centre for Trade and Sustainable Development (ICTSD). ICTSD wishes to gratefully acknowledge the author of the paper, Kazuhito Yamashita. For more information about ICTSD’s programme on agricultural trade and sustainable development, visit our website at www.ictsd.org ICTSD welcomes feedback and comments on this document. These can be forwarded to: jhepburn @ ictsd.ch Citation: Yamashita, K (2008). Implications for Japan of the July 2008 Draft Agricultural Modalities. International Centre for Trade and Sustainable Development, Geneva, Switzerland. Copyright ICTSD 2008. Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-Noncommercial-No-Derivative Works 3.0 License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/us/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. The views expressed in this publication are those of the author and do not necessarily reflect the views of ICTSD or the funding institutions. ISSN 1887-3551

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ICTSD Programme on Agricultural Trade and Sustainable Development

CONTENTS LIST OF TABLES

iv

1. INTRODUCTION

v

2. Japanese agricultural policies and WTO disciplines

6

3. Japanese negotiating position

8

4. Domestic Support

9

4.1. The State of Japanese Domestic Support 4.2. Japanese Domestic Support and the Revised Modalites

5. Market Access

9 10

12

5.1. Tiered formula and sensitive products

14

5.2. Other market access issues

17

6. Export competition 6.1. Possible increases in Japanese exports

7. The Drawbacks of the URAA and the Draft Modalities

18 18

19

7.1. Domestic Support

19

7.2. Absence of a Peace Clause

19

7.3. Subsidies contingent upon the use of domestic over imported goods

19

7.4. Environmental concerns for sustainable agriculture

20

7.5.Export competition

20

7.7. Export tax

21

7.8. Export prohibitions and restrictions

22

8. conclusion

23

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

LIST OF TABLES Table 1 :

Comparison between the policies of Japan,

9

the United States (US) and the European Union (EU) Table 2 :

Domestic Support

10

Table 3 :

Impact of the tariff-cutting formula and associated

12



provisions on Japanese bound duties (in %AVE)

Table 4: Highest-ranking products in terms of sensitivity criterion in Japan (in %AVE)

13

LIST OF FIGURES Figure 2:

Necessary traffic rates on rice (%)

14

Figure 3:

Import price of Chinese rice (yen/ton)

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ICTSD Programme on Agricultural Trade and Sustainable Development

1. INTRODUCTION In contrast to the EU, which took a defensive position in the Uruguay Round but has been playing a more active role in the current Doha Round, Japan has maintained the defensive position it has taken in previous Rounds. In 1992, at the end of the Uruguay Round negotiations, the EU instituted reforms, significantly lowering support prices for grain and beef and compensating farmers by paying them directly. Lowering prices enabled the EU to allow the volume of subsidized exports to be reduced through reductions in surpluses. The EU has subsequently continued its reform process. In the 2000 reform, it reduced the support price of cereals by 15 percent, and in the 2003 reform reduced the support prices on dairy products, with the price of skimmed milk powder being lowered by 15 percent and that for butter by 25 percent. In the 2005 reform, the EU finally reduced the support price for sugar (previously unchanged for 40 years) by 36 percent, and switched to direct payments corresponding to 64 percent of the price reduction. For these reasons, the EU could make a commitment to eliminate export subsidies for sugar, dairy products, cereals and beef, and could tolerate 100 percent tariff caps in the current Doha Round of negotiations. Since the 1960s, price support has dominated Japan’s agricultural policy, supporting farmers’ incomes but placing a huge burden on consumers. In order to maintain high prices, Japan has had to rely on tariffs and non-tariff measures so as to isolate its domestic market from the international market. In the Uruguay Round, the country resisted tariffication and resorted to special treatment stipulated in Annex 5 of the Uruguay Round Agreement on Agriculture (URAA), compensating for not tariffying rice by providing more minimum access than would have otherwise been required. Japan, however, finally recognized that it could no longer bear the excessive minimum access burden and applied tariffication in 1999. The Japanese position in this Round has not changed much from the Uruguay Round, since the country has not changed many of its domestic policies. In 2000, Japan introduced

direct payments for farmers in disadvantaged regions. In 2007, it changed the 70 percent of deficiency payments for wheat, barley, sugar and some other dry farming products into green box payments. These policy reforms, however, did not change the domestic prices of agricultural products. Japan therefore has to continue to rely on high tariffs in order to maintain those prices and protect its agricultural sector. To what extent would a successful conclusion of this Round along the lines of the Revised Draft Modalities paper issued by the chair of the agriculture negotiations, Ambassador Falconer, require changes in Japanese agricultural policies? How much increased market access is likely to be generated as a result of tariff cuts and tariff rate quota expansion? Could Japan play a more aggressive role in the world market, taking advantage of the expansion of market access generated in other countries? This paper makes attempts to address these issues by exploring the implications of the Revised Draft Modalities paper. In addition to quantitative analysis of the extent to which tariffs would be reduced, this paper attempts to analyze the probable and possible effects of the paper on Japanese agriculture and agricultural policies, taking into accounts recent developments in the world market. The first section of the paper gives an overview of the current state of Japanese agriculture and agricultural policies, insofar as these relate to the disciplines introduced in the Uruguay Round Agreement on Agriculture (URAA). The second section reviews briefly the Japanese positions in this Round. The next three sections discuss in more detail the implications of the domestic support, market access and export competition modalities. The following section tries to point out several legal drawbacks to the proposed commitments on subsidies, the lack of disciplines on export tax, and the overly lenient disciplines on export quantity restrictions. It also refers to some environmental concerns which are just as important as trade concerns. The final section makes an overall assessment of the impacts of the suggested modalities on Japan.

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

2. Japanese agricultural policies and WTO disciplines The Uruguay Round of negotiations were more comprehensive and ambitious than any that had preceded them, introducing trade in services and protection of intellectual property rights to the WTO in addition to trade in goods. The negotiations on agriculture also marked a watershed. After a succession of negotiating rounds, the US finally put a stop to EC agricultural policies that had been distorting global trade, and it was determined that the WTO would regulate countries’ domestic agricultural policies as well as market access and export subsidies. Since Japan protects domestic agriculture by means of price support, and has heavily depended on import quantity restriction measures for nationwide or region-specific important agricultural products such as rice, wheat, barley, starch and dairy products, it was strongly opposed to “comprehensive tariffication” in the Uruguay Round of negotiations. Among other things, rice is the most difficult item to be liberalized due to its large share of agricultural production (approximately 25 percent), the large number of people involved in its production (half of all farmers), and the geographical distribution of production, which is spread all over Japan. Japan strongly resisted tariffing the import quantity restriction on rice in the negotiations. This became one of the most important issues at the top of Japan’s political agenda at that period. At 4 o’clock in the morning, just one day before the conclusion of the Uruguay Round of negotiations, the Japanese Prime Minister announced to the nation on TV that the government had accepted the special treatment of rice with respect to tariffication. As compensation for the special treatment, however, Japan agreed to raise the minimum tariff quota access to 8 percent of domestic consumption, from the 5 percent that would have applied in the case of tariffication. Arguably, if the Japanese people and politicians had discussed the rice issue coolly, on the basis of relevant and easily available information,

Japan need not have resorted to establishing an excessive amount of minimum tariff quota access. The agriculture modalities drafted by the Director General of GATT, Dunkel’s Draft Final Act, permitted the out of quota tariff rate to be based on the difference between historically high domestic prices and the historically low international prices caused by the glut from 1986 to 1988, no matter how high the new tariff rate might be. The very high tariff rate resulting from this modality would prevent actual importation, while minimum tariff rate quota access with a significantly lower in-quota tariff would have inevitably forced Japan to import the exact amount of the tariff quota. Arguably however, a cool and rational discussion of this issue was hindered by vehement opposition to comprehensive tariffication. At first, the US did not prefer the idea of special treatment for rice, but finally supported it because it guarantees greater access to the Japanese rice market. An additional 300 thousand tons of minimum access opportunities had suddenly emerged unexpectedly for Californian rice farmers. In 1999 Japan stopped applying the special treatment and introduced tariffication. This was due to a number of reasons, including the fact that the increased access would lead to even more reductions in production, on top of the sweeping domestic production restriction in which Japan was engaged, and the fact that it would be able to curb increases in minimum access according to paragraph 2 of Annex 5 of the URAA by resorting to normal tariffication. Because Japan had delayed introducing tariffication, however, the required minimum access was raised from the concessionary rate of 5 percent to 7.2 percent of domestic consumption in the base period. It is a basic GATT and WTO rule that if a country seeks exemption from general principles, it must invariably provide compensation in return. Japanese policy makers, however, have arguably not learned from this bitter lesson and are trying to repeat the same kind of mistake in this Round.

ICTSD Programme on Agricultural Trade and Sustainable Development

Rice is the only product with tariffs for which Japan has constrained market access. For the other products subject to tariffication, Japan has been forced to apply current access commitments to maintain the level of actual access in 1986 to 1988. According to the Uruguay Round negotiations, this more than 5 percent of domestic consumption. The tariff rate quota of wheat, for example, amounts to 90 percent of domestic consumption. Even a very modest expansion of the tariff quota would make the Japanese production of wheat next to impossible. During the current Round of negotiations, the EU has moved towards WTO compliant “green box” direct payments, or decoupled payments in 2003, which were no not linked to the type or volume of production, prices or production factors. At the same time, the EU reduced the support price for butter by 25 percent. The specific tariff rate on butter, 1,896 per ton, is estimated to be a 200 percent ad valorem tariff rate if the average import price in 1986 to 1988 is used for conversion. For simplicity of calculation and explanation, the imports at the c.i.f. price of 100 after the 200 percent ad valorem tariff will be priced at 300 euro in the internal market. In the case that this price is equal to the domestic price, the tariff would be reduced by 25 percent, bringing the overall price of domestic imports to 225. The necessary tariff rate in order to maintain this price level would be 125 percent (225-100). This is exactly the same tariff level on butter and sugar in the US. In this demonstrative example of CAP reform, the EU is ready to bring its tariffs to the same level as the US. This is an important objective of the 2003 CAP reform. Furthermore, since current tariffs contain some “water” or “overhang,” a tariff cap of 100 percent would be feasible for the EU’s policy objectives. This led to the US-EU agreement in the WTO’s agriculture negotiations in August of 2003. The Japanese Agricultural Minister issued a statement, just after the announcement of the US-EU agreement, mentioning that he would revise the 5-year agricultural policy plan to adjust calculations to reflect the effect of direct

payments in foreign countries. According to some, this decision was largely in response to the US-EU agreement on agriculture negotiations. The Japanese Agricultural Ministry acted because, in its estimation, domestic agriculture would face need policy changes to accommodate a 100 percent cap on certain products, such as rice. Therefore, the Ministry moved towards direct payments, just as the EU had done in response to the Uruguay Round. Nonetheless, the Ministry sought protection of domestic agricultural production through two specific initiatives in the round – a product delimited tariff cap and the notion of ‘sensitive products.’ The specific tariff caps came from a paragraph the chair’s text of the Cancun’s Ministerial meeting in September of 2003 which let a country exempt certain products designated for non-trade concerns. Some in the Ministry believed that it would not have to apply a tariff cap to rice, much like the special considerations under tariffication process in the Uruguay Round. It was assumed that since tariffs would protect domestic prices, farmers would not need direct payments to support Japanese rice production. The idea of “sensitive products” as an exception to the rate of tariff reduction of tiered formula was introduced in the July 2004 Framework Agreement. The agreement did not specify the number of sensitive products and left it open to future negotiations. The Japanese Agricultural Ministry had to explain to its farm industry that it would seek to designate all of the important agricultural products including rice, wheat, barley, sugar, dairy products, beef, pork, starch as “sensitive products.” Since the price levels of those products designated as “sensitive” might remain intact, the Japanese Agricultural Ministry would not have to introduce direct payments in order to compensate farmers for a decline in price. At the time, the Ministry decided to convert an aspect of the deficiency payments subject to URAA reduction commitments to decoupled payments under the green box provisions for domestic support. Under current policy reforms, Japan is unlikely to introduce direct payments for the reduction of prices.

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

3. Japanese negotiating position The negotiating position of the Japanese government has changed greatly as reform of agricultural policies has changed amongst its negotiating partners, namely the EU. The change in policies is demonstrated through the Producer Support Estimate (PSE), developed by the Organization for Economic Co-operation and Development (OECD), an index for measuring farm support or protection. It is a sum of the taxpayer burden in the form of subsidies and payments made to farmers and the consumer burden in the form of higher prices due to tariffs. Breaking the PSE down to its constituent parts of a consumer and taxpayer burden, it can be seen that the proportion of the consumer burden declined in the US from 37 percent in 1986–88 to 17 percent in 2006 and in the EU it went down from 86 percent to 45 percent for the same period. However, in Japan it changed slightly from 90 percent to 88 percent. To some, the US and the EU are moving forward with agricultural policy reforms that shift the burden from the consumer to the taxpayer. The EU’s switch to an agricultural policy that places the burden more heavily on the taxpayer leaves Japan in a difficult position amongst negotiating Members of the WTO. Though traditionally the EU and Japan have had common negotiating interests against the US, the reform process has politically positioned the US and the EU against Japan. Table 1 shows the comparison between the policies of Japan, the US and the EU. Unlike the US and the EU, which have lowered their dependence on tariffs by switching to direct payments, Japan maintains exceptionally high tariffs on products such as rice, wheat and dairy products. For Japan, the most important issue in the WTO agricultural negotiations is not domestic support but maintaining tariff levels. In the current Doha Round of negotiations, many WTO members favour a tariff cap of 100 percent. The EU approves of a tariff cap on the one hand while resisting tariff reductions on the other hand. An 80 percent reduction in the EU’s highest tariffs, approximately 200

percent, would reduce them to 40 percent, a level that European negotiators are not likely to agree to. Conversely, Japan’s tariffs are extremely high. If its rice tariff of 778 percent were reduced by 80 percent, to 156 percent, they would still be in excess of the 100 percent tariff cap. Therefore, to maintain its primary method of protecting domestic agricultural production, Japan’s negotiating position has strongly opposed tariff caps. The Japanese government can accommodate the need for a tiered tariff reduction formula, with the greatest cuts on the highest tariffs. However, it is seeking exceptions, such as the “sensitive product” designation for as many goods as possible. As compensation, Japan will be required to increase its low tariff-rate quota the sensitive product exceptions. Rice has perhaps been the most protected and subsidized among Japanese agricultural goods. Most agricultural production has therefore shifted towards rice. Thus, over a period of forty years, food self-sufficiency has fallen by half, from 79 percent to just 39 percent. Given the recent surge in the food prices and the declining rate of food self-sufficiency, the issue is now a grave concern to Japanese consumers. Japan does not have export subsidies or export credits. The volume of tariff-rate quotas are far above 5 percent of the domestic consumption of each product. For example, the volume of imports through the tariff-rate quota for wheat corresponds to 90 percent of domestic consumption. Even for rice, the volume of imports through tariff-rate quota corresponds to 7.2 percent of domestic consumption in the base period, 1986-88, or 8.2 percent of current domestic consumption. The change in the composition of domestic rice consumption shows the continuing decline of the size of the domestic rice market. Japan relies heavily on high tariffs for protection and support for a limited number of agricultural products such as rice, wheat, barley, and dairy

ICTSD Programme on Agricultural Trade and Sustainable Development

Table 1. Comparison between the policies of Japan, the United States (US) and the European Union (EU) Country

Japan

US

EU

Decoupled direct payments

Partial

yes

yes

Environmental direct payments

Partial

yes

yes

Direct payments for less favourable regions

yes

no

yes

Production restriction programme for price maintenance

yes

no

no

Tariffs over 1000%

2 (beans, tubers of konnyaku)

None

None

Tariffs of 500–1000%

2(rice, peanuts)

None

None

Tariffs of 300–500%

2 (butter, pork)

None

None

Tariffs of 200–300%

5 (wheat, barley, skim None milk powder, starch, and raw silk)

None

products. Tariffs for other agricultural goods are quite low. The average tariff rate of agricultural products, excluding rice, wheat, barley, and dairy is 12 percent. Although this is higher than the US (6 percent), Canada (5 percent), and Australia (3 percent) it is significantly lower than the EU (20 percent), Thailand (35 percent), and Argentina (33 percent). Japan is often criticized abroad for being too protective of its farming sector by its rigid opposition to tariff reductions for a very limited number of agricultural products. However, at home the government and the Ministry of Agriculture, Forestry and Fisheries is blasted for damaging the nation’s interests because its position on agricultural issues stalls negotiations in the WTO and talks on free trade agreements (FTA). However, Japan’s use of price supports backed by tariffs, and not direct payments, is a poorly understood fact.

4. Domestic Support 4.1. The State of Japanese Domestic Support Table 2 shows the summary of notifications made by the Japanese Government. The Total AMS (Aggregate Measurement of Support) amounted to 3,508 billion yen. The AMS for rice amounted to 2,662 billion yen or 76 percent of the total AMS in 1995. The structure of AMS changed drastically in 1998. The AMS for rice was replaced by blue-box payments, or direct payments under production limiting

programmes. The new blue-box policy is a direct payment which is equal to a certain part of the difference between a standard price and an actual average market price. The farmers who participate in the production-restriction programme are eligible for the payments. This is similar to the deficiency payments with production limiting programmes in the US. These were abolished by the 1996 Farm Bill. Due to the elimination rice, the Total AMS was reduced to 767 billion yen in 1998, which is 22 percent of that in 1995. This change in AMS occurred because Japan abolished the administered price of rice after the Uruguay Round negotiations. This was concurrent with the abolishment of the Food Control in 1995. The basic structure has changed little since then. With total AMS in 2005 at 15 percent of the level of the binding commitment, 3,973 billion yen, Japan is well within the limits set by URAA. The high level of AMS in the base period, and elimination of rice from AMS are contributing factors to the difference between bound and applied levels of domestic support. A high domestic market price can be maintained by tariffs or other border protection measures, without intervention by governments in the form of an administered price or other measures. The market price determined by domestic supply and demand is different from an international price, if a domestic market is isolated from an international market by means of border protection measures. The support provided under the AMS is the difference between an

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

administered price, not a domestic market price, and an international price . Without an administered price, even if a domestic market price is higher than an international price, the AMS will not account for the difference between domestic and international prices. On the other hand, with or without an administered price, the PSE measures the difference precipitated by the existence of tariffs that isolate the domestic market from the international market . Therefore, Total AMS has declined substantially but PSE has changed little. Figure 1 shows that PSE declined by less than 10 percent, between 1986-88 and 2005, a striking contrast against the 88 percent reduction in AMS. The government had been forced to dispose of surplus rice stock because it had to purchase rice from farmers at an administered price under the

old Food Control Law until it was abolished in 1995. At that time, it cost 3 trillion yen. It sought to reduce the mandatory purchase quantity of rice and its financial burden through the production-restriction programme, operated by providing subsidies for producing crops other than rice since 1970. After the abolition of the old Food Control Law, the government did not have to continue the production-restriction programme for any financial reasons. Agricultural cooperatives, however, demanded the government to continue the programme. The price for rice has since been maintained by the production-restriction programme and not by an administered price leading to differences in an assessment of domestic support. The production - restriction programme, essentially a cartel of the government and

Table 2. Domestic Support Binding Average commitment Fiscal year 1995 1996 1997 1998 1999 2000 of 2001 2002 2003 2004 2005 by Falconer 1995-2000 modality paper AMS(total)

3,508 3,330 3,171

767

748

709

2,039

667

730

642

608

593

1,192

Wheat

55

60

69

68

69

78

67

82

85

103

95

95

67



Barley

25

26

21

16

22

11

20

11

11

14

11

10

20



Rice

-

-

-

2,539

-

-

-

-

-

2,539



Soya beans

2

3

5

7

10

16

7

19

27

28

28

26

7



Sugar

59

49

54

60

55

54

55

55

55

58

59

57

55



Starch

22

18

21

20

16

16

19

18

19

17

16

15

19



Milk

152

153

150

148

142

130

146

36

54

31

27

27

146



Beef & veal

206

171

166

166

168

147

171

193

226

132

116

110

171



Meat of swine

323

292

286

281

265

255

284

252

253

259

257

252

284



Silk-worm cocoons

3

1

2

1

1

2

2

1

1

1

1

1

2



Blue (rice)

-

-

-

50

93

93

65

91

87

68

68

65

246



Total

37

37

36

117

33

32

49

32

44

35

49

49



Product-Specific

13

11

12

53

10

11

18

12

23

17

24

23



Rice

-

-

-

42

0

0

14

0

0

0

8

8



NonProduct-Specific

24

26

24

22

22

21

23

20

20

18

17

18



total

894

873

833

2,152

790

860

745

724

707

Deminimis

Product-specific





2,662 2,557 2,398

3,544 3,367 3,207

1,145~1,608

Note; billion yen

Specific tariffs are applied to tariffied products in Japan and the EU. Here these specific tariffs are estimated as their equivalents of ad valorem tariff rates, taking into account of international prices.

ICTSD Programme on Agricultural Trade and Sustainable Development

agricultural cooperatives, is another form of price support which is not captured by AMS. The subsidies under the programme stood at 168 billion yen in 2005. These payments were classified under environmental programmes in the Green Box. Facing a decrease in price due to declining demand in 2007, the government added an additional 50 billion yen for the 2008 programme. period Japan has shifted 70 percent of Amber box direct payments for those products to Green box direct payments in 2007. Therefore disciplines on product-specific AMS will not pose any problems to Japan. The measures for De minimis should be 2 to 2.5 percent of the value of agricultural production. We cannot know with certainty the value of agricultural production in the upcoming implementation period. However, the 1995-2000 value of agricultural production is 9,847 billion yen. Therefore, the limits on the De minimis support would be between 197 and 246 billion yen. This amount exceeds the product-specific or non product-specific support policy in 2005. Blue Box payments would be capped by 2.5 percent of the 1995-2000 value of agricultural production. This was nearly 246 billion yen. Blue Box payments in 2005 were 65 billion yen. Product-specific AMS would also be capped by the average value in 1995 to 2005 period. Its current value has remained unchanged since 2005. Japan will not have to change its domestic support if the revised text of modalities is put into effect.

4.2. Japanese Domestic Support and the Revised Modalites The revised February WTO agricultural modalities set a limit on overall trade-distorting support (OTDS). Accordingly, OTDS will be comprised of the Final Bound Total AMS, as well as, 10 percent of the value of agricultural production in 1995-2000 and the greater of, the average Blue Box payments or 5 percent of the value of agricultural production in 1995-2000. Under the modalities, Japan would be required to reduce OTDS by 70.5 to 79 percent.

The Base OTDS is listed as 5,450 billion yen in Table 2. The reduced and final bound OTDS is between 1,145 and 1,608 billion yen. It is far above 707 billion yen, the total of AMS, blue box payments and de minimis corresponding to OTDS in 2005. The Final Total AMS binding set for Japan would be 70 percent of the current Total AMS. The current Final Bound AMS on schedule is 3,973 billion yen. With a reduction of 70 percent, the resulting limit of 1,192 billion yen will be greater than the most recent data on AMS spending at 593 billion yen in 2005. Product-specific AMS for some products such as wheat, sugar and soybeans in recent years was greater than that in the base period, 1995 to 2000. However, since that reporting period Japan has shifted 70 percent of Amber box direct payments for those products to Green box direct payments in 2007. Therefore disciplines on product-specific AMS will not pose any problems to Japan. The measures for De minimis should be 2 to 2.5 percent of the value of agricultural production. We cannot know with certainty the value of agricultural production in the upcoming implementation period. However, the 1995-2000 value of agricultural production is 9,847 billion yen. Therefore, the limits on the De minimis support would be between 197 and 246 billion yen. This amount exceeds the product-specific or non product-specific support policy and was classified under De minimis in 2005. Blue Box payments would be capped by 2.5 percent of the 1995-2000 value of agricultural production. This was nearly 246 billion yen. Blue Box payments in 2005 were 65 billion yen. Product-specific AMS would also be capped by the average value in 1995 to 2005 period. Its current value has remained unchanged since 2005. In summary, Japan will not have to change its domestic support if the revised text of modalities is put into effect.

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

5. Market Access For the Japanese agricultural industry, market access is much more important than domestic support. For the Japanese government, agricultural market access liberalization is a stumbling block of the Doha Round as a whole. Since Japan protects agricultural good through tariffs, domestic prices for certain products are much

higher than international prices. Price support, or the consumer burden, provided through high tariffs composed nearly 90 percent of the PSE in recent years. Due to this discrepancy, prices of important domestic agricultural products such as rice cannot be maintained without tariffs.

Assessing the tariff-cutting impact of the formula of the revised modalities. Table 3 : Impact of the tariff-cutting formula and associated provisions on Japanese bound duties (in %AVE) Bound applied rte after TF Bound applied rate after + Tariff rate after TF Tiered Escalation + Tropical hs2 Description Initial Bound formula (TF) (TE) products (TP) 1 2 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 29 33 35 38 41 43 50 51 52 53

All Live Animals Meat and Edible Meat Offal Dairy Produce. Birds Eggs. Natural Honey. Edible P Products of Animal Origin Not Elsewhere Specified Live Trees and othr Plants. Bulbs Roots and the L Edible Vegetables and Certain Roots and Tubers Edible Fruit and Nuts. Peel of Citrus Fruit or Mel Coffee Tea Maté and Spices Cereals Products of the Milling Industry. Malt. Starches. Oil Seeds and Oleaginous Fruits. Miscellaneous Gra Lac. Gums Resins and othr Vegetable Saps and Extr Vegetable Plaiting Materials. Vegetable Products N Animal or Vegetable Fats and Oils and Their Cleava Preparations of Meat of Fish or of Crustaceans M Sugars and Sugar Confectionery Cocoa and Cocoa Preparations Preparations of Cereals Flour Starch or Milk. Pa Preparations of Vegetables Fruit Nuts or othr Pa Miscellaneous Edible Preparations Beverages Spirits and Vinegar Residues and Waste From the Food Industries. Prepa Tobacco and Manufactured Tobacco Substitutes Organic Chemicals Essential Oils and Resinoids. Perfumery Cosmetics Albuminoidal Substances. Modified Starches. Glues. Miscellaneous Chemical Products Raw Hides and Skins othr thn Furskins and Leather Furskins and Artificial Fur. Manufactures Thereof Silk Wool Fine or Coarse Animal Hair. Horsehair Yarn a Cotton othr Vegetable Textile Fibres. Paper Yarn and Wove

47.9 142.8 55.8 113.3 0.1 0.3 17.6 10.0 2.9 167.4 140.2 9.1 5.0 3.5 4.3 22.3 207.4 34.1 74.6 16.2 40.7 19.3 9.1 21.2 8.5 0.4 8.1 2.9 0.0 2.0 148.2 0.0 0.0 0.0

16.5 44.2 19.6 36.9 0.0 0.2 6.4 5.0 1.4 53.9 44.8 2.8 2.5 1.7 2.1 8.9 63.5 11.9 24.7 7.9 15.0 8.8 4.5 9.2 4.3 0.2 4.1 1.4 0.0 1.0 44.4 0.0 0.0 0.0

15.8 44.2 19.6 36.9 0.0 0.2 6.4 5.0 1.3 48.9 39.6 2.5 2.5 1.7 1.2 8.9 63.5 9.2 23.7 7.8 14.9 8.8 4.5 9.2 4.3 0.2 4.1 1.4 0.0 1.0 44.4 0.0 0.0 0.0

15.4 44.2 19.6 36.9 0.0 0.0 5.8 3.5 1.0 48.9 40.6 2.1 0.8 1.7 1.0 8.9 47.5 8.1 24.7 7.9 15.0 8.8 4.5 9.2 4.3 0.2 4.1 1.4 0.0 1.0 44.4 0.0 0.0 0.0

ICTSD Programme on Agricultural Trade and Sustainable Development

Table 4: Highest-ranking products in terms of sensitivity criterion in Japan (in %AVE) hs6

Description



Initial

Post formula half cut on

MFN

MFN

10119 LIVE HORSES EXCL. PURE BRED FOR BREEDIN

349.067

104.720

186.169

20130 FRESH OR CHILLED BOVINE MEAT BONELESS

50.000

21.500

31.000

20230 BONELESS FROZEN MEAT OF BOVINE ANIMALS

50.000

21.500

31.000

20319 FRESH OR CHILLED MEAT OF SWINE EXCL. CA

66.075

23.787

37.883

20329 FROZEN MEAT OF SWINE EXCL. CARCASES AND

79.332

23.799

42.310

20649 EDIBLE OFFAL OF SWINE FROZEN EXCL. LIV

211.253

63.376

112.668

40210 MILK AND CREAM IN SOLID FORMS OF A FAT

280.425

84.128

149.560

40221 MILK AND CREAM IN SOLID FORMS OF A FAT

351.385

105.416

187.405

40229 MILK AND CREAM IN SOLID FORMS OF A FAT

548.878

164.664

292.735

40291 MILK AND CREAM CONCENTRATED BUT UNSWEET

193.686

58.106

103.299

40299 MILK AND CREAM CONCENTRATED AND SWEETEN

236.776

71.033

126.281

40410 WHEY WHETHER OR NOT CONCENTRATED OR SWE

521.380

156.414

278.069

40490 PRODUCTS CONSISTING OF NATURAL MILK CONS

273.803

82.141

146.028

40510 BUTTER EXCL. DEHYDRATED BUTTER AND GHEE

598.222

179.467

319.052

29.800

12.814

18.476

377.517

113.255

201.342

71332 DRIED SHELLED ADZUKI BEANS `PHASEOLUS O

476.361

142.908

254.059

71339 DRIED SHELLED BEANS `VIGNA AND PHASEOLU

215.472

64.641

114.918

16.000

4.800

10.667

100110 DURUM WHEAT

247.610

74.283

132.059

100190 WHEAT AND MESLIN EXCL. DURUM WHEAT

298.694

89.608

159.303

100300 BARLEY

254.740

76.422

135.861

35.714

15.357

22.143

100620 HUSKED OR BROWN RICE

933.415

205.351

497.821

100630 SEMI MILLED OR WHOLLY MILLED RICE

840.623

184.937

448.332

1000.000

305.429

740.433

110100 WHEAT OR MESLIN FLOUR

399.070

95.777

212.837

110230 RICE FLOUR

679.323

149.451

362.305

110429 GRAINS OF CEREALS HULLED PEARLED SLIC

740.396

177.695

394.878

57.785

20.803

33.130

110811 WHEAT STARCH

311.585

74.780

166.179

110813 POTATO STARCH

249.770

74.931

133.211

110814 MANIOC STARCH

577.298

127.006

307.892

120220 SHELLED GROUND NUTS WHETHER OR NOT BROK

312.017

68.644

166.409

121299 FRUIT STONES AND KERNELS AND othr VEGET

747.531

164.457

398.683

160242 PREPARED OR PRESERVED SHOULDERS AND CUTS

105.556

31.667

56.297

160249 PREPARED OR PRESERVED MEAT AND OFFAL OF

67.728

24.382

38.831

170111 RAW CANE SUGAR EXCL. ADDED FLAVOURING O

362.974

79.854

193.586

170191 REFINED CANE OR BEET SUGAR CONTAINING A

274.128

60.308

146.201

180620 CHOCOLATE AND othr FOOD PREPARATIONS CO

87.673

19.288

46.759

180690 CHOCOLATE AND othr PREPARATIONS CONTAIN

49.630

14.889

30.770

40690 CHEESE EXCL. FRESH CHEESE INCL. WHEY C 71310 DRIED SHELLED PEAS `PISUM SATIVUM` WHE

80300 BANANAS INCL. PLANTAINS FRESH OR DRIED

100590 MAIZE EXCL. SEED

100640 BROKEN RICE

110710 MALT EXCL. ROASTED

bound rates

13

14

Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

hs6

Description

Initial



Post formula half cut on

MFN

MFN

bound rates

190120 MIXES AND DOUGHS OF FLOUR MEAL STARCH

174.856

41.965

93.256

190190 PREPARATIONS OF FLOUR MEAL STARCH OR M

145.677

43.703

77.695

210120 EXTRACTS ESSENCES AND CONCENTRATES OF T

122.746

36.824

65.465

220421 WINE OF FRESH GRAPES INCL. FORTIFIED WI

24.026

12.013

16.017

220710 UNDENATURED ETHYL ALCOHOL OF ACTUAL ALC

63.021

22.688

36.132

163.238

48.971

87.060

500200 RAW SILK NEITHER SPUN NOR THROWN

5.1.

Tiered formula and sensitive products

Analysis of the formulas under consideration suggests that Japanese policies on market access may change. Table 3 shows that the tiered formula would reduce Japanese average ad valorem equivalent (AVE) tariff rates of all agricultural products from 48 percent to 17 percent. A 66 to 73 percent reduction of tariff rates, in the top of tariffs greater than 75 percent, for products such as rice, wheat, sugar and dairy products will cause tremendous upheaval in Japanese agriculture. The current AVE tariff on rice is 778 percent according to the Japanese government’s notification to the WTO Secretariat. Table 4 shows that the initial MFN tariff rate on husked or brown rice, 933 percent, on milled rice, 841 percent, will be reduced to 205 and 185 percent, respectively, after cuts under the tiered formula proposed in the current modalities. Figure 2 : Necessary tariff rates on rice (%)

Two important facts need to be taken into account. For one thing, the current bound tariff rates resulted from “dirty tariffication” in the Uruguay Round. The difference between historically high domestic prices and historically low international prices in the base period (1986 to 1988) created tariff rates which contain a great deal of overhang. Another issue is that the recent surge in international prices has decreased the level of tariffs necessary to protect Japanese agriculture. Five years ago, a 400 percent tariff rate on rice was needed to maintain the domestic rice price. Now only a 50 to 80 percent tariff rate is enough for that purpose (see Figure 2). Japan could therefore feasibly accept tariffs caps and a 70 percent reduction in tariffs while achieving its domestic agricultural policy objectives. One might therefore wonder why Japan is opposed to a tariff cap and the top band cut. Somehow, however, many in the agricultural

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sector are unaware of this fact and believe that high tariff is indispensable for its protection. There is a historical precedent. In the Uruguay Round, Japan opposed tariffication and resorted to special treatment in Annex 5 in the URAA. In 1999, five years after the Uruguay Round ended, Japan finally accepted tariffication. It made an attempt to avoid the additional expansion of tariff rate quotas by 0.8 percent of domestic consumption and settled at 7.2 percent of current of domestic consumption in 1986-88 by resorting to paragraph 2 of section A of Annex 5 in URAA. The Japanese government, or the Ministry of Agriculture, Forestry and Fisheries at that time, finally realized that the request for an exception to a WTO rule would be accompanied with compensation and that tariffication was less damaging than a minimum access tariff rate quota. Some argue that current Japanese government officials are pursuing a similar path. They may push for the same policies again. A request for “Sensitive Products” would be accompanied with compensation, that is, the expansion of tariff quota equivalent to no less than 4 to 6 percent of domestic consumption, the base period for which is not mentioned in the Draft Modalities, where the two-thirds deviation to the tiered formula is used. This amount exceeds the market access creation which Japan tried to avoid in 1999. Officials in the Ministry of Agriculture, Forestry and Fisheries consoled the agricultural industry with the observation that the revised modalities paper does not mention tariff caps. By doing so, they were able to emphasize the success of the diplomatic efforts by the Japanese delegation. However, if tariff caps are avoided, further tariff rate quota expansion is demanded. The modalities require that if a Member wishes to have 4 percent of its tariff lines exceed a 100 percent ad valorem tariff it should expand quotas for all Sensitive Products by 0.5 percent of domestic consumption. This has not changed much in the package presented by the Director General of the WTO’s Secretariat, Pascal Lamy. A request for “Sensitive Products” would be accompanied with the expansion of tariff rate quotas by the equivalent of 4 percent of domestic consumption. A request for an

increase in the number of “Sensitive Products” from 4 to 6 percent of total tariff lines would an additional expansion of tariff rate quotas by the equivalent of 0.5 percent of domestic consumption. In addition, maintaining tariffs in excess of 100 percent would be require an additional expansion of all tariff rate quotas by the equivalent of 0.5 percent of domestic consumption. In all, the tariff rate quota for rice would be expanded from 8.2 percent of current domestic consumption to 13.2 percent of domestic consumption, according to the Lamy package. The tariff rate quota for wheat would be expanded from current 85.2 percent of domestic consumption in 2007 to more than 90 percent of domestic consumption. This will jeopardize the domestic policy goal of increasing the agricultural self-sufficiency rate from 39 percent to 45 percent. Paragraph 72 of the Agriculture Draft Modalities issued in February states that each developed country Member shall have the right to designate up to four or six percent of dutiable or scheduled tariff lines as “Sensitive Products”. Japan’s scheduled tariff lines are 1,332. Its dutiable tariff lines are 1,013. Therefore, four to six percent of tariff lines corresponds to 53 to 80 in the case of all tariff lines and 41 to 61in the case of dutiable tariff lines. In order to designate as many tariff lines as possible, Japan insisted that the base should be not dutiable tariff lines but all scheduled tariff lines. In paragraph 71 of the revised modalities issued in May, the term “dutiable” was deleted, garnering Japan a larger number of tariff lines for sensitive products. The tariff lines of agricultural products of Japanese concerns are 17 (rice), 20 (wheat), 47 (dairy products such as butter and skim milk powder), 56 (sugar), 8 (starch), 6 (miscellaneous beans), 2 (peanuts), 12 (barley), 1 (glucomannan or tubers of konnyaku), 2 (raw silk), 32 (pork), and 26 (beef). In sum, there are 229 tariff lines, or 17 percent of all tariff lines, that Japan would like to designate as sensitive. This is well above the 6 percent of all tariff lines mentioned in the draft modalities to date. Japan has requested that more than 10 percent of all tariff lines be allowed the “Sensitive Products” designation.

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

In the Ministerial meeting held in July of 2008, Japan lowered its target to 8 percent of all tariff lines. This was turned down by the EU. They insisted on 4 percent. Lamy suggested that the number of the “Sensitive Products” be 4 percent and that a member could designate the “Sensitive Products” up to 6 percent by paying additional compensation, that is, the expansion of tariff quota equivalent to 0.5 percent of domestic consumption. Ad valoremtariff rates of the following products, except beef, a non-tariffied item in the Uruguay Round, are in excess of 200 percent: 778 percent (rice), 252 percent (wheat), 256 percent (barley), 482 percent (butter), 218 percent (skim milk powder), 234 percent (starch), 1,083 percent (miscellaneous beans), 593 perpercent (peanuts), 1,705 percent (tubers of konnyaku), 245 percent (raw silk), 325 percent (sugar), and 120~380 percent (pork) according to the Japanese government’s notification to the WTO’s Secretariat. Even when tariff reduction in the highest tier is 73 percent and Japan adopts the one-thirds deviation, which it is not likely to adopt, tariff rates on those products still remain in excess of 100 percent ad valorem. If Japan designates 4 percent of tariff lines as “Sensitive Products,” paragraph 75 of the Draft Modalities will apply and an additional expansion of 0.5 percent of domestic consumption is required for all of the “Sensitive Products”. Tariff rates on rice, butter, miscellaneous beans, peanuts, tubers of konnyaku and pork after the application of tiered formula will be in excess of 100 percent ad valorem without resort to “Sensitive Products”. Then paragraph 75 of the Draft Modalities will apply to all designated “Sensitive Products” other than these products. Other products designated as “Sensitive Products” will have to pay the price of additional tariff rate quota expansion on behalf of the above products with high tariffs. In order to avoid this situation, Japan has to reduce some of these products more than required by paragraph 61 or not to apply “Sensitive Products” at all. A tariff cut, in line with the tiered formula in paragraph 61 of the Draft Modalities, does not adversely affect Japanese agriculture by itself. However, the designation and use of “Sensitive

Products,” with the requisite expansion of tariff rate quotas, will damage Japanese agriculture. Some farmers maybe pushed out of the market. The domestic market for the Japanese farmers will shrink due to an increase of imports. This damage will multiply over the long run as Japan’s population continues to decline from current 130 million to 100 million according to the Ministry of Health and Labour of the Japanese government. Per-capita rice consumption has halved in the space of 40 years according to the according to the “food supply and demand statistics” of the Ministry of Agriculture, Forestry and Fisheries. Moreover, as society ages, the average amount that each person eats will decrease even further. In short, the overall level of rice consumption will decline at a higher rate than the population decrease. If by 2050 percapita rice consumption were to fall to half of the current level and the population were to decrease from 130 million to 100 million as predicted by the Ministry of Health and Labour, the overall amount of rice consumed would drop significantly from its present level of 9 million tons to 3.5 million tons. Even if per-capita rice consumption were only to fall from its present level of 60 kg to the order of 50 kg, the overall amount of rice consumed would still drop to 6 million tons. Some may argue that agriculture exporting countries should capitalize on quota expansion aspects of “Sensitive Products”. They should not oppose the Japanese proposal but be willing to accept or support it. Paragraph 2 of Annex 5 of the URAA lets Japan cease the application of special treatment on rice during the implementation period of the Uruguay Round. If tariff lines for “Sensitive Products” are restricted to 4 or 6 percent, Japan will have to prioritize products. For political reasons, rice must be designated a“Sensitive Product”. Other products likely to be designated as sensitive are ranked in order of their value of production from rice (2,004 billion yen), dairy products (688 billion yen), pork (534 billion yen), beef (445 billion yen), sugar (130 billion yen), wheat (126 billion yen), starch (33 billion yen), miscellaneous beans (32 billion yen), barley (25 billion yen), glucomannan (11 billion yen).

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As tariffs are restructured, the Japanese government may lose an important source of revenue for various domestic agricultural programmes. Particularly for goods such as beef, sugar, starch, wheat and barley, tariff revenues, levies, or quota rent are utilized to subsidize these products. A reduction of tariff rates might make this system untenable. Current bound tariff for beef is 50 percent, while applied tariff is 38.5 percent. This earns revenue to support for subsidies to beef and pork farmers. At the moment, the Japanese government needs an increase in revenue to cope with price hike of feed grain for livestock farmers. If the 50 percent tariff were reduced to 21.5 percent, in line with tiered formula in paragraph 61 of the Draft Modalities, the revenue needed to subsidize farmers may not be generated. In the case of wheat, things are somewhat different. The revenue for the deficiency payment between the guaranteed price and market price is earned by what is called “markup” between the market price and the import price which is levied on imported wheat. Under this system, when an import price increases, the market price will also increase. The amount of deficiency payments will therefore decrease because the import price will not affect the guaranteed price for domestic farmers. Since more than 90 percent of domestic consumption is imported and international prices have soared recently, the necessary tariff rate which can generate enough revenue for the deficiency payment between the guaranteed price and market price that is augmented by increasing the price of imports is estimated to be reduced from 25 percent in the upper half of the 2006 fiscal year to 7 percent in the latter half of the 2007 fiscal year. If the import price in the recent months (February and March in 2008) will be used, it would be further reduced to 3 percent. In the case of beef and pork, applied tariffs are not at bound levels. A Snap-back, or safeguard system, which raises applied tariff up to bound tariff when imports pass a certain threshold level was introduced in the Uruguay Round. The pork snap-back system has caused a trade dispute with the EU. If bound tariffs on these products were reduced, this snap-back system would be very hard to maintain.

5.2.

Other market access issues

If a 10 percent tariff is reduced to 1 percent, it is 90 percent tariff cut. Dutiable tariff lines with a less than 20 percent tariff compose of 62.5 percent of total dutiable tariff lines. By reducing these tariffs disproportionally more, than other higher and more politically sensitive ones, the 54 percent minimum average cut on final bound tariffs is not very difficult to accomplish. Japan has resorted to the Special Agricultural Safeguard (SSG) on several products including rice, wheat flour, rice flour, butter, milk powder, milk and cream, manioc starch. Most of SSG actions are not volume-based but price-based. The price-based SSG is triggered when an import price is lower than the reference price. If the tariff rates are substantially greater compared to the reference price and they are specific tariffs, the decrease of an import price does not adversely affect domestic producers and an automated price-based SSG remedy is not important. Though substantial tariff cuts, tariff simplification, and a move towards ad valorem tariffs may value a price-based SSG more, its value may diminish when the international price is well above the reference price and projected to increase. Therefore, the elimination of SSG, or a reduction to 1.5 percent of scheduled tariff lines, will most likely not have adverse affects on Japanese agriculture. According to Table 3, estimated by David Laborde, the modalities on tariff escalation or tropical products will not substantially change the tariff levels after the application of the tiered formula. The modalities may affect some individual products. There are several products and processed products in Annex D of the Draft Modalities where tariff escalation is observed in Japan. Tariff escalation is the practice of maintaining higher tariffs on goods that are more processed. The degree of tariff escalation between fruits and fruit juice and between oilseeds and oil will be lessened. Take tomatoes and tomato juice for example. Now tariff on tomatoes is 3 percent while that on tomato juice is 29.8 percent. Application of the Draft Modalities will reduce those tariffs to 1.5 percent and 10.7 percent respectively. Among the list, cassava starch is a tariffied product and a potential sensitive product. In order to avoid

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

of disciplines on tariff escalation, this must be designated a sensitive product. If Annex G for tropical products is an indicative list, just as in the Uruguay Round, paragraph 135 will not matter to Japan. Otherwise, Annex G, including tariffied products such as rice, manioc starch, ground-nuts, tubers of konnyaku, cocoa powder as well as sugar, may pose a serious problem.

6. Export competition When Japan accepted minimum access requirements for rice, the cabinet decided that the relevant production restriction programme will not be strengthened or affected by it. In other words, the domestic market for rice must not be affected by the minimum access requirement. Rice imported under the minimum access tariff quota will be mainly disposed of for industrial use or food aid. Domestic rice production is grown largely for human consumption. Even when some imported rice is directed to human consumption, the government will offset losses for domestic producers by utilizing a larger amount of Japanese rice for food aid or industrial use. The government pays the difference between the high domestic price for rice for human consumption and a low rice price for food aid or industrial use. While food aid is the result of surplus of domestic production in the US, it is for the disposal of minimum access rice in Japan. Japan imported 3,710 thousand tons of minimum access of rice between 1995 and 2000. Of this amount, 360 thousand tons of it, or less than 10 percent, is directed for human consumption for food in Japan. Another, 1,390 thousand tons are directed to industrial use, 1,210 thousand tons are for food aid, and 750 thousand tons go towards stock holding. Nearly, 1,210 thousand tons of domestic rice was directed towards food aid between 1997 and 2001. In order to offset the impacts on the domestic market, the government responded by introducing 360 thousand tons of minimum access rice for human consumption in Japan.

If the decision of the Appellate Body in the US Upland Cotton case were still valid, Japan’s export for food aid could be considered inconsistent with Article 10.1 of the URAA. This is because the amount of export subsidies in Japan’s bound commitments to WTO are not defined. Therefore, Japan cannot grant export subsidies. According to paragraph 3 of Article 3 and Article 8 in URAA and paragraph 144 of the Draft Modalities there can be no change of obligations and rights under Article 10.1. Even when this is not the case, some Japanese export for food aid was made in the form of loans. This was not in fully grant form and inconsistent with the paragraph 2 (b) of Annex L of the Draft Modalities. The other forms of Japan’s food aid are Kennedy Round aid and donations to the World Food Programme. If Japan will not be allowed to export surplus rice, garnered through an increased minimum access requirement under a sensitive product designation, it may have to strengthen production restrictions on rice.

6.1. Possible increases in Japanese exports After accounting for the use of the sensitive product designation, average tariffs in developed countries would be reduced from 7.5 percent to 4.3 percent for Japanese exporters. Tariffs in developing countries (nonSVE, non-RAM, non-LDC) would be slightly reduced from 16.3 percent to 16.1 percent. Tariffs in RAMs, or Recently Acceded Members, would be reduced slightly from 18.1 percent to 17.4 percent. The reduction in tariffs faced by Japanese exporters is listed by trading partner and product in Tables 5 and 6. Though Japan wishes to export high quality produce to China, it cannot expect much help from tariff reductions in the Agriculture Draft Modalities. The items of Japanese interest, the tariffs on vegetables would be reduced 14 percent to 11 percent and those on fruits remain the same, at 18 percent. The Modalities, therefore, do not help Japan. Japan will continue to play a very defensive role in the agricultural negotiations in this Round.

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7. The Drawbacks of the URAA and the Draft Modalities 7.1. Domestic Support Countermeasures against the URAA’s inconsistent subsidies In URAA, there are several special disciplines which do not exist in the WTO Agreement on Subsidies and Countervailing Measures (SCM). In the URAA, the ceilings for amber box subsidies, or AMS, are bound in the schedule just like tariffs. They are also subject to reductions. Whether the actual amount of amber box subsidies exceeds the bound ceiling is usually seen after the relevant year ends. In contrast with a civil legal action, remedies in the Dispute Settlement Mechanism of WTO are confined to rectification or removal of measures inconsistent with WTO rules in the future. A country does not have to compensate for previous losses or injury caused by measures inconsistent with WTO rules. Though countries may be familiar with previous violations by other Members, they cannot issue retroactive countermeasures. Arguably, subsidies under the de minimis provision utilize a loophole. The binding commitments for other provisions, such as for export subsidies or AMS commitments, are prepared in a country schedule well before the relevant year starts. Even though de minimis provisions in the URAA are 5 percent of the total value of production during a given year, the data on the total value of production for a given year generally becomes public long after the year has passed. Therefore, enforcement of de minimis commitments is usually a difficult or nearly impossible task. Moreover, the current structure of de minimis allows the absolute amount of support to increase during a given year since it is percentage of the total value of production. A possible solution to this problem would be the introduction of a base period, like the one for AMS, such as 1986-88 or 19952000. However, at present there are no such provisions in the Agriculture Draft Modalities.

7.2. Absence of a Peace Clause In the URAA, subsidies are categorized as green, blue and amber. This is different from the SCM. Under the SCM, an industryspecific subsidy is no longer green and export subsidies, including export credits, are red. The SCM, in Article 5, states that it does not apply to subsidies that are maintained on agricultural products, as provided in Article 13 of URAA. The Peace Clause, Article 13 of the URAA, expired at the end 2003 according to Article 1(f) of the URAA. It was a time bound agreement between countries to refrain from bringing disputes to the WTO dispute settlement process. Now, any subsidy under the existing or newly established disciplines is not considered green box compliant and may be subject to countermeasures in the light of Part III of the SCM. This can be the case, regardless of the URAA’s category or bound levels of OTDS, AMS, product-specific AMS, blue-box payments and product-specific blue-box payments. The Peace Clause should be introduced again in the Draft Modalities and in the revised text of the URAA. Alternatively, Article 5 in SCM could be amended by inserting the language of Article 3, “except as provided in the Agreement on Agriculture.” Without these accommodations negotiations on domestic support will continue to be inutile or volatile. On the other hand, because the Article 3 of SCM stipulated as “except as provided in the Agreement on Agriculture”, export subsidies which conform to the reduction commitment in the URAA are not red or prohibited in the sense of SCM 7.3. Subsidies contingent upon the use of domestic over imported goods In the US Upland Cotton case, although the US argued that these kind of subsidies should be grouped in amber-box subsidies in the URAA in light of negotiation history, the Appellate

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

Body found that these subsidies should be prohibited since Article 3 of SCM applied. The Draft Modalities has not mentioned how to deal with this kind of subsidies. If a member had included these subsidies in the Final Bound AMS which was based on the subsidies given in 1986 to 1988 (the base period of current the URAA) and deducted them from current AMS, it would be easier for the member to achieve the OTDS or AMS commitment without any policy change. To remedy this, these subsidies should be deducted from the Final Bound AMS in the first place. 7.4. Environmental concerns for sustainable agriculture The term “multi-functionality of agriculture” refers to the fact that agricultural production yields not only specific agricultural products but also positive external economy effects, such as the cultivation of water resources. Japan is susceptible to natural disasters caused by heavy rainfall due to its steep terrain. Agricultural and forest land fulfill a number of functions: agricultural and forestry activities prevent floods, cultivate water resources, and prevent soil erosion and landslides. This multi functionality represents positive externalities that are not traded in the market. In addition, the production activities themselves constitute sustainable agricultural methods that contribute to the conservation of production factors such as water—as distinct from the case in the US and elsewhere. If agricultural production activities harm the environment through negative externalities such as soil erosion, salinization, and groundwater depletion, trade liberalization will transfer these effects from importing countries that reduce production to exporting countries. The flow of goods and negative externalities is often in opposite directions. Goods maybe exported, but environmental degradation remains. If there are externalities in importing countries or exporting countries, trade liberalization will increase the overall burden on the environment worldwide. If Japan increases its imports of agricultural products such as rice and wheat, this will lead to increased agricultural production

in the US and Australia, where large-scale irrigation techniques are employed and cause problems such as soil erosion, salinization, and groundwater depletion. This will not only increase the environmental burden on those nations, but will also reduce the environmental benefits to Japan from its agriculture. The OECD report for multifunctionality shows that multifunctionality is accompanied by production factors or is related to the amount of production in the case of food security. This conclusion is a matter of contention since multifunctionality is a positive externality created by agricultural production. Perhaps, another type of direct payment for multifunctionality should be added to the green box. The current green box policy is related to the question of trade distortion. These criteria have nothing to do with positive externalities. Policies for positive externalities should affect production and thus will relate to production factors or the amount of production. Japan, however, has dropped this potentially beneficial proposal. It is not certain if GATT Article 20 applies to this case. 7.6. Export competition Paragraph 144 reads as “nothing can be construed to imply any change to the obligations and rights under Article 10.1 or to diminish in any way existing obligations under other provisions of the Uruguay Round Agreement on Agriculture or other WTO Agreements”. In the US Upland cotton case, the Panel and the Appellate Body found that it was not consistent with Article 10.1 of the URAA to give any amount of export credit along with Article 9.1 export subsidies in excess of the bound level of export subsidies or given to a product without scheduled commitments. The panel concluded that export credit given in excess of the bound level to a product without scheduled commitments was prohibited by Article 3 of SCM .It is not certain that Annex J of the Draft Modalities is based on this finding. Interestingly, export subsidies according to Article 9.1, will eventually be eliminated with the result that there would be no export subsidies commitments.

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The Panel and the Appellate Body found that food aid would be granted provided that they do so consistently with Articles 10.1 and 10.4 . If this finding holds true, food aid shall not be granted to non-scheduled commodities even though it is consistent with Annex L of the Draft Modalities. This would adversely affect the demand for food in developing countries. In order to avoid this situation, negotiators should consider amending or removing Article 10.1. 7.7. Export tax In the Uruguay Round, the EU emphasized that export subsidies were good for importing developing countries. In this Round, the US asserted the same argument for export credit. Is this true? When are export subsidies and export credit given? They are generally given during a surplus. This often occurs when food prices are low and major producers want to increase export levels. What did the EU do in 1996-1997 when world prices soared and developing countries could not afford to buy or import food? It resorted to an export tax in order to prevent domestic prices from increasing. This exacerbated the state of the world’s food supply. Reduction of exports in the world market further increases the world price. The same thing is happening today.

Figure 3 : Import price of Chinese rice (yen/ton)

Contrary to export subsidies, an export tax may benefit a big exporter. An export tax lowers the domestic price of agricultural goods in the country as well as the amount produced. If it is a small country, the world price will not change and economic welfare of the country is made worse by an export tax. But in the case of a big country the terms of trade will be made better by limiting the world supply and economic welfare may improve with an export tax. Other exporting countries also benefit from a big country’s export tax since the world price of the agricultural goods increases. That is why there are few or no objections to an export tax in the export-oriented WTO, although it hurts food importing developing countries. The Draft Modalities does not refer to export tax at all. There have to be strong disciplines on it, since it threatens the food security of food importing developing countries which cannot afford to buy food. According to Lerner’s wellknown symmetry theorem of international economics, export taxes have the same effects as import tariffs. Up to now, however, there are no disciplines on export tax in GATT and WTO. There should be binding commitments for maximum amounts of export taxes just like import tariffs.

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

7.8. Export prohibitions and restrictions

import food in case of food shortage, it is exactly a matter of life and death.

Export prohibitions and restrictions function in a more restricted way than an export tax. Current Article 12 of the URAA was based on the proposal by Japan in the Uruguay Round. This author, among others, persuaded participants to support the proposal. Faced with some opposition from exporting countries, it was watered down to Article 12 during adoption. The Draft Modalities made some improvements on Article 12 but have, arguably, not gone far enough. Paragraph 1(b) of Article 12 refers to consultation but it does not mention what an importing country can do as countermeasures such as withdrawal of concession if it is not satisfied with the consultation like the Agreement on Safeguard. If a Member cannot

Import quantity restrictions are prohibited by Article 4 in the URAA. In principle the interests of exporters should be balanced with those of importers. When Japan argued against comprehensive tariffication to protect its food security in the Uruguay Round, the US and other exporters insisted that free trade was the best way for food security. Allowing export quantity restrictions is contrary to this argument. Export quantity restrictions have serious effects on food- importing countries and threaten their food security, low income developing countries in particular. Many have argued that they should be prohibited, just like import quantity restrictions

ICTSD Programme on Agricultural Trade and Sustainable Development

8. conclusion If the Draft Modalities accomplish a substantial reduction of protection in developed countries such as the US and the EU, the world food prices may increase. However, this is not a likely scenario. More importantly, subsidizing exporters, such as the US, may not need subsidies thanks to the increase in international prices. Even some trade liberalising measures, such as tariff rate quota, will have a limited impact if the EU does not resort to a great number of Sensitive Products. Japan will not take advantage of many measures of the Draft Modalities negotiated in the interest of other Members. In some ways, Japan is maybe repeating previous errors. It is seeking to some products taken out from the tiered formula cut and will apply the “Sensitive Product” designation which will compensate the protective measures with an increase in quota levels. Some may argue that this position will likely lead to a further decline in Japanese agricultural production in the midst of shrinking domestic market due to a declining population and per-capita rice consumption. The government does not disclose the fact that the increasing import prices of many agricultural products makes tariffs less and less important. Today, Japanese rice farmers do not need a 100 percent tariff on rice, because domestic prices have decreased due to decline of consumption in the midst of world price hike. This is true for many other highly protected products such as wheat and dairy products. The tiered formula of tariff cuts in the Draft Modalities, by itself, will cause no damage to Japanese agriculture. Japan can address the disciplines of domestic support in the Draft Modalities without much difficulty. It has already attained many of the most important objectives. However, with

the increased amount of access by applying “Sensitive Products” and more stringent disciplines on food aid in order to avoid circumvention of export subsidy commitments, Japan would have more and more difficulties in utilizing the food aid outlet for minimum access rice. It would have no other way to strengthen production restriction programme of rice. This will further deteriorate Japanese agriculture. In order to maintain agriculture against the background of the shrinking domestic market, Japan has no other way than to recuperate international competitiveness by lowering its price so as to export rice and other agricultural products in promising Asian markets that have growing populations and income. Political observers are likely to note that Japan will not take this course. Rather, they might describe it as trying to take the alternative position by strengthening production restriction programmes to maintain high prices for rice. Exporters may capitalize on this Japanese policy. The exporters maybe better served by accepting Japan’s proposal to designate more than 10 percent tariff lines as sensitive products. They may enjoy improved access to the Japanese market, just as the US did under the Uruguay Round. The URAA and the Draft Modalities have several legal drawbacks in commitments on subsidies. More fundamentally, they do not discipline export taxes at all in contrast with binding commitments on import tariffs. The discipline on export quantity restriction is too lenient while import quantity restriction is prohibited by Article 4.2 of the URAA. This lack of meaningful regulation of exports may jeopardize the food security of food importing developing countries. We have to realize that the era of food surplus is perhaps over and that we are entering an era of volatility.

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Kazuhito Yamashita — Implications for Japan of the July 2008 Draft Agricultural Modalities

i

This estimation of an ad valorem equivalent is part of a submission of the Japanese Government accessible through the WTO Secretariat only to Members.

ii

It is defined in paragraph 8 of Annex 3 in the Agreement on Agriculture as follows. Market price support shall be calculated using the gap between a fixed external reference price and the applied administered price multiplied by the quantity of production eligible to receive the applied administered price. Budgetary payments made to maintain this gap, such as buying-in or storage costs, shall not be included in the AMS.

iii What makes the difference between AMS and PSE? For one reason, AMS is an indicator of not border measures but domestic support, while PSE is an indicator of overall level of protection of domestic and border measures. For another, the government can change not a market price but an administered price as a legally binding commitment of the WTO. iv Paragraph 75 Draft Modalities v

Appellate Body Report, United States – Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3

vi

Ibid 608-627,677

vii Ibid 618-620

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ICTSD’s Programme on Agricultural Trade and Sustainable Development aims to promote food security, equity and environmental sustainability in agricultural trade. Publications include: • Value Chains and Tropical Products in a Changing Global Trade Regime. Issue Paper No.13 by Charles Mather, 2008 • Trade Effects of SPS and TBT Measures on Tropical and Diversification Products. Issue Paper No. 12 by Anne-Célia Disdier, Belay Fekadu, Carlos Murillo and Sara A. Wong • Tropical and Diversification Products Strategic Options for Developing Countries. Issue Paper No. 11 by Santiago Perry, 2008. • Implications of Proposed Modalities for the Special Safeguard Mechanism: A Simulation Exercise. Issue Paper No. 10 by Raul Montemayor, 2007. • Trade and Sustainable Land Management in Drylands. Selected Issue Brief, 2007. • A Comparison of the Barriers Faced by Latin American and ACP Countries’ Exports of Tropical Products. Issue Paper No. 9 by Jean-Christophe Bureau, Anne-Celia Disdier and Priscila Ramos, 2007. • South-South Trade in Special Products. Issue Paper No.8 by Christopher Stevens, Jane Kennan and Mareike Meyn, 2007. • The ACP Experience of Preference Erosion in the Banana and Sugar Sectors: Possible Policy Responses to Assist in Adjusting to Trade Changes. Issue Paper No.7 by Paul Goodison, 2007. • Special Products and the Special Safeguard Mechanism: Strategic Options for Developing Countries. Issue Paper No. 6 by ICTSD, 2005. • Lessons from the Experience with Special Products and Safeguard Mechanisms in Bilateral Trade Agreements. Issue Paper No. 5 by Carlos Pomareda, forthcoming. • Methodology for the Identification of Special Products (SP) and Products for Eligibility Under Special Safeguard Mechanism (SSM) by Developing Countries. Issue Paper No. 4 by Luisa Bernal, 2005. • Special Products: Options for Negotiating Modalities. Issue Paper No. 3 by Anwarul Hoda, 2005. • Tariff Reduction, Special Products and Special Safeguards: An Analysis of the Agricultural Tariff Structures of G-33 Countries. Issue Paper No. 2 by Mario Jales, 2005. • The New SSM: A Price Floor Mechanism for Developing Countries. Issue Paper No. 1 by Alberto Valdés and William Foster, 2005. For further information, visit www.agtradepolicy.org. ABOUT ICTSD Founded in 1996, the International Centre for Trade and Sustainable Development (ICTSD) is an independent non-profit and non-governmental organization based in Geneva. By empowering stakeholders in trade policy through information, networking, dialogue, well-targeted research and capacity building, the centre aims to influence the international trade system such that it advances the goal of sustainable development.