When Business Sits at the Table in APEC

Boracay, Philippines—One complaint frequently expressed by business is that governments keep making trade policy decisions without sufficient input from companies.  Government officials often remark that businesses are not providing sufficient feedback into the policy process.

Asia Pacific Economic Cooperation (APEC) is supposed to help sort out these issues by deliberately providing seats at the table for both business and government.  APEC does this in multiple ways.  Two prominent examples are the use of the APEC Business Advisory Council (ABAC) and providing opportunities for companies to participate in the myriad meetings and sideline events attached to different APEC officials meetings.

ABAC meets four times per year in shifting locations around the world and provides its’ own recommendations to the leaders of the 21 APEC member economies at the end of each year.  APEC officials gather in the host country for three rounds of senior officials meetings, plus the final jamboree of leaders and trade ministers towards the end of the year. 

I have now attended several different meetings of these sorts and I can clearly see the difficulties that both sides have in communicating with one another.  I believe I have gone to enough events and spoken to sufficient numbers of people about their own experiences to draw some preliminary conclusions about the process, but not so many that I have become an insider.  

APEC is an extraordinarily complex animal.  There is not, as far as I know, an organizational chart that maps out the various working groups, committees, consultative mechanisms, and projects that are underway at any given time.  If there were such a chart, it would be so jammed up with lines and boxes that it may not make sense. 

The institution comes with its own jargon.  This is a terribly complex mix of trade terms, language drawn from business, and a set of acronyms that would make any military proud.  It can be so complicated that even long-time participants in the system cannot recall the meaning of all the abbreviations without looking them up.

Of course, lots of different organizations use specific jargon.  Yet the closest equivalent body I can think of—the World Trade Organization (WTO)—doesn’t seem to have quite the same level of jargon plus acronyms plus often detailed technical content under discussion.  I sometimes found the WTO to be impenetrable, until I sat in on these APEC meetings.  Now I feel particular fondness for conversations in Geneva at the WTO.

If I am struggling with managing the information and APEC-speak, I can only guess at the challenges that face the business leader that pitches up an APEC meeting.  With no one to put things into context and what appears to be an inability to translate some of the worst acronyms into normal language, I suspect that many extremely capable business leaders are mostly lost.  Everything is in English, which does not help.  Even most of the slides that were presented at the events I attended were not helpful—too small to read, whipping by at too fast a speed to comprehend, and without hard copies (or downloadable files) always available. 

The next set of barriers to communication could be put down to meeting formats.  Business leaders expect (or at least hope to achieve) clear and crisp meetings with specific action items identified.  This format does not exactly appear compatible with APEC (or maybe government meetings in general?).  In any case, the objectives of meetings are not always clear.  The deliverables may not be spelled out.  Or, they might be obvious to someone who has attended multiple meetings and understands the unspoken subtext of the meeting.  But I could certainly imagine frustration by some businesses about the loss of a whole day or more in a meandering, apparently pointless set of meetings.

One mechanism for including business has been to invite business leaders to serve as speakers.  This approach also has drawbacks.  Absent clear instructions about what is supposed to be accomplished by the speaker, many firms show up and basically give a short infomercial about their company.  (Before I upset anyone, I should note that this complaint was made frequently about presenters at meetings I did not attend.) 

If feedback is needed on policy documents, the materials have to be circulated sufficiently far in advance.  Then some guidance should be given to help businesses understand the context for the materials as well as specific areas of focus.  An open ended, “Please give us your feedback” is probably not going to solicit helpful remarks.  Asking for reactions to technical briefings from the business community on the spot are also not likely to yield much in the way of truly useful comment.  Firms can provide ample input, but need time and structure to do so effectively.

Public-private partnership models of all sorts seem to be currently in vogue.  However, businesses seem extremely unclear about what sorts of inputs they are expected to provide to these projects and meetings.  Without meaningful solicitation of ideas and a format or structure that aligns with their company interests, firms will simply stop attending.

Attendance problems are compounded when APEC meetings are held in locations that are not easy to reach.  For SOMII (the second Senior Officials Meeting of the year), the Philippine hosts selected Boracay as the venue.  Boracay is a challenge to reach.  Most participants flew into Manila and then changed planes.  The island of Boracay is serviced by two different airports.  One is 2 hours away from the ferry terminal by car.  The other airport is closer, but in both cases, participants had to be loaded onto boats for the short crossing to the island.   From there, participants were sorted into vans.  While Boracay has lots of hotels, none are big enough to host the number of delegates needed.  Participants have been spread across the whole of the island in a variety of venues.  All need to be shuttled between hotels all day long.

Thus a business leader that wanted to attend one meeting would have to give up at least 3 days to do so.  For that kind of commitment, business expects to at least get some clear outcome and see progress being made.  This is, as even many APEC groupies admit, not always obvious.

Smaller companies are unable to attend at all.  Between the time commitment and the costs of getting to places like Boracay, small firms simply give the whole process a miss.   The only way to encourage small and medium sized (SME) firms to participate is to hold carefully structured meetings (with no jargon or APEC-speak allowed) in locations like capital cities where SMEs congregate. 

Getting businesses to sit at the table may not be so difficult.  Firms understand the potential power of APEC to shape the economic environment in a key part of the world.  They want to be engaged.  They are often eager to attend.  The real challenge is getting business leaders to attend more than once.  For meaningful engagement between government and business, APEC has to keep people coming and provide them with all with clear, helpful and constructive roles to play. 

*** Two other points worth noting here related to trade:

The Senate last week voted to start the debate about Trade Promotion Authority (TPA).  This was not, as some people thought, the same thing as approving TPA.  The fight in DC has been over which amendments to the TPA bill will be allowed before the final vote.  Of critical importance is limiting the number of amendments, since the Senate bill was written to match similar legislation in the House of Representatives.  If there are differences between the two bills, these have to be reconciled. 

Again, if the fight were merely about TPA, timing would not matter so much.  But negotiators are sitting in Guam right now trying to iron out the remaining differences in the Trans-Pacific Partnership (TPP) negotiations.  Trade ministers are planning to leave Boracay and join them next week.  Absent TPA, it may prove to be a long, tiring trip for little purpose since most are not willing to put final offers on the table unless and until the Americans are ready.

Second, I am going to add a shameless plug for our work in the Asian Trade Centre.  We have been asked to help demonstrate that businesses and other stakeholders have an interest in greater participation in the parallel trade negotiations in Asia, the Regional Comprehensive Economic Partnership (RCEP).  We are still coordinating our plans, but if there are stakeholders out there that are interested in at seat at the table (or standing in the room) in RCEP, it would be great if you could contact me (elms@asiantradecentre.org).  Thanks!

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The TPA Vote: The Day America Stopped Leading on Trade?

The U.S. Senate’s apparent inability to proceed with Trade Promotion Authority (TPA) may represent the day when the Americans conceded leadership on global trade. 

The vote that blocked consideration of TPA highlights to the rest of the world that the Americans cannot be counted on to get things done any more. The Trade Promotion Authority (TPA) bill is not just about the Trans-Pacific Partnership (TPP). 

TPA is meant to cover a set of extremely important, next generation, trade deals with: the 11 other parties in the TPP; up to 19 members in an expanded TPP by 2020; the Europeans in TTIP; more than two dozen countries in services (TiSA); a hugely important grouping of members in the information technology space (ITA2); with China and others over opening up government procurement markets in a clear and transparent manner (GPA2); more than 160 countries in implementing new rules to move goods faster and cheaper across borders (the WTO Bali deal on trade facilitation); and anything else that might begin negotiations in the next 5 years.

The Senate had an opportunity to outline their primary objectives and allow the Executive Branch to see what is the best possible deal that could be gained.  Afterwards, Congress will vote on each individual agreement after consultations along the way.

These ought to have been key objectives for every member of both parties.  Yet some members in the Senate have allowed misinformation to guide their thinking.  Most damaging has been a set of arguments about currency manipulation, disguised as a discussion about "enforcement" or "enforceable provisions."  The agreements currently on the table--all of them, but especially the TPP--already have extremely strong enforcement provisions built in.  These help to ensure that participating members in each deal follow the rules.

Currency manipulation is not about enforcement of a trade deal.  It is simply a bad idea.  It is not workable and will not address the supposed problem.  Even worse, the collateral damage might end up ensnaring the United States by preventing actions that the Americans may want to take in the future.  

But insisting on including this set of rules alongside the TPA debate just illustrates the nature of the debate in Washington.  It is not about creating helpful rules to guide trade in the next five years.  It is about following narrow, domestic partisan interests and using flawed arguments. 

In the end, it also shows the rest of the world that the United States cannot be viewed as a trusted partner because--no matter how much you bend to accommodate the Americans in a negotiation--they will always add one more bitter pill and insist that you swallow it.  Even then, passage of the final deal is never assured.  

The TPA legislative vote has been cast by the White House as a “procedural issue.”  It is true that the specific problem in voting was whether or not the TPA bill could be considered on its own, or in conjunction with three other bills.  One is presumably not controversial—to renew ongoing trade programs with Africa.  One is to provide worker training for workers harmed by trade (Trade Adjustment Assistance or TAA).  Finally, the worst idea on the table, of having something with currency manipulation as a key objective in (all?) trade agreements.

While Washington has gotten stuck in partisan battles over TPA, the timing for TPP has only gotten worse.  This agreement does not just include the United States.  Delays over TPA have held up the conclusion of the TPP.  If the Americans end up unable to pass the implementing legislation on the TPP until after the next election in 2017, other members may also face similar domestic challenges between now and then that permanently stop the TPP.

By 2017, who knows what will have changed in the other TPP members?  Canada votes in an apparently close election in October.  The Japanese Prime Minister has staked a great deal on the TPP and his tenure length is unknown.  Chile just reshuffled the cabinet.  The domestic scene in Malaysia is also uncertain.  The Australian Prime Minister has already been forced to survive one vote on his leadership.

This "procedural" issue in the United States Senate over TPA could end up like the proverbial butterfly flapping its wings.  The consequences of this delay could, indeed, reverberate for a long time to come.

***

Let me reprint part of an earlier post to explain again why currency manipulation should never have been an objective and certainly does not deserve to shut the Americans out of a responsible leadership role in trade:

Any sort of currency manipulation clause is unlikely to solve the problem it is ostensibly trying to address.  Worse, in order to ensure that American interests are not undermined, the provisions have to be carefully crafted such that they might never be triggered.  The final point of damage—even if there are virtually no circumstances under which such clauses might be used, America’s trade partners in the TPP might simply refuse to conclude negotiations at all.

So what is the problem so many backers of such legislation are trying to address?  In brief, governments can give a competitive advantage to their export industries if their currency is lower in value than their export partners.  The difference in currency values effectively makes imported goods cheaper in the foreign market, encouraging consumers and producers to buy more, relatively cheaper, foreign goods than relatively more expensive domestic items. 

How would a government go about making this happen?  If a government intervenes in currency markets, it can drive down demand for its own currency (or drive up demand for foreign currencies) by buying and selling currency.  

Another way to accomplish the same thing is to print more money domestically.  If there is more money in circulation now, the value of any given note is lower.  However, governments engaged in such behavior often argue that such policies are not aimed specifically at artificially depressing the value of the currency for the purpose of generating an unfair trade advantage. Therefore, such behavior is not considered currency manipulation, at least as members of Congress appear to want to define it. 

The purchase of assets by the government can also change the value of currencies, even if the objective is to stimulate the domestic economy.

Singapore loosened monetary policy recently in response to weaker oil prices and low domestic demand.  The government argued it was using one of the primary items in its tool kit to address low inflation, since it does not use interest rates as a tool. 

Thus, governments may have lots of legitimate reasons for adjusting currencies without the specific intention of getting a leg up for exports.

It may be important to note that not every country is able to manipulate currencies.  If the country is small, especially with limited demand, the value of the currency is more likely set by market forces.  A country with limited resources cannot intervene very much to buy or sell currencies.  And, finally, the United States has a unique position in the global economy.  Since the U.S. dollar functions as a reserve currency, it allows the United States to have different options than anyone else in the markets (for the moment, at least, but that is another story).   Let me also note that because of this position, the United States does not have to intervene in currency markets like anyone else.

Efforts to stop countries from “unfairly manipulating” their currency will not work. 

There are many reasons why not, but start with the fact that most countries in a position to manipulate currencies also have complex economies.  These economies rely on both exports and imports.  For many firms, exports can only be produced with imported content.  By depressing the value of the currency to make exports cheaper, imports become more expensive.  As a result, firms may not actually be competitive in the export market since the price of imported content of the final goods might be more than offset by whatever the discount on the export side might be.

Equally key, for the most complex products, the value of the benefit from a depressed currency is likely to be small.  Consider an i-Pod, for instance.  Imagine that China were, in fact, manipulating their currency to a massive extent—say 50% off the presumed “normal” value of the yuan.   In this hypothetical context, it might appear that Chinese intervention is dramatically affecting the price of the device in the American market.  But, in fact, the total amount of Chinese content in an i-Pod could be as little as $4 of the $150 sales price.  Thus, the extent of the “unfair” advantage of Chinese currency might make a whole $2 difference to the final buyer.

Recall that this example gives figures for a truly exceptional rate of currency intervention at 50%.  The actual extent of manipulation is likely to be considerably smaller.  This means that the total price difference could be literally pennies.

While other products may not show such dramatic figures, the point is that—in most complex, higher value items—the content is likely to be provided by multiple countries.  As a result, even crazy high manipulation is unlikely to affect the final price very much. 

The Big 3 auto companies are driving the issue of currency manipulation in Washington.  But a car in the modern, globalized economy is very much like an i-Pod.  Even if you could determine that a China or a Japan was intervening to depress currency prices by a lot, the total difference in the price of a finished car is still likely to be much more modest than people realize.

To make this pressure by the Big 3 auto companies more surprising, many of the cars sold in the United States today are actually manufactured in whole or part in the United States (or NAFTA countries).  Thus, the value of potential manipulation on the total cost of a car is small. 

Practically speaking, a currency manipulation clause has additional challenges.  How can the specific amount of currency tweaking be measured?  Currencies change regularly in the open market, so a trade agreement has to take this into account somehow.  Even in the alleged cases of Japanese or Chinese manipulation, few could agree on the extent of intervention—was it 10 or 45% or something in between?

What is the appropriate response to such intervention?  Even if a trade agreement could specify the triggers for determining manipulation, then what?  Many of the proposed “solutions” appear to run afoul of other laws and regulations.

The United States, clearly, does not want to become ensnared in its own rules either.  Depending on how defined, basic American policy in the independent Federal Reserve could be challenged by foreign governments.  Problems like this make whatever provisions that might end up in trade agreements so tightly restrictive that they can never be applied or it might mean that the United States breaches the rules and argues for non-intervention in its own affairs. 

Finally, none of the specific partners currently negotiating the TPP are keen to see rules on currency manipulation included.  This agreement has been under discussion for more than five years.  To add a controversial (to put it mildly) item so late in the game is to risk imploding the whole deal.

Some may argue that TPP partners have already accepted proposals and provisions that they do not like.  What is different about currency manipulation from other American ideas?  At some point, however, pushing too hard may make others snap.  This is likely to be that point.  Adding a very unpopular and unworkable idea like currency manipulation clauses into the TPP mix at this late day is a truly dreadful idea that should be discarded immediately.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Using Trade Deals for Non-Members

I met this week with a European company.  Their firm has an extensive global footprint, including factories in Vietnam, Malaysia, Thailand and Indonesia. 

Because they are producing products out of Vietnam and Malaysia, I asked about whether the firm has been following the Trans-Pacific Partnership (TPP) negotiations.  Both countries are members of the TPP and many of the company’s final consumers can be found in other TPP members like Singapore and Japan.

“No.  We are a European company, so we didn’t think we could use the TPP.”

This is actually a common answer, but it is not necessarily true.  Many firms can take advantage of the TPP’s benefits, regardless of the location of company incorporation.

Rather than worry about the ownership structure of the company, firms need to consider whether they “substantially transform” products in TPP members or deliver services or hold physical investments in member countries.  This is not unique to the TPP, as the same thing holds true for other trade agreements like the ASEAN Economic Community (AEC), bilateral deals, and future regional agreements.

Admittedly, this can be complicated, but the potential benefits to firms from getting this right can be significant.  Other companies can also get cheaper supplies and inputs from using agreements like the TPP.  Consumers in member countries can receive a greater variety of products at different price points as well.

Go back to the European firm.  The factories in Vietnam and Malaysia make extensive or even exclusive use of raw materials sourced domestically.  These inputs are then used to create the company’s final products. 

Trade agreements come with rules (Rules of Origin or ROOs) that are designed to keep non-member firms from taking advantage of the preferences granted by the deal.  After all, if a non-member could simply trans-ship items through a member and get better benefits, the purpose of the trade deal would be lost for member country firms. 

Companies cannot just engage in simple repackaging, minor assembly, break down bulk shipments into smaller quantities or add several items together in a package to make a different item, to gain access to the agreement either.  Instead, items must be substantially transformed in a member country to qualify under the rules for preferences.

Here is where life can get complicated.  Each trade agreement has different rules for what constitutes substantial transformation.  The two main rules are value content (VC) and change in tariff heading or tariff classification (CTH or CTC). 

For most ASEAN agreements, governments have used regional value content (RVC) rules.  This requires a certain percentage of the final good to be made with content (materials and labor) from member countries.  Generally, the percentage is set at 40% or greater. 

In other words, what matters is not whether or not the company is registered in Holland or Bangladesh, but whether the final good contains at least 40% content sourced from within ASEAN. 

The final item has to be shipped to a member country.  A firm cannot create products with ASEAN content for shipment under ASEAN preferences back into Holland or Bangladesh, since these preferences (benefits like lower tariffs) only apply within member states.

A second method of qualifying for preferences involves a change in tariff heading.  Again, this can be slightly complicated, but put simply if the raw materials and other components or inputs are considered one type of product and end up being exported into other member countries with an entirely different tariff heading, the product can qualify for benefits even if the value content is not above 40%.

As an example, consider the production of beer.  If the agreement allows the use of CTC or CTH rules, the raw materials of water and hops and so forth are transformed into a different product—beer.  Since water, hops and other items are classified differently than beer, the product can be eligible for benefits under the trade agreement.

It does not matter whether the company producing beer is headquartered in the country of production.  What matters is the location of the factory (in a member country), the ingredient sourcing for RVC or transformation in tariff heading rules, and the final destination of the products (for sale in a member country).

What sounds relatively simple can be unnecessarily complicated at the outset, of course, as firms have to comb through agreements to see what rules apply for which products into which markets.  For example, even CTC rules can vary as officials may select different levels of aggregation in tariff headings (2, 4 or 6 digit level changes in tariff classifications are required). 

For the European firm I was meeting, however, no matter how the rules are calculated, production with nearly 100% local content combined with final products that should qualify under CTC rules no matter how such tariff rules are calculated, the company ought to have no problems taking advantage of the TPP once it is signed and enters into force. 

Hence the company ought to be taking an active interest in, and planning ahead for, the entry into force of the TPP.  Despite being a European company in registration and brands, the local factory production from Malaysia and Vietnam should be eligible for the lower tariff rates coming in the TPP.  In the sector for this firm, these benefits—particularly tariff reductions from current levels—should be substantial as well, since this industry faces substantial tariff obstacles in most countries in the region.

Stay tuned for future posts on some reasons why firms do not seem to take advantage of these benefits and why the system as a whole does not benefit from the proliferation of bilateral and regional trade agreements.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The Other Half: Dealing with U.S.-Japan Auto Disputes

My last post covered one of the most difficult topics in trade negotiations—the problems with agriculture.  This issue is partially confounding a solution to the ongoing U.S.-Japan bilateral negotiations related to the Trans-Pacific Partnership (TPP) agreement.

But agriculture (specifically the fight over Japan’s five “sacred” items) is only half the battle.  In exchange for receiving more access to Japan’s important and protected agricultural markets, the United States is supposed to allow improved access to its auto market.   However, since the auto market barriers into the United States are not seen as sufficiently problematic to match the barriers in agriculture, the Americans are also asking for a number of changes to let more cars and auto parts flow into Japan.

This fight over autos between the United States and Japan has been underway for decades.  Literally.  Equally astonishing, there appear to have been very few changes along the way in the tone or tenor of the argument despite a radically different market environment over the same period.

My Ph.D. dissertation was partially about auto fights of the late 1980s and mid-1990s.  Sometimes, listening to the arguments made now around the topic, I could swear that nothing has changed in the past 25 years.  Many of the very same people who were present all those years ago are the same folks driving these negotiations.

The United States has two clear barriers to trade in autos.  For passenger cars, the tariff is currently 2.5%.  For trucks, the tariff rises to 25%.  Japan would like to see both removed.

What makes this whole argument rather surreal is that Japan exports almost no finished autos from Japan into the United States.  Instead, in the wake of NAFTA provisions on car manufacturing, Japanese auto manufacturers largely moved their production networks into NAFTA countries. 

About 85% of all Nissan autos sold in the United States are domestically produced.  For Toyota, the number is about 70%, with mainly just Lexus models built outside NAFTA.  Honda’s figures are higher at 95% production inside the United States, Canada and Mexico. 

Even if the auto tariff of 2.5% were eliminated tomorrow, it is unlikely to drive dramatically different trade patterns.  In spite of this, the Americans are apparently insisting on extraordinarily long phase out periods of up to 25 years. 

Think about that for a moment—a quarter century to phase out a 2.5% tariff on products that are largely domestically produced.

I would hate to think about the sheer number of hours spent arguing over this point across the decades.  Even in the past year, officials have invested hundreds of hours in conference rooms around the world hashing out how to make this tiny tariff go away.

Of course, the other piece of the equation is figuring out how to get more finished American cars into Japan.  This is an equally nonsensical fight.  

Take the specific case of General Motors.  After complaining about limited opportunities to sell cars in Japan for more than 3 decades, how many models does GM make with right-hand drive that could be sold in Japan?  Answer:  two. 

So the Americans are fighting vigorously to get more cars into the Japanese market that are just as unsuitable as they were decades ago. 

The company, I am sure, would argue that the math does not justify the tremendous investment in creating suitable products.  GM has 34 outlets in Japan.  (For comparison, Toyota has more than 4,700 dealerships in the United States.)  If GM sold 1400 cars in Japan, it would mean only 41 sales per outlet in an entire year. 

GM and Ford didn’t even bother to show up at the Toyota Motor Show for four consecutive years.  

Because the volume is so small, it is hard to justify the investment of a full garage to service the cars.  Without a garage, consumers that might take the plunge and buy a car with the steering wheel on the wrong side of the vehicle, also have to factor in very high prices for parts and servicing. 

In the last heated battles over autos, the American insisted that they could not sell more cars into Japan because of various barriers to entry, including an inspection system that favored local producers.  While many of these issues remain, it is worth noting that European car manufacturers have continued to experience market growth.

European brands made the decision decades ago to invest in their own dealerships and not rely on Japanese-brand outlets to hawk their goods like the Americans.  European brands brought in garages and auto parts.  And, critically, they built cars that were suitable for, and adapted to, the local market.

Now, European sales still fall short of what might be expected in a different type of market setting.  Total foreign auto sales still account for less than 5% of all autos sold in Japan.  But European sales leave American brands in the dust. 

BMW regularly alters models to meet customer needs, including introducing a range of diesel and hybrid autos that are in demand from consumers.  Volkswagen sells the largest number of foreign-branded cars in Japan, with a strong focus on economy to mid-range models.

Certainly, there are still obstacles to selling vehicles in Japan.  For example, Japan has a preferential tax system that rewards domestic vehicles with tiny motors.  Nearly a third of the market consists of autos with engines of less than 660 cc.  Neither the Americans nor the Europeans have models that fit this profile.

Japan also has its own safety standards that do not match either the EU or the United States.  (Although frankly, this could also be turned around--the EU and the U.S. do not have standards matching Japanese auto regulations making it difficult for Japanese brands to thrive in both markets without potentially extensive modifications.) Getting a new model certified in Japan can be extremely expensive.

They say that generals usually prepare to fight the last war.  This adage appears to be equally true in the auto debates.  Instead of focusing on competitive challenges, the Big 3 blame Japan’s supposed manipulation of currency as a key impediment to selling more cars.  Again—this is an incredible flashback to the fights of the 1980s and 1990s when the exact same arguments were used by the Big 3.

If currency values could somehow be adjusted only for autos and not for the economy as a whole, perhaps currency misalignments might be a genuine complaint.  However, it is certainly difficult to argue that currency stops American sales and not European sales.  Or that it somehow affects cars more than other goods.

In short, the United States auto industry has been making the same arguments about the closed car and parts markets in Japan, about currency manipulation, and about the necessity for tariffs to protect the domestic market for decades.  It is time to close the debate, sign the bilateral deal on the table for autos and move on to new, 21st century issues in the TPP.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Why is Agriculture So Difficult for Trade Deals?

Seoul—As we wait for Japan’s Prime Minister Abe to discuss the U.S.-Japan bilateral talks during his address to the United States Congress, it is a good time to discuss why agricultural trade regularly confounds trade negotiations.  After all, the bilateral discussions between Japan and the United States, part of the parallel path in the Trans-Pacific Partnership (TPP) negotiations, is largely focused on agricultural products in Japan’s 5 “sacred” sectors (rice, beef/pork, dairy, wheat, and sugar). 

In short, the major obstacle is that agriculture is sensitive in every single country.  As a result, more than 60 years of negotiations in the General Agreement on Tariffs and Trade (GATT) and its successor organization, the World Trade Organization (WTO), made only modest progress towards opening agricultural markets. 

This has left significant barriers to trade in food and beverages in different countries. WTO members now have widely varying commitments to tariff levels across different types of products.  Newer members and developed countries generally have lower tariff levels, but even relatively low tariffs conceal some significant tariff peaks.  Tariff levels and tariff peaks are significantly greater in agricultural sectors than in non-agricultural goods.

Tariff peaks are where general levels are low, but suddenly, for example, the Japanese tariff for a type of potato (konnyaku) faces levels of more than 1400 percent.  Peaks are frequently found in other agricultural items like rice, dairy, wheat, soybeans, edible oils, certain spices, as well as some specific items that are often unique to individual countries. 

If the tariff peak is high enough, no foreign products can be found in the marketplace at all.  Removing these peaks is particularly difficult, since they mark the most highly sensitive products that have been sheltered behind tariff walls for a significant time.

While most trade agreements do not even try to address the highest tariff peaks, the TPP is supposed to open all trade.  This means contentious discussions around highly sensitive agricultural items and sectors.  As we get close to the end, officials have had to finally grapple with these concerns. 

Another problem that is supposed to be addressed by the TPP for agricultural producers is tariff escalation.  This is where the tariff on a raw agricultural product like unprocessed coffee beans could face a tariff of 5 percent.  But roasted beans are charged 10 percent.  Ground beans could be 20 percent and bottled Starbucks Frappuccino drinks could be slapped with 45 percent tariffs.  The example is hypothetical, but the problem of tariff escalation is quite common. 

Escalation is a major problem, particularly for developing countries, because rising tariffs on higher processing can prevent firms from moving up the value chain into higher value items.  High tariffs on processed goods can mean that products are often not competitive and cannot capture the highest value.  Firms are stuck shipping raw coffee beans and not bottled coffee drinks where the highest money can be found.

As my last blog post noted, agricultural trade is particularly held hostage to problems of collective action.  Consumers benefit from lower tariff barriers to agricultural products.  They get a wider selection of items at potentially lower prices.  In areas with significant tariff peaks, consumer benefits could be substantial.  But no consumer ever lobbied government for cheaper butter or more soybean options. 

By contrast, farmers are frequently well organized and fiercely protective of their market space.  Any attempt to change the status quo is strongly resisted. 

This is true in the TPP members.  It is also true in non-members, who have to decide whether they want to join in the future.  I am sitting in a workshop in Seoul, sponsored by Korea’s Rural Economic Institute, to discuss agricultural changes around potential TPP membership.  The level of concern is palpable.

Korea will argue that their farmers tend to be working small scale, family plots.  Agricultural production, especially for an item like rice, has strong historical significance.  If rice were not produced domestically, wouldn’t it wreck Korea’s countryside and toss farmers ignominiously out of work?  Won’t the rural areas suffer irreparable harm and destruction?

No matter what happens in the TPP, it is unlikely that South Korea will witness the total destruction of the countryside and the complete loss of rice production.  Rice will still be grown in Korea.   It will continue to be consumed domestically and much of this production will be grown locally.  But Korean rice might someday be be exported more widely across TPP members as well.

Deeply held concerns about rice and other products, I should note, are not unique to Korea.  Japanese farmers make similar points.  So do growers in potential members like Taiwan.  In fact, I suspect that nearly every member and potential member faces similar kinds of issues.  Even in agricultural export powerhouses like the United States or New Zealand, it is possible to find small-scale, family farms that worry about increasing agricultural competition in their particular sectors.

It is important to note that agreements like the TPP do not mean that agricultural trade across the board will become completely open overnight.  Highly sensitive sectors will clearly be opened last.  For most members, the final items to be phased into the deal are likely to be agricultural products.

In addition, agriculture can use specific procedures to avoid complete opening overnight.  In the U.S.-Japan bilateral, Japan has not agreed to open the last five “sacred” sectors immediately.  Instead, we expect that Japan will, for instance, agree to drop tariffs on a very small quantity of rice for a bit of time.  The quantity will be specified by a quota that is likely to be opened for only 100,000 tons of rice from the United States at the outset. 

Over time, the goal is to gradually open the quota for more rice (or other sensitive agricultural products) at lower tariffs.  In time, the quota could even disappear all together, leaving the market completely open at some (likely) quite distant time. 

For beef products, frozen beef imported into Japan may fall from the current 38.5 percent tariff level to 9% for the United States (and hopefully this will also be extended to all TPP members).  Pork for Japan used to be split into three categories.  Now tariffs will drop from between 482-547 yen/kg down to 50 yen/kg with tariffs on the highest price pork falling to 0 tariffs. 

These commitments fall short of complete free trade.  The tariffs have not fallen to 0, at least for the near term.  However, it would have been impossible to lower tariffs of more than 777 percent on polished rice to 0 right away.  The other TPP members recognize the difficulties of forcing such a drastic change on a highly sensitive sector.  The goal is to get to free trade, but reality often intrudes--making the transition relatively long and slow.

In addition, given the sensitive nature of agriculture in every member state, governments have strong reasons to view deviations from fully open markets with a more relaxed eye.  After all, each government likely has its own sensitive products that it would like to support and grant farmers additional time for adjustment.

The real trick in a multi-party trade agreement is to grant sufficient flexibility in timeframes and commitments to allow everyone to remain inside the agreement while not diluting the outcome so much that the benefits are lost.  In an agreement like the TPP that promised coverage for all products, it has been difficult to manage. 

We may learn tomorrow how well the Americans and Japanese accomplished this delicate balance in agricultural trade.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***