You Can Indeed Lose What You Never Had

The start of a piece in yesterday’s TheStreet summarized a common viewpoint on the US withdrawal from the Trans-Pacific Partnership (TPP) trade agreement, when it said: “You can’t lose what you never had…”  In fact, you can. It is becoming increasingly obvious that American companies are losing ground.  The damage is two-fold—the United States has chosen to sit out from the TPP and it is also not benefiting from the range of trade deals that crisscross Asia, giving preferences to competitors in the region in key markets.  Adam Behsudi nicely showed this week in Politico how international trade agreements are directly affecting farmers from one county in Iowa. 

Updated Update: Pork, Beef and Autos

News continues to flow out from last week's meetings between the United States and Japan over the five "sacred" items and automobiles.  The last post covered this ground in greater detail, but here's a few more pieces of useful information:

After more than a year of vigorously denying the possibility, it finally looks like Japan and the Americans have agreed to handle some or all of the sacred agricultural issues through tariff rate quotas (TRQs).  This is a somewhat complex administrative system that allows a country to import a certain quantitative amount of a good at one, lower, tariff rate.  Imports above that quota are charged a different, higher amount.  Such schemes are possible for agricultural products.

For pork, indications are that the in quota rate on low-value pork will be lowered from 482 yen (or roughly USD$4) a kilo to 50 yen across a ten year time period.  The out of quota rate (for pork in excess of, perhaps, 500,000-600,000 tons) will be charged 100 yen once the agreement is fully phased in.   For some context, Japan currently imports 760,000 tons of pork (with more than half of imports from the United States and Canada).  

However, as noted in my earlier post, the agreement will also have a snapback provision to allow tariffs to revert to 482 yen if imports surge.

Beef will also be subject to the same TRQ schemes, with the in-quota rate falling from 38.5% to just under 10%.

The primary issue with all these quotas now seems to be the specific provisions for the safeguards.  If defined too loosely, they will automatically be applied as imports go up post-TPP.  If defined too tightly, the Japanese are worried that they may never meet the criteria and may face crippling competition from American farmers with no remedy available.

In order to increase the leverage the United States has over these sensitive agricultural issues, the five sacreds were always tied to changes in automobiles.  The Americans now appear to have promised to drop auto tariffs, but to do so on the same schedule as the longest phase-out period permitted for agricultural products.  This keeps the pressure on Japan to implement tariff reductions in the shortest possible time period.

Because Japan was a late entrant into the TPP negotiations, it has been busily conducting bilateral market access talks with the other TPP member countries as well.  It looks like Japan is running into some resistance from Vietnam (also rice and autos), New Zealand (dairy), Canada (also dairy), and Malaysia (plywood and timber products).  Talks with other member countries where Japan already has existing trade agreements may be going more smoothly, although it is always difficult for governments to agree to additional concessions in the TPP negotiations that were not available in the bilateral talks.

Finally, I would like to close with a shout out to the Japanese media.  Although accusations of TPP secrecy have been flowing thick and fast (even from people who ought to know better as I pointed out on January 14), the Japanese media have done a solid job in providing regular updates on the state of the talks.

Beef, Pork and Butter in Japan: An Update on "Sacreds"

Multiple reports suggest that the United States and Japan are getting closer to resolution of the five "sacred" agricultural items discussed in my last post.  

Not all of the sectors are equally challenging to address.  For example, Japan placed sugar on the "sacred" list.  Given American sensitivities on sugar, it was never very likely that the United States would push Japan particularly hard in this sector.  It's the old "people who live in glass houses should not throw stones" problem for U.S. negotiators.  

Equally, it was never very likely that Japan would be asked to drop rice tariffs from more than 700% to zero in any short timeframe.  Each government can appreciate that doing so would have been economically and politically challenging.  Thus, it was always likely that Japan would be given a long timeline for rice.  In addition, since many Japanese believe deeply and passionately about the quality of domestically produced rice (and, indeed, most agricultural products), even if the rice market were completely tossed open it is highly likely that consumers would still opt to buy Japanese rice.  

The real fights have been over access to Japan's beef and pork markets. These are lucrative and have been highly sheltered in important ways.  Low priced pork items, for example, are assessed duties as high as $4.06 a kilogram (482 yen).  A duty of this magnitude can keep consumers from purchasing foreign pork--especially on lower value items.  Pork prices in Japan are managed by a complicated "gate price" system that the American pork industry has long sought to change.

Reports now suggest that Japan is prepared to slash tariffs on pork dramatically.  The duty on lower value pork products could fall to less than a fifth the current level.  High value pork may see the current 4.3% tariff finally reach zero.  

Beef is currently assessed tariff rates of 38.5% into Japan.  The cut being discussed would drop these rates to 20% and then to 9%.   

Of course, the cuts in both beef and pork are to be phased in over a long period of time.  In the case of beef, the 9% rate will not be in effect until 15 years after the agreement is first implemented.  Even then, the final deal will not lower rates all the way to 0, as many might have expected, given the long-standing discussions in the TPP of a "high quality, no exceptions" agreement that covered all goods.

Tariffs are not the only way of protecting markets either.  It is entirely possible to keep foreign cuts of meat limited in Japan through maneuvers like labeling requirements that make foreign beef and pork appear less savory than locally produced cuts of meat, or stringent health and safety inspections that take so long to complete for imported products that the food spoils.  There are a myriad other ways to use non-tariff barriers (NTBs) like these to limit what would otherwise appear to be more open markets in the future.

This is not to say that the Japanese government will turn to such measures, but simply to highlight that such possibilities exist.

Another potential tool (or NTB, depending on your perspective) being built into the agreement is something called a "snapback" provision.  This is a "safeguard" measure that is designed to give an industry "temporary breathing room" if imports suddenly surge.  In the TPP, the safeguard on beef could allow the government to raise tariffs from 9% all the way back to the current levels of 38.5% if imports of beef do surge after the deal is done.

This is deeply problematic, as it is highly likely that imports of beef (and pork) will, indeed, rise after the agreement is fully implemented.  After all, if foreign cuts of meat are not subjected to painful additional tariffs at the border, prices at the supermarket should fall.  The increase in foreign products could be defined as a "surge" and trigger the sudden imposition of safeguards or the snapback to the original tariff levels that were present prior to the TPP.  

Similar maneuvering can be expected in dairy where Japanese tariffs on various dairy products like butter are significantly higher.  It is certainly likely that a drop in butter tariffs from more than 200% will be met with a surge of imports since consumers will be buying cheaper American or TPP butter.  Shops were already running out of domestic butter at the end of the year as Japanese domestic herd sizes have fallen.  A similar shortage (and emergency lifting of quotas) took place in 2008.  Butter crises struck again in 2011, 2012 and imports were allowed under emergency rules twice in 2014.

The Japan Dairy Industry Association has argued that the domestic industry is set for a catastrophic fall once the TPP comes into effect, with the butter market falling from 83 million yen to less than 13 million yen.

Dairy is also an issue with Canada.  Thus far, the Canadians have been waiting on the resolution of agricultural issues with Japan before they get serious about their own promises to reduce protection to TPP members in dairy and poultry. 

TPP: The Importance of Resolving the “Sacred” Market Access Issues

I have been told for several years now that if TPP negotiators were stuck in a room with no food and no water, they would rather quickly come to an agreement.  We almost had a real-world test of this theory, as TPP chief negotiators and team members were stuck in New York City.  Fortunately, the snow was lighter than expected and the experiment ended before stocks of food and water ran out.

So, what are the issues that are holding up conclusion of the TPP?  This post will discuss the biggest sticking points—old-school fights over cows, pigs, butter, rice, and pickup trucks. 

These kinds of market access issues continue to confound the conclusion of the negotiations. 

What is particularly amazing about these topics is how long officials have been wrangling over them.  Wendy Cutler, acting deputy USTR, must be one of the world’s most unlucky bureaucrats. She’s been fighting over market access for the same narrow set of products with Japan for what must now have been most of her career.   Up until now, she has continued to bash her head against the same implacable forces with little to show for her efforts. 

When I started tracking U.S.-Japan trade disputes from the 1980s and 1990s, she was pushing for expanded access for autos, apples, insurance, and construction.  All these years later, she is still pushing for access for autos and assorted agricultural products.  (In the interest of full disclosure, we have never met and I grant that she is good at her job—the evidence from some specific Japanese agricultural markets notwithstanding.)

The specific context for negotiations has altered over the decades.  But the prospects for deep and substantial change have never been brighter.  She is currently holed up again with her Japanese counterparts in Washington DC, trying to sort out the bilateral concerns over Japan’s “five sacreds” and autos. 

Japan entered the TPP in July 2013.  When Japan got in, the signs for negotiations were somewhat ominous.  President Obama seems to have thought he had sufficient wiggle room by putting talks over a few key agricultural items and autos onto a separate, bilateral track.  This portion of the negotiations could take as long as necessary to resolve, since conclusion of the bilateral portion of the deal need not finish at the same time as the rest of the topics under negotiation.

Prime Minister Abe, for his part, promised to “take special care of” five sectors:  rice, wheat, beef/pork, dairy and sugar.  These so-called “sacred” sectors were swiftly declared to be off limits for bilateral discussions by Japan’s Diet. 

The deal that both sides thought they had mapped out quickly unraveled.  First, it is impossible for Japan and the United States to negotiate endlessly (or continue to negotiate for another 30 years) on the five sacreds and autos.  The other 10 TPP members need to see what sort of commitments the two players are willing to make.  If Japan, for example, is able to exclude or fail to completely open certain sectors like dairy or beef or butter, then other TPP parties will argue that they, likewise, do not need to fully liberalize their own most sensitive sectors.  Hence, it matters greatly what Wendy Cutler and her team manage to achieve in dialogue with her Japanese counterparts for the entire TPP negotiations.

Second, while the Japanese were likely to be given significant latitude to have extremely gradual market opening, government officials showed up with more than 500 tariff lines of products that were part of the original “sacred” list.  Japan has more than 60 tariff lines devoted to rice--including not just polished rice with current tariffs of more than 777%, but also all sorts of products made with rice. 

Again, quite clearly, for the TPP as a whole this laundry list of products was not going to be acceptable.  If Japan managed to exclude or minimize its commitments across hundreds of product lines, then every other member would try to do likewise. 

Even as the product list was slowly, painfully, peeled back to include a shorter list of products, the timelines for liberalization have remained long and the final outcome is less ambitious than promised.  

Following the Japan-Australia FTA, for example, would allow beef tariffs to remain at 19.5% for 18 years.  Nikkei just reported that beef tariffs in the TPP will be cut from 38.5% to 20%, with (as yet) unspecified plans to reduce further over time.  Such reductions may be significant, but such promises over beef are certainly far from 0 tariffs or a 10 year timeline, as the original levels of ambition specified.

These deviations from high ambition will now likely flow through elsewhere, particularly in market access for agricultural products.  Canada wants very much to exclude or minimize openings in its own dairy supply management system.  Supply management is a complicated system designed to ensure continued production of dairy and some poultry products in the face of strong competitive pressures from the Americans.  Under previous agreements like the North American Free Trade Agreement (NAFTA), the system was not addressed. 

If Japan ends up being able to shelter some or all of its sacred agricultural items in the end, then Canada will likely argue for maintaining, in whole or part, the dairy supply system.  The Americans will say that they need not open the domestic sugar market to greater competition from TPP parties.   Or that the tariff rates on autos into the United States can remain at 2.5% indefinitely.

To get the TPP across the finish line, negotiators need a breakthrough in U.S.-Japan bargaining over autos and the remaining agricultural items.  Until this portion of the final agreement is sorted out, the remaining sensitive products elsewhere cannot be properly addressed.  Every deviation from high ambition encourages similar swerving by other parties elsewhere. 

The stakes are high.  But with a little luck, Cutler may finally be listening to a different tune when she presses her Japanese counterparts to open market access.  After nearly a lifetime of waiting, it is past time to hear something other than “no.”