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***

TPP: Waiting for Godot?

The news that the next scheduled ministerial for the Trans-Pacific Partnership (TPP) negotiations have been postponed from March until April will cause many people to wonder again whether we are all waiting for Godot.  Will the TPP ever get across the finish line or will the goal posts keep getting shifted backwards?

The 5th anniversary of negotiations is just around the corner.  The first substantive talks in Australia began in March 2010 with tremendous enthusiasm.  Here was a rare trade agreement that would take high ambition and high quality as objectives from the opening moment. 

The intervening years have been a long, hard slog.  Adding new members along the way (like Malaysia, Canada, Mexico and Japan) complicated talks.  Moving to a deal with 12 members increased the potential benefits but also brought new sets of sensitive issues to address. 

Getting the agreement done means that 12 countries have to convince themselves that the deal on the table is the best possible outcome at this point in time.  There is no way that every member will be able to receive all of their original objectives, so each must decide how far to compromise. 

The problem is that no individual member has an incentive to be the first to drop their objections or to accept less than ideal outcomes in their most important areas.  Negotiators have to believe that they are in the final moments of bargaining before they can solve the last, most challenging topics. 

This is why the shifting goalposts are problematic.  If the finish line keeps moving backwards, then officials can never be certain that the time has come to resolve the toughest issues. 

Why did this latest “deadline” change?  It’s not entirely clear, but two explanations are likely.  First, some members of Congress have been very blunt about how the TPP agreement cannot be concluded until Congressional authorization in the form of Trade Promotion Authority (TPA) is in place.  The push is on to get TPA concluded in Washington, but will likely take until March before this vote will take place.  Thus, any announcement of TPP “substantial closure” cannot take place at the time of the originally scheduled TPP ministerial round in March.

Second, the deal cannot be substantially concluded until members agree that they are ready to close.  Most of the focus has been on Japan and their difficulties in getting a suitable bargain on the remaining agricultural items (the five “sacreds” as noted in an earlier Talking Trade post). 

These are certainly challenging.  But a focus on Japan has obscured other member issues.  The United States, for example, will likely have to concede something on autos.  For example, American negotiators have apparently been holding out for phase-outs on tariff reductions in cars for 25-30 years.  This is clearly incompatible with the timelines used elsewhere in the deal (and certainly flies in the face of the “high ambition” objectives of the agreement).

The Canadians have not yet prepared their own market access concessions in dairy.  Any change in Canada’s supply management system is highly sensitive and politically challenging.  Yet getting the TPP done means that Canada cannot expect to receive 100% of what it wants at the end.  Crafting a bargain that will satisfy both Canada and its partners that want ambitious market openings in this sector takes time.   In the end, the best deal might be the one that leaves everyone the least unsatisfied or unhappy.

There are other challenges in timing as well.  Some of the most sensitive points that remain to be locked into the agreement are still not confirmed—like the extent and reach of state owned enterprise (SOE) rules, the listing of rules and regulations that will not change after the TPP comes into effect (non-conforming measures), specific timing for implementation of rules for different members in areas like intellectual property rights (where some members will have longer timeframes for implementation of certain provisions), and so forth.

Officials appear to have decided that getting it all done will take more than a few more days and will require another round of talks at the chief negotiator level (with a few working groups also feverishly trying to wrap up their outstanding issues).  Thus, the hoped-for “final” ministerial has been pushed to April.

Perhaps, this time, the April “deadline” will stick and we will finally be able to stop waiting for Godot to arrive.