Dairy Highlights Challenges to TPP Closure

The Trans-Pacific Partnership (TPP) negotiations did not close in Hawaii last month partly due to disagreements over dairy access.  Why did bargaining across 12 countries get so bogged down over milk and cheese market access?  What does the dairy dispute tell us about problems ahead?

Agriculture has historically been protected more than industrial goods, since nearly every country has particularly sensitivities around farming, farmers, and food.  The global trade regime under the GATT/WTO has made only modest inroads into agricultural trade so far, mostly by limiting tariffs in some sectors. 

The protection of agriculture has continued in various free trade agreements (FTAs) signed between WTO members, as Jo-Ann Crawford demonstrated by looking at 162 tariff schedules.  The countries in the sample varied in the extent of market liberalization for agricultural goods; however, overall, agricultural commitments made in trade agreements regularly omitted or excluded tariff lines.  The most frequent products carved out of FTAs include sugar (HS Chapter 17), miscellaneous edible preparations like coffee and tea (Chapter 21), beverages (Chapter 22), cereals (Chapter 10), dairy (Chapter 4), and meat (Chapter 2). 

This strategy for handling sensitive agricultural sectors—by simply excluding the items from market liberalization at all—was not supposed to take place in the TPP.  From the earliest days of discussions, officials took pains to announce that the TPP would contain “no exceptions.” 

Hence, even tough issues like dairy, sugar, meat and cereals (like rice and wheat) have had to be on the table for negotiations.  It will perhaps not surprise anyone to learn that these sectors, however, have been some of the very last items to be dealt with in the TPP. 

Canada apparently did not put forward an offer on dairy until just days ahead of Hawaii.  The original offer appears to have been a liquid milk equivalent tariff quota for all dairy products.  This gets rather complicated, but in short it meant that the partners could have access to a certain portion of Canada’s dairy market at lower tariff rates.  Once the quantitative cap was filled, everything after that would be charged (much) higher tariff rates.

Under a liquid milk equivalent scheme, all products made with milk, including cheeses, butter and all sorts of milk items would be interchangeable—in other words, partners could ship whatever form of dairy added up to the equivalent amount of liquid milk at lower tariffs up to the filling of the cap.  It could be that the entire cap could be filled with butter, leaving no room for cheese exporters, or the reverse. 

This is a deeply problematic outcome, however, for dairy exporters, as it is extremely difficult to determine what sort of outcomes farmers might receive in practice.  Quota systems are widely used in dairy and can sometimes be completely filled within a matter of weeks.  A sort of “blanket” quota would be even harder to judge since there could be no way to determine what portion of the quota other member countries might be able to fill or when.

Canada’s revised offer appears to have split up quotas for major subsectors of dairy.  This is an improvement, but still remains problematic.

The reason for Canadian delay in offering anything at all on dairy relates to specific domestic challenges.  Canada has a long-standing set of policies in place for dairy (and poultry) to protect the market against encroachment by (mostly) American dairy farmers. 

Under supply-management, the government has sheltered the dairy sector behind extremely high tariff walls (more than 300 percent, in some cases) and limited import quotas.  The system also includes complicated marketing boards that determine domestic prices, and controls on supply through the use of quotas per farmer for production. 

The net results of this system are a lucrative source of revenue for dairy farmers and extremely high dairy prices for Canadian consumers.  Efforts to dismantle or dramatically revise the system in the past have been complicated by the fact that the bulk of the 13,000 dairy farms in Canada are geographically concentrated in two important voting provinces.  While consumers would presumably benefit from cheaper products, like consumers worldwide, the average Canadian is not likely to rise up and lobby hard in favor of reduced dairy and poultry prices. 

Despite the soaring rhetoric of the TPP as a new kind of trade agreement better suited to the 21st century, dairy reforms in Canada will likely remain grounded firmly in the past.  Whatever happens, reform is likely to be limited, with changes to dairy phased in slowly over long time horizons.

Canada is not the only country, of course, with complex systems of support in place for dairy production.  Japan’s butter market follows a similar pattern—the government controls import volumes and prices and uses high tariff walls.  The result is that Japanese consumers pay more than triple the international price for butter and even experience shortages.

Like in Canada, however, consumers are not carrying protest signs around the trade ministry begging for lower butter prices. 

In the absence of visible support from consumers, officials are mostly getting an earful now from potentially disadvantaged firms.  It might be expected that industries that rely on dairy as an input, including all sorts of food manufacturers, bakeries, restaurants, and so forth would be working hard to convince governments that cheaper products could also be beneficial.  While some of this is undoubtedly taking place, their efforts are likely modest. 

Even firms that could be clear winners can be withholding visible support.  Many argue that, in the absence of a text that clearly lays out the extent and scope of changes that are coming, they cannot say anything at all. 

But once the agreement is finished and revealed, whatever (likely modest) changes are included for dairy are likely to provoke backlash from entrenched interests that benefit from current schemes.  Expect to hear loud calls for maintaining systems that “benefit small, family farms” and “produce high quality, safe food products” and “ensure adequate domestic supplies of dairy and dairy products.” 

Such complaints will be made even though: domestic farms remain set to continue to dominate markets; many farms could carve out an advantage in exporting; TPP products are of similar or equal quality; and supplies of products like butter, milk powder and cheeses are likely to increase.

Groups that feel under threat will not likely sit quietly.  Simply having the text available will not settle the issues.  

In the face of what can appear to be overwhelming support for the status quo, officials and political leaders can go wobbly.  They can backtrack on commitments for market opening and threaten to undo or torpedo the entire deal. 

A similar scenario will happen in various other sectors of agriculture and elsewhere.  Revealing the specifics of the compromises made in each of the 12 member countries is likely to set off vigorous debates.  Firms and industries that have decided to sit on the sidelines until the text is released may be joining the battle much too late. 

***Talking Trade is a blog post written by Dr. 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***

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.