Blocking Trade With a Label

Trade policy experts frequently discuss non-tariff barriers (NTBs) or non-tariff measures (NTMs) that hamper the movement of goods across borders.  But much of this discussion takes place at a high level of generality with few specific examples.

Businesses on the ground are not particularly interested in vague discussions about NTBs.  Instead, they are occupied with trying to understand and respond to specific issues that prevent their goods from getting into or out of markets.  One underappreciated problem for companies is product labeling. 

Governments can certainly use labeling laws and regulations as a means to protect their markets from foreign competition.  Often, however, government regulatory bodies and legislators view product labels as a necessary tool to protect their citizens from harm or to provide customers with important information.

Global and regional trade rules all allow governments to regulate in the interests of public health, animal health and plant life.  For companies, ensuring safe products with reliably high quality is also important.  Hence, both government and firms would agree that regulations for product labeling are necessary. 

But many governments appear to be asking for excessive information to be included on products.  For smaller companies in particular, onerous regulations on labels can make it impossible for otherwise competitive firms to trade. 

As an example, here are the rules for exporting food products to Laos:

Food distributed directly to consumers in Laos must carry Lao language wording in a font and size that is clearly visible. Foreign language wording is also permitted.

In principle, food product labels are required to indicate the following:

·      name of product

·      registration number for food products

·      name and location of producers or company that packed products for distribution

·      country that produced the product

·      quantity of product (expressed in metric system)

·      important contents of products in percentage in relation to gross weight, in decreasing order

·      production date or expiry date, depending on products

·      if available, advice on storage, preparation methods, use of preservatives and colorings

In practice, it may be that regulations requiring Lao language labels are not always enforced.  Uncertainty is one of the biggest challenges for businesses.  Uneven enforcement of the rules means that companies could be caught out at any moment if the regulations are not strictly followed.

Thailand has equally complex rules around labels, with particularly strict provisions for dairy, baby foods, canned foods, vinegar, beverages, edible oil and fats, and gourmet powder (defined as an article containing monosodium glutamate (MSG) and used for food seasoning).  Food products must be approved and registered with the Thai Food and Drug Administration (FDA). When seeking registration, importers must supply two samples of each product, details of the exact composition by percentage of each ingredient, and six labels. Foodstuffs in sealed containers are subject to specific regulations.

Assuming a company survives this far, food products for shipment into Thailand must show labels in Thai with the following information for consumers:

·      Name and brand of the product (both generic and trade)

·      Registration number

·      Name and address of the manufacturer

·      Name and address of the importer

·      Date of manufacturing and expiry

·      Net weight and volume

·      Any additives used

·      Health and nutritional claims (if any)

Alcoholic beverages must advise the percentage of alcohol content. There must also be a health warning, printed in Thai, on the label or on a sticker, with specific wording.

Cosmetics have to be labeled in Thai with:

·      The name and type of the product

·      The name of manufacturer and address

·      Directions for use

·      Net contents

·      A statement of caution if irregular use may cause injury

These rules from Thailand are so complex, overall, that firms may have to use a local agent or importer to help register foreign products and help with labeling.  Again, for smaller firms, meeting these rules may prove impossible.

These examples may be on the extreme end, but juggling different requirements for labeling of products, boxes, packaging and so forth is a common issue across companies, countries and sectors.  If labeling rules get to be too onerous, firms will simply bypass markets entirely. 

Future posts will continue to highlight specific examples of labeling and other non-tariff barriers as well as explore how free trade agreements can conflict with labeling rules and create outcomes that governments do not always appear to appreciate.

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.