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.” 

My "State of the Union" Is Stronger on Trade

President Barack Obama gave his annual State of the Union address on January 20, 2015.  In a familiar refrain heard in such speeches, he characterized the state of the union as strong.  While the speech may have been strong, the trade portion of his remarks could have been more powerful and persuasive. 

The specific portion of his speech covering trade ran for several paragraphs: 

“21st century businesses, including small businesses, need to sell more American products overseas. Today, our businesses export more than ever, and exporters tend to pay their workers higher wages.

But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and our businesses at a disadvantage.

Why would we let that happen? We should write those rules. We should level the playing field.

That’s why I’m asking both parties to give me trade promotion authority to protect American workers with strong new trade deals from Asia to Europe --(applause) -- that aren’t just free but are also fair. It’s the right thing to do.

Look, I’m -- I’m the first one to admit -- I’m the first one to admit that past trade deals haven’t always lived up to the hype, and that’s why we’ve gone after countries –- (applause) -- that break the rules at our expense. But 95 percent of the world’s customers live outside our borders. We can’t close ourselves off from those opportunities. More than half of manufacturing executives have said they’re actively looking to bring jobs back from China. So let’s give them one more reason to get it done.”

The good news? 

1) This is the lengthiest statement on trade out of President Obama in a long time.  The relevant trade portions of last year’s State of the Union address contained only the following:

“…And when ninety-eight percent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create more jobs.  We need to work together on tools like bipartisan trade promotion authority to protect our workers, protect our environment, and open new markets to new goods stamped “Made in the USA.”  China and Europe aren’t standing on the sidelines.  Neither should we.”

2) This year, by contrast, the President specifically asked Congress to grant Trade Promotion Authority (TPA). 

3) The President expanded the argument about why he needs TPA from a set of pure economic arguments into suggesting it is necessary to protect American workers and set new rules of the game for fairness.

The less positive news? 

1)  Obama specifically fingered China to provide the frame for why TPA is needed at this time.  Arguing that China will rewrite the rules of the trading game might get him more votes and more support from Congress in passing TPA in the short run.  But this statement may ultimately cost him (and the United States more broadly) significantly in the longer term. 

China needs to be inside the TPP agreement in the future.  This is important not just for helping ensure that Chinese economic growth and restructuring takes place along the most compatible lines for the United States, but also because China’s eventual entry into the TPP will deliver significant benefits to the United States and to American companies.

2) By commenting that the United States should “write the rules” it suggests that the Americans have not already done so, especially in the context of the TPP.  This is clearly not true.

How else could Obama have discussed trade?  By going on offense and not just playing defense, for a start.  If I had been asked to write the justification for TPA and support for American trade agreements, my own State of the Union speech draft would have read:

“The data shows that the American economy remains the primary engine for global economic growth.  While we continue to grow, the rest of the world is starting to struggle.  This presents an important opportunity for us. 

The United States has some of the most productive, innovative and creative companies in the world. High quality products can be found in manufacturing, in services, and in companies both large and small.  

It is critical that we continue to show economic leadership and write rules for the global economy that will empower our companies in the future.  We need to work together to pass trade promotion authority to give our negotiators a key tool to close economic deals.

The United States has always been a leader in the global economy.  We must maintain our seat at the head of the table in discussions at the World Trade Organization on goods and services, and in key trade agreements with both Asia and Europe. 

These are the types of trade agreements that can provide American companies with greater opportunities for exports and give American workers a shot at broader range of high quality jobs.

Look, I’m the first one to admit that past trade deals haven’t always lived up to the hype.  But we cannot respond to a world where 95% of the world’s customer’s live outside the United States by withdrawing.  We must provide opportunities for the millions of Americans who work hard every day by continuing to design a global economy that works for everyone.”

My State of the Union would remind everyone that the United States has always shown strength in trade.  Now, partisan battles in Washington threaten to keep the U.S. on the sidelines.  But this need not be the case.  It is time to show leadership, starting with the passage of TPA.

Promoting Trade: Congress and the Passage of Trade Promotion Authority (TPA)

As the Trans-Pacific Partnership (TPP) negotiations with the 12 international trading partners nears conclusion after five long years of hard bargaining, the battle for the future of the agreement inside the United States is heating up.  There are two key elements of the fight: Congressional approval of Trade Promotion Authority (TPA) and passage of the implementing legislation necessary to bring it into force in the United States. 

 In the U.S., Congress has the authority to regulate commerce, which includes setting tariffs.  But getting 535 members of Congress to negotiate trade agreements is not practical, so historically the executive branch has handled these tasks.  In the 1970s, this arrangement was formalized.  Members of Congress decided to explicitly give the role of negotiating trade agreements to the White House (subject to a number of specific provisions).

 Under what used to be called “fast track” and is now labeled “Trade Promotion Authority” (TPA), Congress is to be notified of the intention to launch negotiations. Congress is given 90 days to respond.  The United States Trade Representative (USTR) office is also tasked with gathering information about the future direction and important elements for the talks during this time period from a range of key stakeholders including business groups.  After the initial comment period is concluded, USTR is required to keep Congress informed as negotiations continue.  Finally, Congress has promised to vote the entire trade agreement up or down without amendment at the end by a simple majority vote in both chambers. The timeline is shown below.

Source:  Cooper, CRS, January 13, 2014

Ideally prior to the start of new negotiations, USTR would receive TPA from Congress, with the broad parameters and objectives set for any trade agreements to be negotiated during the time covered by the approval.  However, this was not done for the TPP as the latest version of TPA expired in 2007.

The outgoing George W. Bush administration announced its intention to join what became the TPP in September 2008.  The Obama White House decided not to press Congress for renewal of TPA in 2009, but rather started negotiations in March 2010 by following the provisions of TPA “as if” it were active. 

Over all the years of TPP negotiations, the White House did not seriously pursue votes in Congress to support renewal of TPA. But now, as talks enter the closing phase, TPA is necessary to finish the agreement.  Without TPA, Congress can amend the agreement from the opening sentence to the closing word.  As I always joke, without TPA in place, someone in Congress will propose amending an opening line of "The 12 parties of the TPP..." to "The Glorious United States of America and the 11 other parties of the TPP..."

Without TPA, Congress could also allow the agreement to die in committee or tangle ratification in an endless filibuster.  In short, without the provisions of TPA in place prior to the closure of the agreement, the TPP will likely fail to be ratified by Congress.

The first problem for 2015, then, is to secure passage of TPA.  The last time the bill was authorized, in 2002, the votes were very close: approval by 215 to 212 in the House of Representatives and by a margin of 64 to 34 in the Senate. All indications are that a TPA vote may be equally close this time. 

Note that the passage of TPA, however, will not mean smooth sailing for a TPP deal.  In authorizing TPA, many members of Congress want to place strict conditions on elements of a final deal that must be present before they will grant approval.  Most controversial is an ongoing discussion of including legally binding rules to prevent trade agreement members from manipulating their currencies.  (This terrible idea will be the subject of a later post.)

Ideally, TPA will be granted—as it has always been—for a range of trade agreements and not simply given for the TPP.  The United States is simultaneously engaged in multiple negotiations over trade: with the European Union in the Trans-Atlantic Trade and Investment Partnership (TTIP); with nearly two dozen countries on the sidelines of the World Trade Organization (WTO) in the Trade in Services Agreement (TiSA); with 80 countries at the WTO in updating the Information Technology Agreement (ITA); and with more than 160 countries in the WTO in the Doha Development Agenda (DDA).   All will need a version of TPA, at least before any agreement can be implemented and enter into force for the United States.

 The White House has finally begun a whip count operation this week to start the TPA procedures in earnest.  This ought to be backed by forceful pressure from President Obama to get TPA as quickly as possible.  Tonight’s State of the Union address is the best place to begin.

Then the next phase of the battle for TPP—passage of the final agreement—can be joined.