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2014.04.28

Where to for the TPP Negotiations?

IIST e-Magazine on March 31, 2014("The TPP and Agricultural Revitalization" Final Part)


 Bound by Prime Minister Abe's election pledges and Cabinet decisions, Japan can't allow the elimination of tariffs on agricultural products. Meanwhile, the US Trade Promotion Authority legislation is far from receiving Congress approval. When will the TPP negotiations be concluded?


Japan's perspective on the TPP negotiations

 The Liberal Democratic Party and the Diet agricultural committees have adopted resolutions urging the government to have Japan's rice, wheat, beef and pork, dairy products and sugar exempted from the Trans-Pacific Partnership (TPP) agreement and to leave the negotiating table if unable to do so. As with other trade negotiations to date, on the political level, agriculture stands as Japan's greatest concern.

 The view within the Japanese administration is apparently that when Prime Minister Shinzo Abe met with US President Barack Obama, they reached mutual agreement that industrial goods (automobiles) are sensitive for the US, while agricultural products are sensitive for Japan. Since the meeting, Abe has said that the two leaders affirmed that there would be matters not up for discussion at the negotiations. However, while the Obama administration might have recognized the sensitivity of agricultural products, does it necessarily equate this with keeping tariffs in place? Preserving tariffs is simply a Japanese assumption; the US has not committed to that extent. The US itself has accepted that tariffs will be eliminated on automobiles, and views a lengthy phase-in period for that elimination as reflection of the area's sensitivity. If the US were to counter that it will accept a lengthy 20-year phase-in period for the elimination of tariffs on Japan's agricultural products in recognition of the sensitivity of that area, over which time Japan should surely be able to boost agricultural productivity, Japan would be at a loss to respond.

 At home, some seem to believe that Japan will be able to get through the negotiations if it just eliminates tariffs on processed and prepared foods. The five sensitive farm product categories are sub-divided into a whole range of tariff lines or items according to the degree of processing and their constituents. For example, there are 58 tariff lines or sub-categories for rice, including husked (brown) rice, semi-milled or wholly milled rice, rice flour, mochi (rice cakes), dango (rice dumplings), senbei (rice crackers), rice confectionery dough, and preparations of rice flour. Altogether the five sensitive farm product categories encompass 586 tariff lines , or 6.5 percent of all tariff lines when industrial goods are included. If all 586 were excluded, Japan's liberalization rate-the ratio of tariff lines on which tariffs have been eliminated-would be 93.5 percent, far below the liberalization rate of around 98 percent sought at the TPP negotiations. That's why Japan has been looking at reducing the number of tariff lines exempted from tariff elimination.

 However, if tariffs on processed and prepared foods are removed, domestic agricultural production will fall. Let's say that as a result, Japan was able to lift its liberalization rate to 95 percent. Would that satisfy the other parties at the TPP negotiating table? Tariff negotiations are not negotiations on liberalization rates-their focus is on the extent to which a country can sell its products and the extent to which it can get trade partners to eliminate tariffs to achieve that end.

 The following countries want to export to Japan some or all of the five farm products which Japan has identified as sensitive: the US (rice, wheat, dairy products, beef and pork), Australia (rice, wheat, dairy products, beef, pork and sugar), Canada (wheat and beef), Mexico (beef, pork and sugar), New Zealand (dairy products) and Vietnam (rice). Even if Japan were to scrap tariffs for prepared beef products, neither the US nor Australia will agree to let tariffs on beef itself to remain in place. So even if Japan raises its liberalization rate, it will still be unable to avoid eliminating tariffs for the five sensitive product categories.

 What will happen if Japan continues to insist on maintaining tariffs? The nature of trade negotiations is that countries that hold out for exceptions to a principle must pay the price. In the GATT Uruguay Round negotiations, all countries were required to convert non-tariff barriers to tariff only shemes, under the principle of what was called "comprehensive tariffication" without any exceptions. If Japan had imposed tariffs in place of non-tariff barriers such as quantitative import restrictions, all it would have needed to do was set minimum access opportunities (tariff-rate quota equivalent to five percent of domestic consumption with no or little in-quota tariffs), but because Japan wanted rice exempted from tariffication, it was forced to expand that minimum access to eight percent of domestic compensation. Recognizing this as excessive, the government shifted to tariffication in 1999, bringing minimum access down to 7.2 percent of consumption (770,000 tons).

 Then too, many groups of producers of goods which had been sheltered by quantitative import restrictions, including wheat, dairy products, pork, sugar and starch, expressed vociferous opposition to tariffication, but in the end the Japanese government decided to retain only rice as an exception. If, for example, dairy products had been exempted, there would doubtless have been calls from sugar producers to exempt sugar as well. However, exempting rice causes no dissatisfaction among producers of other products, for the simple reason that rice is far more politically sacrosanct than any other product.

 Prime Minister Abe went into the TPP negotiations after explaining to the LDP that he had confirmed with President Obama during their summit meeting that agricultural products would be off the table. At very least, tariffs will need to be kept for rice as the most sacred of sacred areas. At the same time, however, Abe will also have to deal with the issue of material benefit, namely having to expand the US rice industry's imports to Japan, which will effectively require establishing tariff-rate quota for TPP member countries.

 Such an outcome would damage Japan's national interests. In exchange for the US allowing rice to be exempted, the US phase-in period for the elimination of tariffs on Japanese cars would probably be greatly extended. And in agriculture too, in the absence of tariff reductions, the reduced rice acreage policy would doubtless remain in place alongside the policy of high rice prices. The structural reform of rice farming would be delayed even further. Just like the Uruguay Round negotiations, the result would be Japan opting for form while the US chooses substance.

 Moreover, that would be the final shape of the negotiations. Abe has insisted to the LDP that he has the negotiating power to keep agricultural tariffs exempt from tariff elimination, and won elections in both houses as a result. To the extent that Japanese agriculture is not shown how Japan's position is being repeatedly rejected, at this stage Abe has no room to back down. In the Uruguay Round negotiations too, it was a long time before international insistence on tariffication with no exceptions was accepted as unavoidable in Japan. With the government's hands tied by agricultural interests, Japan will not be able to conclude the negotiations any time this year.


The US perspective on the TPP negotiations

 Under the US Constitution, trade negotiation authority lies with the Congress. Accordingly, the US has in the past passed trade promotion authority (TPA) legislation, what is called fast-track, transferring that power to the US Trade Representative (USTR), with the Congress able only to approve or disapprove but not amend the results of negotiations undertaken by the government. The USTR does not currently have that fast-track authority. It would of course be possible to seek Congress approval of the negotiated treaty even without TPA, but the Congress would then be free to make amendments, which would in turn require the US Trade Representative to go back into negotiations.

 However, getting the current TPA legislation through Congress will be no easy task. There are many Democrat members of Congress supported by trade unions and the like who oppose free trade, and the last TPA bill made it through the House of Representatives by just one vote.

 On all previous occasions, the US government has secured fast-track authority before concluding negotiations. However, most trade people in Washington believe that the TPA bill presented in January this year is unlikely to make it through Congress this year due to US Senate Finance Committee Chairman Max Baucus, who introduced the bill, moving on to become the US Ambassador to China, as well as the negative stance taken by House of Representatives Minority Leader Nancy Pelosi.

 While TPA has traditionally been a prerequisite for concluding negotiations, US Trade Representative Michael Froman and others at the USTR believe that if a good outcome can be achieved from the TPP negotiations, the Congress will come under strong pressure to pass the TPA bill. In other words, rather than the conventional course of passing a TPA bill to reach agreement in negotiations such as the TPP, the USTR is looking to achieve a good TPP outcome to push through the TPA bill.

 The success of the USTR plan will hinge on producing a high-level agreement in terms of tariff elimination and rules-by extension, an agreement that eliminates tariffs on Japan's agricultural products and gets the results that US agriculture wants. Naturally, it also needs to satisfy the other relevant industries, labor unions and environmental groups. In other words, the USTR needs to sell the negotiation results to the Congress, which is sensitive to the views of these various interested parties.

 Further, if the US allows Japan to exempt the elimination of agricultural tariffs, other countries taking part in the TPP negotiations could well backtrack on matters that the US has already negotiated in areas such as state-owned enterprises and intellectual property rights, which would make the resulting TPP agreement even more difficult to sell to Congress. For the above reasons, neither the US nor Japan have room for concession.

 Of course, the US too has weak areas, such as sugar from Australia and dairy products from New Zealand. However, in the case of dairy products, the US appears to be calculating that if participation by Japan and Canada opens their markets as well, the impact on the US market would be lessened. In other words, tariff elimination for dairy products could be possible.

 In the case of sugar, while a compromise proposal has apparently been put forward, Australia's response has not been particularly enthusiastic. Sugar producers in Florida, which is a swing state in the US presidential elections, have an enormous amount of power due to their significant political donations, so the US is unable to make further compromises.

 Some negative views have also been expressed on the negotiating stance of US Trade Representative Froman and others, primarily in relation to the nature of a 'good outcome'. As also seen in the current TPA debate, the US Congress believes that countries around the world should be made to commit to not engaging in currency manipulation to grow trade. Behind this lies the opposition of the US auto industry, which considers that Japan has deliberately brought down the value of the yen in order to expand auto exports. Not only the USTR but also the Treasury Department and other US government agencies disagree. To win over Congress, a currency manipulation provision needs to be written into the TPP, but the USTR is doubtful as to whether this can be achieved.


When will the TPP negotiations be concluded?

 Given the current state of the negotiations, it will be difficult to reach agreement on agricultural tariffs or on rules for state-owned enterprises, etc., before mid-2014. With the US midterm elections taking place in November 2014, negotiations are unlikely to be concluded around that time either. The negotiations could accordingly run into 2015, but as Japan's national elections aren't likely to take place until 2016, they won't be impacted even if agreement is reached around mid-2015. The US too has no major elections in 2015, and if the composition of Congress changes as a result of the midterm elections, the new Congress might not insist on including currency manipulation as a condition for granting fast-track authority. Given all this, we will probably see a conclusion to the TPP negotiations next year in 2015.


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