Talking Trade blog
Why is agriculture so difficult for trade deals?
Published 28 April 2015
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.
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