Will the U.S.-Japan TPP Trump the Japan-Australia JAEPA?

February 12, 2015International Tradeby East Asia Forum

Australia's farmers can't be happy about the TPP.

Australia’s farmers, particularly beef producers, may have celebrated too early when the Japan–Australia Economic Partnership Agreement (JAEPA) took effect on 15 January 2015. The deal may be gazumped by another that is taking shape between Japan and the United States in the Trans-Pacific Partnership (TPP) negotiations. Some elements of the proposed US–Japan agreement are reminiscent of the kind of bilateralism — or US-specific agricultural market concessions — that characterised Japan’s trade policy in earlier decades. Those deals significantly disadvantaged Australian agricultural exporters.

Japan has a long history of offering inducements to the US government in order to settle difficult multilateral trade negotiations. In December 1993, at the 11th hour of the General Agreement on Tariffs and Trade negotiations, the Japanese government agreed to place tariffs on all remaining agricultural import restrictions and commit to a minimum access arrangement on rice imports. The deal was worked out principally in bilateral negotiations between the United States and Japan. It included ‘special treatment’ on rice that, since 2000, has virtually guaranteed market access for 360,000 tons of US rice annually. This accounts for roughly 47 percent of Japan’s 770,000-ton minimum access tariff-free quota for rice imports.

Australia also gained country-specific concessions from JAEPA. This included preferential access for a large volume of pork and exemption from Japan’s ‘gate price safeguard’, as well as a country-specific quota for chicken meat. Australia also won duty-free quotas for natural cheese and other cheese products, as well as for ice cream and yoghurt.

But there is supposed to be a big difference between a bilateral economic partnership agreement and the TPP. Despite the TPP’s aspirations to be both a multilateral and a free trade agreement, in reality it looks like being neither. Negotiations have been proceeding on two fronts simultaneously: among all 12 participating countries and bilaterally between particular countries, principally Japan and the United States.

This dual-track trade diplomacy will inevitably result in bilateral agreements between particular countries with carve outs and country-specific concessions. The TPP will not observe one of the fundamental principles of the multilateral trading system: most-favoured-nation (MFN) treatment. The TPP participants will not only discriminate against countries that are not parties to the agreement but also countries that are. This means that any US-specific concessions on agriculture will not apply to Australia. And yet extending MFN status is how you make originally bilateral agreements into multilateral ones.

The deal that is shaping up between the United States and Japan on agricultural market access is likely to contain several provisions that will affect Australia.

Rice, wheat and sugar will be exempt from tariff reduction. But in return for maintaining these tariffs, Japan is examining a 50,000-ton special import quota for American rice in addition to the current 770,000-ton tariff-free minimum access quota.

Tariffs on American beef will be reduced from 38.5 percent to 9 percent over 10 or more years. There will be a 20–30 percent reduction in tariffs on cheaper pork, from the current tariffs of 482 yen (US$4.03) per kilogram to around 100 yen (US$0.83) per kilogram. The 4.3 percent tariff on high-end pork will also be removed and tariff quotas will be set for some dairy products with low level tariffs. Finally, the terms of the deal will not be applied to other countries.

Offers along these lines were made by TPP Minister Akira Amari to the United States in the TPP meeting last November. They were turned down. But now more stars appear to be aligning in the domestic politics of both the United States and Japan.

Since last November, both countries have significantly adjusted their positions. The US side has changed its stance to allow a certain level of tariffs to remain on key ‘sensitive’ agricultural items. At the same time, Japan has been prepared to accept a greater reduction in tariffs on the condition that a relatively low trigger level can be established for safeguard measures that will kick in if there are surges in imports. It is currently predicted that a TPP ministerial meeting will be held before the end of February when the Japan–US talks will be settled.

Australia has a limited defence against these measures. Its beef exporters, for example, will be paying a 30.5 percent tariff on frozen beef and 32.5 percent on fresh beef. These are expected to fall to 23.5 percent in 15 years and 19.5 percent in 18 years respectively.

JAEPA does include a provision for a review that can be triggered immediately if Japan provides one of Australia’s competitors with a better deal on beef. This provision aims to provide Australia with equivalent treatment, but it is not necessarily guaranteed and would be subject to bilateral negotiations at the time. Naturally, it would also have important implications for Japan’s relations with the United States, Australia’s main beef competitor in the Japanese market.

On rice, Australia can request that Japan allocate more minimum access rice for them as well. But, given Japanese farmers’ sensitivities on rice market issues, the outcome is by no means certain either. Japanese farmers are against the increases in minimum access rice even from the United States.

For Japan, the special minimum access deal put in place to settle agricultural market negotiations with the United States more than 20 years ago still generates large deficits in the special account budget of the Ministry of Agriculture, Forestry and Fisheries. Between 2002 and fiscal 2013, it accumulated a deficit of 277.8 billion yen (US$2.3 billion). This fiscal burden would only increase if the United States were granted another 50,000-ton special rice quota.

It seems that ‘getting in first’ — as Australia did with the JAEPA — may have only conferred a temporary advantage in Australia’s export trade in beef and other agricultural products with Japan.

What the TPP portends for Japan–Australia agricultural trade is republished with permission from East Asia Forum

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