The Heritage Foundation

Asian Backgrounder #15

June 26, 1984

June 26, 1984 | Asian Backgrounder on

Food Exports and the U.S. -Japan Trade Deficit

(Archived document, may contain errors)

15 July 26, 1984

-JAPAN: TRADE DEFICIT FOOD EXPORTS AND THE U.S.

INTRODUCTION

It is widely believed that Japan is one of the most protec- tionist industrialized nations, and unfairly'protects its markets. from American products, particularly,agricultural goods. As @he U.S. merchandise trade deficit with Japan is expected to top $20 billion this year, the charge that Japan erects barriers to U.S. agricultural exports sounds even more plausible. As a result, a rising chorus seems to be chanting that it is about time for the U.S. to "get tough" with Japan to end its import protection on agricultural products. This would enable the U.S. to expand its agricultural exports to Japan, it is said, and would narrow sig- nificantly the American trade deficit with Japan.

Determining whether Japan is more protectionist than the U.S. or Europe is quite difficult. In the case of agricultural products, Japan maintains some quantitative restrictions on certain agricultural items, including beef and citrus. So do most industrial nations. It thus is true that Japan does not have a completely open, free-trade policy in these markets.

However, the important and more realistic issue is the degree to which Japan's agricultural markets are open. Today, Japan is the largest net importer of farm products in the world. Over the past 20 years, Japan's agricultural imports have increased more than 30 times. Japan is the largest customer for U.S. farmers, and American farm exports to Japan have risen from $1 billion in 1970 to nearly $7 billion in 1983. In the case of individual commodities, Japan is the number-one market in the world for American exports of lemons, limes, grain sorghum, beef, grapefruit, pork, corn, and chickens, and the number-two market for exports of soybeans and wheat. Indeed, from the viewpoint df Japanese farmers, their markets have been "invaded" by Americans, and, in fact, domestic production of many traditional farm commodities in Japan has ended almost entirely. As a result, Japanese farmworkers, as a percentage of Japan's total workforce, have declined from about 50 percent in 1950 to less than 9 percent in 1983'.

Japan is a mountainous archipelago. Its agricultural sector, with a paucity of arable land, is one of its most inefficient industries. Therefore, it would be beneficial for the Japanese people, particularly consumers, to import farm products without government restrictions.

At the same time, as in most industrial countries, Japanese farmers have substantial political power and play a key role in maintaining the country's political stability. They also consis- tently have supported-a pro-American foreign policy in Japan. More important than the political factor, however, has been Japan's growing concern about "food security." The Japanese and their leaders have been asking with some urgency:

--Would it be politically wise to further reduce Japan's farm population?

--Would it be safe for Japan to increase its dependence on foreign food supplies?

The answer is naturally "yes" for Japanese consumers and taxpayers, who must pay higher food prices and bear with ever growing government subsidies for farmers. However, the credi- bility of the national security argument has been greatly en- hanced in recent years, since there is no reasonable assurance the supply of basic foodstuffs can be acquired without interrup- tion, even from friends such as the U.S.

Unfortunately, the past record of the U.S. as a food supplier has eroded the confidence of Japanese people. The sudden U.S. export embargo on soybeans in 1973 created the worst food crisis in Japan since World War II. This incident severely shook Japanese confidence in any policy that would markedly increase dependence on foreign supplies of food.

Because of Japanese worries about food security, the recent U.S. "get tough" strategy on the farm import issue will not be the most effective approach. Rather than intimidations, the U.S. government should extend more positive and attractive proposals, such as stronger assurance of food security, to the Japanese people. Armed with such an assurance, the Japanese government will be able to gain the political support needed to reduce further the remaining import barriers to agriqultural products. Without this political support, overbearing U.S. pressure will not only make it more difficult for Japan to open up its market but also undermine the current conservative, pro-American govern- ment. This could permanently endanger the strong relationship between two of the most trusted allies in Asia.

JAPAN'S IMPORTED FARM PRODUCTS

Imports from World Markets

Before World War II, Japan and its colonies (such as Korea and Manchuria) produced virtually all of its food needs. Today, Japan is the world's largest net importer of farm products. Over the past 20 years, agricultural imports have increased more than 30 times in dollar value, from $550 million in 1960 to $16 billion in 1982. And Japanese agricultural imports have been increasing at a much greater pace than domestic food production,' and they are now second only to crude oil in Japan's total imports. The main food imports are wheat, maize, soybeans, sugar, cotton, tobacco, coffee, beef, and fruit, coming from the United States, Australia, Canada, China, Thailand, and other countries.

Imports from U.S. Farmers

American farmers, the world's most productive and efficient, have captured the largest share of the Ja@anese market, now accounting for nearly 40 percent of Japan's total agricultural imports. This share is steadily growing.2 Moreover, Japan is the American.farmers' best customer, purchasing about 0 billion worth of farm products this year. In fact, the Japanese market is twice as big as America's second largest customer,3 the Nether- lands, and nearly four times larger than that of West Germany. In absolute terms, American farmers increased their exports to .Japan from $1 billion in 1970 to $6 to $7 billion in 1983. Moreover, while the European Community's 6hare of the U.S. farm exports has been declining in recent years, that of Japan is slowly expanding (see Table 1).

In the case of individual commodities, Japan is a most attractive market for U.S. farmers. It is the numbet-one market for American lemons, limes, grapefruit, pork, beef, chickens, grain sorghum, corn, and number-two for soybeans and wheat.

. In contrast to the tidal wave of U.S. agricultural goods pouring into Japan, the flow of farm goods from Japan to the U.S. is a trickle, amounting to only $168 million in 1983. Last year it was only 0.01 percent of the $16.6 billion in agricultural products imported by the U.S. Thus the U.S.-Japan trade in farm products is completely one-sided, with a large surplus for the U.S. versus a large deficit to Japan. The surplus, moreover, has expanded in value every year.

1 The Ministry of Agric'ulture, Forestry and Fisheries. (MAFF), "Production Farm Income Statistics"; The Ministry of Finance (MOF), "Japan Exports 2 and Imports." MOF, op. cit. :3 U.S. Department of Agriculture (USDA), Foreign Agricultural Trade of the United States. Table 1

Comparison of Shares Between Japan and European Community (EC) in U.S. Farm Exports

(Unit: million dollars, %)

Value of Share of U.S. Total U.S. farm exports Year farm exports Japan EC Japan EC

1975 $21,859 $3,082 $5,563 14.1 25.4 1976 22,978 3,563 6,421 15.5 27.9 1977 23,636 3,857 6,620 16.3 28.0 1978 29,382 4,435 7,148 15.1 26.3 1979 34,749 5,255 7,642 15.1 22.0 1980 41,256 6,111 8,929 14.8 21.6 1981 43,337 6'561 9,059 15.1 20.9 1982 -36,622 5:547 8,273 15.1 22.6

Source: U.S. Department of Agriculture, Foreign Agricultural Trade of the United States.

It thus cannot be argued that-the Japanese market is closed to U.S..farmers. Indeed, Fred H. Sanderson, an economist at the Brookings Institution notes that more U.S. farmland is devoted to growing crops for Japan than the total of all farmland under cultivation in Japan. For example, American farmers supply more than 90 percent of Japan's soybean consumption, nearly 60 percent of Japan's wheat, and more than 95 percent of all feed grains. Because of imports from the U.S., in fact, 'cultivation of many traditional farm commodities in Japan has ceased almost entirely.

JAPANESE FARM POLICY

Competitiveness of Japanese Farm Products

Very small-scale farming operations and high priced farmland make it impossible for Japanese farmers to be internationally competitive. The average per farm household size is 3.0 acres in Japan, compared to 37.8 acres in West Germany, 66.0 acres in France, 164.8 acres in Great Britain, and 454.3 acres in the United States (see Table 2). As a result, prices of most of Japanese farm products are considerably higher than those on the international market (see Table 3).

The dramatic increase in food imports, along with the greatly increased demand for labor in nonagricultural sectors, caused a dramatic decline in the number of workers employed in Japanese agriculture over the past 30 years. As a percentage of Japan's total workforce, farmworkers have declined from nearly 50 percent in the 1950s to about 9 percent in the 1980s. Table 2 International Comparison of Farmland Acreages and Prices (1979)

Fed. Rep. Japan U.S.A. Germany U.K. France

Farmland acreage 1,368 107,582 3,077 4,612 7,962 (10,000 acres) (79 times (2 times (3 times (6 times Japan) Japan) Japan) Japan)

Farmland acreage per farmhousehold 3.0 454.3 37.8 164.8 66.0 (acres) (151 times (13 times (55 times (22 times Japan) Japan) Japan) Japan)

(Paddy- Farmland price field) $5,226 $148 $1,591 $630 $474 per 10 acres ($1 = V230) (Upland- field $3,652 (3%) (35%) (14%) (10%)

Notes: 1. Indicated in are the ratios of each country's figure to Japan's. As to the farmland prices, the figures in ( ) are the ratios of the average price of Japan's paddy and upland fields weighted with areas. 2. The farmland prices of U.K. are those of England;. the farmland prices of France are those of cultivated fields.

Source: FAO, Production Yearbook"; EC, "Agricultural Situation in the Community"; and USDA, "Agricultural Statistics." Table 3 Estimated International Comparison of Farm Prodact P-rices (1980) (International price 100)

Japan W. Germany France U.K. U.S.A. 1977 1980

Wheat 401 375 109 102 115 85

Rice 321 310 - - - 121

Beef 254 198 141 145 121 86 Dairy Products 263 203 175 160 187 126 (butter) Pork 132 107 87 117 108 60

Chicken 99 82 92 99 112 64 Eggs 99 97 98 96 80 68

Notes: 1. The prices, in principle, are the import peices on the world average; each of them has been obtained by dividing the total import value by the total import quantity. 2. The prices are, in principle, the wholesale prices; and as regards Japan's rice and wheat, they are the government's purchasing prices.

Sources: FAO,"'Trade Yearbook" and "Production Yearbook"; USDA, "Outlook & Situation" and "Agra Europe"; the Ministry of Agriculture, Forestry & Fisheries, "Statistical Survey on Distribution of Meat," "Statistical Survey on Distribution of Eggs," "Statistical Survey on Distribution of Broilers"; the Animal Industry Bureau of the Ministry of Agriculture, Forestry & Fisheries, and the Food Agency.

Government Support Policies

As in most industrial nations, there has been a long political struggle between the supporters of agriculture and the advocates of free trade.

To make the economic and social adjustment of Japanese farmers as smooth as possible and to enable the Japanese farmers to be as competitive as possible, the Japanese government has encouraged farmers to convert their operations from the production of uncompetitive crops such as wheat, soybeans, and corn to a few selected products, such as rice, mandarin oranges (Mikan), live- stock, and vegetables, which appeared to have some potential to be productive and competitive-in the international market. Instead of protecting farmers who cultivate wheat, soybeans, corn, and other crops through an import relief measure, the Japanese govern- ment has encouraged farmers to concentrate on selected farm products by providing large subsidies and import protections. As a result, most Japanese farmers today are engaged 'in the production of rice, vegetables, mandarin oranges, or livestock.

The government's price and income support to farmers, parti- cularly rice growing farmers, naturally has had far-reaching effects on the nation's budgetary expenditures, causing a large deficit. The government's annual expenditures for direct subsidies to Japanese farmers is believed to be more than $10 billion or about 55 percent of Japan's total farm income. But unlike the European Community and other nations, Japan does not subsidize its farmers to expand its export markets. The Japanese agricultu- ral program, therefore, is in no way threatening America's overseas farm market.

Japan's Import Restrictions Compared with Those of Other Nations

In addition to the large direct subsidies to certain.farmers, the Japanese government protects farmers through import quotas on 22 agricultural products, including beef, oranges, rice, and processed cheese. By contrast, the European Community imposes import restrictions on 60 commodities, including grain, dairy products, meat, sugar, oil seeds, potatoes, tomatoes, grapes, and other crops. Even the U.S., the world's largest agricultural exporter, restricts imports on 16 items, including sugar, beef, dairy products, peanuts, cotton, tomatoes, grapefruit, orangest avocados, limes, eggplant,. Irish potatoes, cucumbers, onions, walnuts, and others.

Japan's tariff rates on farm products are not substantially higher, compared to those of the European Community and the United States. The average tariff rate of agricultural products in Japan since the last Multilateral Trade Negotiation in Tokyo ended in 1979 is 8.6 percent, while the European Community maintains 12.3 percent, and the U.S. rate averages 2.9 percent.

U.S.-JAPAN CONFLICT ON BEEF AND CITRUS FRUITS

In light of the huge U.S. trade deficits with Japan, Tokyo's quotas on beef and citrus fruits have come to symbolize Japanese agricultural protectionism. In the United States, it is believed that a further expansion of the Japanese import quotas on beef and citrus will help eliminate the trade deficit with Japan, despite the fact that these quotas have been gradually expanded each year.

After several years of negotiations and after substantial pressure from Washington, Tokyo recently agreed to expand its import quota for high-grade American beef by 6,900 tons annually from the 30,800 tons in fiscal 1983. This means Japan will be importing 58,400 tons by the year 1987. Its import quota for fresh oranges will be increased by 11,000 tons annually from 82,000 tons in 1983 and thus will keach 126,000 tons in 1987; its orange juice import will be increased by 500 tons.annually from 6,500 tons in 1983, growing to 8,500 tons in 1987; and Japan will completely open up its grapefruit juice market by 1985.

This agreement was hailed as a major U.S. victory. And it may well be--at least in symbolic terms--that a "get tough" approach on Tokyo worked. However, an important unresolved question is whether or not this "get tough" posture will have a positive impact on the bilateral trade balance and on overall economic relations between the U.S. and Japan.

Even prior to the new agreement, of course, Japan was the largest customer for U.S. beef and citrus fruit, buying 60 percent of the U.S.'s total beef export and 40 percent of total citrus fruit export (see Tables 4 and 5). The U.S. is Japan's number-one supplier of citrus, providing nearly 100 percent of the Japanese market share in the case of fresh citrus and 50 percent in citrus juice. In the case of beef imports, the U.S. is the number-two supplier, with about 40 percent of the total market. (Although most of the high-quality beef consumed by Japanese comes from the U.S., most of the common-grade beef, about 60 percent of Japan's total beef imports, comes from Australia.) What this means, according to the U.S. Department of Agriculture, is that the new beef and citrus fruit agreement will at most add an extra $200 million to the U.S. export trade figure next year. This is not

Table 4 U.S. Beef Exports (Unit: tons)

1979 1980 1981 1982

Total exports 57,403 59,503 749668 85,667 Japan 35,244 34,262 43,696. 53,175 (Japan's share) (61.4%) (57.6%) (58.5%) (62.1%) Source: U.S. bepartment of Agriculture, Foreign'Agricultural Trade of the United States.

Table 5 U.S. Citrus Fruits Exports (Orange, Grapefruit, Lemon and Lime) (Unit: 1,000 tons)

1979 1980 1981 1982

Total exports 763 941 910 748 Japan 299 302 353 330 (Japan's share) (39.2%) (32.1%) (38.8%) (44.1%)

Source: U.S. Department of Agr.iculture, Foreign Agricultural Trade 6f the United States. much compared to the big items among agricultural exports, such as soybeans and feed grain, of the nearly $7 billion food exports to Japan.

Even if beef and citrus quotas were lifted completely, Japan would not buy much more of them from the U.S., according to Japanese officials and American experts. Some Japanese officials predict that-the American share might actually decline, since competitors would take advantage of a completely open Japanese market. Australia, New Zealand, and other countries, for example, are ready to sell Japan more beef, while Brazil, Israel, and others would sell more citrus fruit-and juice. Moreover, a large increase of imported beef would mean less beef production in Japan; this in turn would mean fewer imports of feed grain, mainly from the American.farmers.

JAPANESE OPPOSITION ON EXPANDED QUOTA

While the U.S. is pressing hard to increase its exports to' Japan on beef and citrus fruit, the Japanese government has resisted strongly and has maintained an unusually inflexible negotiating stance. Three factors may be causing this--the political power of the farmers; food security; and pro-farmer groups' growing impatience with U.S. trade policy.

Political Power

The Liberal Democratic Party (LDP), which has been ruling Japan since 1956, has maintained its' power in large part because of the vote of farmers. Despite the sharp decline in the farm population in the last thirty years, Japan has not redrawn its voting districts since 1945. According to the Japanese Home Ministry, there may be four or five times as many voters for each seat in the Diet in urban districts as there are for a seat in rural districts. As a result, the rural vote has a dispropor- tionate influence in the national elections, and Japanese farmers wield a powerful control over the ruling LDP.

While voters in urban districts, in general, tend to support opposition parties, such as the Socialist and Communist parties, rural voters consistently have supported the conservative LDP. In fact, all the prime ministers of Japan since 1955, who are LDP Diet members, have come from predominately farming districts. In addition to their electoral power, Japanese farmers are, by any standard, well-organized and well-situated for political action. Hence, the LDP-controlled government is heavily influenced by farm interests.

A further decline in the farm population, the likely result of lifting beef and citrus import quotas, will mean the further decline of the LDP's political base. And this prompts almost all LDP Diet members to fight adamantly against eliminating the remaining quotas in agricultural imports. U.S. policy makers must appreciate that the farmer-supported LDP has been the main source of Japan's internal political stability and democratic political system of the last 40 years. And the Japanese farmers and the LDP have been the staunch supporters of pro-American foreign policies. Consequently, the U.S. "get tough" approach on import quotas could upset the foundation of Japan's political stability. It gradually could eliminate Americans' best friends within the Japanese political system. Food Security Issue As with all nations, ensuring the food supply is a dominant political and social concern in Japan. Many Japanese still carry the memory of the acute food shortage during and immediately after the World War II.' Thus, a central role of the government has been assuring its people of a dependable food supply. With the dramatic increase in agricultural imports and the decline in farm populations, Japan's food self-sufficiency rate has declined substantially over the past two decades. Today, domestically produced foods in terms of calorie supply account for only slightly over 50 percent of total calorie supply per Japanese per day.4 It was nearly 80 percent in 1960. This declining food self-suf- ficiency contrasts with the increasing rate of domestic production in European nations. in view of this, Japanese understandably have been asking whether it is safe for Japan to increase its already heavy depen- dence on food from foreign suppliers. From the standpoint o-f Japanese consumers and taxpayers, the answer is naturally 11yes,11 so long as there is reasonable assurance that the supply of basic foodstuffs can be acquired without interruption from Japan's friends, such as the U.S. Regrettably,"however, the recent U.S. record as a food supplier is not very reassuring to the worried Japanese.- In 1973, the U.S. suddenly imposed an export embargo on soybeans and triggered the worst food crisis in Japan since the war. Japan was totally unprepared for such a contingency. Because soybeans are a main component of the Japanese diet, the embargo-induced shortage created panic. In fact, many Japanese housewives, journalists, and government officials remember the 1973 soybean crisis painfully as far more terrible than the oil crisis that followed in 1974. In sum, U.S. actions in 1973 have shaken severely Japanese confidence in foreign suppliers of food. At the same time they have enhanced the credibility of the Japanese farmers' argument that further opening up of beef and orange imports will eventually force even more Japanese to abandon farming. Growing Impatience Among the Farmers Japanese farmers and farm organizations in recent years have appeared to become more impatient and resentful of U.S. pressure. Reasons:

4 MAFF, "Agriculture in Japan."

1) Expanding import quotas affecting such U.S. products as beef also mean expanding the beef quotas from-Australia and other countries. In fact, the Australian government is'requesting an increase in its total import quota of more than 14,000 tons annual- ly (twice that of the U.S.) from the present level of 141,000 tons. 2) Japanese farmers do not feel that they cause the huge U.S. trade deficit with Japan; rather it is caused by Japanese manufacturing. Nonetheless, farmers always are being pressured to sacrifice in the name of U.S.-Japan economic relations. 3) U.S. trade policies toward Japan have appeared contradic- tory. For example, while U.S. trade officials arepreaching the consumer benefits of an open import policy of beef and oranges to Japan, they are negotiating with Japanese government officials to continue "voluntary" export restrictions of Japanese automobiles to the U.S. 4) Despite the fact that American cattle producers are the world's most competitive and efficient, the U.S. has maintained beef import restrictions through the Meat Import Law, which limits beef imports to less than 10 percent of U.S. total consumption. 5) The U.S. government enforces a marketing order cartel allowing U.S. orange growers to determine collectively the portion of their crop to be sold in the U.S. domestic market. This leads to higher U.S. domestic prices and, in effect, to the "dumping" of lower-priced surplus oranges in Japan.. 6) Since Japan is not a litigation oriented country and also has no trade legislation, such as the'U.S. Trade Act of 1974, the farmers in Japan have no legal means to protect their interests through the import relief measures, such as countervailing duties, anti-dumping duties, or escape clauses.

CONCLUSION Political leaders in Washington appear to be panicking at - the projected 1984 U.S. merchandise trade deficit of around $100 billion, without taking account of surpluses on services, unre-' quited capital transactions, and long-term capital accounts. Moreover, attention has been concentrated almost entirely on the nation's bilateral trade deficit with Japan. This ignores the much more important U.S.-Japan balance of basic account, which includes services, capital transaction and long-term capital accounts. Nor should policy makers focus only on U.S.-Japan economic relations. Indeed, Japan's surplus with the U.S. is not so large from the basic account perspective. Japan consistently experienced a large basic account deficit prior to 1982 and ex- perienced surplus in'1983 for the first time in six years. In other words, Japan's deficit with other countries is covered by the surplus of basic account with the U.S. in 1983. And much of Japan's purchases in other countries enables them to buy goods and services from the U.S. International trade patterns, after all, are multilateral, not bilateral. Even looking at U.S.-Japan bilateral merchandise trade balance, it is not clear whether Japan will be able to-sustain a large sur- .plus over the long term. The recent liberalizatio'n plans of the Japanese financial market and the gradual internationalization of the Japanese currency will eventually strengthen the value of the yen, making Japanese goods more expensive and U.S. exports more competitive in the world market. If policy makers insist on being concerned about the U.S.- Japan merchandise balance, then they should not look at agricul- ture--where sizeable gains are unlikely. Instead, they should seek ways to sell Japan U.S. surplus Alaskan oil and natural gas, and seek ways to expand the Japanese market for U.S. cigarettes and tobacco products, communication equipment and other high-tech goods, and weapons. This would narrow the merchandise trade defi- cit much more than marginally greater agricultural sales. In addition, the competitive strength of the U.S. service sector, such as insurance, communications, computer software, and financial services, will substantially increase in Japan during the coming information age--if Japan's market is open. In comparison to the substantial'potential of these develop- ments, the impact of a "symbolic victory" in enlarging the Japanese farm products market is extremely minor in terms of the future U.S. trade balance.' On the other hand, the political damage done by the U.S. pressure on the farm group could be enormous. This could also permanently endanger the foundations of a strong relationship between the most important allies in the Pacific. This is not to say that the U.S. export of agricultural pro- ducts to Japan should not increase. on the contrary, Japan still has the potential to expand its import market in the near future, despite the fact that it is already the largest in the world. The trouble is that recent U.S. diplomatic pressures on Tokyo to open up the market is not the most effective approach to the issue. Rather than intimidation, the U.S. government should extend more positive.and attractive proposals to the Japanesepeople. For example, the U.S. could offer stronger assurance of food security to the Japanese; this might be done through a joint resolution of Congress guaranteeing American food supply to Japan, a U.S. govern- ment promise of no sudden embargoes of soybeans or other important foods, or U.S.-Japan joint efforts for stockpiling main foodstuffs. Any of these U;S. government actions would greatly reduce Japanese popular and political resistance to importing more food. The assurance of food security is a matter of great importance to Japan as well as to American farmers. If the United States can establish a long-term arrangement with a country such as the Soviet Union, this should not be a difficult commitment between the United States and its closest ally in Asia.

Katsuro Sakoh, Ph.D. Senior Policy'Analyst

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