Seals, Morality, and the WTO

REUTERS/Paul Darrow

I recently returned from a conference in which a coauthor and I presented some research on clubbing seals to death. No, not on the methodology of the ugly business; instead, we were looking at the economic and legal questions raised by a recent pair of decisions by the World Trade Organization’s dispute settlement mechanism. The case raises issues of morality, extraterritoriality, and the dangers of a global trading system adrift.

To set the scene, Canada and Norway both engage in commercial seal hunts. The hunters ultimately sell the seal skins and furs commercially. In part to preserve those skins and furs, the hunters club the seals in the head to stun them before killing them.

More than a few people find this process offensive. In 2009, the European Union adopted measures to ban the sale of seal products in most cases (Foreshadowing: the “most” ends up mattering a lot). This prompted a formal complaint at the WTO later that year. Canada and Norway claimed, in effect, that the European Union had reneged on past promises of trade liberalization. The premise was that when Canada and Norway signed agreements such as the Uruguay Round of trade talks in the early 1990s, they did so on the understanding that their products would gain access to foreign markets. When Europe closed its markets to these particular products, the value of the original deal was diminished in Canadian and Norwegian eyes.

The European Union, which contains 28 countries but negotiates with a single voice at the WTO, responded that it was within its rights. The central trade agreement in question offered a number of exceptions that countries could use to justify the imposition of trade barriers. The language reads, “nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures…”—and then goes on to list the exceptions. Curiously, Europe did not opt for the one that concluded “…necessary to protect human, animal, or plant life or health.” Instead, Europe claimed that its seal trade barriers were “…necessary to protect public morals.”

The European Union recently ended up losing the case, both in front of the original panel and in front of the appellate body, though each used different reasoning. A key factor was the pliability of European moral concern. The original measures that banned seal product trade had, in fact, permitted it when hunts were performed by indigenous communities (e.g. Inuit) or when hunts were part of “marine resource management.” There was no evidence that these types of hunts were any more humane; they were just instances in which other European objectives (e.g. protecting indigenous communities) came into conflict with their expressed moral concerns.

A major challenge for the dispute panels was to figure out just how broad this “public morals” exception ought to be. Though it had appeared in trade agreements for a long time, it had not really been invoked much. Thus, its scope was ill-defined. This was what made the EU Seals case noteworthy; it grappled with a clause that, under an expansive interpretation, could blow an enormous hole in countries’ trade liberalization commitments. After all, countries are permitted to ban products that are dangerous or unhealthy, but there is a natural limitation to this license to block trade—one can test whether the products are, in fact, dangerous. But if countries can block products because they claim their citizenry has moral concerns about the way the product was produced, there are no such natural limits. As one of the conference participants had noted in previous work, a country could express moral concern about products made by trade partners who supported Israel or Taiwan. The intent of the original WTO agreement was clearly not to allow countries to reinstate protection whenever they felt like it. Yet the “moral concern” exception is there on the books. How to strike a balance?

The jurists decided that, at a minimum, the moral concern had to be pure. An abhorrence of seal clubbing, except when done by an Inuit, did not meet that test. This largely postponed the question. It served as a check against simple protectionist motives, in which moral concerns were put forward as an excuse for discriminating against imports. But it leaves open the extent to which countries can use their moral concern about the production methods, policies, and practices of other countries to justify barriers (which may, in turn, look a lot like sanctions).

The question is a difficult one. Judicial systems everywhere fill in blanks in the law when vague phrases demand interpretation. But they usually operate in conjunction with active legislatures, who can clarify the laws if they so choose. Further, justices often undergo careful selection and vetting procedures, as with the US Supreme Court, for which nominees are picked by the president and approved by the Senate. This process gives their interpretations some legitimacy (though, as this last week demonstrated, it hardly immunizes them against criticism).

The WTO dispute settlement mechanism does not enjoy either of these advantages. Global trade talks launched in 2001 have largely stalled and struggled to produce even modest results. The last two full global trade agreements concluded in 1994 and 1979. Policymakers have sometimes been tempted toward complacency about the lack of negotiation progress. The 1994 agreement strengthened dispute settlement; why not just let that system work and enjoy the benefits? The difficult questions of the EU Seals case show the dangers of such an approach. New political questions require new political agreements. Such an agreement at the WTO is long overdue.

Europe–Too Soon for An “All Clear”

The economic crisis that once seemed poise to rip the euro zone apart more recently appears to have receded. Greece just successfully floated a bond issue and yields fell across Europe’s troubled periphery. The threat would seem to have been beaten back by bold central bank assertions. In the summer of 2012, European Central Bank President Mario Draghi announced a plan to do “whatever it takes” to save the euro zone.

Appearances can deceive. The Draghi plan (also known as OMT) restored a degree of confidence and stopped a sell-off of sovereign bonds. But the sovereign debt crisis was only one of three interlinked crises plaguing the euro zone. A crisis in the banking sector meant that European business had little access to credit. A crisis of growth meant that peripheral euro zone countries have been suffering from shocking and persistent levels of unemployment. None of these crises have gone away. In recent weeks each crisis has burbled and revealed a lack of policy coordination, either within the euro zone or internationally.

The sovereign debt crisis appears the most benign, as evidenced by this week’s nonchalance among bond investors in Portugal, Italy, Greece, and Spain. But in none of these countries does there appear to be an accepted plan to reduce debt to manageable levels, leaving them vulnerable to future crises of confidence. France and Italy have recently pushed for lenience on austerity rules (waivers for deficit targets), to the dismay of the Germans and the Finns.

Banking progress might seem promising, given that the members of the euro zone recently concluded arduous negotiations to craft a plan for banking union. They reached an agreement, but it appears unwieldy. For example, it grants euro zone banking authorities the power to close troubled banks, but only after a dauntingly extensive series of mandated consultations. At least one prominent commentator (Wolfgang Münchau) argues it is worse than nothing. In terms of international coordination, the US Fed clearly caught Europe off guard with its recent stress tests by setting tougher standards than the Europeans were inclined to impose.

Growth has been tepid, at best, and uneven throughout the zone. The latest IMF forecast, released this week, featured upward revisions, but only called 1.2 percent euro area growth in 2014 and 1.5 percent in 2015 (after -0.7 in 2012 and -0.5 in 2013). Those numbers are averages, with much of the strength coming from northern countries like Germany. Recently, the IMF Managing Director, Christine Lagarde, warned of the dangers of European deflation. The ECB, however, declined to lower rates (it did begin to muse about the possibility of quantitative easing). None of these moves signal confidence about an impending recovery. The Trans-Atlantic Trade and Investment Partnership (TTIP), upon which Europeans were placing their hopes for a boost to growth, is moving very slowly. There are serious conflicts over issues such as data protection, investor-state dispute settlement, and multiple facets of agriculture. TTIP has the potential to boost European growth, but that is likely well into the future. The countries could also pursue growth through structural reform, but this is impeded in countries such as Greece, Italy, and France by ideology or political weakness.

The euro zone has enjoyed a prolonged reprieve because of heightened global confidence, but core problems in sovereign debt, banking, and growth remain. Recent weeks have highlighted sharp differences of view over ways to address these concerns.  Without longer-term solutions, the problems simply await a fall in market confidence in order to reemerge.

The Cost-Benefit of Responding to Russia

In the wake of the initial events in Ukraine last week, I wrote about some of the options and challenges if the West were to attempt to prop up the country. Now, after Russia’s move into Crimea and the danger that its military involvement could spread further, there is the question of how to deter a Russian invasion.

Chicago Council President Ivo Daalder, former US ambassador to NATO, writes that Russian use of force “is a clear violation of international law and of Russia’s own commitments, and a grave threat to stability and security.” President Obama declared that Russia would suffer costs were it to proceed.

But what costs, exactly? There has been some skepticism about the options that are open to the President. How do we differentiate among the different proposals that have been put on the menu? There are some general principles that can be used to rank the alternatives for a Western response. The ideal policy would prove very costly to Russia and minimally costly to the West. The former requirement is obvious—the policy can only dissuade Russia from misbehavior if it inflicts some real pain, given the importance of Ukraine in Russia’s foreign policy. As to the latter point, it goes directly to the credibility of the policy. If the threat is too painful to carry out or to maintain, Russia will not deem the prospect likely enough to factor into its calculations. The ease of adopting a policy is especially important since the United States would likely need to hold a coalition together—with allied countries of Europe. That task becomes more difficult the more painful the measures are to adopt.

Consider, along these lines, a number of the prominent measures that have been discussed:

Military action. This is not really on the table. It would be very costly (not just financially) to the countries of the West. There is no doubt that US forces could inflict serious pain on Russia in such a contest, but it is a war that Russia could not afford to lose.

International Disapproval. Russia’s moves can be condemned at very little cost, but it is not clear that such condemnation inflicts much discomfort on Russia, either. It is important to reaffirm core principles—such as the importance of national sovereignty and territorial integrity—but this move should not be confused with deterrence.

Kicking Russia out of the G8. This would result in some loss of prestige for Russia, particularly since it is soon suppose to host a meeting in Sochi. But this does not seem the sort of thing over which Russian President Vladimir Putin would lose much sleep. How costly would it be for the United States? The answer depends on how one assesses some of the foreign policy initiatives of recent years. The Obama administration has taken great pride in expanding the inclusiveness of global summitry. It is not clear to me that the broadening of participation has accomplished much. Beyond summitry, such a move would almost certainly be followed by a cessation of cooperation with Russia on issues such as Syria and Iran. Again, these are initiatives, trumpeted by the administration, that seem to have accomplished relatively little. The costliness of the policy to the United States depends on how one assesses these likely repercussions.

Defense buildup and bolstering NATO border states. The Obama administration just released a budget that calls for reducing US military power. It had previously pulled back from missile defense in countries like Poland, a NATO member adjacent to Ukraine. These moves could be reversed. The downsizing had fiscal motivations; the missile defense stance was part of an effort to reach an arms-reduction accord with Russia. On the latter, one could particularly question the value of a treaty with Russia, given that Russia in 1994 had signed a treaty guaranteeing Ukraine’s borders.

Banking and economic sanctions. Many commentators have noted that Russia is far more integrated in the global economy than it used to be. This, in turn leaves it more vulnerable to economic sanctions. There was evidence of this vulnerability in the sharp drops of the Russian stock market and the ruble when the potential for conflict increased. Experience with Iran and North Korea have shown that moves to cut a country off from the international financial system (by denying bank access) can be particularly effective. Thus, these measures could certainly catch Russia’s attention. The difficulty, as noted by Sen. Chris Murphy (D-CT), is that “(u)nilateral US sanctions against Russia are not going to have much an effect if Europe remains a haven for Russian banks and Russian oligarchs to stash and invest their money.” Europe has far more extensive economic ties with Russia than the United States and would thus find tough sanctions more painful.

Targeted sanctions. One relatively modern innovation in sanctions has been to target them at the figures within a target country deemed most culpable, rather than just inflicting pain on the target country as a whole. Such sanctions can involve the freezing of assets or bans on international travel. This variation on traditional sanctions is seen as both increasing the cost to target-country decision makers (who often have the power to insulate themselves from less-focused sanctions) and decreasing the cost to the countries applying the sanctions (who find it painful to see the costs fall on innocents in the target country, as in antebellum Iraq). As with any sanctions, though, the effectiveness hinges on the breadth of participation. Europe could still balk at the prospect of retaliation that imposes hefty costs.

Exports of oil and gas. In the examples above, a principal means by which Russia might retaliate would be through its role as a principal supplier of gas to Europe and Ukraine. In the past, there was relatively little the United States could do to counteract this. That has changed, though, with recent energy developments. The United States has become a major gas producer. However, it maintains a range of restrictions on the export of oil and gas. The crisis in Ukraine has increased calls for loosening or lifting those restrictions. This is a policy that would impose costs on Russia—diminishing its economic power over European buyers—and benefit the United States. Such a policy could not be implemented immediately, but it could shift the balance of power over time.

This list is not necessarily comprehensive, nor is this an exhaustive consideration of the knock-on consequences that each action might have. The fear of unknown potential repercussions can always serve as a justification for inaction. President Obama has promised that Russian actions will bring costs. President Putin seems to have judged that the United States is eager to avoid involvement. The credibility of the US threat may hinge on the costs and benefits of the measures the President selects.

Today’s Economic Report Card

This has been an eventful week in economic news. This morning, we got a first, early look at US economic growth in the fourth quarter of 2013—and it proved a pleasing sight. The economy grew at a 3.2 percent annual pace. That was down from a 4.1 percent rate in the third quarter, but both numbers are the best we’ve seen in almost two years. These figures are interesting in their own right, but they also cast a revealing light on some big economic controversies of the last year, such as the government shutdown, fiscal austerity, and the Federal Reserve’s taper.

The period in question covers the government shutdown and debt debates of early October. Those antics, which were forecast at the time to be devastating for the economy, seem only to have had a marginal effect. Today’s numbers included a calculated impact of the shutdown—0.3 percent. That seems to suggest that, absent the shutdown, growth would have been 3.5 percent in the quarter. In fact, the underlying story is a bit more interesting. In a note, the Commerce Department says that it cannot quantify the effects of the shutdown. It generates the 0.3 number by looking at the reduction in federal labor services (employees not coming in to work). Since those workers were eventually given back pay, the note says it ultimately modeled the effect as “a temporary increase in the prices paid for federal employee compensation.” Qualitatively, at least, this bears some resemblance President’s proposal to raise the minimum wage for federal contractors, though that change is meant to be permanent. In retrospect, October’s predictions of catastrophe seem overblown.

Today’s report also covers a period in which the US government engaged in fiscal austerity. If one compares government budget numbers in the fourth quarter of 2012 to the fourth quarter of 2013, we saw a decrease in spending (from $909bn to $838bn, a 7.8 percent drop); we saw an increase in tax receipts (from $616bn to $665bn, an 8.0 percent increase); and a resulting decrease in the quarterly deficit (from $293bn to $174bn, a 40.8 percent drop). And yet the economy grew substantially faster (growth in 2012:4 was just 0.1 percent). Of course, these numbers hardly suffice to confirm or reject Keynesian claims about how one spurs or slows the economy. Multiple factors play into economic growth and some of those factors are not contemporaneous—they can kick in with a lag, or they can even work in advance, when people change their behavior based on expectations of future changes. But these numbers, on their face, certainly do not lend strong support to the assertion that a smaller government role dooms the economy to stagnation.

Before today’s GDP report, the big economic news of the week was the Federal Reserve’s decision to continue with its “taper”—the program of cutting back by $10bn per month in the amount of money it pumps into the economy (quantitative easing). In both the case of GDP and that of the Fed, the news came exactly as forecast by market watchers. The Fed had to act first, without the benefit of the GDP report. It proceeded in spite of some pressure to reconsider. The December jobs report, released earlier in the month, had been surprisingly weak. Further, if the Fed looked abroad, the view was more alarming. Emerging markets, along with some major Asian exchanges, have been crashing this last week. Among the explanations that have been offered were the tightening of the global money supply (directly affected by the Fed taper) and weakening growth in China. This highlights the challenge faced by the Fed. Its actions do work with a lag—perhaps 18 months. That means it must react not to current conditions, but rather to its forecasts for years to come. Furthermore, it has really just one tool—the money supply—with which to target domestic prices (inflation), unemployment, plus the well-being of the global economy, and that last one isn’t even part of its official mandate. The problem of getting the timing right led one past Fed chairman to say that the central bank’s job was “to take away the punch bowl just as the party gets going.”

So what hints of the future are there in today’s GDP report? The Bureau of Economic Analysis helpfully breaks down the contributors to GDP growth (Table 2). One of the most striking contributors in the last quarter of 2013 was the importance of international trade for the US economy. Net exports of goods and services accounted for 1.3 percent of the overall 3.2 percent growth. Most of that came from exports growing at an extraordinary 11.4 percent annual rate. Looking ahead, that driver of growth now looks threatened, both with faltering economies abroad (someone has to buy those exports) and an endangered agenda for gaining new market access through trade agreements.

The TPP and Evel Knievel – Up in the Air

Last night, as part of the Chicago and the World Forum, Ian Bremmer proclaimed that the most important region of the world for US foreign policy was Asia. Further, he said, the most important US undertaking in Asia was the Trans-Pacific Partnership (TPP) trade agreement. At roughly the same time that he was speaking, TPP ministerial negotiations in Singapore were coming up short. The disappointment came on the heels of a successful weekend WTO deal in Bali that had led some to proclaim a Trade Renaissance.

The twelve assembled TPP ministers didn’t admit defeat, of course. They heralded “substantial progress.” In a briefing, USTR Michael Froman said, “If I had to describe the outcome of the meeting, I would say ‘great momentum.’”

No doubt progress was made. But it can be notoriously difficult to figure out just how much. Herewith, some points to consider:

1. We’ve been here before. We haven’t been at this level of progress, with this set of participants, exactly. But in November 2011, the United States was hosting the APEC meetings in Hawaii, TPP negotiations had been active for almost two years, and there were serious hopes that the agreement among the nine participants would be concluded then and there. Participants knew that beyond those meetings lay a US election and few deadlines that would force tough choices. As it happened, the negotiations could not conclude and the leaders were left praising themselves for good progress.
2. Are they 65% done? Japan’s Vice Economy Minister just gave that figure as the degree of agreement among TPP participants. But what does that mean? Appropriately cautious, Amb. Froman reminded that “the thing about trade negotiations…is that nothing is agreed to until everything is agreed to.” To see the issue, think of the late daredevil Evel Knievel. He would pull off stunts like jumping his motorcycle over 15 cars parked in a row. To do so, he would rev his motorcycle along a straight-away, ride up a ramp, then, if all went well, fly over the cars and land on the other side. For Knievel, would 65% done mean the straightaway, before he mounted the ramp? It was certainly important for him to pick up speed that way, and that would have been 2/3 of the measured distance. But it would hardly have counted as 2/3 of the difficulty of the task.
3. Ambition vs. Conclusion. In 2011, there were nine participants in the TPP negotiations. Since then, Canada, Mexico, and Japan all joined, bringing the number to twelve. When Japan joined, one former USTR privately predicted that the negotiations would now not conclude during the Obama presidency. Reportedly, delegations in Singapore were upset with Japan’s limited offers of liberalization. The 2011 delay posed a dilemma, however. As long as the negotiations were to conclude soon, it was reasonable to ask allies like Canada, Mexico, and Japan to wait to join. As the talks dragged on, such a stiff-arm seemed undiplomatic. Further, the three countries’ admission undoubtedly raised the level of ambition of the talks and the potential economic impact of the TPP. But when they were allowed in, the talks became significantly harder to conclude.  Now, as a 2013 deadline passes, S. Korea has expressed interest in joining…
4. This is level one of two. Robert Putnam helped clarify the difficulty of international negotiations by describing “two-level games.” International negotiators need to reach agreement among themselves, and among critical constituencies at home. So far, the Obama administration has neglected the consensus-building at home on trade. One indication of this is the domestic drumbeat for enforceable measures against ‘currency manipulation.’ There is no indication such measures are on the TPP agenda, nor would the other countries likely accept them.

None of this implies that TPP is a lost cause. However, it does imply that President Obama will need to make TPP a top priority for the new year and devote substantial time to the project if it is to have a chance. Given the centrality of TPP for Asian relations and the centrality of Asia in this administration’s foreign policy, that’s not an unreasonable prioritization.

Guest Commentary: TTIP – Views from Europe

By Fredrik Erixon, director and cofounder of the European Centre for International Political Economy (ECIPE), a world-economy think tank based in Brussels, and was the Convenor of the Transatlantic Task Force on Trade, a joint project of ECIPE and the German Marshall Fund of the US that spearheaded the TTIP negotiations. A fuller version of his analysis can be found here (PDF).

Failures in the World Trade Organisation’s Doha Round have prompted countries to turn to preferential trade agreements. But are they worth their salt? While the most outstanding feature of past FTAs is that they have not had impressive effects on growth in trade and Gross Domestic Product (GDP), the negotiations for a Transatlantic Trade and Investment Partnership (TTIP) may change this verdict. Clearly, TTIP will be won or lost for its economic merits. And the pro-growth effects of TTIP are really what persuaded reluctant officials and politicians in Europe to join countries like Germany and Sweden in their efforts to push for a transatlantic FTA. Given Europe’s poor growth rates, trade agreements that could deliver higher economic growth have been given a new hearing.

Few would deny that TTIP has the capacity to deliver a sizeable contribution to GDP in Europe. The gains from this FTA would be bigger than from other FTAs for the reason that it involves two large economies. Simply, size matters. A “conservative” estimate by the Centre for Economic Policy Research in London suggests the TTIP gain for the EU to be in the tune of 0.3-0.5 percent of GDP (the GDP gains are slightly smaller for the US).

However, political scepticism of TTIP is less concerned with the bilateral economic gains (or losses) and more directed to its consequences on the World Trade Organisation as the central forum of trade negotiations. But perhaps surprisingly to some, the debate in Europe over TTIP has taken a different view. Generally, it has not thrived on the notion that TTIP should be an attempt to build a Fortress Atlantic – or that it is a strategy to gang up on China or other emerging powers competing with the US and Europe.

So while the strange acronym of TTIP is for some a code word for the death knell of the WTO, many trade observers in Europe would argue it is the substance that should be used to give global trade policy a needed shot in the arm.

TTIP, like the TPP, was not born out of deep and genuine beliefs in the principles of free markets or the classical school of free trade. Like any other trade agreement in the past years, these initiatives build on conditional views of free trade and free competition mixed up with soft mercantilism and a growing urgency to support economic growth. Yet it is the best available strategy to rejuvenate global efforts to liberalise trade.

In the past 15 years, the multilateral trading system has been a leaderless system with no clear direction that has unified the key members. The system itself benefited for several decades from the leadership by the United States, which considered this system to be critical for its overall strategic objective of spreading market-based capitalism. There were willing followers to the US leadership, but none other than the US had the requisite economic, political, and institutional capacity to underwrite the system. Yet since the collapse of the Cold War, American leadership has withered away, and its general position on trade liberalisation has somewhat changed. Absent political leadership and direction, the Doha Round got stuck because the political instinct of many countries was to favour status quo rather than new liberalisation as long as there is no external pressure that prompts them to revisit that position.

Like many other things in economic life, trade liberalisation tends to be driven by two motives: profits and fear. Countries agree to open up for greater foreign competition because they believe it will boost their economy or because they fear that other countries will go ahead without them if they stubbornly resist liberalisation. Despite all the success of trade-oriented models of growth, many countries have grown to think that they will not stand to benefit much from new trade liberalisation – and that they have no reason to fear failure.

TTIP may partly change this. It is a big initiative. And if the two biggest economies of the world go for a bilateral agreement, it means that there is a risk for other countries that stand outside that bilateral agreement and, which is important, other efforts to liberalise trade. That risk is mostly about not having a voice in the design of the trade reforms that are likely to serve as benchmarks in future international agreements. It is far less about loosing current trade access – but it is about the fear of not having as good access to trade that will be liberalised in the future. Consequently, if TTIP is the ‘real thing,’ if it achieves the promise of ushering the world into 21st Century trade policy, the response from the larger emerging economies cannot be no response at all. The political and economic opportunity costs of status quo would have been changed.

Guest Commentary: Japan’s Agriculture and the TPP

As US presidents encounter domestic policy obstacles, they traditionally turn their attention to foreign affairs. At the top of the agenda for the Obama administration has been the conclusion of the Trans-Pacific Partnership talks, scheduled to wrap up this calendar year. The economic potential of the TPP and its degree of difficulty both increased significantly when Japan joined as a full participant this last summer. Not only is there a lengthy history of contentious trade negotiations between the United States and Japan, but there is the long-time sticking point of agricultural trade. If TPP is to succeed, Japan will need to make politically difficult concessions on agricultural liberalization. Below, Yutaka Harada, an expert at the Tokyo Foundation and Waseda University, summarizes his view of why Japan needs the TPP. A fuller version of his analysis can be found here (PDF).

By Yutaka Harada, Tokyo Foundation and Waseda University

Many Japanese industries are perceived to be strong, active, and competitive in the global market, but agriculture is usually considered an exception. For years, the farm sector has sought protection from international competition, subsidies, and favorable government treatment, and it has been largely successful in getting them until now. In spite of these privileges, Japanese agriculture is in a perilous state, and most farmers oppose any movements toward free trade.

In spite of opposition from powerful agricultural lobbies though, the Japanese government has decided to join the Trans-Pacific Partnership (TPP).

The State of Japanese Agriculture

At a glance, the situation of Japanese agriculture seems absurd. The average age of Japanese famers is 65.8. Fields and rice paddies that have been abandoned and are no longer cultivated total 400,000 hectares (Japan’s arable land is 4.5 million hectares), while another 1,100,000 hectares lie unused owing to the government policy of reducing rice cultivation acreage. Japanese agriculture is in a state of collapse.

Potential for Growth

Despite such dire conditions, there are some areas with potential for growth. Looking at the shares of sales by farm scale, we see that in the case of broilers (chicken), farms with sales of more than 10 million yen (100,000 dollars) accounted for 98% of total sales. Similarly, the shares claimed by farms with sales of more than 10 million yen were 97% or higher for eggs, pork, and milk cows.

By contrast, the shares of 10-million-yen-plus farms were 39%, 51%, and 63% for fruits, rice, and vegetables, respectively. Relatively low shares were also seen for beef, wheat, flowers, beans, and potatoes.

The figures suggest that large farms were dominant for those agricultural products that lend themselves to large-scale production. There is less economy of scale for fruits, vegetables, and flowers. There is considerable potential economies of scale for rice, wheat, beans, and potatoes, but such potential is not realized at present.

Wrong Policies

Why has Japanese agriculture been unable to develop? One possible culprit is government policy that has discouraged farmers from taking advantage of economies of scale.

One might even say that the goal of Japanese agricultural policy has not been to develop agriculture but to maintain the number of farming households, which have tended to vote for the ruling Liberal Democratic Party.

This policy might have been meaningful when the Japan Socialist Party (now the Social Democratic Party) was strong, especially among urban voters, and there was a possibility that the JSP could knock the LDP from power, but such a possibility disappeared many years ago.

What Can Be Done?

In order to correct the shortcomings of Japan’s agricultural policy, it is important to have an understanding of the distorted system of protection for agricultural products. Tariff rates for flowers are zero, those for vegetables range from 3% to 9%, and those for fruits are between 10% and 20%. By contrast, tariffs are extremely high for rice, tapioca starch, butter, sugar, wheat, potato starch, and skimmed milk, being from around 200% to 800%.

Additionally, many unprotected agricultural sectors have been growing while heavily protected ones have not. Sales of vegetables, fruits, and flowers are 2.1 trillion yen, 0.7 trillion yen, and 0.3 trillion yen, respectively. Sales of rice, meanwhile, are only 1.8 trillion yen, with sales in unprotected sectors now being larger than in protected ones. Unprotected sectors are those that can stand on their own feet, increase sales, and make profits, while the protected sectors have been losing sales and continue to depend on protection from the government.

Farm Sector Depends on Japan’s Overall Prosperity

The average agricultural income of Japanese farms is only 0.5 million yen per year. Half a million yen is only about 5,000 dollars. Obviously, this is not enough to live on in modern-day Japan.

Then, how do they live? The average income from side jobs is 1.9 million yen and average pension revenue is 2.1 million yen. Total income, including from agriculture, is 4.5 million yen. This is how they survive.

The figures suggest that for the average farmer, the most important consideration in making a living is to secure a steady income from a side job and to receive pension benefits. Getting a stable side job will become easier if the Japanese economy is growing, and for this, Japan’s best option would be to open its doors wider to the global market and to seek further trade liberalization.

And what are the most important considerations in receiving pension benefits? Since benefits are paid from the contributions of the working-age population, then it follows that Japan needs to be prosperous with many job opportunities. For this, too, Japan should seek liberalized global trade. In short, Japan needs the TPP to ensure its own prosperity.