Shooting Ourselves in the Hoof

American ranchers now know the cost of President Trump’s ill-considered withdrawal from the Trans-Pacific Partnership (TPP) in January 2017. The TPP promised US exporters of high-quality beef improved access to the lucrative, highly protected Japanese market. Instead, US beef producers now face discriminatory treatment, which undercuts their position in their top export market.

US ranchers have been hurt in two ways because the United States is not in the TPP. First, their competitors get better access to the Japanese market. Australian producers are charged lower tariffs in the Japanese market by dint of the Japan-Australia Economic Partnership Agreement (JAEPA). The JAEPA took effect on January 15, 2015, and provides Australian exporters a large and growing tariff advantage over US producers, who must pay the higher most-favored nation (MFN) rate. Under the JAEPA, Australian beef exporters currently are charged a preferential tariff of 27.2 percent compared with the MFN rate of 38.5 percent. Under TPP, both countries would have faced a Japanese tariff of 27.5 percent—and that tariff would have declined over time to 9 percent. The TPP would have leveled the playing field for US ranchers on day 1!

Second, US exporters are subject to special safeguard measures applied by Japan to blunt import surges; Japan’s EPA partners generally are exempt from such restrictions. Unlike regular safeguard actions that require a finding that imports injure domestic producers, the special protection for farm products is imposed automatically if the growth of imports exceeds a fixed amount. In this case, Japan’s total imports of frozen beef in April-June 2017 (the first quarter of Japan’s fiscal year) increased by (slightly) more than 17 percent from the same period last year (see table 1).

Because of this large increase, Japan imposed on August 1, 2017 special safeguard measures in the form of additional tariffs against frozen beef imports from the United States and other countries without an EPA with Japan. The extra duty above the MFN rate is 11.5 percent and will be applied until the end of Japan’s fiscal year (i.e., through March 2018). During this period, Japanese imports from the United States will pay a 50 percent tariff while those from Australia will pay 27.2 percent.

The 23 percentage point difference in tariffs applied to US and Australian shipments undercuts the competitiveness of US beef in the Japanese market. According to analysis by the US Meat Export Federation (USMEF), “when the 50% duty is applied…, U.S. frozen short plate [high-quality beef] becomes more expensive than Australian brisket.” Moreover, the USMEF cautions “that Australia’s prices could ease further in the coming months, as production increases above year-ago levels and exports start to normalize.”

How much trade is at stake?

Japan is a major importer of fresh, chilled, and frozen beef. In 2016, Japanese imports of these products totaled 503,000 tons worth $2.65 billion. Australian producers accounted for 54 percent of the shipments; the US share was about 40 percent. Japan is the largest export market for US producers. In 2016, US exports totaled 204,000 tons worth $1.01 billion (or 22 percent of global US exports of these products).

Note: Trade data are based on 4-digit Harmonized System (HS) code. Original data in April–June 2017 are recorded in ¥1,000, which are converted into millions of US dollars using average monthly exchange rate ($1 = ¥110.8545).
Source: www.trademap.org using Japanese Ministry of Finance statistics and UN Comtrade statistics.

What can be done to redress the discrimination faced by US beef exporters in the Japanese market? US producers bemoan the export opportunities that TPP would have provided and hope that the lost benefits can be recouped in a bilateral trade pact with Japan. But US-Japan trade talks are not on the immediate horizon and unlikely to bear fruit in any event: The Trump administration expects Japan to commit to opening its market more than it did in the TPP and accept fewer US concessions in return. The Japanese have little interest in such a deal. Instead, Japanese officials have been working with other TPP signatories to sustain and implement the original Asia-Pacific agreement in hopes that the United States might return to the fold in the future.

In sum, US beef exporters will continue to face tough competition in the Japanese market over the next few years. Even without the safeguard measures, Australian exporters will be charged declining tariffs while US suppliers face the much higher MFN rate. US producers will continue to pay a substantial price for Trump’s trade policy blunder.