US-Japanese Agricultural Trade

With interest and emotions about the U.S. trade gap with Japan running high, RFF produced a radio program dealing with the agricultural component of that trade. Part of the FOCUS public affairs series that RFF sponsors along with five other non-profit, nonpartisan organizations in Washington, the show will be broadcast nationwide this month. An edited transcript follows.

The participants are Emery N. Castle, president and senior fellow at Resources for the Future, and Fred H. Sanderson, guest scholar at the Brookings Institution. Castle is co-editor and Sanderson a contributor to U.S.—Japanese Agricultural trade Relations, published by RFF in June I982.

Harry Ellis, senior economics correspondent for the Christian Science Monitor, was the show's host and moderator.

ELLIS: Gentlemen, the whole subject of trade between the United States and Japan is both complex and controversial. Obviously, Americans like such Japanese goods as cars, television sets, and other consumer electronic products—so much so that in 1981 the United States suffered an $8 billion trade deficit with Japan. It's often charged that we have a relatively open market for Japanese goods but that in various ways the Japanese limit U.S. exports to their domestic market. Our focus here is on agricultural trade between the two countries, and I'd like to start by asking, how important to the United States is the Japanese market for farm exports?

CASTLE: It is very important. We export almost one-third of our total agricultural output, so agriculture is a major source of foreign exchange for the United States. And Japan is the largest single customer that we have for our agricultural exports; it is indeed very important to us.

ELLIS. Let me turn the question around, how important to Japan is the United States as a supplier of foodstuffs?

SANDERSON: The United States is supplying about half of Japan's very large imports of foodstuffs, and approximately 80 percent of the grains and soybeans that Japan imports to feed its livestock. I would argue that the trade is of mutual benefit. Obviously it helps the U.S. balance of payments, as Emery pointed out. And it helps the American farmer who, incidentally, cultivates for Japan as much cropland as there is in all of Japan: one out of every twenty cultivated acres in the United States produces foodstuffs for Japan. But for Japanese agriculture, America is absolutely essential as a source of supply of the raw materials for livestock products. In this respect, Japan is very much in the same position in agriculture as it is in industry, where it depends so heavily on imported fuel and raw materials for processing into finished products.

ELLIS: It's ironic that we hear so much about Japanese cars flooding the U.S. market, Japanese steel coming in, limitations on television sets, and so forth, and very little, it seems to me, about the fact that Japan is actually our number one customer for food exports. Does this mean that if it were not for our food exports our trade deficit with Japan would be much larger?

CASTLE: That's right—and there's one very interesting dimension to this problem that often is not fully appreciated in this country. We hear about how the Japanese try to keep out certain agricultural products. But with other agricultural products—principally the grains and soybeans—their concern is that we be a reliable and dependable supplier. They want to be assured of our willingness to continue to sell to them.

Embargoes and food security

ELLIS: What were the circumstances in 1973 when the U.S. government embargoed the export of soybeans and soybean meal?

SANDERSON: In a way, it was the foreigners, including the Japanese, who brought the embargo on themselves, although we know now that this act was really unnecessary. What happened was that we discovered, suddenly, a great foreign demand for our soybeans; in effect, there was a run on the bank. Everyone, including foreign importers, tried to ensure himself a supply by concluding precautionary contracts for amounts much greater than what ordinarily would be imported. We did not have sufficiently reliable information about the extent of the overlapping of contracts and it seemed, on the face of it, that there was more demand for soybeans than we could possibly supply. Therefore, the embargo was imposed. But it lasted only two months and the Japanese actually imported, in that year, more soybeans than they ever had imported before! Nevertheless, every time I go to Japan and we talk about food security, the Japanese remind me of the soybean embargo to illustrate their dependence on foreign supplies.

ELLIS: So the Japanese began to have doubts, perhaps, about our reliability as a supplier as a result of that 1973 incident. What about the effect on the Japanese of the Carter administration's embargo on grain exports to the Soviet Union? Did that also cause the Japanese to think, Well, it's against the Soviet Union under these circumstances; conceivably under other circumstances it could be against us?

CASTLE: In talking with the Japanese I find a dual concern on that point. There is the feeling that if we can impose embargoes on the Soviets we could impose them on the Japanese as well. But I think there also is a concern that Japan, as a friend of the United States, often finds itself in competition with, say, the Soviet Union as an alternative buyer of our agricultural output. And I think the Japanese resent the fact that they are having to compete with some of the centrally planned economies for the food that they have become accustomed to importing from the United States.

ELLIS: Now let's discuss trade barriers. Currently, for example, the U.S. semiconductor industry is saying that Japan is shielding their domestic market until their own companies are fully ready to go out and compete. Is there anything similar in the way of trade barriers so far as our agricultural exports are concerned? Both of you have stressed that the reliability of the United States as a supplier of food to Japan is extremely important to them, and yet one hears about Japanese barriers raised against some of our exports.

SANDERSON: There are two types of motivation for the existing barriers. First, the Japanese maintain an extremely high price to domestic producers for rice. It is the national objective to remain at least self-sufficient in this basic Japanese food, and this goal has not been seriously challenged by any of Japan's trading partners. Nor has it been challenged by the Japanese consumer and taxpayer, who after all must meet the tremendous bill for it.

Beef, oranges, food politics

ELLIS: Japan is, though, self-sufficient in rice?

SANDERSON: Yes. In fact, they have a recurrent surplus because the demand for rice is declining. As the Japanese people become more affluent, they substitute livestock products and fish for starchy foods. To some extent they also substitute wheat for rice; sandwiches are more convenient to have for lunch in the office than is a bowl of rice. But rice and rice substitutes never have caused serious problems between our two governments. The problems that are generating a lot of heat these days relate primarily to Japanese restrictions on imports of beef and oranges. In the case of beef, we are dealing with a young industry that is clamoring for infant-industry protection. Moreover, it's an industry that always will be relatively inefficient because land is so limited in Japan: we don't have to worry about Japan someday exporting beef to the United States. But the protection is obviously excessive when a pound of steak in Tokyo shops is priced at $16. Clearly, at those prices, consumption is greatly restricted. The United States has been arguing—and I think correctly—that if the Japanese saw their way clear to reduce the quantitative restrictions on beef imports, and prices came down to a more reasonable level, there would be such an expansion in demand that everybody could benefit—the Japanese producer, the American exporter, and, of course, the Japanese public. That there is a substantial, unsatisfied demand for beef in Japan is illustrated every day, as may be attested to by anyone who has ever had a chance to watch Japanese tourists loading up on American steaks at O'Hare airport before departing for Japan. There are ways to protect the farmer; one proposal (put forth by Yujiro Hayami, a Japanese agricultural economist and one of the contributors to the RFF volume, U.S.—Japanese Agricultural Trade Relations) is for Japan to shift to a system of deficiency payments to compensate the Japanese beef grower for the difference between the import price and the high domestic price, and to finance that deficiency payment out of the receipts from a duty or import levy. Even in that case it can be demonstrated that the Japanese farmer could receive the same price for his beef that he does today. The retail price would drop by about 30 percent; consumption would go up by about 50 percent; and imports would go up by about 150 percent. The benefit to the United States, while not overwhelming, could be on the order of about $300 million.

ELLIS: I want to come back in a moment to oranges, but first, Mr. Castle, it seems to me that we have here an interesting situation. Japanese protectionism against foreign-made technological products—manufactured products in general—would seem to be motivated by a desire to protect or expand the Japanese share of a world market in those goods, whereas from what Mr. Sanderson says, the desire of the Japanese where their foodstuffs are concerned is to protect the internal market, with the aim of becoming as nearly self-sufficient in food as is possible.

CASTLE: I think that is correct. The concern about food self-sufficiency is both deep and widespread. As a matter of fact, the party in power—the Liberal Democratic Party—has been attacked not for its restrictive agricultural policies and high price supports, but because it has not made Japan more self-sufficient. Accordingly, it is not surprising that the political system reflects the concern about self-sufficiency. Thus, some people in the Liberal Democratic Party are very much in favor of high price supports; they have a rural constituency, which is reflected by representation in the Japanese parliament, the Diet. The Ministry of Agriculture, Fisheries, and Forestry provides the third leg of the stool, so to speak. The result of these political alliances has been small and relatively inefficient farms. One other fact is very important here. After World War II, a land reform program was carried out in Japan which put the ownership of the land in the hands of farmers. But in order to retain the land, they must farm it. In other words, there is no separation of the cultivation right, from the ownership right. Coupled with Japan's industrial performance, the rest is that people have begun to work outside the farm while also farming the land on which they live. This may be done by the man of the house himself, or the women and children may do the farming while the male member of the household works in industry. The income of the rural people is roughly the equivalent of, and may even in many cases be superior to that of the urban population, so in general it's not a matter of protecting farmers who are in a hardship situation. Rather, it's a political manifestation of the deep concern about food self-sufficiency combined with some unusual characteristics of Japanese agriculture.

ELLIS: Now, Mr. Sanderson, not to leave, the oranges dangling. What about oranges? What is it in that case that causes the Japanese to protect their market?

SANDERSON: Well, there you have a paradoxical situation. Japan essentially is competitive in citrus. They have the climate of California; they can and do grow citrus fruits and, in fact, they have made a big success of growing the mandarin orange. They expanded the acreage tremendously during the 1960s, and now they have a surplus. In a situation like that, any farmer—including American farmers—would resent any pressure to increase imports. However, even in this case, I think the protection is unnecessary and probably counterproductive. There really are three different markets for oranges in Japan. One is the in-season fresh market—the fall and winter, when Japanese oranges come on the market. Any visitor to Japan can testify that these oranges are delicious, easy to peel, and very cheap. We could not possibly compete with these oranges in the fresh season. Nevertheless, they have a 40 percent tariff and restrictions that limit imports to 1 percent of domestic product. Then there is the off-season, fresh fruit market, when there are no Japanese oranges in the Japanese market. But they restrict that market also. As a result, if you want to buy a California orange, you pay about $1.00 each. It has been argued on the American side that, at least during the off-season, the Japanese should open their borders to imported fruits, and that such a move couldn't possibly do any damage to the Japanese producer. But, as Emory pointed out, there is a political reason for the restrictions. The farmers are so adamant against any liberalization of imports—even during the off-season, for fear that it might spill over into the on-season—that they demonstrate in front of the American Embassy to prevent even partial relaxation of the restrictions. Finally, and most importantly, there is a large unexploited market for orange juice. I tell Japanese friends that in the United States, orange juice isn't only for breakfast anymore, and that they should be trying to expand their markets similarly. They have a provision that any orange juice consumed in Japan must have at least 40 percent domestic content. But, in addition, they severely restrict the imports of orange juice and of orange juice concentrates. If they lifted the restriction, they could sell a lot more orange juice and it would benefit both the Japanese growers and the American growers.

Import quotas

ELLIS: What types of barriers other than tariffs are we talking about? One hears a great deal about the difficulty of getting a product—even when it is allowed in and has paid its tariff—into the distribution stream within Japan. Realistically, what does a product face that is going to have some barrier raised against it?

SANDERSON: In the case of agricultural products, the barriers are predominantly import restrictions. Only a certain quantity can be imported, and that's it. There are quotas. And then the question arises, what does one do with the difference in price? Obviously, the importer gets these imports very cheaply and sells them very dearly. That's where an important political vested interest comes in. In the case of oranges, middlemen take the windfall profit. Of course they are adamantly opposed to any liberalization, even though it may not hurt the Japanese farmer. In the case of beef, it is a sort of cartel, a livestock import organization, which, in theory, is supposed to employ some of the windfall profits to improve the efficiency of beef production in Japan. But apparently the benefit to the Japanese beef grower in this case is extremely small.

ELLIS: What is the United States doing to open the agricultural market further, and to what extent is it succeeding?

CASTLE: The United States has a fairly aggressive program of expanding agricultural exports generally, not just to Japan but elsewhere as well. Perhaps the most important thing we have done is to try to establish world competitive prices wherever possible in agricultural products. Because we are an efficient and competitive producer for a great many agricultural products, it's obviously to our advantage to have a competitive pricing situation. In addition, the U.S. Department of Agriculture is very active in expanding agricultural sales. Indirectly, I think we have done a great deal to stimulate economic development around the world by improving the agriculture of other countries. On the surface that might appear to be counterproductive, but it has permitted many countries to break out of the cycle of poverty and to increase their income generally, and thus has increased their demand for food. Often, then, they may start exporting nonagricultural products but enter into the world market for agricultural products and as a result, expand their demand. One of the recommendations, incidentally, of U.S.-Japanese Agricultural Trade Relations, is that the United States should cooperate with Japan in trying to improve the world food situation. Quite apart from the relationship between the two countries, we should indeed do what we can to improve the general world food situation.

SANDERSON: It is important to keep in mind that in Japan the United States has a vast and rapidly increasing market and that a good argument can be made for leaving things pretty well alone in the agricultural field. As matters stand, the agricultural imports of Japan are going to double during the remainder of this century. We are now exporting to them agricultural products worth $6.5 billion. Now, by the year 2000, we can expect to double that volume of exports even without any change in Japanese agricultural trade policies. Therefore, we can expect that simply the increased need for American grain and soybeans will result in a further narrowing of the trade gap by perhaps another $6 billion in that span of time. This is the important fact for the United States. The beef and oranges are problems, but we could expect to get perhaps $500 million worth of additional trade from liberalization regarding these products. They are small fry compared to the "big-ticket" items—grain and soybeans—that we are exporting to Japan.

ELLIS: You are saying that we have a lot to gain even if things stay as they are, simply because the market itself will increase. Am I right that this will come not so much through increases in population as through a rise in the standard of living?

SANDERSON: It's through the rise in incomes. The Japanese are in the process of transformation from a vegetarian diet typical of a developing country to a western-type diet, which typically consists of about 40 percent livestock products and fish in the total calorie intake. That development alone—Japan's catching up with western dietary standards—will cause that tremendous increase in imports.

CASTLE: Basically, that's the reason that we can help improve agriculture around the world without cutting into U.S. production or exports. That is, as the incomes of other countries rise, their people eat a diet that demands many of the things that we produce and sell.

Models for Japan

ELLIS: Now obviously we have here two extremely different countries. The United States is continental in size, and its farming increasingly is large-scale; the small farm dwindles in America. The opposite, from what you have said, is true in Japan: there farming is primarily done on small family plots. The question then arises, Is there any aspect of the U.S. system, which has produced the greatest outpouring of food and fiber in history and which has made the American farmer so productive, that might be translated into the Japanese scene?

CASTLE: A number of interesting considerations flow from that question. One of the things that I believe has been demonstrated around the world in the last two decades is that people on the land, producing food and fiber, respond in about the same way to the incentives that they face. Of course, the resources with which they have to work may differ greatly. Our resources in the United States—the amount of land we have relative to labor, the distance to market, and so forth—all of these things are very different than they are in Japan. Nevertheless, if Japanese farmers are faced with a set of market incentives you can expect them to respond in roughly the same way that farmers in the United States respond. For example, when our demand for labor increased so much after World War II in our industrial sector, our people left the land, by and large, and moved to the cities to take advantage of that shift. The Japanese, on the other hand, were able to remain on the land, retain the title to the land, and simultaneously work off the farm in factories, as I indicated earlier. The consequences of these quite divergent trends has been a very great difference in the size of farms in the two countries. But even if Japanese agriculture were made more efficient, I would not expect a system of farming comparable to that found in the United States. Yujiro Hayami believes that the agriculture of the Netherlands would more nearly be the model for Japan than would be that of the United States. So even if Japanese agriculture were reformed and brought more into conformance with world demand-supply conditions, one would not expect it to duplicate that of the United States or to be organized as U.S. agriculture is organized.

SANDERSON: An important distinction should be made between crop production and livestock production. Livestock production lends itself to what essentially amounts to a factory system. For example, the Japanese are already fully competitive in producing broilers, for the same reason. In a sense, a large feedlot operation producing beef or hogs also is essentially an industrial enterprise, and there is no reason why Japan ultimately should not be fully competitive in that case, too; but beef may be an exception, because that also requires a lot of land for raising the calves and for related dairy production. Land is so high-priced in Japan, so scarce, so much in demand for many purposes, including agriculture, that crop production probably could not be competitive even if by some political miracle small farms in Japan all were consolidated into large farms on the scale of not only the Netherlands, but also perhaps on our scale. So crop production probably will continue to be pretty much a backyard operation. Indeed, some of our farmers visiting Japan would say "Well, what you are doing is gardening!" And maybe that is what they ought to be doing—producing high-value crops, vegetables and fruits mainly, plus some forage for the animals that require it. For the rest, I think the Japanese farmer would do well to tend his nonfarm sources of income, which now constitute 80 percent of a farmer's average income. As Emery has noted, members of the family can go out to teach school or work in a factory—it's a compact country where they can commute to nearby cities—and perhaps they are developing a solution that is novel and of some interest to densely populated developing countries. One of the principal ways out of poverty for the small farmer in India, for example, might be to follow the Japanese example of highly dispersed industrialization where farmers can work part-time in nonagricultural jobs and supplement their incomes.

ELLIS: Gentlemen, if I might summarize what we have been saying: Japan—perhaps to the surprise of many Americans—is the largest single customer for our farm goods. It is a market which may double by the end of this century. There are particular problems for some of our farm products, notably beef and oranges, and these are deeply embedded in internal political considerations within Japan. But the bulk of our agricultural exports, notably soybeans and grains, do go in without hindrance because the Japanese very much need them, and Japan will continue to be America's preeminent agricultural trading partner.