Rice Trade Policy Overview

Claiming a need for self-sufficiency stable supply, Japan has a long history of heavy protectionism in the rice sector. Despite pressures from virtually every single trading partner Japan deals with, they have maintained a rigidly stubborn stance opposing foreign imports of rice. At the peak of such protectionist policies in 1985, Japan records that imports of rice from the US barely totaled .2% of total domestic consumption. In fact, until very recently, Japan has been closed to virtually all rice imports.

Japan’s aggressive protectionist stance began with strict quantitative limitations on imports shortly after World War II. These policies continued to be modified to further restrict trade until the mid 1980’s when, due to pressure from many trading partners—particularly the US—the country began to grudgingly open its borders to foreign rice. For example, in 1986 California rice producers filed a petition to the US government under section 301, claiming that Japan’s policies caused significant injury to their industry. At this time, Japan was providing a $2,200-per-metric-ton subsidy to Japanese domestic producers. This subsidy was as much as ten times the world price (Unites States House of Representatives, 1986). Following this complaint and many similar, the US began to put heavy pressure on Japan to open its market. Although slow to respond initially, due to this and other negotiations, Japan has begun to liberalize its market.

However, despite this gradual reduction of tariffs, subsidies, and other policies, current trade barriers in Japan are still very prevalent. Recently, Japan has relied most heavily on domestic subsidies, although quota and tariff policies are also in effect. The most recent information available indicates that the Japanese government directly subsidizes rice production by as much as $1.82 billion (206 billion yen) (Fukuda, Dyck, & Stout, 2003).

Japanese subsidies come via a number of different government programs. The most direct subsidy program, called the Japanese Rice Farming Income Stabilization Program, was implemented in 1998. The Income Stabilization Program allows for rice farmers to claim payments equal to the difference of domestic rice prices and a predetermined standard, should the market price fall. In 1999, such payments totaled $815 million (92.7 billion yen). On a per-hectare basis, Japan subsidizes an incredible $9,600 more than the United States. The Office of the Unites States Trade Representative (USTR) reports that, “. . . because of high tariffs and other barriers to trade, Japan's rice producers are very insulated from the open market” (2003). Such programs enable inefficient Japanese rice producers to continue to produce rice and charge a much higher price to the domestic consumers than the world price, greatly reducing the net social welfare. This effect will be discussed in greater detail in the following section.

With total direct subsidies, as well as more indirect programs designed to enhance rice farmer competitiveness and drive up domestic process, taxpayers spent an estimated $2.8 billion in support of just the rice industry in 1999 alone (Fukuda et al., 2003). On a per-hectare of production basis, Japan’s subsidy is enormous, over 12 times that of the US and EU subsidies combined. A more detailed breakdown of subsidy programs is shown in Table 1.

Beyond subsidy programs, Japan also has a myriad of border policies in relation to the rice industry. Japan currently has a tariff of 150 yen per kilogram imposed on all rice as it crosses the border. Additionally, rice imports are subject to a quota of 682,000 tons, above which imports are taxed with a tariff of 341 yen per kilogram. Statistics show that this tariff rate effectively prohibits all imports above the quota (Fukuda, et al., 2003). Without exception, every policy has been designed to protect a comparatively disadvantaged domestic industry. Figure 1 illustrates the nominal rate of protection in the Japanese rice sector due to high tariff levels.

Domestic Welfare Effects

The Japanese have a culture deeply rooted in traditional behavioral models. Japanese feel an intense sense of obligation to keep things stable and are thus very resistant to change. These attitudes are manifest in their policies (Yoshimura & Anderson, 1997).

However, in this case it is clear that resisting change—refusing to allow more foreign rice into the domestic economy—is not benefiting the Japanese economy at all. While admittedly producers receive some benefit from protection, with prices continuing to climb, the welfare loss to consumers is tremendous. The result is the country as a whole loses. Even several Japanese economists and politicians have finally admitted the poor stance of their policies and have suggested that heavy rice protection is no longer the answer (United States Senate, 1986).

The purpose of Japan’s protectionist policies is to drive domestic prices up and provide producers with higher incomes. However, this welfare gain is immediately lost by the fact the consumers must pay higher prices. Thus the policies do not increase welfare, but simply divert income from producers to consumers. Additionally, due to the fact that rice is a main stable in the Japanese diet, empirical research indicates that consumer demand for rice is inelastic—as prices increase, demand is not likely to change very much (Fukuda et al., 2003). Therefore raising the domestic price of rice imposes a severe burden on consumers.

In 2000 consumers spent over 1% of their income ($638 per individual) to cover the merely the difference between domestic and world rice process. This problem directly affects an individual when he goes shopping at the local market. Current data shows that Japanese consumers pay roughly $2.63 per kilogram compared to the US price of $.20 per kilogram (Ministry of Agriculture and Forestry [MAFF], 2001).

Other welfare losses are shouldered by the government, which then taxes consumers and imposes further welfare losses. One example of such expenditures is storage costs. As indicated previously, the government has agreed to pay the difference to producers when the domestic price falls below a predetermined standard. It accomplishes this buy buying surplus rice stocks at the predetermined price. The government has then chosen to store the rice rather than export it, and this then requires increased taxes to provide for the storage facilities.

Figure 2 illustrates a few of these effects. Note that when consumption exceeds production, storage volumes and the associated expenses increase. Also interesting to note is the import level of nearly zero until 1993. The lack of imports can be taken as evidence of the welfare loss experienced by consumers.

International Welfare Effects

The negative effects of Japan’s rice protection are not limited to the domestic market alone. Virtually every economy involved in rice trading has felt adverse effects from the Japanese policies. As a specific case study, this report will look the welfare effects felt by Burma, a small rice-exporting country in Southeast Asia.

Burma entered the rice market in the late 1920’s, producing just under half of the quantity of Japanese production at the time. Like Japan, traditionally Burma has not been lacked protectionist tendencies. Until recent decades, privately-owned firms were not allowed to export rice at all. However, the Burmese government realized the effects and in an effort to encourage expansion of its relatively small rice industry has begun to move toward more liberal policies (Siok-Hwa & Lumpur, 1968).

However, this move toward trade liberalization has been complicated by the aggressive protectionist policies still in place in developed countries such as Japan (Kazmin, 2004). Being geographically close and also a large consumer of rice, Japan is a natural export target for Burmese producers. However, high tariffs and vast array of protectionist policies have severely limited Burma’s ability to trade. As shown in Table 2, over the past several years, Burma’s export volume of rice has significantly increased. A major portion of this increase has been going to Japan. At this same time, Japan has been gradually reducing trade barriers. This trend suggests that Japan’s limitations on imports have played an influential role in limiting past exports of Burmese rice and thus imposing a welfare loss on the country’s producers (United States Department of Agriculture [USDA], 2002).

From a theoretical standpoint, the trade pattern between Burma and Japan suggest that Burma has a comparative advantage in the rice industry. Burma tends to export and Japan tends to import. When the specific data is considered, it becomes clear that Burma does indeed have a comparative advantage over Japan in rice production. Japan is one of the highest cost rice producers in the world, requiring as much as $12,000 to produce one hectare of rice. Burma, on the other hand, enjoys some of the lowest production costs, around $500 per hectare (Yap, 1991).

As a normative argument, the trends suggest that global welfare is better off by allowing Burma to specialize in rice production and export. On the other hand, Japan should use its resources to specialize in another sector where it can produce efficiently, for in rice, it is rather inefficient. This pattern is occurring, but the ridiculous degree of protectionism demonstrated by the Japanese government limits the extent. The result is a set of policies that does not allow the world to enjoy an optimal level of efficiency.

Burma, although a more efficient producer of rice, is unable to produce at its free-trade equilibrium. Additionally, Burmese producers must pay significant costs to get their rice across the Japanese border. These distortions yield a negative net welfare effect on the Japanese, Burmese, and world economies.

Econometric studies have indicated that Japan has the ability to influence market prices in rice, but Burma behaves more like a price-taker (Barker, Herdt, & Rose, 1985). Thus Burma is subject in part to the whims of the Japanese government. Qualitatively, the isolation of the Japanese economy in the rice sector decreases the demand that Burmese producers face. With lower demand than free trade would otherwise allow, Burmese producers are unable to produce as much and are stuck with higher production costs. Rice demand in the small Burmese economy is saturated and if Burmese producers wish to expand production, they must try and sell in foreign markets. The Japanese market exhibits severely inflated prices due to tariffs and other restrictions and thus the growth of the otherwise competitive Burmese rice industry is greatly hindered by the Japanese restrictions which are destroying the possibility of trade between the two economies (Coyle, 1981).

A comparison of the costs of rice production, as well as other indicators in the two economies make it is obvious that Burma is the more efficient producer of the rice and Japanese resources would be better spent elsewhere. It can also be seen that Japanese protectionism is causing unnecessary costs on everyone else participating in the market (Yap, 1981).

Benefits of Trade Liberalization

Clearly, the best course of action, when considering world welfare, is to eliminate all trade barriers. Senator Pete Wilson gave his opinion to the US Congress that Japanese protectionism harms international rice trade. Total liberalization would benefit all involved, not just the United States. He stated that “the elimination of Japan’s unfair import ban would also benefit rice growers in Burma, Thailand, Pakistan, and other developing countries” (United States House of Representatives, 1986).

Burma, as well as other small, developing countries, are typically the recipients of the greatest injury from trade barriers. The rice industry in Burma is still small and is struggling to get a firm hold in international markets. However, Japan’s policies drive up domestic prices of the otherwise low-priced Burmese rice. Because Burma’s costs of producing rice are so much lower than Japan’s, Burma has a comparative advantage in its production. Trade barriers distort this advantage.

Burmese producers are faced with high costs when selling their stocks to Japanese consumers. These costs come primarily from the enormous tariffs that must be paid as the rice crosses the border. The result: Burmese producers are not able to sell as much rice as they would otherwise. Japanese consumers also lose out by being forced to pay much higher prices than they would with international free trade.

In the event that the trade between the two countries was to be completely liberalized, the benefits would be abundant. Burmese producers would have a much larger consumer base to sell to and the elimination of trade barriers would allow them to produce more rice much more efficiently than the Japanese. Japanese consumers would likewise benefit from the increased supply and subsequent decline in prices.

WTO Meetings in Cancun

The issue of Japan’s rice protectionism proved to be a major obstacle up during the World Trade Organization negations in Cancun. In fact, it was one of the primary contributors to destroying negotiations completely. Japan, along with several other Asian countries, pressed very hard for exceptions allowing them to impose even more barriers on trade than the current policies. They surrounded this stance in an argument saying it is necessary for the survival of the domestic rice industry (Reuters, 2003). This is a sensible argument when view the situation from the perspective of the Japanese rice producers. As demonstrated earlier, the Japanese rice producers are not efficient at all and produce rice at a very high cost. In order for them to survive against low-cost producers—such as Burma—they must protect the industry.

Unfortunately, Japanese producers represent only a small fraction of the world population. Their stance fails to take into account the other welfare effects imposed on other players in the world economy. The other countries were fighting to get Japan to open its borders to rice. They argued that doing so will not only improve the industries abroad, but will also allow rice production to move to producers who are the most efficient. In the long run, this is better for everyone involved.

Japan’s stubborn stance seemed to be more political than economic. When one takes a good look at the statistic presented in the report, it should be quite clear that trade liberalization is the best policy. However, rice farmers provide votes and Japanese politicians depend on these votes for their survival. Although they did make a few minor compromises, Japan continued to refuse to reduce its trade restrictions. This was a major factor in the breakdown of negotiations (Azuma, 2001).

Conclusion

Thus it is easy to see that rice trade in Japan—and the Orient in general—is a very sensitive topic to all involved. The powerful countries, such as Japan, seem to be the highest-cost producers and are experiencing a comparative disadvantage. The low-cost producers, such as Burma, are the ones who should be producing the bulk of product. The interesting thing is that if Japan was to really act in its own self-interest, considering the welfare imposed on the country as a whole, it would open its borders to trade. Such a move would, in the long run, increase Japan’s domestic welfare, and the welfare of all of its trade partners. Japanese consumers would enjoy the price reductions and use the extra money to build up other sectors in the struggling economy. However, the politicians are bowing to the wishes of a powerful special interest groups—rice farmers—and are refusing to liberalize. There remains some hope, however, as Japan’s borders are more open now than they have been in the past. But unfortunately for the Asian rice consumer, it will likely be a long road until free trade will become the rule, not the exception.

References:

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