Protectionist Measures within the Japanese Agricultural Sector

Tariffs and Import Quotas

Term Paper 2009 17 Pages

Economics - Case Scenarios


Table of Contents

1. Introduction

2. Protectionism

3. Protectionist Measures
3.1 Import Quotas
3.2 Tariffs

4. Japan and Protectionism
4.1 Historic Development since 1945
4.1.1 Development of Import Quotas
4.1.2 Development of Tariffs
4.2 Current Situation
4.2.1 Milk Products
4.2.2 Grains

5. Effects

6. Importance of Protectionism for Japan

7. Conclusion

1. Introduction

In its latest White Paper on International Economy and Trade 2009, the Japanese Ministry of Economy, Trade and Industry listed prevention of protectionism as one of its courses for “Domestic and foreign integrated economic measures” (Ministry of Economy, Trade and Industry 2009). With 153 member states in the World Trade Organization, formerly known as General Agreement on Tariffs and Trade, which is a multilateral institution that liberalizes trade, establishes trade agreements and solves trade disputes, one might think that protectionism should not be a problem in the 21st century (Gabler Verlag 2009b). Japan joined the General Agreement on Tariffs and Trade in 1955 and is still a member of the World Trade Organization today. However, the government of this nation still feels the necessity to state deterrence of protectionist measures in a paper which was only published in June 2009 (World Trade Organization 2009a). Thus, the question arises how important is protectionism for Japan nowadays. This question will be answered by explaining protectionist measures and looking at the historical development of such measures in Japan since 1945 in the agricultural sector. The agricultural sector is interesting since Japan's agricultural imports accounted to over $50 billion in 2008. After the United States of America and the European Union, Japan is the third largest importer of agricultural goods. Based on total calories consumed, Japan imports about 60 per cent of its food sources annually (United States Department of Agriculture Economic Research Service 2009a). By evaluating official government sources, the current situation is assessed and the effects of protectionist measures on imports by focusing on the agricultural sector will be elaborated.

2. Protectionism

To understand protectionism, one first has to be aware of the supply and demand model and the effects of international trade on this model. When ignoring international trade, domestic supply and domestic demand meet at the equilibrium. Thus a price at which products are sold within a country is generated by the “invisible hand”. The idea of international trade can now be added to this concept. Assuming that the world price is lower than the equilibrium price created by domestic supply and domestic demand, the equilibrium shifts. Imports enter the domestic market and the domestic price falls from the autarky price to the world price. With falling prices, the domestic demand increases. The emerging gap is filled with imported goods (Krugman and Wells 2009: 206-207). Thus, domestically produced goods have to compete with the foreign products on the home market. Even though the overall world economy might be better off with international trade, it can be disadvantageous for domestic producers since they either have to sell their goods at a lower price or will sell less because of cheaper competition (Krugman and Obstfeld 2008: 225-226). Due to free trade, under- performing industries as well as newly developed industry sectors can be usurped from the market by international competition. Hence, domestic production suffers and companies might be forced to cut jobs (Seidel and Temmen 2000: 336). To counter such problems, governments use protectionist measure as trade policy (Krugman and Obstfeld 2008: 225-226). Protectionism is defined as the practice of fostering and developing domestic industries by keeping foreign competition away by introducing public policies (Gabler Verlag 2009a). To protect domestic companies, some governments introduce policies that restrict free trade with the world market - this kind of behavior is called protectionism (Sheffrin and O'Sullivan 2005: 734).

3. Protectionist Measures

By introducing protectionist measures, the theory of the equilibrium of supply and demand will be influenced and changed. There are many public policies that can restrict free trade. However, the most important ones are import quotas and tariffs which will be explained in the following and used as exemplary trade restriction measures (Sheffrin and O'Sullivan 2005: 734).

3.1 Import Quotas

An import quota is a non-tariff barrier, which is a measure that directly lowers the quantity of imported goods (Lipsey and Chrystal, 2007: 632). It is defined as “a limit on the amount of a good that can be imported” (Sheffrin and O'Sullivan 2005: 781). Absolute quotas limit the amount of imported goods to an exact level during a specified time span. Occasionally these quotas are set internationally and thus control all imports, while other times they are only imposed against individual countries (Suranovic 2006).

Since the number of goods produced abroad is restricted, the equilibrium moves closer to the price that would exist without international trade (Mankiw and Taylor 2006: 171). Since the market price of imported goods is increased, more domestically produced goods are sold while the number of goods produced abroad is lessened on the market.

3.2 Tariffs

A tariff is defined as a tax solely imposed on imported goods (Lipsey and Chrystal 2007: 632). A tariff discriminates foreign producers since it protects domestic industry (Albers 1982: 630). The effect of such a tax is that it directly increases the prices of imports (Lipsey and Chrystal, 2007: 632). Deductively one can say that the tariff, if high enough, reduces the quantity of goods that are produced abroad and sold domestically since the profit margin for foreign producers is lower. Hence the market equilibrium moves closer to the price that would exist without trade. (Mankiw and Taylor 2006: 171). Thus, more domestic goods and less imported products are sold at a higher price due to the import tax. A special category of import taxes are megatariffs. They are exceptionally high tariffs that efficiently prohibit all imports exceeding the minimum access that has to be granted according to bilateral and multilateral agreements (Economic Research Service/USDA 2001).

3.3 Combined Quotas and Tariffs

Import quotas and import taxes can also be combined in a tariff-rate quota. The quota is a fixed quantity of a specific product. Goods imported within such a quota are subject to lower import taxes while imports outside the quota face much higher tariffs (United States Department of Agriculture Economic Research Service 2009b). On the one hand, an in-quota tariff, the tax rate applied on imports within the quota allows normal trade. On the other hand, over-quota tariffs, the tax rates applied on imports in excess of the quota volume are so great that they basically prohibit market access (Economic Research Service/USDA 2001). Thus, one can say that the tariff-rate quota successfully combines two policy instruments that restrict trade.

4. Japan and Protectionism

In Black Hole Tariffs and Endogenous Policy Theory: Political Economy in General Equilibrium the author states that “Japan is the third most protected country in the world” (Magee, Brock and Young 1989: 28). Thus, one can clearly say that Japan has a history of protectionism. Most importantly, such trade policies were introduced and executed past 1945. The historic development as well as the current situation concerning protectionism in Japan will be evaluated in the following chapter.

4.1 Historic Development since 1945

After World War II, Japan followed a policy which was meant to rebuild its domestic economy. One of the public policies that were followed after 1945 was the Yoshida Doctrine. This doctrine was named after Prime Minister Shigeru Yoshida and stated that Japan should mainly focus on economic rebuilding, keep a low political profile and rely on the U.S. in security issues (Curtis and Sharpe 1993: 347). Economically speaking, Yoshida’s main goal was to focus all available means on economic recovery since it was the highest priority during his time in office. This was achieved by introducing measures that lower market access of foreign competition (Macdougall 1988: 55). During the American occupation, it was generally accepted that Japan established tight restrictions on goods that were produced abroad, since the measures were deemed to be non-permanent (Dower 1993: 13). During the post-war era, the industrial sector within Japan grew at an exceptional speed. The government felt thus obliged to make sure that no imbalances within society arise. As a result, heavy support and protection measures were implemented in the agricultural sector since farmers did not benefit as much from the economic miracle as the industrial participants on the market (Meer 1990: 10). Since 1945 tariffs and import quotas have experienced different developments.

4.1.1 Development of Import Quotas

When Japan joint the General Agreement on Tariffs and Trade in 1955, the original agreement that was made by its founding members in 1947 was also applicable to Japan’s trade policies. The eleventh article of the General Agreement on Tariffs and



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Title: Protectionist Measures within the Japanese Agricultural Sector