Subsidized Wheat Production in Japan

Japan is not a particularly good environment for growing wheat. Wheat produced on large fields in the
dry climates of North America, Australia, and Argentina is far cheaper and of much higher quality than
anything produced in Japan. Indeed, Japan imports some 80 percent of its wheat from foreign producers. Yet
tens of thousands of farmers in Japan still grow wheat, usually on small fields where yields are low and costs
high, and production is rising. The reason is government subsidies designed to keep inefficient Japanese wheat
producers in business. In 2016, Japanese farmers were selling their output at market prices, which were
running at $9 per bushel, but they received an average of at least $35 per bushel for their 2016 production!
The difference - $26 a bushel - was government subsidies paid to producers. The estimated costs of these
subsidies were more than $700 million in 2016.

To finance its production subsidy, Japan operates a tariff rate quota on wheat imports in which a
higher tariff rate is imposed once wheat imports exceed the quota level. The in-quota rate tariff is zero, while
the over- quota tariff rate for wheat is $500 a ton. The tariff raises the cost so much that it deters over-quota
imports, essentially restricting supply and raising the price for wheat inside Japan. The Japanese Ministry of
Agriculture, Forestry and Fisheries (MAFF) has the sole right to purchase wheat imports within the quota (and
since there are very few over-quota imports, the MAFF is a monopoly buyer on wheat imports into Japan). The
MAFF buys wheat at world prices, then resells it to millers in Japan at the artificially high prices that arise due
to the restriction on supply engineered by the tariff rate quota. Estimates suggest that in 2015, the world
market price for wheat was $5.96 per bushel, but within Japan the average price for imported wheat was
$10.23 a bushel. The markup of a bushel yielded the MAFF in excess of million in profit. This “profit” was then
used to help cover the $700 million cost of subsidies to inefficient wheat farmers, with the rest of the funds
coming from general government tax revenues.

Thanks to these policies, the price of wheat in Japan can be anything from 80 to 120 percent higher
than the world price, and Japanese wheat production, which exceeded 850,000 tons in 2016, is significantly
greater than it would be if a free market were allowed to operate. Indeed, under free market conditions, there
would be virtually no wheat production in Japan since the costs of production are simply too high. The
beneficiaries of this policy are the thousands of small farmers in Japan who grow wheat. The losers include
Japanese consumers, who must pay more for products containing wheat and who must finance wheat
subsidies through taxes, and foreign producers, who are denied access to a chunk of the Japanese market by
the over-quota tariff rate. Why then does the Japanese government continue to pursue this policy? It
continues because small farmers are an important constituency and Japanese politicians want their votes.

Source: Charles-Hill-International-Business 9ed. Page 217

1. What type of trade barrier has Japan imposed on imported wheat?

- They operated tariff rate quota on imported wheat, in which a higher tariff rate is imposed once wheat
imports exceed the quota level (The in-quota rate tariff is zero, while the over-quota tariff rate for wheat
is $500 a ton).

2. How much is the world market price of wheat? In Japan?

- In 2015, the world price of wheat was $5.96 per bushel, while in Japan was $10.23 per bushel.

3. What is the landed cost of imported wheat in Japan and what is the cost of local wheat?

- Within Japan the average price for imported wheat was $10.23 a bushel. Japanese farmers were selling
their output at market prices which were running at $9 per bushel, but they received an average of at
least $35 per bushel due to subsidies.

4. What would be impact of introducing free trading in wheat in Japan?

- There would be virtually no wheat production in Japan since the costs of production are simply too high

5. Who win, who lose in this case?

- The winners: the thousands of small farmers in Japan who grow wheat.
- The losers:
o The consumers (have to pay more for products containing wheat).
o The ones who must finance wheat subsidies through taxes.
o Foreign producers (are denied access to a chunk of the Japanese market by the over-quota tariff
rate).

6. Why is Japanese government interested in continuing with local wheat cultivation?

- Because small farmers are an important constituency and the government need their votes.