The Peculiar Rationality of Beef Import Quotas in Japan

Abstract

In recent years economists have devoted considerable effort towards explaining why governments protect certain domestic industries from import competition (Anderson and Baldwin). So far, however, little attention has been directed at explaining the choice of protective policy instrument. Why, for example, are import quotas rather than less distortionary production subsidies or tariffs used? An especially interesting case is provided by East Asian beef protection policies. Import quotas in Japan and South Korea have ensured that beef prices in these countries are several times higher than import prices (Saxon and Anderson, Anderson). A major reason for protecting the beef sector is to boost domestic livestock producers' incomes. The first-best policy instrument for achieving this objective, namely income supplements, is said to be politically impracticable because of its budgetary cost. There is, however, a second-best policy which may harm domestic consumers less than the present policy without reducing returns to beef producers or drawing on general tax revenue. This policy involves replacing import quotas with a less restrictive tariff and/or levy on imports and using the tariff/levy revenue to subsidize the domestic producer price up to its present quota-protected level. Such a change in beef import policy has been advocated for Japan by a number of authors in recent years (Forum for Policy Innovation; Hayami; Longworth 1976, 1978). Hayami's analysis suggests that all parties would benefit from a partial trade liberalization of this sort. If such a policy change is so beneficial, why does Japan continue with restrictive import quotas and why are other countries, such as South Korea, following the Japanese example? In fact, the recommended policy is to some extent already in place. Japan's beef imports are subject to a 25% tariff. In addition, the government monopoly importing agency imposes a levy on imports which is used in part to support feeder calf prices. The question then becomes, to what extent is further liberalization possible without reducing beef producer protection or drawing on treasury funds? The theory section below shows that the answer depends on whether none, some, or all existing government programs being financed by rents from imports are assumed to continue. The second section looks empirically at the likely extent to which consumer beef prices in Japan could fall in each of these cases, and at the effects of such reductions as compared with both the present situation and free trade. In the light of these results, the third section suggests a number of reasons for the persistence of quotas.