The small changes in beef and citrus, however, skirt the underlying issue-Japan's basic agricultural policy. Unless Japan promulgates an economically rational agricultural policy, similar problems will undoubtedly arise for other products. Proof that the U.S. will be a reliable long-term supplier could perhaps ease the transition to a more effective policy, but the Japanese must also take the initiative to a consumer-oriented, deficiency-payment system which protects farmer incomes and ensures maximum feasible production.

TOBACCO PRODUCTS

Japanese taxes and mark-up practices on cigarettes, cigars, and pipe tobacco, as well as restrictions on advertising and retailing, cost the United States several hundred million dollars a year in lost trade. We detailed these problems in the Task Force report; twenty months later, the situation is basically unchanged. It is again worth detailing the barriers to tobacco product trade, since they vividly demonstrate the problems of dealing with various Japanese monopolies and corporations.

Under the Ministry of Finance exists a Japan Tobacco and Salt monoply corporation. Basically, it produces almost all of Japan's cigarettes (in a nation noted for the heaviest smoking per capita in the world). The corporation's factories are reported to be overstaffed, high cost producers. Certainly, in a head to head contest, U.S. cigarettes are highly competitive. The JTS, however, set the price of all cigarettes-foreign and domestic-sold in Japan, and thus controlled the competition. The price differential traditionally was set at about ¥100 above the domestic price, thus effectively limiting U.S. cigarettes to one percent of this $10 billion market!

Effective this April 1, the Diet converted the pricing policies of the JTS into sky-high tariffs-90 percent on cigarettes, 60 percent on cigars and 110 percent on pipe tobacco. This conversion actually increased the differential between domestic and foreign tariffs to as much as ¥140! Under this price discrimination, we may lose even more market share. In making the conversion, Japan indicated a willingness to consider major tariff reductions, and those renegotiations are now under way. Even if they are successful, however, lower tariffs will not become effective until next April 1.

Given the size of our trade deficits with Japan, the history on this case has been a severe disappointment. Not only are U.S. cigarettes made noncompetitive in price, but the marketing, advertising and distribution of foreign cigarettes is ensnared in regulations of a Catch-22 nature. These "M.A.D." issues include a "dual distribution system" which limits the number of retail outlets able to distribute imported tobacco products,' a "test market" system which limits the number of test outlets for imports to 40 centers (this may soon increase to 60) and impedes entry to the commercial market; and advertising guidelines which generally prohibit Japanese-language media advertising and limit promotional activities for imported but not domestic tobacco products. Although JTS has proposed new and less restrictive advertising guidelines for imported tobacco products, the proposed guidelines would still represent "separate but equal" treatment for

1 Foreign cigarettes can be sold in 14,000 outlets compared to 250,000 outlets for JTS brands. We understand tentative agreement has been reached to raise this to 20,000.

imports, i.e., they would not apply to JTS and would therefore not clarify whether true equal opportunity for advertisement would exist.

The cigar and pipe tobacco (but not cigarette) industry, supported by the Administration, has proceeded with a formal GATT complaint against this labyrinth of M.A.D. barriers. A decision is expected shortly; the case seems clear and we expect a U.S. victory.

The tobacco product issue (like the issue of log imports in preference to lumber and raw hides in preference to leather) is a classic example of how Japan insists on importing raw materials and doing the valueadded work, even though foreigners are more competitive in cigarette manufacture. Japan imports enormous quantities of U.S. leaf tobacco, but by blocking the importation of the finished product, she transfers jobs from the United States to Japan. An analogy would be for the United States to allow only imports of auto sheet metal, and insist on stamping the metal and assembling 99 percent of the Japanese auto models here.

FISHERY PRODUCTS

Fish protein is essential to the Japanese. They consume 60-80 pounds of fish per capita per year, compared to 13 pounds in the United States.

U.S. fishery product exports to Japan have increased dramatically in recent years. Our fishery exports to Japan in 1974 were $56 million; in 1979 they were $568 million. Japan's share of total U.S. exports rose from 19.6 percent in 1974 to 55.2 percent in 1979. This export growth has occurred despite numerous Japanese quotas and ĥigh tariffs on certain fish species.

2

In addition to buying U.S. fish catches, the Japanese are the largest users of fishing rights within our 200-mile zone:

In 1979, Japan took 72 percent, by value, and 68 percent, by volume, of all of the fish harvested by foreign fishermen in the U.S. FCZ. Japan's harvest was 1,184,420.3 metric tons, valued at $297 million. According to NMFS, this is an increase for Japan of $87 million over the value of her 1976 catch in the same area.3

The catch described above, of course, is carefully regulated under U.S. conservation laws, and in 1979 the Japanese paid some $10 million for the right to fish in our waters.

Clearly, the growth in our fisheries trade with Japan has been impressive-it should be encouraged, and we hope that remaining barriers can be eliminated.

We express strong concern about a bill, H R. 7039, the American Fisheries Promotion Act, which has been reported to the House by the Merchant Marine and Fisheries Committee. At present, foreign fishermen can only fish for the "surplus" of fish in our waters that our own fishermen do not have the capacity or desire to catch. Thus,

2 See, for example, H. Rept. 96-1138, part 1, a report by the House Merchant Marine Committee on H.R. 7039, the "American Fisheries Promotion Act", p. 31:

"Japan maintains a system of import quotas, exclusive or restrictive import licenses and oppressive import tariffs that substantially impede imports of U.S. fish products. A recent GAO Report to the Committee entitled, "Developing Markets for Fish Not Traditionally Harvested by the United States: The Problems and the Federal Role", states, "Despite marketing opportunities in Japan, tariff and non-tariff trade barriers hamper U.S. marketing efforts there. Japan maintains a tariff of between five and fifteen percent on most imported and fresh and frozen fish, including pollock. Nontariff restrictions, such as import quotas, present an even more important barrier to U.S. exports to Japan. In 1978 Japan's dollar volume import quota (for groundfish) was $20 million for 98 countries, including the United States." The limitation is on all bottomfish, including pollock. However, using pollock alone as an example, the $20 million limitation, which is spread over 98 nations, represents a harvest of 90,000 metric tons. Given that the development of the U.S. pollock resource requires U.S. access to Japan's market, this import quota effectively precludes development of the U.S. industry, particularly since Japan's 1979 harvest of pollock in the U.S. FCZ was 779,003.6 metric tons.'

3 Ibid, p. 30.

as the U.S. fishing industry rebuilds, the level of foreign fishing will decline. H.R. 7039 dramatically accelerates the elimination of foreign fishing in our waters, regardless of our industry's ability to catch all of the portion formerly allotted to foreign fishing fleets. In some cases, foreign fishing would be eliminated within 6 to 10 years. Despite this accelerated phaseout, the bill also calls on the remaining years of foreign fishing allocations to be determined by a number of factors, including the level of access that that foreign nation provides to our fishery exports. We support this type of allocation criteria. But in the case of H.R. 7039, it is such a rapidly diminishing "carrot" that we do not believe it will be effective. Indeed, in the case of Japan, it is likely to backfire: faced with expulsion from our fishing waters, they are likely to increase their development of aquaculture in coastal waters and seek new fishing joint ventures elsewhere in the world. If so, we will lose all of our leverage to obtain increased access for our fish exports. Fish is so essential to the Japanese diet that we regret any legislation which rather suddenly affects the source of supply. In ways, this legislation is similar to the soybean embargo of the early 1970's which caused the Japanese to develop Brazil as an alternative source of supply and which has contributed to their intense nervousness about sources of food and energy supply.

We believe that we are more likely to obtain increased access to the Japanese market if we offer the Japanese long-term commitments for certain minimum access levels (at whatever the current price is). We hope the Congress will understand the sensitivity of this issue and will work for a negotiated improvement in our trade rather than legislating in a rather meat-axe manner.

HIDES AND LEATHER

Since our last report, the United States has obtained a small leather quota increase from Japan (although Japan also maintains a 20-percent tariff on leather). The quota increase, however, has not translated into trade gains. As the Tanners' Council of America has reported to us, in the year immediately before the agreement, April 1978 through March 1979, the United States exported 5.4 million sq. ft. of leather to Japan. In the first full year following the agreement, April 1979 through March 1980, U.S. exports to Japan amounted to but 3.9 million sq. ft. In the last few months there has been no improvement in the volume of leather shipped.

While the recent dramatic rise in leather prices along with the appreciation of the dollar increased the dollar value of shipments, we are very concerned that the relatively small U.S. quota, representing less than 2 percent of Japanese consumption, is not being filled.

The U.S. leather industry has increased its worldwide exports from about $100 million in 1974 to $250 million in 1979, but it has been just about impossible to sell any meaningful quantity of leather to Japan. The United States has urged MITI to facilitate full utilization of the leather quotas by appropriate means, but MITI regards the problem as one of marketing, not amenable to a governmental solution. After participation in the Tokyo Leather Show this March, the American tanners also realized that they needed to adjust their

As the statement of Assistant Secretary of State Thomas R. Pickering to the Merchant Marine and Fisheries Committee, May 6, 1980, points out:

"The phaseout of foreign fishing proposed . . . would seriously jeopardize our ability to use (allocation negotiations) over the long term. Cuts in foreign allocation might then result in tightening the access of U.S. fish exports to foreign markets, the reverse of the intention we hope to achieve."

products to the Japanese market: the Japanese want leather less "rough" than that displayed by Americans and want small shipments at irregular intervals. The Japanese also say that in light of the depreciation of the yen in 1979 and the Japanese leather industry recession in the second half of 1979, the U.S. leather sold relatively well. With the recent appreciation of the yen, U.S. leather sales may pick up. Liberalization of import quotas, thus, cannot be the sole means of improving United States-Japan trade. Although without a more open market in many products, the United States cannot increase exports, the United States cannot assume that American goods will automatically be purchased as quotas are increased. Quality and price competition must also be met.

RICE POLICY

Japan has been self-sufficient in rice for the past two decades-in fact, generous support prices and declining demand have led to chronic overproduction since the late 1960's. Yet, with a rice selfsufficiency rate of 114 percent as of 1977, Japanese farmers have not adjusted their output downward in line with the 1 to 2 percent annual decline in domestic rice consumption. MAFF's Food Agency, purchasing most of the crop, ensures rice growers a gross income generally higher than they could earn by planting other crops. Nearly 50 percent of Japanese farmland is devoted to rice cultivation, and farmers receive about three to four times the current world price for their produce. Foreign rice is so much cheaper that at least one Japanese brewery has established a sake plant in California where it can take advantage of cheap U.S. rice prices and export sake to Japan!

Still subsidizing rice production while also attempting to curb it, MAFF has not yet succeeded in reducing rice cultivation to the domestic consumption level. To ease the nation of its big surplus of rice, in 1979 the government launched a 5-year program to dispose of 4.8 million metric tons of surplus rice through exports, industrial usage, and formula feed production. Policymakers initially hoped to minimize the loss by channeling as much surplus rice as possible into industrial usage, where it was projected to sell for about ¥143,000 per metric ton in contrast to about ¥25,000 for feed use and about 60,000 to ¥70,000 for export. But export sales were brisk in 1979, amounting to about 900,000 metric tons versus the forecast of 200,000 metric tons. These shipments increased the Government's fiscal loss and led to a trade dispute with the United States.

The subsidized nature of the exports motivated the American Rice Millers Association to file a complaint in early April 1980 under section 301 of the 1974 Trade Act. Bilateral negotiations followed on April 10 and 11. As a result of the negotiations, Japan agreed to restrict exports of surplus rice to a total of 1,600,000 tons over the 4-year period beginning with fiscal 1980-compared to their initial goal of 2,000,000 tons. The Americans thus compromised, considering we had originally wanted an export volume of only 200,000 tons a year. The two sides also agreed that Japan would restrict exports to such areas as Indonesia and the Republic of Korea, which are major U.S. export markets, to 640,000 tons (220,000 tons in the first year). Annual talks will be held to determine the export volume for every year after 1980 and to estimate the world's supply-demand situation. If the United

States-Japan "understanding" is followed, the United States agreed not to enforce "reprisals" against Japan as demanded by U.S. rice millers.

Domestically, Japan must still resolve her rice problem in the 1980's; she hopes to realize a changeover from rice cultivation to increase self-sufficiency in other crops, such as so beans, wheat, barley, and forage products. Import demand for these crops, correspondingly, will decline somewhat, as will imports for feed grains as Japan disposes of surplus rice through formula feed production. Thus, the ramifications of Japan's changing policies will be felt by the United States.

GRAINS

Producing less than 5 percent of her soybean, wheat, and feed crop needs, Japan is now emphasizing the need for increased self-sufficiency in these crops. The Government feels that a continuation of the heavy reliance upon imports could be adversely affected by such events as crop failures in supplying states, massive purchases by third nations, and the tactical use of food for political ends by exporting countries.

Presently, Japan is one of the major U.S. customers for all three crops. In soybeans, Japan is the largest purchaser, buying one-fifth of U.S. exports in 1978/1979. In wheat, Japan is one of the most important markets for the United States, importing one-tenth of U.S. exports in 1979. In feed grains too, Japan is one of the largest importers, with her market having almost doubled in just four years. Thus trade stability in these crops is an important issue for both nations.

Will Japan's understandable emphasis on increased self-sufficiency result in protectionism for these crops and reduced U.S. exports in the years to come? In discussing this issue with the Secretary of Agriculture, we have expressed concern that there are dangers of new (and consumer-costly) protectionism for these crops. On the other hand, this new policy may mean less protectionism in the rice sector and may offer the opportunity for long-range changes of benefit to both nations.

FOREST PRODUCTS

The United States-Japan Forest Products Committee (which grew out of the 1978 Strauss-Ushiba Agreement) has made steady progress in resolving trade-inhibiting standards problems that have limited U.S. forest product exports to Japan. While progress has been slow, the domestic industry seems generally pleased by the new opportunities in the Japanese market."

One major area of concern is the large quantity of logs exported to Japan in contrast to the small number of more labor intensive finished lumber products. In 1978, U.S. logs constituted 22 percent of total Japanese forest product imports, but U.S. lumber accounted for only 2 percent of Japan's imports. This percentage appears to be increasing

5 Japan is taking other steps to promote stable supplies. For instance, the National Federation of Agricultural Cooperative Associations (Zenno) has decided to build a major grain elevator in the United States to ensure stable cereal supplies. The elevator should boost Zenno's direct cereal procurement, lead to a cost reduction in transporting cereals from the United States to Japan, and solve the problems which have occurred in shipments to Japan due to a shortage of elevators and port congestion in the United States. 7 To date, U.S. companies have not felt it was economically justified to saw to Japanese standards. See TSG, "A Special Progress Report", April, 1980, p. 31.

Penoyar, William. "The Japanese Market for Solid Wood Products," Forest Products Review, U.S. Department of Commerce, Bureau of Industrial Economics, Spring 1980, p. 18.