Welfare-Improving Collusion in the Japanese Pork Import Market

Imports are increasingly becoming a significant source of Japan's pork supply. Japan's share of imports to total consumption increased from 9 percent in 1980 to 24 percent in 1990, reaching a maximum of 44 percent in 1996. Under the World Trade Organization (WTO) safeguard provisions for pork, Japan can raise its gate price by 24 percent when imports in a given quarter are 119 percent higher than the average imports of the last three years of the same quarter. Japan has already invoked the safeguard provision twice since the Uruguay Round Agreement on Agriculture (URAA) was signed in 1995. In both cases, the level and volatility of retail prices increased; the CIF values of imports increased, making the impact on the government of Japan (GOJ) tax revenue uncertain; the level of imports and stocks increased; and the timing of imports changed. New underlying parameter estimates suggest that the reduction in pork exporters' profit is three times higher when the Japanese General Agreement on Tariffs and Trade (GATT) safeguard is invoked, providing foreign pork suppliers an incentive to collude to avoid exceeding the trigger. Workable and efficient allocation rules are constructed with a multi-plant monopolist structure that allows trade of quota. This collusion is welfare-improving since the safeguard induces more inefficiencies, including larger deadweight loss and a shift from low cost to high cost pork supply.