TED Case Study: Kobe Beef

Kobe beef is a delicacy renowned throughout the world for its succulent flavor and exorbitant prices. In fact, its quality is so high that in many countries, including the United States, there is no beef grading category (e.g. prime, choice) to accommodate true Kobe beef (12). Kobe beef is regulated as a geographic indicator by the Japanese government and the Kobe region. Recently, there has been a surge in the production of Kobe style beef in America, which can be attributed to the low costs of raising cattle herds in the United States, relative to the high costs of raising cattle in the geographically smaller Japan. American farmers are beginning to patent the names "Wagyu" and "Kobe beef," which could be a precursor to a geographic indicator debate (17). Until American beef was temporarily banned in early 2004, many Japanese preferred to buy Kobe style beef from America because it was cheaper than its authentic Japanese counterpart. Although Japanese beef consumption declined after the mad cow disease scares from 2001-2004, it is expected to pick up within the next few years (particularly after beef trade with America is resumed). Once the Japanese beef market regains its strength, there will likely be debate concerning Kobe style beef from America, and whether it can be marketed under the name "Kobe" or "Kobe style" beef.

True Kobe Beef is produced in the Hyogo prefecture (of which Kobe is the capital) in Japan, from a type of cattle called Wagyu (which roughly translates to "Japanese cow"). It is characterized by bright red meat with pure white, extensively marbled fat. There are four breeds of Wagyu: the Japanese Black, the Japanese Brown, Japanese Shorthorn, and Japanese Polled. Kobe beef generally comes from the Tajima strand of the Japanese Black. Although most people consider these breeds to be native to Japan, they are not truly native. There was a group of wild cattle in the Kagoshima Prefecture (on the southwestern tip of Japan) that was crossbred with European cattle more than 2,000 years ago. These cattle are the progenitors of the modern Japanese Wagyu (13). The difficulty in transporting cattle prevented the continutation of this crossbreeding once the herds were established.

Particularly in Kobe, the mountainous and rocky terrain isolated the community and generally prohibited the transport of cattle in or out of the area, meaning that the ranchers could no longer breed the Wagyu with other types of cows. Instead, they selectively cultivated a species that is genetically predisposed to extensive marbling, which gives the beef its distinct flavor and texture. Farmers also use a special, secretive process to raise their cattle, which contributes to the excellent quality and flavor of the Kobe beef. Although there is a great deal of speculation as to what this process entails, the specifics are generally unverified.

Kobe beef is protected by government standards, in that the Wagyu cattle must be born in the Kobe region in order to be called " Kobe beef." The Wagyu breed, however, is only regulated on genetic lines, so Wagyu beef can be born and raised anywhere, as long as it is from a Wagyu genetic line. These regulations offer ranchers looking to increase sales of an extremely expensive product two alternatives to raising Kobe beef in Kobe. Because Kobe beef can only be created from a certain type of cattle raised in Kobe, and since there is a special way to raise the cow, the issue is both product- and process-related.

The Kobe rancher does not want his secrets revealed, because diet, breeding, and treatment are major factors in producing the most succulent beef in the world. If ranchers everywhere (particularly those in America, where Kobe-style beef is becoming more popular) were privy to these secrets, they would lose their comparative advantage over copycats, and the beef would become commonplace rather than almost mythical. Part of the legend of Kobe beef comes from the treatment of the Wagyu cattle. It is rumored that in Kobe, ranchers include beer in the Wagyu cattle diet, as it seems to stimulate hunger (which is necessary in the hot summer months, which appetites decrease). Increased food intake leads to higher fat production and retention, which contributes to the distinctive marbling of the Kobe beef. Another piece of the Kobe beef legend is that the cattle have Sake, the famous Japanese rice wine, rubbed into their coats. Supposedly, the Sake treatments soften the skin and coats, which some ranchers believe is linked to the quality of the meat (1).

Wagyu cattle traditionally receive massages in addition to their special diets and treatment. The reasons given for the massages vary, and seemingly depend on how cynical the author is. The overtly cynical answer is that Wagyu cattle, like the more common veal, do not have much room to roam around and exercise, particularly since land is in such short supply in Japan (not to mention that movement creates tougher muscle tissue); the massages, therefore, are a substitute for the muscle stimulation normally gotten through exercise. On the other hand, the "nice" answer is that the massages relieve stress and stiffness; in this case, the belief is that relaxed, happy cows make better meat (12).

Buddhist influences and cultural factors caused Japanese emperors to ban consumption of beef and meat from other hoofed animals in Japan for more than a thousand years until the Meiji Restoration in 1868. It is thought that before this time, "Japanese soldiers, involved in many armed conflicts over the years, were fed beef to strengthen them for battle. When the soldiers came home from war, they brought, their appetite for beef with them. Village elders believed that consuming beef inside the house was a sacrilege, a desecration of the house, and an insult to their ancestors. Young men were forced to cook their beef outside on plow shears (this process became known as sukiyaki, which literally means "plow cooking") until the Meijii Restoration finally relaxed the restriction against eating beef" (12). During the Meiji Restoration, "the new leaders of Japan wanted, among other things, to reduce traditional social barriers and to encourage the adoption of beneficial Western habits. There may also have been a desire to weaken the power of the Buddhists" (13). After the Meiji Restoration, beef consumption remained low for several decades, but has steadily increased since the end of World War II (likely due to American influence). As the economic situation improved in Japan, families were able to afford regular beef more often; Kobe beef, however, remains a luxury.

While some stories say that the cultivation of Kobe beef began in the Middle Ages and continued secretly during the beef ban, others contend that most of the careful breeding of Wagyu has taken place in the last five decades, when Japan began a cattle registration program for those cattle with superior genes. Kobe beef grew in popularity and extended its global reach in the 1980s and 1990s, especially in America.

In the recent past, American ranchers began to produce a version of Kobe beef that is similarly high in quality, but somewhat lower in price. American style Kobe beef comes from Wagyu cows that were bred and raised in America . Usually, a rancher will import a few live Wagyu cattle from Japan, and start a herd from there. A great deal of the American Kobe-style beef is marketed in Japan, (where top grade true Kobe beef sells for hundreds of dollars per pound) to those who want high quality beef, but can not afford genuine Kobe beef (16).

In order to remain competitive with the American ranchers in Japanese markets, some Japanese ranchers began shipping young cattle to the United States (where land and feed are less expensive and more plentiful) to be raised, then importing the butchered meat, and selling it as true Kobe beef. This meat could technically be sold as true Kobe beef because it was produced in the Kobe region, and raised according to the exacting standards set by the government and the ranchers (16). However, since the cattle are actually raised in America, it is questionable whether this beef should be considered true Kobe beef. It is also questionable because the American-raised cows do not receive the same feed, as they are given American grass and grain rather than the more expensive Japanese feed.

Although its popularity is increasing worldwide, the market for Kobe beef is still rather limited to the very wealthy. In most cases, the high prices mean that few people are willing or able to pay for Kobe or Wagyu beef on a regular basis. For example, a single 16 ounce Wagyu Porterhouse steak from Lobel's, a well-known butcher shop in New York, costs $98.98. A slightly larger (18 ounce) Prime grade Porterhouse from Lobel's is $48.98 (13), while a 24 ounce Choice grade Porterhouse (which can be found in most supermarkets) retails for approximately $21 (15). In Japan, a true Kobe steak of comparable size would be hundreds of dollars. For those in the United States who are willing to pay, American style Kobe beef has only recently become available on a limited basis. In the Washington D.C. area, Sunnyside Farm sells American-style Kobe beef at many farmers' markets, including the FreshFarm Market in Dupont Circle. Otherwise, the beef must be specially ordered, found at a specialty market, or eaten at one of a few restaurants. The limited supply is due, in part, to limited demands of the American consumers, but more so to extensive exporting (in large quantities) to Japan . In fact, last year, according to the USDA, “Nearly one-third, or about 240,000 tons, of all beef eaten annually by the Japanese [came] from the United States . That account[ed] for a $1 billion export for the US cattle industry” (18).

The most recent development in beef trade in Japan stems from the issue of Bovine Spongiform Encephalopathy (BSE or mad cow disease), which was found in the United States in a Canadian cow. The mad cow scare caused the Japanese to ban all imports of American beef, unless the USDA tested each animal for BSE. While the American cattle industry certainly wants to resume exporting to Japan , they believe that such thorough testing is unnecessary and uneconomical. In October 2004, however, Japan consented to allow importing beef from cows under the age of 20 months (at which age cows are supposed to be safe from BSE), with the possibility of full trade resuming in July 2005 (7).

The lore of Kobe beef is part of what makes it special, and the rumors surrounding its production encourage people to try it for the first time. If not for the geographic isolation, the farmers in Kobe would have never bred selectively the Wagyu cattle for the most succulent meat, nor would they have created the fabled beer diet, Sake rubs, or massages that contribute to the beef's flavor. Since few (if any) farmers are willing to share their secrets (or confirm the rumors), it is impossible to produce true Kobe beef anywhere else in the world. While many American ranchers produce Kobe style beef from cattle that are similar, they do not necessarily receive the same treatments or have the same genetic background. Therefore, the Japanese culture that surrounds Kobe beef (especially its exclusivity and renown) is threatened by American attempts to join the market.

The beef grading scale used by the US Department of Agriculture refers to the amount of fat in the beef, though the USDA describes it as a description of “tenderness, juiciness, and flavor.” “Marbled” fat refers to the level of fat distributed throughout the “lean,” or edible meat portion of the beef" (3). Kobe beef's quality is so high (and so much better than even a top prime beef) that it does not fit on this chart. The Japanese beef grading scale has a range of 1-12, with twelve being the best meat possible. A score of 12 is extremely rare; a good piece of Kobe beef usually ranks around 10. The chart below compares the USDA scale to the Japanese scale. Kobe-style beef from America usually earns scores of 6-8 on the Japanese scale.

**Beef Grading Scale (2)**
USDA Grade	Description	Japanese Score
Prime	Top quality beef, with a high degree of marbling (almost 25% fat); usually sold to restaurants and commercial kitchens rather than consumers.	5-6
Choice	High quality, with a good degree of marbling (about 20% fat); usually the top grade sold in supermarkets.	2-4
Select	Leaner meat because of less marbling (about 17% fat). Sold in supermarkets.	1-2

In Japan, Kobe beef is occasionally eaten as sushi, but is more frequently eaten as sukiyaki or steak. According to most sources, the secret to cooking a Kobe steak properly (should you be able to afford one) is to use high heat to sear the steak for a short amount of time. Since the fat is what gives Kobe beef its exquisite flavor, It is important to cook the steak only to medium rare (at most), as anything more would cause all of the fat to melt away. Most recipes recommend cooking a Kobe steak on the grill or a cast iron pan, and seasoning only with salt and pepper.

3. Related Cases

Apple	Looks at Japanese import ban on American apples. Japan refuses to import American apples because of fear of pests.
Eugenban	Looks at EU import ban of genetically modified beef.
Eumeat	Looks at EU import ban of American beef, enacted because of prominent use of bovine growth hormones.
Indbeef	Looks at Indonesian ban of Indian beef.
Japrice	Looks at US demands that Japan replace import bans and quotas with tariffs.
Madcow	Looks at UK beef industry in light of Mad Cow disease problems.

II. Legal Clusters

The Uruguay Round of negotiations in the World Trade Organization saw the discussion of many issues regarding global trade. During this round, one agreement that was reached was the Agreement on Safeguards, which became effective January 1, 1995. A safeguard “allows members to impose temporary border control measures […] if a surge of imports causes or threatens to cause serious injury to a domestic industry” (6). The Agreement on Safeguards sets forth several limitations, including the types of safeguards allowed (quotas and tariffs), length of time safeguards may be in place (initially no more than four years, and no more than eight total after a qualified extension), the necessity of progressive liberalization from the safeguard, and the repetition of safeguards (time without the safeguard must exceed the time the safeguard was in place before said safeguard can be reinstated) (1). Additionally, the agreement says that the nation applying the safeguard must compensate the affected nation in some way; if a compensation agreement cannot be made, the exporting country can take retaliatory actions after a certain amount of time (6).

In accordance with the Uruguay Round, Japan placed a safeguard tariff on its fresh/chilled beef imports on August 1, 2003, which was in effect until March 31, 2004. Japan enacted this safeguard because its beef imports surpassed the trigger level of 63,563 tons. In order to determine the trigger, the Japanese government compares the volume of beef imports each quarter to the prior year's corresponding imports. If the current import values exceed the comparable past imports by 17%, the government increases tariff rates up to 50%. In August 2003, the government responded to increased beef imports by raising the tariff to 50% from 38.5% (10).

Many exporting countries opposed the Japanese safeguards, saying that they were not consistent with the spirit of the Uruguay Round Agreement on Safeguards. One source of contention is with the trigger levels that Japan sets. The triggers are based on the previous Fiscal Year's imports, meaning that a year with abnormally low beef import values will set the triggers at artificially low levels, as was the case in 2003. Beef consumption in Japan decreased in late 2001 and early 2002, as several cases of BSE were found in European and Japanese beef. As consumers regained their confidence in the safety of beef, they purchased more beef, leading to increased American and Australian exports. In the first quarter of Japanese Fiscal Year ‘03/'04, beef imports rebounded to levels similar to those before the BSE scare. With normal beef consumption, these levels would not have set off the triggers; however, since they were being compared to a year with extremely low import values, the triggers were exceeded and tariffs were raised (10).

Although Japan acted legally by enacting the safeguard, nations like Australia and the United States saw the action as unjust. They claimed that the Agreement on Safeguards was meant to protect against relative overall increases, rather than those that result from market recovery. Australia was particularly affected by the tariff hike when US beef imports were banned in December 2003, because it became the main exporter of beef to Japan , and therefore had to shoulder much of the costs. Since beef consumption dropped in Japan after the US ban, many government officials are predicting a situation similar to that of the first quarter of JFY ‘03/'04 in the near future. Australian Agriculture Minister Warren Truss has expressed concerns that “when U.S. beef re-enters the Japanese market, after its recent BSE incident, the rise in overall imports could again trigger the snapback in 2005.” In order to prevent unjust situations in the future, he says, “The government is also committed to fighting for a better deal for our agricultural exporters in a range of international markets and across all agricultural sectors that puts an end to automatic 'snapback' tariffs of this nature”(4).

The potential problem, as predicted by the Austrailian government, is that the resumption of beef trade with the United States will increase overall beef imports and consumption, leading to increased tariffs. This, however, poses more of a problem for those who export beef to Japan. In fact, increased tariffs may actually be beneficial to the Kobe farmers, as the tariffs will likely increase the price of imported beef, bringing it closer to the relatively higher prices of Japanese beef. As Kobe style beef from America becomes more expensive and the prices become more similar, it is possible that the Japanese will choose the higher quality authentic Kobe beef over the lower quality (but still premium) Kobe style American beef.

While there has not yet been any legal discourse regarding the beef trade, the governments that export to Japan are certainly dissatisfied with the status of the trigger levels that cue the safeguards. Since Japan was technically acting in accordance with WTO guidelines, there has been no attempt to redress Australia's grievances. It is likely that if the resumption of trade with the United States does trigger the tariffs again, the affected nations will make further complaints to the WTO. Unfortunately for the exporters and the Japanese must pay for the higher costs, Japan may choose not to adjust its triggers unless ordered to do so, as the current levels are beneficial to its own farmers (including those who produce Kobe beef).

III. Geographic Clusters

11. Type of Habitat: While Japan's temperate to tropical climate is conducive to agricultural production, agricultural ventures are extremely limited by its terrain, which is characterized as “mostly rocky and mountainous.” In fact, only 12.19% of Japan 's land is arable, and less than 1% is used for permanent crops (8). Because of these less than desirable soil conditions, the land is not suited to both extensive crop production and grazing, so the Japanese tend to focus on the production of a few crops, including rice, sugar beets, and various fruits and grains. With most of the arable land dedicated to crop production, it is difficult to raise cattle and other livestock in large numbers. Although there is some crop production, the limited farmland means that large quantities of human and animal feed have to be imported. While livestock production makes up one-quarter of Japan 's agricultural output, it is more geared toward dairy production, and is much smaller than its U.S. counterpart (5). Additionally, the livestock trade in earlier decades was limited, as the mountainous terrain restricted the transportation of animals to market or for breeding. The ensuing isolation of herds led to the development of regional breeds and animal caretaking practices, which is how the secretive processes of raising true Kobe beef developed (12).

IV. Trade Clusters

Until the beginning of 2004, Japan 's major beef trade partner was the United States. In fact, Japan imported approximately $846 million of American beef in 2002, and about $1.2 billion in 2003 (3b). Although Japan produces some of its own beef, the American beef market in Japan was very strong until 2004 because American beef was relatively inexpensive (when compared to domestic beef) and tasty (especially when compared to Australian beef), and did not have the stigma of association with BSE (as both Japanese and European beef did).

While a billion dollar beef market seems strong, the demand for beef in Japan has been in major decline since 2001, when cows suffering from BSE were discovered in both the United Kingdom and Japan. The decline is well-illustrated by comparing consumption data from 2000-2002: in 2000, Japan consumed more than 700,000 tons of beef, which dropped slightly in 2001 to approximately 675,000 tons (since the Japanese were not wary of eating beef until at least part way through the year). However, there was a significant decrease in beef imports in 2002, “when consumption tumbled by 27.9% to just 486,741 tons (9).

Despite this decline, the American market remained relatively strong until January 2004, when the Japanese government enacted an import ban on American beef after the discovery of a cow with BSE in the United States (despite the fact that the cow was from a ranch in Canada). Since the ban, Australian imports have made up approximately 90% of Japanese beef imports, with their grain-fed (and therefore BSE-free) beef (3b).

While Japan has always been a bigger importer than exporter of beef, its export numbers have dropped in the last few years. The BSE scare in 2001 caused several trade partners, including the United States, Hong Kong, and Singapore, to ban Japanese beef imports (11).

As of November 2004, the United States and Japan have reached an agreement to end their respective bans on beef trade. It took several months and many meetings to reach a mutually satisfactory agreement to end the ban, came about on the Japanese side as the result of the discovery of BSE is a single cow in Washington State in December 2003. The United States banned Japanese beef in 2001, after a number of BSE cases were discovered. Following the BSE scare in 2001 (as well as in the EU), Japan adopted very strict guidelines for testing cattle for consumption, requiring100% testing for BSE of all slaughtered cattle. The United States does not believe that 100% testing is necessary, as BSE is commonly found in cows at least 2 years old, and many beef cattle are slaughtered at a younger age. The agreement that was eventually made was to resume trade, but limit it to cattle under the age of 20 months. According to U.S. Agriculture Undersecretary J.B. Penn, "Beef trade may expand after procedures for confirming the age of cattle that qualify for import are reviewed with participation from U.S., Japanese, World Health Organization and other experts in July" (7).

17. Impact of Trade Restriction: High - As the trade bans are lifted, trade in Kobe beef and Kobe style beef between Japan and America can resume. Since the majority of Japanese exports to America are Kobe beef, the end of the trade bans is important to the ranchers in Kobe. Not only will it allow them to regain a source of income (not many nations are wealthy enough to afford the luxury meat), but it may also present a problem as Japanese consumers are given the option to buy the less expensive, but not authentic, Kobe style beef from America.

Top Importers of Japanese Beef *
United States*	Singapore
Canada	Hong Kong

2002 Top Exporters to Japan (9)

United States	49.9%
Australia	44.8%
Others (New Zealand, Argentina, United Kingdom, Vanuatu)	5.3%

*Many nations enacted bans on imports of Japanese beef after several cases of BSE were found there in September 2001. Before that, the United States imported 70-100 tons of beef per year from Japan. Most of these American beef imports were Kobe beef (7).

V. Environment Clusters

24. Substitutes: Like Products - Kobe style beef, particularly from America and Australia (and, on a lesser scale, from the United Kingdom, once bans are removed).

VI. Other Factors

The Kobe ranchers are the producers of one of the most expensive meat products in the world. Currently, Kobe beef is a luxury good, as a result of its extremely high price. The Kobe rancher's concern then, is that other farmers (such as those in America ), will produce a similar luxury beef in larger quantities (as they are beginning to do) that is somewhat more affordable. American farmers are able to sell their beef at a lower price because they have lower feed costs (since the feed is not imported), and they have bigger herds (since they generally have more land). Not only would the influx of American meat cause a decrease in the overall price of luxury beef (including that of true Kobe beef), but it would increase the quantity available so much that Kobe beef would no longer be thought of as special, which in turn would make its price decrease.

The Kobe rancher, along with the other residents of Kobe, place tremendous importance on producing the best beef in the world, and can sell their beef at an extremely high price because of its quality. If any farmer were able to reproduce Kobe beef in large quantities and at lower costs, the Kobe ranchers would lose both some of their profits and their cultural identity.

3b. Bonné, Jon.“How US Beef is Being Replaced.” MSNBC . 4 May 2004. http://msnbc.msn.com/id/4873743/. Last accessed 16 December 2004.

6. Economic Research Service. “WTO: Beyond the Agreement on Agriculture.” US Department of Agriculture. 5 October 2003. http://www.ers.usda.gov/Briefing/WTO/safeguards.htm. Last accessed 16 December 2004.

18. Hernandez, Peggy. "Ban on US Beef Leaves Japanese With a Craving." The Boston Globe. 20 February 2004, A10.

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Geographic Indications and International Trade (GIANT)

I. Identification

II. Legal Clusters

III. Geographic Clusters

IV. Trade Clusters

V. Environment Clusters

VI. Other Factors