The China Business Review

Frederick W. Crook

About 65 percent of China's population lives in the countryside. In 2000, the PRC government counted 499 million people working in the rural economy, with about 355 million working in agriculture itself. And yet China's agricultural sector only generates 16 percent of the country's GDP--in sharp contrast to the 50 percent it generated 50 years ago. Nevertheless, China's World Trade Organization (WTO) entry was held up in part over issues related to protecting this sector.

The terms of China's WTO accession will affect agricultural workers across the board. Many farmers in low-income areas cultivate crops for their own use, while in other areas the government continues to influence cropping patterns through its mandatory grain-purchase system. Still other farmers participate in vigorous market systems. Some regions have an abundance of water, a warm, humid climate, and excellent crop-growing conditions--other regions are dry and have short growing seasons.

China's current rural economic systems may well require a decade to adjust to WTO rules. The pace of change will be rapid in some areas and slow in others, and these changes will inevitably be tied to changes in other sectors, such as transportation, distribution, international trade, banking, and law.

China, agriculture, and the WTO: Major terms

As a WTO member, China must abide by the WTO Agricultural Agreement, the aim of which is to improve market access by reducing tariffs and eliminating nontariff barriers, limiting domestic support for agricultural production, and restricting export subsidies (see Table 1). China must also comply with the WTO Agreement on Sanitary and Phytosanitary Measures, which requires that rules on health and food safety be based on science and not protectionist concerns (see A Test of WTO Compliance: China's Biotechnology Rules).

China's WTO tariff commitments vary according to product and will be phased in by 2004. The average tariff rate on agricultural products fell to 15.8 percent on January 1, 2002, according to the Tax Committee of the State Council. China may use tariff-rate quotas (TRQs) to protect domestic production of some agricultural commodities, including wheat, corn, rice, soybean oil, cotton, and sugar. China must follow WTO transparency principles on TRQ management and has issued some relevant preliminary measures.

China agreed in its WTO Working Party Report that the country would not maintain national or subnational policies that regulate the quantity, quality, or treatment of imports and would outlaw the use of export subsidies on agricultural products. China also agreed to reduce nontariff barriers such as import licenses, quotas, and technical barriers. The Working Party Report also states that China must restrict domestic support to its farmers to 8.5 percent of the value of total agricultural production and cap support for specific products at 8.5 percent of the value of the specific crop. China will maintain state import rights for some agricultural goods, including wheat, corn, rice, sugar, cotton, soybean oil, and tobacco.

Foreign-invested wholesale enterprises will be able to distribute imported and domestically produced agricultural goods by 2003. Foreign majority ownership will be allowed by 2004 with no geographic or quantitative restrictions, and wholly foreign-owned enterprises will be permitted by 2005.

Three regions, different effects

China's imports and exports of agricultural products today differ sharply among its three geographic regions (see Rural Employment). The eastern (coastal) region accounts for 79 percent of the country's agricultural exports and 93 percent of its imports. The central region accounts for 14 percent of agricultural exports and 5 percent of imports, while the western region makes up only 7 and 2 percent, respectively, of agricultural exports and imports.

Following China's WTO entry, the eastern region will likely increase its share of the country's imports and exports. Its position along the coast gives it a great advantage in receiving bulk products, and its more developed rural industrial and transportation systems will allow firms to process and export agricultural products more easily. The central region likely will increase its share of imports, but its exports will face stiff competition abroad. Its transportation and processing industries are not as advanced as those along the coast. The western region will likely lose shares of both imports and exports because of its less developed transportation infrastructure and the greater distances products have to move to find markets.

Table 1
China's WTO Commitments in Agriculture

WTO issue China agreed to... Example

Domestic Support Cap of 8.5% subsidies for agricultural products Subsidies are already below 8.5%

Export Subsidies End export subsidies Corn

Intellectual Property Rights Abide by WTO rules on intellectual property rights including agricultural technology

Judicial Review Establish tribunals, contact points Appeal procedures

Market Access Reduce average tariffs from 21% to 17% by 2004 Oranges from 28.4% to 11%

Reduce nontariff barriers (licenses, quotas, technical barriers) End licensing for sugar

End price controls--use market forces (some exceptions); government-guided pricing for some agricultural products Oranges (tobacco excepted); government-guided pricing for wheat, corn, rice, soybeans

Limit quantity import quotas

Limit tariff-rate quotas to 10 commodities 3% tariff for 8.4 million metric tons of wheat in 2002, 65% tariff for additional wheat

Open agricultural service market and grant trading rights to domestic and foreign enterprises in agricultural commodities and inputs such as fertilizer and agricultural chemicals.

Nondiscrimination Equal treatment for foreign and domestic companies

Open Agricultural Product and Input Markets Open grain and input markets

Price Comparability Several alternative methods of price determination in dumping cases; accept US classification of Chinese economy as "non-market" for limited period In US antidumping cases, US will use 3rd country (e.g. India) price data

Right to Trade Goods to be traded freely in all of China within 3 years, except for state-traded items Canned corn--freely traded
Bulk corn--state traded

Safeguards China waived its right to market-disruption safeguards

Sanitary and Phytosanitary Measures Publish standards, measures, and product coverage within 30 days after accession; base rules on science

State Trading Abide by WTO rules for state trading China will maintain state trading rights for corn, wheat, rice, etc.

Technical Barriers to Trade Publish all technical regulations in an official journal

Transparency Publish laws and regulations Official journal established

Transitional Product-Specific Safeguards Consultations if China's products cause market disruptions in foreign markets; WTO members have market disruption safeguards against China's products for 12 years

Transitional Review Mechanisms Provide information on WTO implementation one year after accession.

Uniform Administration Apply central rules consistently throughout the provinces

SOURCES: Compilation of the Legal Instruments on China's Accession to the World Trade Organization, Beijing: Falu Chubanshe, 2001. WTO and China's Agriculture: A Basic Reader (WTO yu Zhongguo Nongye Jianming Duben), Beijing: Zhongguo Nongye Chubanshe, 2002.

Rural Employment

Farmers in China's north and northeast will bear the brunt of the increased competition in trading of bulk commodities such as wheat, corn, and soybeans. Some farmers may be able to adjust their cropping patterns and substitute other crops. Some may be able to initiate new production activities such as animal husbandry or find work in local businesses. Others may leave farming altogether and find employment in neighboring urban centers. China's authorities are worried about the effects--including lower incomes and underemployment--of the adjustment these farmers will have to make.

In 2001, I visited rural areas in Yunnan and Guizhou provinces where farmers living in isolated mountain valleys earn average annual per capita incomes of less than $200. Because much of these farmers' output is consumed on the farm, China's World Trade Organization (WTO) entry is unlikely to have much effect on them in the short term. But over the long term, WTO membership will probably threaten current production techniques in these areas, which include raising corn on high mountain slopes under plastic film with huge amounts of hand labor.

By contrast, more prosperous farmers near Qingdao, Shandong, are planting fewer grain crops and expanding vegetable and fruit acreage. Local townships and counties are investing in food processing plants. These farmers view WTO entry as a chance for them to break into more domestic and foreign markets.

The restructuring of China's huge labor force will take many years to accomplish. The transition from farm to factory and service jobs has already begun, and tens of millions have left their fields (see p.18). Rural governments should facilitate labor mobility by building better roads and transportation systems, developing job placement centers, creating rural adult education centers to train rural workers in various trades, and supporting the development of enterprises that move products from farm gate to consumers.

--Frederick W. Crook

Short-term trade composition to hold steady

Bulk commodities (mainly grains, cotton, and soybeans) accounted for 59 percent of US agricultural exports to China in the last decade. Though such exports have generally been in decline since 1995, with some rise in 2000 (see Figure), US exporters hope that bulk commodity trade will regain its prominent position in post-WTO China. The TRQs that major grainproducing countries, including the United States, Canada, and Australia, negotiated with China before its WTO entry reflect their hopes that China will increase imports of land intensive crops such as grains and soybeans. However, these hopes will likely remain unrealized in the short term, as the following breakdown by individual product shows. (Statistics are based on US Department of Agriculture (USDA) figures and the author's own estimates.)

Wheat
China is currently the world's largest wheat producer, with an estimated 94 million metric tons of output in 2001 (compared to the United States's 53 million tons), and China has been increasing its cultivation of quality wheat. It also has fairly large wheat stocks--estimated to range from 32 to 45 million tons. China has announced a TRQ of 8.5 million tons of wheat in 2002. Given the large stocks, increase in quality, and changes in domestic consumption patterns, China's importing firms are unlikely to use up the full quota. From July 2000 to June 2001, China imported only 350,000 tons of wheat. For the same period in 2001-02, China is likely to import only 600,000 tons.

Corn
China's corn output of 110 million tons ranked second to the 253 million tons that the United States produced between October 2000 and September 2001. China's corn stocks have been falling because of exports and lower production in the past few years, but are nevertheless probably about 80 million tons. China's TRQ for corn is 5.9 million tons in 2002. From October 2000 to September 2001, China imported 150,000 tons of corn and exported 7 million tons. China's corn exports from October 2001 to September 2002 will likely be substantially below the previous year's because of these lower stocks, the fact that domestic corn prices are above the international price, and because of WTO rules restricting China's government from using export subsidies. Exports for 2001-02 are likely to be only 1.5 million tons, with imports only reaching 1 million tons.

Rice
China is by far the world's largest rice producer and has an estimated 94 million tons of rice stocks. The country imported 300,000 tons of rice and exported 1.8 million tons in 2000. China has a 2002 TRQ of about 2 million tons of short- and medium-grain rice and about 2 million tons of long-grain rice. But given China's comparative advantage in producing many different varieties of rice, firms are unlikely to find it profitable to use up these quotas.

Cotton
China produced 22.5 million 480-lb. bales of cotton between August 2000 and July 2001, making it the world's largest producer, just ahead of the United States, which produced 20 million bales. China is reported to have stocks estimated at 8 to 9 million bales (818,500 tons) and agreed to a TRQ of about 3.8 million bales for 2002. Between August 2000 and July 2001, the country imported about 230,000 bales and exported about 450,000 bales. China likely will not use up its full import quota in 2002.

Soybean oil
Before July 1999, China's policies favored the import of soybean oil and meal and discouraged the import of beans. These policies were reversed in mid-1999 with the result that soybean oil and meal imports decreased sharply while soybean imports increased rapidly. Hence China's 2002 TRQ for soybean oil of 2.5 million tons is unlikely to be used fully. China only imported about 50,000 tons of soybean oil in 2000, and a similar quantity is forecast for 2001. The domestic price for soybean oil was higher than the international price in 2000 and 2001, but at the end of 2001 the gap narrowed.

The Role of Land Management

Labor, capital, and technology in China today have varying degrees of mobility, but land is tied up in a historical, ideological, and political knot. The Chinese Communist Party came to power promising land to the peasants and then reneged on its promise by collectivizing.

Local resident groups (cun min zu) or the old production teams under the commune system legally own China's land. In practice, local cadres in villages and townships control the land, making them the overseers and landlords of the peasants.

Households now have long-term contracts on the land they till and, even though many heads of households leave villages to work in nonfarm employment, wives and children continue to till the land. This pattern persists because the land is the farmers' only security and can provide something to eat if everything else fails. Another reason may be that farmers believe that at some point in time the government will give them actual legal and economic ownership of the land. If they leave their land, they may lose the chance to own it.

Though households can subcontract their arable land to other families, the current landholding system makes it diffi- cult for farm managers to take advantage of economies of scale. This is not likely to change until the government modifies the landholding system, and in the meantime structural inefficiencies will persist.

--Frederick W. Crook

Other TRQs
China's WTO agreements also state the following TRQs for 2002: sugar: 1.764 million tons; rapeseed oil: 878,900 tons; palm oil: 2.4 million tons; wool: 264,500 tons; wool tops: 72,500 tons.

Nonbulk commodities
Most of the TRQ commodities noted above are bulk commodities, but in the past few years nonbulk commodities have made up an increasing portion of trade. Nonbulk commodities accounted for 43 percent of US agricultural exports to China in 2000.

US exports of intermediate agricultural products rose from $40 million in 1993 to $402 million in 2000, including soybean meal, soybean oil, cattle hides, and seeds. China's aforementioned soybean import policies have substantially reduced US exports of soybean meal and soybean oil, which peaked in 1999. Nevertheless, US exports of cattle hides and seeds totaled $229 million and $27 million, respectively, in 2000.

US exports of consumer-oriented products have risen dramatically, from $37 million in 1993 to $216 million in 2000. In 2000, the United States exported $21 million in snack foods, $22 million in red meats, $45 million in poultry meat (wings and feet), $21 million in dairy products, $23 million in fresh fruit, and $25 million in processed fruit and vegetables.

China has overexploited its forest resources for hundreds of years, and despite vigorous efforts since 1949 to remedy the situation, it continues to be at a disadvantage in forestry products. The United States regularly exports a wide variety of forestry products to China. From 1993 to 2000, US exports of forestry products averaged $59 million a year. In 2000 the United States exported $19 million in logs and chips, $54 million in hardwood lumber, and $13 million in plywood.

Though China is one of the world's largest producers of aquatic products, US exports of fish and seafood products increased from $28 million in 1993 to $138 million in 2000, a nearly five-fold increase. Major US exports in 2000 included $16 million worth of salmon and $11 million worth of crab and crab meat.

A long-term agricultural strategy

Exports of products in which China has a comparative advantage should rise as trade barriers decline (see Table 2). China is already the world's largest producer of many labor intensive vegetables (such as garlic, onions, potatoes, spinach, and tomatoes) and fruit (such as apples, melons, and grapes). China exported $3.7 billion in vegetables and fruit in 2001, according to PRC government data, and these figures should increase in 2002. But it will likely take China's firms several years to exploit these new opportunities. China's farmers currently use high volumes of chemical fertilizers and pesticides, and some food products have residues that are above importing country standards. It will be years before farmers and food processors work out cultivation and technical systems to meet international health and food safety standards.

There is no question that China's farmers are some of the finest in the world, but the links between field and consumer are weak. Improvements in transportation, storage, packaging, labeling, processing, and quality standards will require capital investment, technical assistance, government support for the development of domestic standards, and years of effort. China's food-processing industries in particular have made great progress in the past two decades, but further improvements are required to capture overseas market share--they need to find sources of stable financing and assistance with processing technology.

Commodity associations that promote the interests of a particular industry are currently weak in China, and China's foreign affairs officials have not focused on finding market opportunities for the nation's farmers. The industry has formed associations such as the China Feed Industry Association, China National Poultry Association, and China Dairy Association which are a mixture of government and private sector, but they will need time to assess market opportunities. China's foreign service will also need to allocate and train staff to report on market situations in foreign countries and design a market information system to make this data available to producers and processors.

Consumers in foreign countries will eventually welcome the increase in China's exports of high-quality, safe, and competitive products. At the same time, producers of those products in importing countries will have to face the competition and adjust accordingly.

A Test of WTO Compliance:
China's Biotechnology Rules

World Trade Organization (WTO) members have criticized the implementing measures that China released in January 2002 governing import and sale procedures for agricultural genetically modified organisms (GMOs). The problems tend to fall within several categories: approval procedures; treatment of processed food products that use GMO processes or GMO raw materials; forms and supplemental materials referenced in, but omitted from, the appendices; grace periods and grandfathering options; and protection of confidential information. The implementing rules, which take effect on March 20, require three levels of approval for the import and sale of GMO products in China: import approval; safety evaluation; and labeling registration.

US government officials have raised concerns with their PRC counterparts about apparent discrimination against foreign companies in the measure's approval processes. The PRC Administration of Quality Supervision, Inspection, and Quarantine is reportedly responsible for imports, while the Ministry of Agriculture has authority over domestic shipments.

The PRC side is also said to maintain the position that each and every import shipment will need a separate import license; approval could take up to 270 days. PRC officials have yet to clarify what data requirements are needed for license-related safety evaluations and whether such requirements would vary based on product classification. The United States hopes to reach an interim solution with Chinese officials that would allow imports to continue while the safety evaluation applications are pending.

Implementation of labeling requirements, a key issue for many exporters of final consumer goods, also remains unexplained. The implementing rules require all products containing or derived from soy, corn, cotton, rapeseed, or tomatoes to carry special GMO labels that have been registered with PRC authorities before import. Analysts expected China to find it difficult to institute procedures by March 20 to determine which imports should carry GMO labels.

--The US-China Business Council

Rural structural reform

One of the most important effects of China's WTO membership may be the country's implementation of structural reforms to achieve a better balance in the economy between the urban and rural sectors. Over the past 50 years, farmers have supplied capital to build modern China, but the wealth gap between urban and rural areas is widening.

The government has boosted the purchase price of wheat, rice, and corn to sustain rural incomes and to encourage farmers to continue to produce these crops. It is unclear, however, whether the current price support program is compatible with WTO rules. In the meantime, China continues to search for WTO-compatible policies to boost rural incomes--policies that may include research and education subsidies, support for infrastructure projects, and crop insurance payments.

The government has also initiated democratic village elections, giving farmers a chance to elect their own local leaders (see The CBR, March-April 2001. Locally elected officials may be more willing to allow farmers to organize cooperatives to market their output and organize technical associations to purchase inputs and spread new production technologies. As a result, local township authorities may begin to give villages the opportunity to form associations to address mutual concerns, such as the cooperative marketing of products.

Harvesting change

China's WTO membership will require adjustments on both sides of the Pacific. Some US farmers will benefit from a more open Chinese market in the years ahead and will export more agricultural commodities to China. Some US agricultural producers will feel the impact of the imports of labor intensive agricultural products from China.

It will take time for China to gear up to increase agricultural exports. Chinese firms must expand their processing capacity, improve local transport systems, construct storage facilities, develop quality-control systems to maintain health and sanitary standards, adopt internationally competitive packaging and labeling standards, develop marketing systems, and build financial institutions to fund all of these projects.

While China's agricultural sector adapts, the country's trading partners may become irritated as Chinese goods enter foreign markets even as China maintains its import trade barriers. To sustain the support of its trading partners during the transition period, China would be wise to keep them informed of the sequence and progress of change. Patience on both sides will be required.

Frederick W. Crook
is president of The China Group and is retired from the US Department of Agriculture's Economic Research Service.

Last Updated: 20-Mar-02