Will China Liberalize Its Grain Trade?
As the world’s leading importer and exporter of grain, China influences the world grain market in many ways even with its policy of grain self-sufficiency. With population expansion, economic growth, and urbanization in China, concerns arise regarding China’s future ability to feed itself and its impact upon the world. Technologically speaking, China will be able to feed its people. But its traditional policy of swapping different grain varieties will be irrational from an economic standpoint.
China is at this moment debating the possibility of changing its grain trade policy from a policy of self-sufficiency to that of somewhat greater reliance on the world market. Smooth policy transition will bring a win-win situation to both China and the international community: The international community will benefit from greater access to China’s grain market, less volatility in the world grain market, and enhanced security promoted by China’s greater involvement with world grain trade; through greater reliance on grain imports, China will pay less for grain than it would adhering to strict self-sufficiency. Despite potentially mutual benefits, however, the successful transition of China’s grain policy will be impossible without a favorable environment at both internal and external levels. China’s movement toward trade liberalization is confronted with China’s concerns over its food security, possible farmer unemployment, and international payments. To aid China in overcoming many difficulties, measures taken by the international community will be crucial to encourage a smooth transition in China’s grain trade policy.
The Chinese feel proud of their agricultural achievement: feeding 22% of the world’s population with only 7% of the world arable land. Behind this achievement, however, lies a serious challenge to China’s future ability to feed its population. China’s industrialization and urbanization have prompted both Chinese and foreign experts to recognize the increasing difficulty for China to meet its rising food demand. With the recognition, China’s current policy of grain self-sufficiency is under serious scrutiny.
In Who Will Feed China? Lester R. Brown of the Worldwatch Institute forecasts that China will need to import 200 to 369 million tons of grain by the year 2030. His estimate aroused international debates over China’s long-term food prospect and alarmed the Chinese government. In response, the Chinese government released a “white paper” entitled On China’s Grain Issue. In contrast to Brown’s pessimistic stance, the government report expressed optimism by arguing that China can feed its people by itself. International organizations such as the World Bank were also involved in the discussion. In its research report, At China’s Table, the World Bank drew the conclusion that China will be able to meet 90% of its grain need by domestic production with an import requirement of 60 million tons by the year 2020, an amount which will not shock the international market.
Regretfully, almost all the participants in the discussion have focussed primarily on the physical constraints on China’s grain production. The discussion, therefore, evolved into a technological debate. Those who thought China would not be able to produce enough grain assumed that China would have to import a significant amount of grain and paid little attention to China’s grain trade policy. As a matter of fact, even under current technological conditions, additional agricultural investment can greatly increase grain production in China, not to mention after two decades.
International experience reveals that the grain issue has never been a technological question in the past and will not be in the future. Rather, it has been an economic and political question. Market protection and export subsidies-through the Common Agricultural Policy (CAP)-transformed the European Union (EU) from a grain importer into an exporter.
The price of rice in Japan, which is several times higher than the international market price, ensures that Japan achieves self-sufficiency in rice while the supply of other grains mainly relies on imports. Similarly, the grain issue in China is more of an economic and political question than a technological one. The key question is whether China’s grain requirement can be met by domestic production if costs meet international levels.
Agricultural resources put China at a disadvantage in producing grain. The per capita arable land and water resource levels in China are much lower than world averages. To reach the goal of grain self-sufficiency, therefore, China must require its farmers to use most of its arable land for grain; in grain exporting countries, there are large areas of arable land left fallow. The Chinese government, accordingly, has tried its best to increase domestic grain production to meet the rising demand: To be self-sufficient in grain, it has successfully controlled imports under 5 percent of domestic grain production, the ceiling of the current self-sufficiency policy. Despite the relative success of government controls, with domestic grain costs increasing and domestic grain prices surpassing those of the world market in 1994, Chinese scholars began to question the rationality of the self-sufficiency policy.
It is of great significance to analyze the possibility of China’s grain policy reform and gain insight into Chinese thinking on trade liberalization. China has adopted an economic open-door policy since the late 1970s and has been significantly involved in the international economy. China’s ratio of trade volume to its gross domestic product (GDP) is as high as about 30% in 1998, the highest ratio among the world’s most populated countries. In addition, China has been the second largest foreign direct investment (FDI) host since 1994. On the other hand, China has remained self-reliant in some strategic goods such as energy and grain, leading some foreign observers to argue that China has not been fully integrated into the international economy and that China’s future is still uncertain. Indeed, many factors inhibit China’s movement toward greater reliance on grain imports: food security, long-term foreign payment ability, and farmer unemployment, as well as economic efficiency. Since the international community has significant influence over these factors, analysis of China’s grain policy suggests how the international community can promote China’s full engagement in the international trading system.
Also significant, agriculture, along with services, is the most challenging sector in China’s negotiation for membership in the World Trade Organization (WTO). The international community regards China as one of the largest potential markets for grain exports. Because the main grain exporters-the United States, the EU, Canada, and Australia-are at once industrial countries and main trade partners of China, grain market access to China has become one of the most difficult topics during the negotiations for China’s accession to the WTO. For instance, the importance of grain market access was emphasized when U.S. Trade Representative Charlene Barshefsky stated in a Beijing press conference in March 1999 that a successful WTO package must include a settlement on long-standing U.S. concerns over citrus, wheat and meat products.
Without a doubt, China’s concession on grain-the pillar of China’s agricultural sector-will influence the prospect of China’s WTO membership.
Given the importance of grain to the Chinese and to the international community, this paper begins by assessing China’s grain trade and its impact on domestic and international markets. From a purely economic perspective, the second chapter estimates China’s grain import needs. The third chapter analyzes the factors affecting China’s decision to open its grain market and examines the possibility of China’s greater reliance on the world market. The paper concludes with the implications of China’s grain policy for the international community.
Chapter 1: China’s Grain Trade
China in the World Grain Market
From 1977 to 1997, China’s grain imports accumulated to 248.7 million tons and exports to 110.3 million tons, with net imports of 138.4 million tons. In the past 20 years, China has been a net exporter of grain for 6 years and a net importer for 14 years. In the 1990s, the average annual world grain production has been 1.7 billion tons and international trade about 227 million tons, which constitutes approximately 13% of the world grain production. China’s ratio of net imports to domestic production decreased from a high of 4.5% in 1982 to a low of -1.2% in 1997. The purpose of China’s participation in international grain trade is not only to fill an aggregate supply-demand gap, but also to adjust the balance of individual types of grain. China, for instance, imports wheat-in the largest quantity in the world during some years-while exporting rice, beans, and corn.
The amount of China’s imports and exports is determined by the equilibrium of the domestic grain market. Grain production in China fluctuates because of weather variation, price fluctuation, and policy adjustment. More important, grain in circulation accounts for only about 30% of the production, so the supply behavior of farmers has an enormous impact on the grain market equilibrium. Since the 1980s, the grain circulation system has undergone reforms, and market prices have varied significantly over time, both of which have greatly affected the expectation of farmers and their supply behavior. The variation in the domestic grain market caused China’s imports and exports to fluctuate greatly in the reform era.
China’s main exporting crops are rice, beans, and corn. Exports of both rice and beans have been falling since the mid-1980s, and so have their shares in the world grain market. China’s share in the world rice market dropped from a high of 9.11% in 1984 to a low of 0.26% in 1995. The highest share of China’s bean exports was 5.85% in 1987; now the share of China’s bean exports is only about 1% of the world market. China’s corn exports, in contrast, have become more and more important since the mid-1980s. China’s corn exports reached a record of 11.8 million tons with a world market share of 17.18% in 1991. Although they slumped afterwards due to unwarranted panic that had led Chinese officials to believe in a serious shortage of corn in China, corn exports recovered after 1997.
Grain exports are expected to expand in the near future, turning China into a net grain exporter. In recent years, owing to a policy of increased grain production, China has experienced grain surpluses coupled with low domestic demand. Although the government requires that state grain circulation enterprises purchase the amount of grain that farmers want to sell, the farmers still face difficulties in selling their desirable amounts due to a shortage of state facilities for grain storage. Domestic grain prices, consequently, fell from their peaks in 1996. To tackle the demand shortage problem, both the Chinese government and the grain enterprises have been seeking solutions.
Wheat is the most important crop imported by China. To China, international markets are much more important for wheat than for other crops, although the ratio of imports to domestic production had dropped from about 20% in the early 1980s to 1.51% by 1997. China’s wheat imports accounted for more than 12% of world wheat imports in the 1980s and 8% of world wheat imports in the 1990s.
Wheat imports since the early 1980s have a cyclical pattern, exhibiting three peaks and three troughs that correspond to fluctuations in domestic production and supply. Because domestic production of wheat increased faster than domestic demand, the average imports decreased in the past two decades both in absolute and relative terms.
The demand for wheat imports will remain low until the year 2000.
Because wheat accounts for a substantial part of the total Chinese grain imports, a study of wheat suppliers unveils the supply structure of China’s grain imports. Table 1-3 shows that there are three main wheat exporters to China. The world’s greatest supplier to China is Canada, whose average market share for China’s wheat imports was 47% between 1993 and 1997. The United States is the second major supplier, with an average market share of 31%. The third is Australia, whose average market share was 14% in the same period. Imports from these three suppliers account for more than 92% of Chinese wheat imports. Other main exporters in the world wheat market, such as the EU and Argentina, have small market shares in China.
China’s wheat trade with Canada has been more stable than that with other wheat exporters. Canada has supplied more than 40% of China’s wheat imports since the mid-1980s, and its share reached 72% in 1997. In contrast, although the United States is the largest exporter in the world wheat market, its share in the Chinese market is about 10 % lower than Canada’s and fell to as low as 10% in 1997. One possible explanation is that the price (C.I.F.) of Canadian wheat was US$ 26 lower per ton than that of American wheat in 1997. The lower price may have helped Canada avoid a drastic fall in exports when China’s wheat imports shrank by 91 % in 1997.
The Impact of China’s Grain Trade
China’s grain trade has major consequences for both China’s domestic grain market and the international grain market: In the domestic market, international grain trade has helped balance supply and demand; in the international market, unexpected variations in the amount of China’s grain trade have often shocked international market prices.
On the Domestic Market
Previous researchers have paid little attention to the impact of international trade on China’s domestic market. This lack of proper attention is due to a popular belief that the amount of international grain trade is minimal relative to domestic production. In reality, however, international grain trade has had a substantial impact on China’s domestic market.
The influence of international grain trade over China’s domestic market is much greater than suggested by the ratio between international grain trade and domestic production. China’s dualistic economy with a highly autarkic agricultural sector accounts for this apparent discrepancy. Because two-thirds of the grain produced domestically is consumed by rural households without entering market channels, only the remaining one-third of production is in market circulation. The annual imports of wheat, for example, are only about 10% of domestic production, but they account for approximately 30% of the market supply, quite high among the world’s most populated countries.
Sharp variations in Chinese wheat imports, more than anything, have affected the fluctuations of domestic market supply: Wheat imports increased by 116% in 1987 and fell by 40% in 1993; after just two years they increased again by 61% in 1995. The contribution of import variation to total supply variation in the domestic market was 15.6% at its lowest and more than 100% at its highest, while it was higher than 50% in most years.
The Chinese government has used wheat imports to maintain a domestic market equilibrium. The government controls prices primarily through import quotas and the exclusive trading rights of the China Cereal and Oil Import-Export Corporation, a state foreign trade company directly under the central government. The government has also used wheat imports to forecast import needs on an annual basis. A rule of thumb in grain production is that two good harvest years are followed by a poor harvest year in China. In addition, it is said that farmers’ supply remains stable as long as market prices do not fluctuate sharply.
To test the validity of these rules, a regressive analysis has been made between wheat imports and real market prices. The correlation coefficients are 0.972 for the period of 1981-86 and 0.896 for the period of 1987-93, revealing a strong positive correlation between wheat imports and real market prices.
An increasing price implies a potential shortage of supply and vice versa. Thus, increasing imports when prices rise and reducing imports when prices slump functions as a mechanism of controlling price stability. As such, the Chinese government has stabilized the domestic grain market by relying on the world market.
On the International Market
China’s engagement in the world grain market has two distinct effects. On the one hand, massive imports by China sustain the production of grain in the principal exporting countries. On the other hand, volatility in Chinese imports and exports can cause serious price fluctuations in the world market.
China has been a net grain importer in most years. In the past two decades, the average annual imports of wheat have been about 10 million tons. As the world’s number one importer in several years, China provides a market of about USD 1.5 billion to 2 billion every year to world grain exporters. Without imports by China, there will be a greater amount of grain surplus and a heavier budget burden on the governments of principal grain export countries, which are generally committed to farm price stability.
Fluctuations in China’s foreign grain trade shock the world market. From Figure 1, the changes in world wheat prices are highly correlated with the changes in Chinese imports. Almost every year when China’s imports increase substantially, world prices surge. By contrast, a drop in China’s imports causes a slump in world market prices. Econometric analysis reveals that the correlation coefficient of the real price of wheat in the world market and the amount of China’s imports is 0.87 for the period between 1981 and 1986 and 0.97 for the period between 1987 and 1991. Because the increase in world grain prices after 1995 was caused by the reduction in grain subsidies in the main grain export countries and by rising prices of agricultural inputs such as chemical fertilizer, the correlation coefficient of the real price of wheat in the world market and China’s imports fell to 0.56. Still, it is high enough to illustrate the significant impact of China’s wheat imports on world market prices. Variations in China’s imports affect the world grain market so seriously that forecasting China’s import requirement becomes essential for world grain exporters.
Chapter 2: China’s Potential Grain Import Needs
Grain Demand: Status Quo and Projection
The food consumption structure of China has been changing over the past several decades. Before 1978, the average Engel’s Coefficient was higher than 60% with a per capita daily caloric consumption of 2000.
Also, the food consumed was predominantly staple foods, half of which was coarse grain. In contrast, the period 1978-1985 witnessed a fall in Engel’s Coefficient to below 60% and a rise in daily caloric consumption to 2400. At the same time, consumption of coarse grain fell rapidly, from 50% in 1979 to 18.5% in 1985. After 1985, the food consumption structure entered a new stage: Direct consumption of grain by urban households decreased rapidly, from 137.9 kg per capita per year in 1986 to 94.7 kg per capita per year in 1996; and indirect consumption of grain by urban households-the consumption of meat, eggs, and wine-began to fall slowly after reaching a peak in 1991-92. Although the direct consumption of grain by rural households decreased more slowly, indirect consumption by rural households increased even faster than that by the urban people.
In 1996, the Engel’s Coefficient for urban households fell to 48.6% and rural to 56.3%; by the same year, the average caloric consumption had reached 2600.
Table 2-2 suggests two important consumption trends: First, per capita grain consumption has been falling slowly since the early 1990s; second, the urban households consume much less grain than rural households.
In 1996, urban per capita consumption of grain was 242.9kg, 89.72kg less than the amount consumed by rural households. This figure indicates that with increasing urbanization in China, the average grain consumption will fall further. If the differences between the rural and the urban in security food stock are taken into account, the impact of urbanization on future grain consumption becomes even more apparent. The average per capita stock of grain in rural households was 540kg in 1995, which equaled 19.5 months of grain consumption. In contrast, grain security stock for urban households requires 3 to 4 months of consumption by international standards, although the real stock in China is much higher than this level. Both consumption and stock for urban dwellers are, hence, less than those for rural residents. In the end, increasing urbanization will lower China’s average grain consumption level and offset some of the effects of population growth.
Grain demand consists of five items: direct grain consumption, feed grain, seed, requirement for grain as an industrial input, and post-harvest loss.
China’s direct grain consumption reached a peak of 273 million tons in 1990. After 1990, because per capita consumption fell faster than population growth, total direct grain consumption decreased slowly. The ratio of direct grain consumption to total grain demand had fallen from 70% in 1981 to 59.6% in 1996, while the average growth rate of the total direct consumption was 0.51% in the same period.
Feed grain always presents a puzzle in China’s grain demand. Because official production data exaggerate the production of meat, eggs, and aquatic products, it is better to take household survey data as a basis of estimation. As consumption of meat and eggs has expanded with income growth, feed grain demand has also increased since the early 1980s. During 1981-1996, the average growth rate was 4.55%.
Seed, industrial input, and losses are estimated by assuming a fixed ratio to grain production. The ratios are 5% for seed, 6% for industrial input, and 4% for losses. During 1981-1996, the average growth rate was 2.77%.
Table 2-3 estimates grain demand in China.
The average growth rate of the total grain demand during 1981-1996 was 1.65%. Analysis of the average growth rate by stage reveals that the growth rate has declined substantially since 1981. The average growth rate for 1981-1984 was 4.0%, for 1984-1990 1.5%, and for 1990-1996 0.6%.
That grain consumption is determined by numerous factors makes an accurate forecast on China’s long-term grain demand even more difficult. Economic factors include price and income. Structural factors are food consumption habits, differences between rural and urban areas, aging, and occupational structure. Since China has been on its path of rapid economic growth and social transition, both the income and price elasticities of food consumption have been unstable and estimates variable.
To forecast future grain demand in China, the following factors should be taken into account:
- The consumption and demand trends in the past 10 to 15 years. Data show that a per capita grain demand in China has fallen slowly to 360kg in 1996 after reaching a peak of 372kg in 1990, while the GDP and average income have experienced high growth.
- Urbanization. The significant gap in grain demand between the urban and rural areas reveals that progress of urbanization-the ratio of which is only 30% in China-will forestall a rapid rise in the average grain demand.
- Food consumption habits of neighboring countries in East Asia. The histories of the average food consumption of East Asian economies provide a useful reference to China’s grain demand forecast. While per capita GNP in Japan is about 30 times that in China, its per capita grain demand is only 425kg, 60kg higher than China’s. Per capita GDP in Malaysia is 5 times that in China, but its per capita food consumption level is almost the same. All the available data on East Asian economies indicate that per capita grain demand will grow slowly even if the Chinese economy further develops.
In this research, the future per capita grain demand in China is estimated by taking into account all the factors mentioned above and by relying on previous research results. Population estimates are drawn from officially forecasted data. The projection of grain demand in China is shown in Table 2-4, where some other projections are collected for comparison.
According to the forecast, the average growth rate of the total grain demand will be 1.2% between 1996-2020 and 1.1% between 1996-2030. Although no exact forecast on individual crops is available in this study, feed grain represents the fastest growth in demand.
Grain Production Potential
Estimates on China’s grain production potential vary considerably. The most pessimistic view is that China’s grain production will decrease due to a shortage of water resources, the erosion of arable land, and limits on increasing yields. The most optimistic opinion to date is that China still has great potential for increasing grain production. Most research conclusions lie between these extremes: China’s grain production will rise, but the growth rate will not be as high as it was before.
Increases in production may come from two sources: an increase in sown land or an increase in yield. China’s cropland base is steadily diminished by industrialization and urbanization, but the annual encroachment is decreasing from the average of 360,000 hectares per year in 1984-1992 to 117,000 hectares per year in 1990-1996. Furthermore, land reclamation may mitigate a cropland loss: It is estimated that 11.33 million hectares of barren land, 24 million hectares of tidal land, and 2 million of wasteland are potentially reclaimable.
In the upcoming 50 years, therefore, the arable land may keep a dynamic balance.
At the same time, China’s effort to increase grain production will require a vast amount of investment: The cropping index ranges from less than 100 in northern provinces to more than 250 in Hubei province;
improved water control, short-season varieties, and appropriate production incentives may further increase multiple cropping in the southern and middle provinces; and finally, increasing the cropping index will demand additional investment.
The increasing of yields is regarded as a main source of grain production growth. Official statistics estimated China’s cultivated land to be 95 million hectares for many years. Based on a new land census and satellite imagery, however, the Chinese government recently raised the figure to 132 million hectares, about 40% higher than the former figure. The real yield, thus, was exaggerated by the same amount. In China, the high yield is 2 to 3 times higher than the lower yield in the same crop regions, and by international standards, the revised yields in China are low: The rice yields in China are 35% lower than those in the United States; wheat yields are 5% lower; and corn yields 36%.
To increase yield growth, China will need to focus on new technological inputs, encouraging investment in land and agricultural infrastructure, and more efficient use of fertilizer.
Nevertheless, in technological terms, it seems that China’s future demand for grain will be met by domestic production. According to projections, the demand will be met if the average annual growth rate of grain production reaches 0.79% in 1997-2030. In light of 3.1% average production growth in 1949-1996 and 2.58% in 1978-1997, it appears that the forecasted growth rate will be attained.
Potential Import Requirement
Regardless of China’s production potential to feed its people, consideration of economic rationality leads to different conclusions. Because of relative disadvantages in grain production stemming from factor endowments, continued adherence to the current grain policy will impose heavy costs on China.
Compared with the United States, China has a different trend of real grain costs: From 1976 to 1995, real grain costs in the United States decreased annually by 3.77% for corn, 2.92% for rice, and 1.86% for wheat; on the contrary, real grain costs in China have increased since the mid-1980s. Based on data for 1985-1995, for a 1% increase in production, real costs will increase by 0.163% for wheat, 0.517% for corn, and 0.978% for rice. In 1995, the ratio between the cost of corn in China and in the United States was 77.83%; the ratio for wheat was 68.37%; and 40.33% for rice. If the growth pattern of grain costs in China remains unchanged from the past 15 years and Chinese currency’s real exchange rate with the U.S. dollar continues to be stable in the future, the cost of corn in China will surpass that in the United States in the year 2000, and the cost of wheat will surpass that in the United States in the year 2011. Higher costs for the Chinese consumers indicate that China will incur extra economic losses from grain self-sufficiency, despite its production potential to feed itself.
Because the market has not fully functioned in determining grain prices in China, and the Chinese government has used prices as a tool to stimulate farmers productivity in grain crops since 1978, grain prices have increased faster than the average cost. Corn, for example, had an 8% higher procurement price in 1979 and a 33% higher price in 1994 than the average cost.
After 1993, grain prices in China increased so rapidly that they surpassed the prices in the United States. A shortage of grain warehouse capacity further worsened the problem of excessive grain production. When China eventually became a net grain exporter in 1997, the government faced a dilemma: to provide export subsidies or to bear losses from an excessive stock of grain.
In the long run, with the deepening of market-oriented reform in China’s grain circulation system, the market will presumably play a greater role in determining grain prices, so price will approximate cost. By comparing the economic costs of grain in China with those of the United States, therefore, it will be possible to forecast China’s potential import requirement. Also, it will be assumed that the current real exchange rate of the RMB remains unchanged from the 1995’s exchange rate, and the shipment cost for imports is 15% of the import price. The forecast results are shown in Table 2-5.
Without government intervention in the domestic grain market, China will emerge as a net grain importer after the year 2005. According to the forecast based on cost comparisons, potential imports will be 71.1 million tons for coarse grain including corn in 2010, and 20.8 million tons for wheat and 186.8 million tons for coarse grain in 2020. With a 15% tariff on grain imports, the total potential imports will be 157.4 million tons for coarse grain in 2020. If, on the other hand, the government wanted to be self-sufficient in grain, it will have to levy tariffs of 95.23% on coarse grain and 3.16% on imported wheat in the year 2020.
The potential import requirement will be even greater with the existence of price and cost margins. For example, with the assumption that the margin is 20% (the current margin is higher than 30%), the potential imports of coarse grain will be 119.2 million tons in the year 2010; The necessary tariffs to ensure self-sufficiency will be 134.3% for coarse grain, 23.8% for wheat, and 10.24% for rice in 2020.
It is possible to make simple estimates on the social cost of self-sufficiency. If the demand for grain has no price elasticity, and there is no price margin over cost in China, the producers’ surplus will increase by USD 4.56 billion, and the consumers’ surplus will fall by USD 11.15 billion, resulting in a net loss of USD 6.59 billion in the year 2020. If there is a price margin of 20%, the producers’ surplus will increase by USD 9.87 billion, and consumers’ surplus will fall by USD 23.39 billion; hence, the net loss of social welfare will be USD 13.52 billion in 2020 in 1995 dollar terms. Clearly, self-sufficiency carries a heavy social cost.
Chapter 3: Prospects for China’s Grain Trade Policy
Current Grain Trade Policy
Fundamentally, China’s grain policy is to feed its people by itself. The policy of grain self-sufficiency was re-affirmed at the Third Plenary Meeting of Central Committee of the Chinese Communist Party on October 14, 1998. Under normal conditions, net imports will not be higher than a 5 per cent of domestic consumption.
The Chinese government has adopted several policies to achieve grain self-sufficiency. On grain production, the sown area plan-designed annually by the government-is implemented by administrative means, requiring almost every farmer to plant grain. Converting arable land for non-farm use is under strict government control, and land reclamation is encouraged. The government also offers financial aid to agricultural research, especially to those projects on high yield seeds. Pursuing grain production policy has a long history in China and persists even in times of grain surplus.
On grain circulation, the government had insisted on the domination by state-owned grain circulation enterprises until 1985 when the exclusive purchasing by the state grain enterprises was replaced by a system that permits other purchasers to buy grain from farmers. By 1997, the state owned grain enterprises had accumulated a loss of RMB 214 billion yuan (USD 26.1 billion), partly attributable to the participation of other enterprises in purchasing grain. The core contents of the latest grain circulation reform in 1998 are as follows:
- Only the grain bureaus can purchase grain from farmers;
- The grain bureaus must buy all the grain that farmers want to sell at protective prices;
- The grain bureaus may not sell grain at a loss.
Prices have been used as a tool to stimulate farmers to plant grain. In China, the government largely determines grain procurement prices, which in turn affect market prices. The real average purchasing price of grain has increased by about 70% since the economic reforms of 1978. Implemented in 1997, protective prices are determined by the government at a level higher than economic costs of grain production.
On grain imports, the government formulates an annual plan, uses import quotas, and grants a single state owned trading company the exclusive rights to deal with international grain trade. According to the plan, licenses are issued by the State Development Planning Commission.
Factors Affecting Grain Trade Policy
In 1994, prices of all kinds of grain in China exceeded the international market prices; since then, more and more scholars and officials in China have been reassessing China’s policy of self-sufficiency. Because grain is an important strategic good, however, policy makers must consider both economic and non-economic factors when formulating grain trade policy.
Comparative Economic Advantage
International comparative economic advantage (comparative advantage) initially caused debates over China’s policy of grain self-sufficiency. China is poorly endowed with arable land relative to population or labor: The land to labor ratio in China is only 13.3% of the U.S. ratio and 6% of Canada’s.
Even more challenging for China is that grain production is a land-intensive activity rather than a labor-intensive one. This comparative disadvantage in grain production guarantees that with the policy of grain self-sufficiency, domestic costs of grain will be higher in China than in other main grain exporting countries; hence, domestic grain prices will be much higher in China than in other grain exporters.
From grain self-sufficiency, China will incur both direct and indirect costs. Direct cost is an annual loss of social welfare in US $ billion-$6.59 billion or 13.52 billion in 2020-depending on whether or not there will be a price margin. Indirect costs are even greater. The higher price generated by self-sufficiency will increase the cost of labor and of all products made from grain and will weaken China’s competitiveness. Furthermore, farmers may lose opportunities to be engaged in other higher value-added activities because grain self-sufficiency requires the farmers to use most of their land for grain production. While the average economic revenue from grain production is a mere 26% of rural households’ total annual revenue. As the Chinese economy entered a demand-constrained pattern of growth, the low purchasing power of rural people-the staggering 70% of the total population-has been viewed as a main obstacle to economic growth. The high protection of grain will inevitably have various negative effects on urbanization, industrial restructuring, and agricultural productivity for a country with a comparative disadvantage in grain production. The Chinese can easily learn the lesson from Japan’s experience with its high protection of rice.
It is understandable that Chinese leaders pay enormous attention to food security: There were numerous farmer rebellions in China’s long history, most of which were caused by famine; the disastrous famine of the early 1960s, moreover, left an indelible imprint on China’ national psyche.
Although trade liberalization and economic globalization provide China an opportunity to partially rely on the world market for food supply, Chinese leaders doubt whether China’s food security can be ensured by relying on the world market. First, the main grain exporting countries have poor policy records, and specifically in times of domestic crises, they may transfer internal shocks to importing countries. During the 1970s, the United States embargoed for three consecutive years the exports of soybeans or grain to prevent higher consumer prices.
In 1996, the European Union imposed a wheat export tax in an attempt to reduce exports and forestall a rise in domestic wheat prices.
Second, Chinese leaders are also concerned that a grain embargo will be used by main exporters as a political weapon against China. During 1914-1985, there were 104 international embargoes, of which 10 were grain embargoes.
The most intensive one was the U.S. embargo of grain, other foods, and agrochemical exports to the former Soviet Union to protest its invasion of Afghanistan in 1980. Although grain embargoes in general are considered ineffective, they still pose a great potential risk for China-a country with a vast population. Unfortunately, there is no assurance that no grain embargoes will be launched against China. Although “constructive strategic cooperative partnership” was formulated between China and the United States, there are still numerous disputes between the two countries involving trade imbalances, market access, military sensitive technology, and human rights. When their disagreements are based on ideological prejudices, some petty issues can be fastidiously exaggerated. Furthermore, most main grain exporters are the U.S. allies that are likely to follow the U.S. policy toward China. With U.S. sanctions against China not completely eliminated since the Tiananmen incident, the concerted efforts between the United States and its allies will make grain embargoes against China more effective.
At the same time, China’s potential food insecurity is often overstated by the opponents of liberalization of grain trade. In fact, the probability of grain embargoes against China is very slim. Having learned that its embargoes have been highly ineffective, the United States is not likely to use grain embargoes as a political weapon. Even if the United States imposes grain embargoes against China, other main grain exporting countries are not likely to follow the policy of the United States. Even during the Cold War, other grain exporting countries did not follow the U.S. policy of grain embargo against the former Soviet Union. It will be even less probable for the grain exporting countries in the post Cold War to employ a policy of embargo against another country.
More important, China will be able to alleviate the shock from potential grain embargoes by using its grain stock. China’s ratio of grain stock to grain consumption is apparently high by international standards. Moreover, the central government’s investment in the construction of grain stock facilities will significantly increase China’s grain stock. Any grain embargoes have only short-term effects due to the high elasticity of grain supply: Supplier countries that do not participate in an embargo can easily ramp up their production to provide China with grain over time.
Limited effectiveness of grain embargoes as well as the large grain stock in China validate the view that China’s insecurity over its food prospect is unwarranted. Still, international commitments to ensure China’s food security will alleviate even the glimpse of the doubts China has about its food security.
Unemployment of Farmers
Rural China is faced with large underemployment and unemployment: there are about 490 million rural laborers and 900 million people who depend on the land for their subsistence. The annual labor transferred from agriculture to non-agricultural sectors fell from 13 million between 1983 and 1988 to 4.5 million between 1989 and 1993.
With the deepening of state-owned enterprises reform, a large number of workers have been laid off. It is estimated that there are 13 million laid-off workers, and only half of them are re-employable. Unemployment will be even more serious in the coming years as the government further initiates reforms and the economy enters a recession.
The impact of grain imports on unemployment has been a subject of controversy. Those who advocate trade liberalization argue that Chinese farmers can convert themselves and arable lands from grain production to higher value-added and labor-intensive goods production as in Japan, South Korea, and Taiwan. Because most of these high value-added crops are more labor intensive than grain, such a transition will provide a solution to the unemployment problem. On the contrary, the opposing school argues that the unemployment problem will be solved only when there are enough markets for higher value-added and labor-intensive goods. Unfortunately, with an increase in the supply of fruits, vegetables, and other cash crops, the prices of these goods have been dramatically slumping in recent years in China. It has been frequently reported that farmers destroy their fruit trees and other cash crops due to a shortage of the demand for their products. From these examples, it is doubtful that the transition in production will take place.
The main solution to the superabundance of rural labor is to transfer most of them to non-agricultural sectors, especially to the service sector, although the transition from grain to non-grain crops is one of the solutions. The slumping of prices of non-grain crops in recent years reflects a short-term disequilibrium in the domestic market. In the long run, the market for non-grain crops will expand with the increase in a per capita income, but the market expansion will not be as rapid as expected. Relatively high by international standards, the per capita domestic consumption of vegetables has fallen since the early 1980s, and the consumption of meat has stagnated since the early 1990s. Only the consumption of aquatic products and fruits is likely to increase rapidly with economic growth. Unless per capita income rises significantly, therefore, the domestic demand outlook for non-grain crops will not be very optimistic. In Japan, Korea, and Taiwan, the majority of grain farmers were transferred to non-agricultural sectors rather than to non-grain crop production. Agricultural labor relative to the total labor force fell from 20% in 1970 to 7% in 1990 in Japan, and the ratio fell from 49% in 1970 to 18% in 1990 in Korea with economic growth.
In contrast, China has about 70% of its total labor force in agriculture. International experience suggests while employment will gradually shift to service sectors with economic growth, the portion of the total labor in services is highly dependent on the per capita income level. In 1997, China’s per capita income was only 8.2% of Korea’s and 2.3% of Japan’s in nominal terms and 26.4% of Korea’s and 15.3% of Japan’s with purchasing power parity (PPP). If the pace of China’s economic growth continues, its per capita PPP income will reach the 1990s level of Korea in twenty years. Therefore, in the long run, China will be able to transfer most of its rural labor to non-agricultural sectors, buffering the impact of liberalized grain imports on rural unemployment. Similarly, in the short run, greater international market access for China’s labor intensive goods including labor intensive agricultural goods will help China overcome rural unemployment.
International Payment Ability
Skeptics of China’s grain trade liberalization also question whether China will be able to afford to import a large amount of grain. China now has more than US$ 140 billion in its foreign exchange reserve, the second highest in the world. However, it is not clear if, in the long run, China will be able to sustain surpluses in its exchange reserve.
There are several reasons behind such a pessimistic forecast. First, the rapid growth of China’s exports is mainly attributable to “processing trade,” in which countries import inputs and re-export processed goods. Between 1980 and 1997, normal exports did not increase as much as the average GDP growth. The exports of “processing trade” are mainly labor-intensive goods with the value-added ratio of 10-15%. Because China has not realized the “import substitution” of inputs for processing trade, processing trade industries are called “rootless industries”: The plants that produce goods for processing exports move to other countries due to the increase in the labor cost in China, as what had happened in Japan and East Asian Dragons. Unlike its predecessors, however, China will have difficulty in adopting the model of exporting higher value added intermediate inputs.
Second, China ran current account deficits in the most years between the beginning of the economic reforms and 1993. After 1993, China has recorded current account surpluses from a surge of exports. The export surge is mostly a result of short-term policy adjustments rather than a result of improved international competitiveness. For short-term adjustment, China devaluated its currency by 50% and implemented an export tax rebate system in 1994. China’s currency has depreciated by 180% relative to the U.S. dollar since 1985, significantly affecting China’s balance of payment. According to an estimate by the World Bank, Chinese currency’s PPP value is about 4 times the value indicated by its nominal exchange rate, illustrating the weak competitiveness of China’s foreign sector.
Third, the long-term prospect of China’s capital account balance is ambiguous. As a result of its open-door policy, China has been the second largest foreign direct investment (FDI) host since 1993. Although decreasing profitability may prevent FDI from rising in the future, foreign investment in service sectors, such as telecommunications, banking and insurance, will rise if China lifts its restrictions on foreign investments. At the same time, the tremendous expansion of outward investment and illegal capital outflow explains why China’s foreign exchange reserve increased only slightly despite 1998’s huge surplus in the current and capital accounts.
Given China’s unpromising outlook for its exchange reserve, a number of Chinese economists and policy makers are pessimistic about China’s long-term balance of payment, although they tend to have confidence in China’s short-term balance of payment surplus and exchange rate stability.
The pessimistic assessment of China’s long-term balance of payment does not imply China’s inability to afford grain imports. Assuming imports will be 10% to 15% of total domestic grain consumption in the year 2020, and grain prices will remain at the current levels, China’s grain imports will cost US$ 8-12 billion by 2020.
If China’s exports increase at an annual rate of 5%-a conservative estimate for China-exports will reach about US$ 490 billion by 2020. In short, the expenditure on grain imports will account for only 1.6 % to 2.5% of the exports.
Why, then, are the Chinese still uncertain about their ability to pay for grain imports? Because China is on its path of rapid industrialization, imports of machinery and transportation equipment, raw materials, and high-value services will inevitably increase rapidly with continued economic growth. Grain imports will have some crowding-out effects on other imports if foreign exchange is a scarce resource and the opportunity cost of grain imports will be higher than the nominal cost. In this regard, international payments pose difficulties in China’s import decisions.
Such a concern, however, should not be overstated. Unlike high costs incurred from self-sufficiency, grain imports will forestall the rise in China’s labor costs and will help China to maintain its international competitiveness, especially for its labor intensive industries. Furthermore, even if China truly faces difficulties in keeping its balance of payment, the Chinese currency will depreciate and lower domestic grain prices, reducing or halting grain imports.
Possible Scenarios of China’s Grain Policy
That China’s grain policy will be largely determined externally enhances uncertainty about the future grain policy of China. Yet, China’s future policy is likely to fall into one of the three possible scenarios outlined in this study.
Scenario I: Grain Self-sufficiency
If the international community can not effectively mitigate China’s concerns over its food security, China will continue to exercise a policy of self-sufficiency in the future. In this scenario, both China and the main grain exporters will suffer great losses.
First, as domestic grain prices double world market prices, China will have to pay more for food. As a result, it will weaken China’s competitiveness in labor-intensive goods, which are likely to be its main export goods in the coming century. In addition, this policy may delay the transformation of China’s agricultural sector-necessary for China’s modernization and economic and social development.
The only benefit from China’s grain self-reliance is that it may provide China with flexibility in formulating independent foreign policy.
In this scenario, the international community will also suffer losses. When the direct consumption of grain in China slows down, domestic wheat production will increase faster than the domestic demand for wheat. Consequently, China’s imports of wheat will be less than its previous amounts.
Scenario II: Free Grain Trade Policy
If the Chinese government adopts a free grain trade policy, its interference with international grain trade will be minimal. Domestic grain prices will match world market prices and result in no extra social cost. The domestic market, nonetheless, will be exposed to the price volatility in the world grain market.
Although main grain exporters may prefer this scenario to anything else, it is least likely to take effect. First, agricultural goods are far from being freely traded in the world. None of the major grain exporters exercises free trade in agriculture. Even the United States, the largest exporter of agriculture goods, has a substantial level of government intervention when it comes to agriculture. In this international framework, China can hardly go so far as to liberalize grain trade as a developing country. Second, free trade in grain does not constitute China’s national interest. China will not only be exposed to the possible shock of price fluctuations in the world market, but also face the risk of rampant rural unemployment, even in the absence of man-made attacks such as grain embargoes. Third, other grain importers might not want China to adopt a free trade policy: The importing countries may object to the international pressure to open up their agricultural markets.
Scenario III: Partial Reliance on the World Market
China will steadily import grain from the world market. With the ratio of grain imports to total demand expanded to 10% or more by 2020, the amount of China’s grain import requirement will be about 60 million tons or more, significantly lower than 200 million tons suggested in the free trade scenario. The Chinese government will still need to impose quotas or tariffs to regulate grain imports. With partial reliance, domestic grain prices will be higher than those of the world market, but lower than what would be in Scenario I.
The contents of imports will also differ from now. Because the demand for feed grain is the fastest growing kind in China, China’s import requirement will mainly for feed grain, different from the current pattern that is dominated by wheat. The new pattern is likely to give the Chinese government some protection against grain embargoes.
The international community will benefit from a smooth transition in China’s grain trade policy. China will provide the largest grain market for world exporters with an annual amount of 60 million tons. In addition, China will be more deeply involved in the world economy once it liberalizes its grain trade; thus, it will inevitably encounter the pressure for further reform in conformity to international norms.
Chapter 4: Implications for the International Community
Because grain is a crucial strategic good, a transition in grain trade policy will have important implications for China’s domestic and foreign policies. Because China is an indispensable player in the world grain market and a rising power in international affairs, China’s policy transition will also have major consequences for the international grain market and world security. Generally speaking, both China and the international community will benefit from the transition.
China’s Membership in the WTO
It has been thirteen years since China applied for its membership in the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO. Over the long period of negotiations for membership in WTO, China has taken a number of measures to liberalize trade according to international norms: It lowered its average tariff level from 43% to 17% and eliminated most of the non-tariff obstacles. Meanwhile, China has greatly reformed its planned trade system to be more competitive. Still, the gap between China’s bid for WTO membership and the demand by negotiators had been so large that the negotiation for China’s WTO membership had stalled for months until the recent resumption of talks between China and the United States. If China fails to enter the WTO before the coming round of the WTO trade negotiation-scheduled to begin at the end of this year, it will take another several years for China to be able to join the organization. Both China and its main trade partners, therefore, regard this year as crucial in China’s prospect of gaining membership in the WTO. During Premier Zhu Rongji’s visit to the United States in April, the issue of China’s WTO membership became a heated topic among a broad spectrum of people.
Market access for agricultural goods had been one of the two most difficult areas of the negotiations prior to the China-U.S. Agreement on Agricultural Cooperation. Among many agricultural goods, foreign grain has been the core issue on market access.
With regard to grain market access, the disagreement between China and the United States unfolded along three dimensions. The first was about the level of grain import quota. The United States insisted that the level of quota should be the average grain imports during the peak of China’s grain imports between 1994 and 1996. On the contrary, the Chinese wanted to import the average amount during the five years prior to China’s entry to the WTO. The two countries also disagreed over the amount by which import quota should increase. While the United States asked for gradual growth of the quota based on the 1994-1996 average, the Chinese refused to increase the amount of quota altogether. The third dimension of the disagreement between China and the United States involved the allocation of quota. Despite the United States’ desire to have 50 % of China’s quota to be allocated to non-state trade firms, the Chinese wanted to commit only a small fraction of quota to non-state firms.
The United States also linked TCK wheat issue with the negotiations for the WTO. Since this is a bilateral issue, it will be discussed in the following section on China-U.S. Grain Trade Relations.
The U.S. demands were higher than the WTO requirement on several counts because the United States believed that negotiations for the WTO membership had provided the United States with an unparalleled leverage to open up China’s market. There are four important elements in the Uruguay Round agreement with respect to the protection of the agriculture market. One is the conversion of all non-tariff barriers to tariff (tariffication). The second is reduction in tariffs, which will be cut by an average of 36% for the OECD countries by the end of the implementation period and two-thirds of the OECD countries’ level for developing countries. The third is tariff binding at the end of the implementation period. Finally, there is a minimum access commitment for all products where non-tariff barriers have been in place.
There is, nonetheless, no requirement for an increase in quota levels in the agreement. Therefore, demanding China to set minimum access is in accordance with the WTO rules, but gradually increasing quota levels is beyond the requirement of the WTO. Allocating half of the quota to non-trade firms also exceeds the WTO requirement. The Uruguay Round agreement has no regulation over the monopoly of the government or government controlled importing agencies. Some WTO members, accordingly, have maintained government controls of grain imports: The Japanese food agency, which controls all wheat imports into Japan has the right to establish Japanese trading companies as the only purchasing agents.
China made significant concessions on its agricultural sector in order to eliminate a formidable barrier to taking part in the WTO. According to the list of China’s commitments released by the United States Trade Representative (USTR), China agreed to almost all the conditions requested by the United States including tariff rate quotas.
Since China’s concessions reflect its strong desire to join the WTO, they do not guarantee China’s greater liberalization of grain imports. The Chinese government currently allows less than the ceiling level of quota for grain, although in theory, the ceiling level set by the government is 5 % of domestic consumption. At any rate, it can at least be expected that China, in the direction of further liberalization, will not oppose to the opening up of its grain market.
Still, the Chinese government will face short-term difficulties even after joining the WTO: first, to deal with larger grain surpluses; and second, to coordinate the domestic circulation system with the foreign trade system.
If China is admitted to the WTO this year, China will import grain at least as much as the amount set by the quotas, because prices in the world market are lower than those in the domestic market. China will not be able to export grain without subsidies, but the Chinese government is not committed to providing export subsidies. In the end, China will turn into a net grain importer with surpluses in supply and a short-term deterioration of the market equilibrium.
On the second count, despite China’s commitment to distributing grain import quotas to private enterprises, the current domestic grain circulation system will not allow it. Implemented in 1998, China’s domestic grain circulation system ensures the monopoly of the grain bureau by permitting no state-owned or private enterprises except the state grain bureau to purchase grain directly from farmers. If other enterprises can directly buy cheaper grain from the world market and sell at prices lower than the grain bureau’s, the monopoly of the grain bureau will break down. Granting import quotas, thus, is not viable under the current system of domestic grain circulation. For a broader distribution of import quotas, a reform of domestic grain circulation system is essential.
China-U.S. Grain Trade Relations
The United States is one of the main agricultural suppliers to China and the second largest grain exporter to China, while China is the fourth largest regional market (including Hong Kong) for American agricultural goods.
There are two main issues affecting China-U.S. grain trade. The first has to do with trade imbalances between the two countries. A total of 18 “memorandums of understanding and protocols on export of American animal goods to China” have been signed by the two sides. In contrast, only one “protocol on export of Chinese animal goods” to the United States has been signed. Also, in 1997, China imported US$ 2.24 billion of agricultural goods from the United States, but exported only US$ 953 million of agricultural goods to the United States with a remarkable deficit.
Similarly, China’s exports of agricultural goods to the United States accounted only for 1.69 per cent of the total U.S. agricultural imports in 1997. In light of current trade imbalances, more market access for Chinese agricultural goods, especially labor-intensive goods, will help China avoid large scale rural unemployment and enhance its foreign payment ability. Penjing (bonsai), pears, citrus, apples, and longans are the products which China has requested as imports to the United States, but has not received permission. While attempting to open China’s agricultural markets, the United States should consider how it can expand market access for Chinese labor-intensive agricultural goods. Otherwise, it will be tempting for China to retain traditional grain trade policy.
The China-U.S. grain trade is also complicated by the TCK wheat issue. TCK wheat contains spores from the fungal disease tilletia controversa kuhn (TCK), which may affect the production of wheat. The United States and China took different positions on the potential harmful effects of imported TCK wheat on China’s winter wheat. Lest TCK wheat should affect China’s wheat growth, China banned imports of U.S. TCK wheat in 1972 and California wheat in 1981. The United States has argued that TCK wheat would not affect China’s wheat plant: In the latest bilateral negotiation in May 1998, American experts insisted that the probability of infecting China’s domestic wheat would be minimal because only 3.8% of the winter wheat growing regions has the conditions susceptible to TCK. Accordingly, the United States demanded that China lift its ban on TCK wheat.
On the contrary, the Chinese scientists argued that TCK might infect domestic wheat in most of the areas where winter wheat had been planted, based on the experiments in Beijing, Tianjin, and Dalian. Despite its disagreement with the United States, China opened the market of Hainan province to American TCK wheat because the province-an island-is isolated from the mainland and has no planted wheat.
In its WTO negotiation with China, the United States suggested three ways of solving the TCK problem. One was to press for an acceptable tolerance level of TCK, which had been set by the USDA in a pest assessment at 43,000 spores per 50 grams sample of wheat. The second involved geographic limits on the U.S. wheat shipments to Tianjin and the ports south of Tianjin. It was argued that TCK would be impossible to infect Chinese wheat because TCK can not germinate unless covered by snow for several weeks. The third was a combination of a geographic restriction and the establishment of risk levels. The Chinese proposed that TCK wheat be shipped to Hainan Island and enter the mainland after it was refined.
During Premier Zhu Rongji’s visit to the United States, the two sides announced an agreement entitled U.S.-China Agreement on Agricultural Cooperation, in which China would lift its longstanding barriers to American grain, citrus, meat, and poultry. The agreement has not been released because the final Chinese translation, which also requires signatures, has not been available. At any rate, the agreement states that China will allow the imports of U.S. wheat at or below a specific tolerance for TCK (30,000 spores per 50 grams).
The agreement, however, does not mean that China has given up its position on the possible danger of TCK wheat, but instead, represents a concession by the Chinese to join the WTO. As a result, the method for the Chinese to deal with TCK wheat has been to refine TCK wheat in Hainan Island before it is shipped to mainland China.
The agreement will improve the competitiveness of U.S. wheat in the Chinese market. U.S. wheat shipped off the west coast can reduce freight costs to China by 1/3 to 1/2 or by as much as $10 per ton, relative to other U.S. exports.
The agreement, however, have severe limitations. Subsides by other exporters will greatly offset the U.S. advantages in grain trade. Also, the geographic requirement on TCK wheat will weaken U.S. competitiveness. Furthermore, the agreement will not be effective because in the long run, what China will need to import is mainly feed grain rather than wheat.
If China further liberalizes its grain trade, it will provide a larger market for grain exporters including the U.S. farmers. The market share that the U.S. farmers will gain depends on their competitiveness. Although the U.S. agricultural industry has higher productivity than its competitors, its competitiveness has been greatly eroded by the enormous export subsidies provided by its counterparts. If the United States wants to gain a larger market share in China, therefore, it must induce other grain exporters to lower their export subsides through multilateral trade negotiations.
World Food Security
There is no doubt that China, as the largest grain producer and consumer grain in the world, will affect world food security. The question is how. China affects world food security mainly through the price volatility it causes in the world market. There are two reasons for price volatility in the world market.
First, almost every country, including China, imports grain primarily to take advantage of the world market to stabilize its own domestic market. Almost no country relies solely on imports. Rather, countries vary the amount of grain imports according to the changes in their domestic grain prices. For this reason, the share of imports in the domestic market relative to domestic production is fairly small in most cases.
Second, variations in the amount of imports in individual countries affect the world market prices since the world market is small relative to the total grain production. China swaps different varieties through the world market, and its enormous variations in import volumes usually affect world market prices.
With China changing its trade policy and increasing its grain imports, the variations in China’s imports will be reduced substantially, mitigating the price volatility in the world grain market.
Previous research paid great attention to China’s grain imports and its impact on grain prices in the world market. Will China’s grain imports raise world grain prices? Some researchers, including Brown, were alarmed by the prospect of China’s rising imports and its potential harmful effects on some of the poor grain importers. However influential in policy-making, this view lacks credibility. Variations in China’s imports caused price shocks in the world grain market because suppliers could hardly anticipate the changes and adjust their production in time. If China relies more on grain imports, its import requirement will become more transparent and more predictable. Moreover, main exporters will be able to expand their grain production to meet China’s increased import needs. Therefore, the price of the world grain market will not soar even with China’s new grain policy. In addition, the previous forecast is based on the projection that the real world price will continue to fall with the pace of the past two decades. China’s expansion of grain imports may reduce the rate of decrease in the real price of world grain, but will never increase it. If the real price is maintained at the level of 1995, China will be able to feed itself without net grain imports in 2030, even if China adopts liberalized grain policy.
Besides direct economic benefits, the international community will also gain great security benefits from China’s grain trade liberalization. China has been deeply involved in the global economy since the late 1970s as suggested by the amount of FDI and foreign trade in China. The twenty-year history of China’s integration into the international economy reveals that China has chosen to play under the current international rules along with the West, rather than to establish a new international framework that would challenge the current rules. China has been involved with international organizations including the United Nations, the World Bank, and the IMF and applied to take part in the WTO. With deeper economic integration with the world market, the Chinese have realized the importance of interdependence and cooperation with other countries. Yet, because China still maintains a position of self-reliance in main strategic goods, such as food and energy, some countries perceive China as a potential challenger to current world order.
Rather than China’s intention of challenging the current international rules, the absence of reliable assurance of food security is precluding China from fully opening up to the world grain market. If main grain exporters to China try to boost Chinese confidence in the world grain market, China will be likely to change its grain trade policy to rely in part on world grain supply.
Such a policy change will have important implications for China’s foreign policy. International and regional peace and stability will become a higher priority for China. When dealing with international affairs, China will be more cooperative with main grain exporters. Consequently, the prospect of international cooperation will have positive consequences for international security.
Such a policy change will also indirectly promote regional security. The China-U.S. Agreement on Agriculture Cooperation is the first step in China’s opening up its agricultural market to foreigners and one step closer to joining the WTO. China’s entry to the WTO will effectively promote the normalization of trade relations across the Taiwan Straits, where persists the tremendous potential for grand-scale instability. To delay a reunification with mainland China, the Taiwan authority has adopted a policy of limiting mutual investments and imports from the mainland. Partially owing to the policy, the mainland runs a large trade deficit with Taiwan at US$ 12.8 billion in 1998. If Taiwan adheres to limiting investments, it will provoke trade disputes, deteriorating cross-strait relations and inducing regional unrest. By contrast, the accession to the WTO by the two sides will greatly promote normalization of cross-strait trade relations and enhance regional security.
China’s transition toward partial reliance on world grain supply will bring a win-win situation: Both China and the international community will benefit greatly from the policy change. The United States will gain a stable market for American agricultural products, a reduction in budget subsides on agricultural goods, and a more predictable and reliable partner rather than a potential rival. So will other grain exporters. China will be able to feed its people with lower costs and strengthen its international competitiveness. The policy transition, however, is dependent not only on China’s domestic circumstances but also on what the international community will do. In the international efforts to promote peaceful transition, the United States, in particular, should play a key role.
To provide reassurance to China, the United States needs to improve its full-scale relationship with China. The two sides should be more active in solving their disputes on trade, investment, security, and human rights. It is necessary for the United States to assure the Chinese that no grain embargo will be launched against China once China liberalizes its grain trade. To solve the unemployment problem facing China and improve China’s payment ability to import grain, the United States should also provide greater market access for China’s labor-intensive goods, especially labor-intensive agricultural goods and textile goods. China should be admitted to the WTO as early as possible so that China can enjoy the phasing out of the Multi-Fiber Agreement (MFA). An unreasonably high threshold for China’s WTO membership will produce no positive results. It will only delay the pace of China’s integration into the international community and aggravate anti-American sentiments within China. Moreover, paying too much for the WTO will be politically infeasible in China since there will be little economic benefit gained directly from taking part in the WTO. The benefits are long-term and political in nature.
Appendix: View the appendix for this document.
The U.S. is trying to outcompete China, and that requires coordination with allies.
On May 5, Tanvi Madan joined the Watson Institute for International and Public Affairs at Brown University for the conversation, “Sino-Indian Relations in the 21st Century.”