Monday, November 19, 2012

Agricultural Trade Crisis Forum

On November 15, a “2012 International Forum on Agricultural Trade Policy” was hosted in Beijing by the Chinese Ministry of Agriculture’s Agricultural Trade Promotion Center and the University of Foreign Economy and Trade. The scholars and officials speaking at the forum reflected the Ministry's bipolar attitude toward agricultural trade, alternately praising China's more-open trade regime while worrying about a rising tide of agricultural imports.

The theme of the forum was "crisis and international trade." It was attended by 180 representatives from China and a number of foreign countries. The remarks by the Chinese speakers regurgitated themes advanced last year in a Farmers Daily article by Minister of Agriculture Han Changfu that assessed the impact of 10 years of WTO membership on agriculture in China. China's agricultural trade has grown rapidly and it is now the third-largest trader after the United States and European Union. Trade increased the supply of agricultural commodities in China, brought improvements in industry and increased income for farmers. Agricultural trade is a focus of the government and the broader society.

Chinese officials at the forum expressed concern about a surge of agricultural imports this year and a drop in farm exports due to weakness in Europe and other foreign markets for Chinese products. China has seen a surge of grain, cotton, oilseed, and sugar imports this year. One speaker attributes the drop in Chinese farm exports to increased protection of foreign markets, rising production costs, and the appreciating Chinese currency.

Another report on agricultural trade for the first nine months of 2012 shows a deficit between agricultural imports and exports that grew 61.9 percent from last year. Imports of corn are up to 4.1 million metric tons even though China had a huge record corn harvest last year and despite elevated U.S. corn prices due to this year's drought. Even wheat and rice imports are up. Cotton imports doubled from last year and sugar imports are up 80 percent from last year.

January-September 2012
China agricultural trade data
Item Unit Value Change from 2011
Exports bil$ 45.3 16.50%
Imports bil$ 83.6 24.50%
Deficit bil$ 38.3 61.90%


Wheat mmt 3.2 232%
Corn mmt 4.1 548%
Rice mmt 1.9 276%
Other grains mmt 6.2 36%
Soybeans mmt 44.3 18%
Edible oils mmt 5.5 19%
Cotton mmt 4.2 100%
Sugar mmt 3.0 80%

The opening speaker at the trade forum, repeating another Ministry of Agricultural talking point, warned that agriculture is still one of the most distorted sectors in international trade and a sticking point in multilateral trade negotiations. He identified several conflicts China has to pay attention to: (1) how to deal with pressure from imports on small-scale farmers in central and western regions, (2) how to preserve domestic "industry security" while expanding foreign investment and (3) how to maintain self-sufficiency while advancing the "going out" policy of investing in overseas sources of agricultural commodities.

Another speaker echoed an opportunities and threats theme apparently drawn from the same playbook that produced Minister Han's article from last year. Agricultural trade has improved resource allocation since WTO accession, but China needs to figure out how to utilize foreign resources to meet Chinese demand while preventing imports from putting pressure on domestic prices that would slow development of domestic industry.

This "two resources, two markets" concept of utilizing foreign resources to meet Chinese demand is often recited in speeches but never explicitly spelled out. It seems to entail compartmentalizing markets, i.e. allowing massive imports of certain commodities--like soybeans and cotton--while protecting other commodities--like rice, wheat and corn. Minister Han Changfu explained last year that China insisted on tariff rate quotas for key commodities with much of the quota controlled by state-owned enterprises to insulate these commodities from international markets. Han said the lack of quotas and low tariffs for soybeans allowed them to flood into the Chinese market, and China now only produces 22 percent of the soybeans it consumes. China must guard against this happening in other industries, warned Han.

Chinese officials have an unfounded confidence in subsidies as a cure-all. In a companion article on WTO last year, Vice Minister Niu Dun attributed the dominance of foreign soybeans in China to foreign countries' subsidies. So the obvious countermeasure is to subsidize China's commodities. Minister Han noted that China had introduced its first subsidies in 2002 for soybean seeds to help the industry deal with competition from imports. But he failed to connect the dots: Chinese soybeans have been subsidized for 10 years but this did absolutely nothing to improve the Chinese industry's competitiveness.

China's crisis in agricultural trade will continue as long as officials keep blaming all problems on external bogeymen. The problems with eroding Chinese competitiveness are home made. The good thing is that there seems to be an increasing buzz about dealing with the fundamental problems of constraints on land, interest rate rigidity and limits on entry to rural banking. The question is whether they will adopt more convoluted jerry-rigged mechanisms to trade imaginary land rights and sprinkle "micro loans" around, or remove the fundamental obstacles to resource allocation that hold back Chinese agriculture.

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