Will China Strengthen Farm Subsidy Incentives?

China's farm subsidies need to have stronger production incentives--that was the argument made in an Economic Daily commentary earlier this month. WTO rules, bureaucracy, and dual roles as rural entitlement vs. production incentive have kept China's subsidies surprisingly ineffectual despite their massive size--China reported about 1.4 trillion yuan (roughly $200 billion) in farm support in its most recent notification to the WTO filed last September. 

The Economic Daily commentator criticized China's practice of announcing and distributing crop subsidies with a long lag, usually months or even a year or more after the crop has been planted. The commentator lamented that some farmers call the subsidies "blind boxes," like receiving a gift-wrapped box with little idea of what's inside. 

The commentator asserts that subsidies are an important tool for the State's mobilization of agricultural production and its preservation of national food security. The commentator notes that China has many types of grain subsidies, including minimum prices for rice and wheat, an arable land fertility protection subsidy given to all grain farmers, soybean subsidies, subsidies to encourage production of niche crops like quinoa and buckwheat, and some localities subsidize farming entities that consolidate land into scaled up farms and/or subsidize companies that provide farming services as an agricultural "trusteeship" or "mechanized farming cooperative." 

The commentator says the lag in subsidies has become a pain point for farmers. In some places the arable land fertility protection subsidy is announced after spring planting has started. In some places, wheat farmers don't get news about the farm machinery subsidy until after seedlings have started growing. The commentator says rice farmers commonly ridicule policy announcements that come after the crop is already growing. On the other hand, the commentator claims that there have been some instances where farmers ploughed up fields and replanted them overnight after the subsidy payment level was announced.

There are several reasons for the lack of precision in China's farm subsidy payments. The Economic Daily commentator attributes the problems to bureaucracy and delays in collecting data and issuing payments. She says these can be addressed by establishing a policy calendar that establishes dates for announcement of subsidies and utilizing information technology to gather data on farmers' plantings and to issue funds, 

The commentator does not mention two other interrelated reasons: unclear objectives of the payments and WTO rules. 

China first began issuing small subsidy payments to farmers when the country entered the WTO. Compliance with WTO rules gave officials an excuse to dismantle a "protective price" system invented in the 1990s that engorged a sprawling grain procurement bureaucracy. In 2004, provinces used a portion of a "grain risk fund" (previously used to finance grain-buying stations) to create tiny cash payments distributed to grain farmers. They added a small subsidy for improved seeds and a subsidy for machinery purchases. In 2006 an input subsidy was added to compensate farmers for rising fertilizer and fuel costs. 

Design of the subsidy payments was constrained by WTO rules that place limits on subsidies that are potentially market-distorting. China tried to avoid subsidies that gave farmers strong production incentives so they would not count against the WTO-imposed cap on subsidies--for China the limit is no more than 8.5% of the gross value of any commodity. The subsidy limit was one of the most contentious parts of the WTO accession negotiations and the last to be settled.

Chinese authorities had multiple objectives for farm subsidies. The first batch of subsidies was hailed as a symbol that the communist party actually cared about farmers--a sentiment that was in doubt at the time when farm prices were depressed, rural officials heaped fees and taxes on farmers, and WTO membership was widely believed to have sold out Chinese farmers. However, when officials wanted to prove their commitment to food security, they would stress that the subsidies functioned as a production incentive. 

Within a few years after their introduction China's farm subsidies were widely criticized as ineffectual due to their tiny size, lack of incentives, and anecdotes of subsidies given for land that no longer produced crops. Some farmers got a half-dozen deposits of various subsidies in their bank accounts and didn't know what they were for.

During 2014-16 officials consolidated the seed subsidy, grain payment, and input subsidy into a single payment that would go only to farmers who actually planted grain. They called it an "arable land fertility protection subsidy" (aka "support and protection payment") but did not demand that farmers take any measures to improve soil fertility. Officials told the WTO the new payment was not market distorting so it could be exempt from limits. For domestic audiences, Chinese officials said the subsidy was a critical policy for encouraging farmer to produce grain. 

Since 2012 China has introduced subsidy payments for soybeans, cotton, corn, and rice. Again, they tell the WTO stories about how payments operate so they can be excluded from subsidy limits. Many other subsidies are just never disclosed to the WTO. The impact of these crop-specific subsidies is still questionable because the payments seem to be based on the previous year's planting and are not distributed until after the current year's crop is harvested in the fall. That brings us back to the criticism lodged by the Economic Daily commentator this month.

Will Chinese officials be inclined to re-couple subsidies to production without fear of WTO sanctions? With WTO's enforcement capabilities weakened, perhaps China can give up the cat-and-mouse game and feel free to follow the commentator's advice and give its subsidies stronger production incentives.