Impacts of Trade Liberalization on China s Agricultural trade

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1 Impacts of Trade Liberalization on China s Agricultural trade Hamdia Ahmed Department of Business and economics, Hohai University, Xikang Road, Nanjing(86) addisharar@yahoo.com Abstract This paper examines the china s WTO accession commitment on agricultural product, the agricultural policy and agricultural trade policies, the impact of tariff-rate quotas (TRQs) on the production and import of selected agricultural products, impact on output price as well as the impact on some of agricultural production and then evaluates the impact of trade liberalization since china accession to WTO. The study doesn t include the impact of trade liberalization on non- agricultural products as well as the impact on the welfare of community income and unemployment. Keywords: Trade, Liberalization, Impact, Agriculture 1. Introduction China s foreign trade has been expanding even more rapidly than its overall economic growth. With the rapid growth of the external sector, foreign trade has been playing increasing role in the national economy since reform started in the later 197s. China s trade to GDP ratio increased from 13% in 198 to 36% in During the same period, the total value of China s agricultural trade increased from US$9.29 billion to US$25.15 billion, with an annual growth rate of 6.% (Huang and Chen, 1999b). China applied to join GATT and then the World Trade Organization (WTO) in 1986, although China has not been accepted as a member of the WTO, China has committed to comprehensively implement the Uruguay Round agreements upon its accession into the WTO. After 15 years of effort, China has finally become a formal member of World Trade Organization on December 1, 21. The basic spirit of the WTO is to lower tariff rates, to eliminate non-tariff barriers, and to allow market entries so that production could be allocate globally according to the principle of the comparative advantage. The provisions and commitments defined by the Agreement on Agriculture include a number of important elements. These can be roughly divided into the following four areas: market access, domestic support, exports subsidy, sanitary and phyto sanitary measures (SPS). The agricultural market access commitments include measures to address the following problems: trading rights, tariff reductions, tariffication and quotas. However, debates on the future of China s agriculture continue. Some argue that the impact of WTO accession on China s agriculture will be substantial, adversely affecting hundreds of millions of farmers (Carter and Estrin 21; Li et al., 1999). This paper is organized by 5 sections; in the first section, the introduction of the major agricultural product of china and the major WTO agreement on agriculture and also introduce the content of this paper, and the next two sections are the main part of the paper therein in overview of china s agricultural policy and agricultural trade policies, china s WTO commitment in agricultural trade, china s agricultural policy and agricultural trade policy, and followed by the impact of trade liberalization on selected agricultural production. In the forth section the result and foundation of the study and in the final section presents conclusion and recommendation

2 2. China s agricultural policy and Agricultural trade policies 2.1. Self-sufficient food policy China has the largest population and agricultural production, with 1.3 billion people and produces 22% of world s total agricultural product. According to the definition on food security of FAO, the self-sufficient food policy means to produce foodstuff in home land. Food selfsupporting policy lies in the core of China s agricultural policy system, under the guide of which, China would rely on herself to feed her large population versus import. Other auxiliary agricultural policy is made based on this core, such as agricultural product trade policy, price policy and subsidy policy, etc. Recently, China put more emphasis on increasing income of rural poor population, as the complementary of food self-supporting policy. Food self-sufficiency policy has long been corner stone before China s start up opening economy, with special emphasis on national food security. Especially after the worry about who feeds China? came about world widely in 199s, food selfsufficiency has become the state strategy. In the FAO World Food Security Conference held in Rome, November 1996, former Chinese Premier Li Peng announced that China would solve food problem based on self-supporting policy and her own resources, which was also supported by other countries 2.2.Domestic support policy The Uruguay round negotiation divided the domestic support policies into two categories; one is the undistorted trade policy, so called green box policy, which could exempt from the commitment; and the other is distorted trade policy, so called Amber box policy. In general, most existing agricultural polices, such as financial support policy, commodities bases construction programs and agricultural development programs, accord with the green box policy, so the commitments could be exempted. The support policies through the market, such as the purchase policy, belonging to negative protection policy (the AMS is negative), need not the commitments. Thus, the negotiation on domestic support in China will only involve the transparency issue. China s existing domestic support policies to agriculture mainly include the following contents (1) Price support policy to agricultural products. (2) Support policies to agricultural production. (3) Trade policies, including the high tariff to imported agricultural products, the quota management and license. 2.3.China s WTO accession commitments in agriculture Under the Agreement, countries agreed to substantially reduce agricultural support and protection by establishing disciplines in the areas of market access, domestic support, and export subsidies. Under market access, countries agreed to open markets by prohibiting non-tariff barriers (including quantitative import restrictions, variable import levies, discretionary import licensing, and voluntary export restraints), converting existing non-tariff barriers to tariffs, and reducing tariff rates

3 Market access [1] Cancellation of Non-tariff Barriers Tariffication, or the replacement of non-tariff barriers (NTBs) by tariffs, is an important part of agriculture s inclusion within the framework of GATT, in that it brings agricultural trade policy into line with the GATT principle of transparency, and potentially eliminates some of the distortion effects that NTBs have on trade. China has committed to eliminate non-tariff barriers on agricultural imports upon its accession to the WTO and to implement a series of tariff cuts between 2 and 24. In addition, China has committed to follow WTO standards in eliminating all quantitative restrictions. In particularly sensitive sectors, China will adopt tariff-rate quotas (TRQs) for wheat, rice, corn, cotton, soybean oil and other products, with gradually increasing quota levels, mostly over the same period. After the accession to WTO, China will eliminate the quota, the license and the quantitative limitation and only adopt the single tariff to the import of agricultural products. [2] Tariff Reduction China promised to decrease the tariff of agricultural production to 17% in 24 from 46.4% in [3] Quota for Important Agricultural Products The promised quota is 5.7%-8.8% for domestic consumption. The tariff rate within the quota is usually from 1% to 1% and that beyond the quota is from 1% to 8%. Table 1 Quota of Main Agricultural Products (1, tons, %) Wheat Corn Rice In In Tariff within quota (%) Tariff beyond quota (%) 71~ 65 71~ 65 71~ 65 Percentage in the current yield (%) 8~ 9 5~ 6 3~ 4 [4] Commitment to give up the use of Special Safeguard Provisions (SSP) The SSP provides that when the import volume of product covering the tariff increase to a trigger level or the import price decreased to a trigger level, the member can adopt the special measures Domestic support China promised to account the subsidies to investment and inputs which should be exempt from commitments under paragraph 2 of Article 6 under WTO Agreement of Agriculture into the minimis permission under paragraph 4 of same Article as amber box policy. Moreover, the percentage of minimis permission of AMS to domestic agricultural or to special agricultural products will not exceed 8.5% of agricultural production or total production of the special products Export subsidy China promised to eliminate the export subsidies to the agricultural products which include the price subsidy, the subsidy in kind and the export subsidies to production process, storage and - 3 -

4 transportation which developing countries could have under the paragraph 4 of Article 9 under WTO Agreement of Agriculture. 3. Impact of trade liberalization on agricultural trade According to our analysis, China s WTO accession and further trade liberalization will have impacts on the prices for nearly all crop and livestock commodities Compared with the baseline (without WTO accession and any further trade liberalization after 21), the prices of most crop commodities decline in the coming decade The impact of trade liberalization on agricultural commodities price China s WTO accession and further trade liberalization will lower domestic prices of wheat, soybean and cotton by about 2-4% in The impacts could be as high as 7-2% for maize, oil and sugar crops in the same time period. On the other hand, trade liberalization will increase domestic prices of those commodities in which China has comparative advantage in the international market. The expected rise in exports of these commodities increases their domestic prices. Table2. Impacts of China s WTO accession and further trade liberalization on agricultural output prices percentage compared with the baseline, Commodity Rice Japonica Indicia Wheat Maize Sweet potato Potato Other cereals Soybean Cotton Oil crops Sugar crops Vegetable Fruits Pork Beef Mutton Poultry Egg Milk Fish Table 2 presents the impact of WTO accession and further trade liberalization on some agricultural out put price, therein the negative implies the price decrease while the positive implies the price increase in 25 and 21.the analysis show the negative impact for the price of - 4 -

5 commodities such that wheat, maize, sweet potato, potato, other cereals, cotton, oil crops, sugar crops, and milk. In contrast, the impact is positive for rice, vegetable, fruits, pork, beef, mutton, poultry, egg, and fish. In general, trade liberalization stimulates domestic production of sectors that are producing commodities in which the nation has a comparative advantage while dampening those in which producers do not have an advantage. As a result, trade policies can lead to different impacts, sometimes negative and sometimes positive. Moreover, because most of the commodities are competing for domestic resources, such as land, labor and capital, cross-commodity substitutions could result from a policy targeting one commodity having an effect on another. 3.2.The impact of trade liberalization on agricultural production out put Table3. Impacts of China s WTO accession and further trade liberalization on agricultural production, percentage change compared with the baseline, Commodity Rice Wheat Maize Soybean 1..2 Cotton Oil crops Sugar crops Vegetable Fruits Pork Beef Poultry Milk Fish China s WTO accession and further trade liberalization affect china s agricultural production output. In table3 presents the results of my simulations on the impacts of China s WTO accession and further trade liberalization on agricultural production in 25 and 21. The analyses show that trade liberalization will affect domestic production moderately. The signs of impacts due to trade liberalization are as expected. Overall, the impact on production is negative for wheat, maize, cotton, oil crops and sugar crops. In contrast, the impact is positive for those commodities in which China has comparative advantage such as rice, vegetable, fruits, meat and fish (Table 3). Increased prices of these commodities due to trade liberalization will generally stimulate their domestic production. Trade liberalization will facilitate China s agricultural diversification and transformation of China s agriculture from less comparative advantage sectors to more comparative advantage ones

6 3.3.the impact of trade liberalization on agricultural import and export After accession to the WTO, China can enjoy multilateral Permanent Normal Trade Relations (PNTR) with the 13 members of WTO. This could be favorable for increasing China s export capacity. Table4. Chinese exports and imports of agricultural products (in billions USD) export import Source: WTO international trade statistics 24 China s WTO accession and further trade liberalization also affects the import and the export of china s commodities. In table4 shows the impact on the total export and total import of agricultural products in billion USD since 199 up to 23. The analysis show in 199 (before WTO accession) the amount of export was greater than the amount of import, and then the following years (china began to fulfill the WTO commitment) the amount of import higher than the amount of export, however both the import and the export continuing increase export import Figure 1 the impact of trade liberalization on agricultural import and export The above figure (figure 1) illustrated the amount of import (pink line) was less than the amount of export in early 1995, in contrast the amount of export (blue line) is greater than import in the late

7 Table5. Import tariff rates on major agricultural products subject to tariff-only protection in China. Actual tariff rates in 21 Effective as of 1 January Commodities tariff rate Barley 114 (3) a 3 3 Soybean 3 b 3 3 Citrus Other fruits Vegetables Beef Pork Poultry meat Dairy products Wine Tobacco a; Barley was subjected to license and import quota, the tariff rate was 3% for import within the quota and no above-quota barley with 114% tariff was imported in 21. b; Tariff rate was as high as 114% before 2 and lowered to 3% in after the early of 2. Source: China s WTO Protocol of Accession, November 21. Table 5 presents import tariff rate on major products subject to tariff only protection in china. The analysis shows the tariff rate of the commodity barley was 3% within quota and 114% in early 21 after this period since 22 the tariff rate will be 3% without quota. Soybean was subject to import quota as high as 114% before 2 and lowered to 3% in after the early of 2. As shown in table 5 the commodities citrus, other fruits, vegetables, beef, dairy products, and wine subject to 17% to 22% tariff reduction in 22 while the commodities pork, poultry meat, and tobacco 2% to 6% tariff reduction in the same period. In further period the table shows further reduction of the tariff in 24. In the following table (table 6) presented the comparison of import tariff for major products between early 21 and 24. Table 6: Comparison of import tariff for major agricultural products Product 21 rate 24 rate (%) (%) Barley Soybeans 3 3 Citrus 4 12 Beef Pork 2 12 Poultry 2 1 Wine Tobacco 34 1 Table6 presents the comparison of import tariff for major agricultural products between 21 and 24. the analysis shows that the tariff for barley is highly distorted from 114% in 21 to only 3% in 24, the other products are also reduce the tariff rate from 21 to 24, however the - 7 -

8 reduction rate is small except the soybeans which has constant tariff rate. To make clearer the figure is illustrated as the following Barley Soybeans Citrus Beef Pork Poultry Wine Tobacco 21 rate (%) 24 rate (%) Figure 2 import tariff for major agricultural product. Figure 2 shows import tariff for major agricultural product. In the figure the vertical line shows the percentage of tariff rate while the horizontal line shows the year of which tariff rate reduction effected. The analysis indicates the graph for barley which is subject to blue line is straight stepper, which indicates highly tariff reduction and the most affected commodities than the rest of major importable agricultural products. The commodity soybean which is subject to the pink line the tariff rate from late 21 to 24 was constant; however it was highly redacted in early 2. Table 7 Tariff and Non-tariff Protection Rates in China for its WTO Accession (%) ITEM Rate of Reduction Initial NTBs Rice Normal Tariff Wheat Na 19.3 Other grains Oilseeds Planted fiber Non-grain crops Na Livestock

9 Dairy and meats Processed food Tobacco & Beverage Forest and fishery Data Source: China's tariff cut is aggregated by the author from 6 digit Harmonized Commodity Description and coding System (HS) tariff schedules based on US-China agreement (November, 1999) and weighted by 1998 import Data from China's Customs. China s non-tariff barrier (NTB is the difference between import protection rate in Version 5 GTAP database and China s tariff after adjustment for duty exemptions. Industrial products are modified on additional information from Zhang et al. (1998) and Li et al. (1998). Detailed data on processing trade and duty exemption is kindly provided by Dr. Shunli Yao based on the China trade database maintained at the University of California-Davis (Yao, Shunli and Robert Feenstra, 1999). The base year service sector protection rate was adopted from Hoekman (1995) and they are tariff equivalent of no-tariff barriers. Table 7 examines the tariff and non tariff rate since 21 up to 21 future forecast. The analysis shows that from 2 up to 25 the tariff rate was highly redacted. (This period is that the period china fulfills the WTO commitment). After this time period in the import tariff rate is almost constant. In this period the domestic farmers adjusted their type of production from less comparative advantage to higher comparative advantage. 4. Results and Foundations My findings in this study show that for some agricultural commodities WTO accession leads to a fall in prices and a rise in imports. Domestic production such as: - Wheat, maize, cotton, oil crops, sugar crops, and milk are the most affected. There are also commodities in which China has considerable comparative advantage e.g., japonica rice, meats, and horticulture products-- and, hence, WTO accession could provide benefits to those engaged in these activities. The prospect of increased imports of feed grains (e.g., maize and soybeans) at lower prices means that livestock producers could become even more competitive. Because maize and soybeans most of time used to feed livestock. This study also shows that as some prices rise and others fall, the trade liberalization is encouraging farmers to adjust their agricultural production structure toward more comparative advantage products. In response to an overall food price rise, consumers decrease their consumption. However, with the increased incomes that accompany the shift of farmers to more profitable agricultural products, most of the farming sector likely will be better off (although we do not measure the indirect rise in consumption due to the income effects of higher agricultural profits). The other finding of this study is that reducing import tariff and TRQs (Tariffication) leads to increase foreign agricultural import in the market which leads to reduce the price of importable product which leads to reduce the price of agricultural product which leads to the farmers out of - 9 -

10 the market transfer from non profitable product to profitable products, non agricultural products instead which leads to the growth rate of import is much more higher than the growth rate of export. 5. Conclusion and recommendation. China s trade liberalization has progressed smoothly since the late 198s. Through nearly 2 years of external reform, China s foreign trade regime has gradually changed from a highly centralized, planned and import substitution regime to a more decentralized, market-oriented and export promotion regime. China s open door policy contributed to the rapid growth of its external economy. The expansion of the external economy has become one of the major driving forces of China s economic growth. The growth of trade also results in greater reliance on both domestic and international trade to meet consumer demand. In general, China will gain a lot from trade liberalization. Rising exports of manufacturing goods will need a lot of rural labor. In a country like China, raising the demand for off-farm labor is probably the most important thing that can happen in the economy. The nation needs to keep promoting policies that facilitate investment and allows rural households to move to these jobs without constraints. Although china gains from trade liberalization, not all the farmers are beneficiary. Most of the farmers who produce comparative disadvantage products are the loser. As a consequence of equity issues, policy makers need to take one of two actions. First, they need to try to encourage farmers in poorer, inland areas to shift their production (where appropriate) to more competitive crops. Second, officials may also need to take other, non-trade actions to increase the livelihood of farmers in these areas. In many areas, farmers do not have profitable opportunities in any farming activity. In such areas rural education, better communications and other policies that facilitate their shift into the non-farm sector may be the most beneficial policy. References [1] Dominick Salvatore, Introduction to International Economics, EISBN: copyright 25 by john wiley & Sons, Inc. [2] Dominick Salvatore, International Economics Forth Edition, [3] [4] [5] [6] [7] [8] [9] Author Brief Introduction I am Ethiopian Scholarship student at Nanjing, Hohai University I am seeking for Master in international trade in 29. I have done my bachelor in Ethiopia in Economics. I am interested to do research on the impact analysis