Analysis of the US challenge against China's grain support policies

On September 13th, 2016, The United States initiated WTO dispute proceedings against China regarding China's domestic support in favor of agricultural producers of, among other crops, wheat, Indica rice, Japonica rice, and corn. The US claimed that China had provided domestic support to the products mentioned above in excess of its WTO accession commitment, and has violated the Agreement on Agriculture.

As the largest exporter of agricultural products, the US, with large production scale and strong competitiveness, produces agricultural commodities mainly for export. By contrast, China is the largest importer of agricultural products, with its agriculture characterized by small scale production and subsistence farming. The average production scale of China per household is only 1/400 of that of the US. Suffice it to say, the US and China are the typical examples of commercial agriculture and subsistence agriculture. By its nature, initiating WTO dispute proceedings against China by the US represents the conflict between interests of large commercial farmers in the US and livelihood of small holder farmers in China. How to comment on this? Has China, the biggest market for US agricultural products, harmed the commercial interests of the US large farm owners by providing subsidies to small farmers? With the impact of excessive import of agricultural commodities being intensified on China, how can livelihood of small farmers be secured?

I. Digging into the impact of US agricultural products exported to China, it is the commercial interests of the US that harm the livelihood of small Chinese farmers.

China, after its WTO accession, has a highly open agricultural market. As a result, the US, with its farm exports swarming into China, has caused sustained harm to small Chinese farmers. Since 2001, the US has exported its agricultural products to China at an increasing speed, from less than 2.8 billion dollars to 28.8 billion dollars at its peak, doubling every four years. The average trade deficit of China to the US in terms of agricultural products has reached 20 billion dollars annually, and China has become the largest export market for US agricultural products.

In recent years, the large amount of agricultural products imported by China has caused increasingly severe impact on Chinese agriculture, from which small farmers suffered a lot. With farmers' income being affected, China is now facing huge pressure in agricultural restructuring. Before 2010, imports such as soybean and cotton from the US impacted China's production by suppressing its growth, by taking the market share of Chinese products, and thus prevented the increase of domestic production that would have occurred following the growth of domestic consumption. From 2001 to 2010, Chinese soybean consumption has increased by nearly 150%, and cotton, 100%. However, the production of soybean has stagnated, whereas cotton has only increased 12%. In the meantime, China has imported 3.1 times more soybean and 15.2 times more cotton from the US than in 2001. After 2011, the impact has turned into real direct suppression. The excessive imports of soybean and cotton have caused a decrease of sown area of 46 million mu (3.07 ha) and 32 million mu (2.13 ha) respectively for these two products, and a decrease of production of 5.6 million tons and 2 million tons respectively. Divided by average production area per household in China, the excessive import of these two products has done harm to the employment and livelihood of 50 million farmers.

The reason why small farmers in China have suffered from commercial exports of the US products is that China's agriculture lacks basic competitiveness due to its small scale. In addition, a highly open market has, to a great extent, limited China's instruments of regulating the market. The US, with its subsidies to agriculture, has strengthened its competitiveness.

China has made significant commitments in WTO accession. With the elimination of non-tariff measures, such as quantitative restrictions and licensing, tariff and tariff quota have become the only two instruments for China to regulate agricultural trade. However, the average tariff rate of China's agricultural products is only 15.2%, which is 1/4 of the world average. In addition, China has ad valorem only tariff, and there is no overhang between the bound and applied tariff. China has also made a commitment of not using SSG to protect domestic production in times of import surges. The weighted average tariff is only 3.6% for major agricultural products that the US exported to China, such as edible oil seeds, cotton, grain, animal products, and dairy products.

China is by far the most open market of agricultural products in the world. From China's accession to WTO to 2015, the import volume of China in terms of agricultural products has increased from 11.8 billion dollars to 116.9 billion dollars, an annual increase of 17.8%, and a deficit of 46.2 billion dollars. China is now the largest importer of agricultural products, and in the front pack of importing products such as soybean, rapeseed, rice, barley, sorghum, cotton, sugar and milk powder. As China's largest source of imports, the US has already made great profits from exporting agricultural products to China. In the meantime, the US has provided large subsidies to agriculture, so as to enhance its competitiveness and export more to China.

II. With the practical need of safeguarding food security and livelihood for small farmers, and against the background of agriculture being exposed to injuries due to lack of tariff protection , the Chinese government has to reinforce its support for agriculture.

Agriculture in China, by its nature, is different from that in the US. This difference is, on the one hand, illustrated by small-scaled household farms in China. The average production scale of China is 0.66 ha per household, 1/400 of that of the US. Even Heilongjiang Province, with the richest land resource in China, has an average production scale of only 3.04 ha per household. The average production scale in 13 main grain-producing provinces is only 0.73 ha per household. On the other hand, the difference is that China's agriculture is subsistence in nature, and most farmers are subsistence farmers as well, out of whom a large proportion still live in poverty.

For them, agriculture is not only an important way of acquiring basic supplies for life, but also the most practical choice for employment, income raising, poverty alleviation, and development. At the same time, agriculture in China to a large extent, plays such a function as a substitute for social welfare, and shoulders the responsibility of the latter, but at the cost of sacrificing efficiency and effectiveness.

The utmost task for agriculture in China is to safeguard food security and livelihood security for millions of small farmers. In recent years, facing the impact of excessive imports, the Chinese government has to reinforce support for agriculture as its tariff plays a small role in protecting domestic production. However, China's support to agriculture is still very limited considering the large rural population. The US government claimed that China provided 100 billion dollars of support to farmers, even if we calculate with this figure, the average support for every Chinese farmer is only 161 dollars, nowhere near the support given by the US government to their farmers.

Measures taken by the Chinese government to safeguard the livelihood of small farmers are on the one hand, necessary for safeguarding food security and livelihood security; and on the other hand, an inevitable requirement for China to honor its commitment in efforts to deliver on the UN Millennium Development Goals. It has been 30 years since the reform and opening-up, China has lifted 600 million people out of poverty, accounting for 90% of the world's total. The World Bank spoke highly of China's achievement, calling it “the fastest large-scale poverty alleviation in human history”. China has made great contributions to the UN poverty reduction mission.

However, China still has 70 million impoverished people according to its own standard, and 200 million impoverished population according to the World Bank standard, most of whom are resource poor small farmers living in remote areas.

III. In view of actual trade growth, China's domestic agricultural support does not impact US large-scale commercial export

China's agricultural support is subsistence support, which mainly aims at improving farmers' livelihood. At the same time, China's agriculture bears multiple functions, to realize which efficiency is sacrificed. China's agricultural support has the distinguishing feature of compensating for the positive externality of agriculture, while the US introduces support policies for the competitiveness and commercial interests of farm owners.

In recent years, China's grain production has made some progress. The main reason, however, is that many farmers have no choice but to grow wheat, rice and maize, as soybeans and cotton they formerly grew were negatively impacted by continuous influx of imports. With regards to real market share, although production of China's three main grains has increased, the current degree of self-sufficiency has decreased to below 87%, if we take soybeans into account as a main grain following China's practice.

This clearly indicates that China has not overly stimulated grain production, China's agricultural support constitutes no obstacle to normal international trade and does not impact on US agricultural export to China. The US claimed that China's domestic support exceeded WTO accession commitments in 2012-2015. While it was during this period, China's imports from the US reached a record-high of 108.97 billion dollars, an increase of 38.53 billion dollars (up by 55%) from 70.44 billion dollars during 2008-2011. Despite slight fluctuations in 2015, the imports from the US accounted for 21% of China's total agricultural import value, with sorghum, DDGS and soybean accounts for 83.8%, 83.7%, 34.8% respectively, and for cotton and livestock, more than 10%.

IV. From the perspective of sustainability, the process of trade liberalization must take into account the need of developing members for food security and livelihood security of small farmers.

The US challenge against China's grain support policy is, in a matter of fact, the reflection of conflict between trade liberalization doctrine and real need of developing members to safeguard food security, which had once happened in the 9th WTO Ministerial Conference in 2013, where developing members and developed members had a dispute over public stockholding for food security purposes. Global cereal trade volume accounts for less than 15% of its output, more than 85% of cereal demand is met by domestic supply. The only way for developing members to have a stable food supply thereby ensuring food security is to increase investment in agriculture and food production, and support small farmers in particular, thus enhancing food production capacity. This is the reason why developing members reiterated in Doha negotiations that food security which is of paramount importance to developing members is not negotiable.

In fact, WTO has its answer to the conflict between trade liberalization and food security: food security must be fully taken into account during the process of trade liberalization, commercial interests cannot be obtained at the expense of small farmers' livelihood security and rural development need. Sufficient Special and Differential treatment must be provided to developing members, which is the underpinning principle of WTO and has been specified in Doha round negotiations. Uruguay round Agreement of Agriculture stipulates, "commitments under the reform programme should be made in an equitable way among all Members, having regard to non-trade concerns, including food security and the need to protect the environment;"

Eliminating poverty, ensuring food security and small farmers' livelihood security, are the common goals of all nations, but particularly important and arduous for China, a developing country with a huge population. Development of agricultural trade should be conducive to the attainment of those goals. Any trade liberalization ignoring China's circumstances and development is morally untenable, and is doomed to failure. Any trade growth ignoring the food security of 1.3 billion people and livelihood security of 620 million farmers is not healthy, nor sustainable.