China may have opened its door wider to foreign goods and services following its accession to the World Trade Organisation, but foreign exporters of agricultural products say the market remains elusive and difficult to penetrate.
It has been more than a year since the Chinese government slashed its tariffs and quotas on farm products, but the expected import bonanza has not yet happened. Imports actually fell 0.4 percent year-on-year to US$8.74bn in the first nine months of 2002, with a big reduction recorded in soybean and wheat imports.
Instead, exports of China's agricultural goods have surged, by 11.5 percent to US$12.62bn during the same period. Corn exports reached 11m tonnes for the whole of 2002, the biggest volume since 1993; wheat exports reached a historical high of 200,000 tonnes. In December, the president of a regional chamber of commerce in the Philippines predicted that China's entry to the WTO would kill certain aspects of his country's vegetable industry. Overall, China enjoyed a surplus in agricultural trade of US$3.88bn in the first three-quarters of 2002.
Some analysts believe China's limited appetite for foreign farm produce is due to its own abundant stocks of grain and other commodities, built up over years of good harvests and aggressive imports. Industry estimates put China's stock of grain at 250m tonnes, of which corn comprises about 66m tonnes. As for its export drive, analysts say, the Chinese government was merely using favourable market conditions to offload stock and earn some hard currency.
Critics, however, accuse China of using protectionist measures to slow down imports, such as tighter sanitary and biotechnological requirements, while supporting its exports with subsidies. They complain that imports of raw poultry, meat and other foreign produce have been held up more frequently and are subject to stricter inspection at ports since China's WTO accession.
The US, a major exporter of farm commodities to China, has been the most critical of the situation. In its recent report to Congress, the United States Trade Representative (USTR) said there had been "serious problems resulting in impeded market access for many US agricultural products, particularly soybeans, wheat, corn, cotton, vegetable oils, poultry and pork."
The US raised the matter with China last year via WTO committees but, according to the USTR report, "little progress was made in resolving US concerns and US exports of the affected products were well below industry expectations." This discontent has not yet led to a trade war with China, but tension could escalate if the complaints of American agricultural exporters are not addressed.
Greater access to foreign exporters
Under the WTO agreement on agriculture, China is to slash tariffs, end subsidies and provide more market access to foreign agricultural exporters. Tariffs on agricultural products were reduced in 2002, in line with its promise to cut the average rate of 20 percent to 17 percent by 2004. The reduction led to "dramatic increases in sales to China, including beef, almonds and citrus fruit," reported the USTR.
But at the same time, China has imposed tighter import controls over genetically modified soybeans from the US. In May 2001, months before the WTO accord was concluded, the State Council passed the Agricultural Biosafety Regulations, which require strict safety, testing and labeling of genetically modified organisms (GMO). It issued implementation rules in January 2002 and gave the industry a mere three months to conduct the field trials required for securing permanent safety certificates.
The first products to be hit by the new rules were US soybeans, most of which are genetically enhanced. At stake is a US$1bn business for American soybean producers, exporting to what has become their biggest foreign market. "The regulations were a surprise. The US has been exporting the same kind of soybeans for many years to China, but no such tests were required," says one Beijing-based US soybean trader. He described the rules as the "most stringent" in the world and which, if implemented in full, would require tests that would take an exporter six to seven years to complete.
US trade officials say the regulations are not based on sound science and could be used arbitrarily as a weapon to slow down farm imports. They lobbied hard on behalf of their exporters and obtained a nine-month extension until December 2002 for compliance with the new rules. At a summit held in October 2002 between the two heads of state, George Bush and Jiang Zemin, the issue was brought up again and the deadline was further extended to September 2003.
Uncertainty over the issue led to a drop in soybean imports from the US – 40 percent down in the first six months of 2002. For the marketing year between September 2001 and August 2002, imports dropped to 4.3m tonnes, down from 5.7m tonnes in the previous year.
Industry sources believe the soybean issue will be resolved eventually, given China's genuine need for the product. US soybean exports could easily bounce back to the same level as in earlier years, once a permanent agreement is reached between the US and China over the GMO regulations, comments one US soybean trader. He notes that Chinese scientists themselves are pursuing GMO projects that have great commercial potential. These domestic projects would also suffer if the government interprets the GMO regulations too rigidly.
An end to corn subsidies
Another contentious issue in Sino-foreign agricultural trade is China's alleged subsidies to its corn exporters. Under the WTO accord, Beijing promised to end all export subsidies but last year it reneged on its promise and subsidised corn exports, foreign traders say.
China exported 11m tonnes of corn last year, 2m tonnes more than in 2001. It exported more because of its bumper harvests, abundant stock and, most important, a surge in international prices following reduced output by a drought-affected US.
China's corn was priced at about US$10 less per tonne than US corn in overseas markets, thanks to a subsidy of about US$20 per tonne, said the US Agriculture Department. It cited as evidence the fact that the price of corn in Dalian for domestic shipment was US$123 per tonne in 2002, while the price for exported corn was a mere US$98 per tonne. China refutes the charge, saying that the lower corn prices were due to the country's lower transportation costs, VAT rebates and recently reduced official fees levied on farmers and grain dealers.
US corn producers complain that Chinese corn exporters have edged them out in the markets of South Korea, Indonesia, Japan and Taiwan. Taiwan temporarily lifted its ban on corn trade with the Mainland in October 2002, leading to a surge in imported Mainland corn.
US exporters are concerned that they will continue to lose out to Mainland competitors in Taiwan, America's third-largest coarse grain customer. "[The situation] will only get worse if the ban on Chinese corn imports is lifted indefinitely," warned Don Jacoby, chairman of the US Grains Council, in a recent report to the council's members. US agribusiness traders also have complaints about the tariff-rate quotas for bulk agricultural commodities. Under the tariff rate quotas scheme, China is to charge significantly lower tariffs on a certain volume of wheat, maize, rice and other bulk commodities and to allow private traders to have some of these quotas. The scheme aims to provide more market access to foreign traders, until the tariffs are finally slashed significantly and the quotas will then be removed.
Delay in issuing quotas
In its first year of implementation, however, the USTR said the scheme did not work. It claimed the State Development and Planning Commission (SDPC), the Mainland body responsible for allocating the quotas, operated without transparency or efficiency. The SDPC was many months late in issuing the quotas in 2002 – a delay that the USTR interpreted as an attempt to "protect domestic farm interests and maintain the monopoly by state trading enterprises."
One industry source said private traders were given quotas for importing only a few thousand tonnes, a volume too small to be commercially viable. "That means a few big state firms continue to dominate the business," he says.
The US government has pressed China to improve the SDPC's performance and urged other WTO members to voice their concerns as well. In September 2002, it presented its grievances formally to China in Geneva. Since then, the SDPC has issued tariff-rate quotas on time, but the US will "continue to monitor developments in this area very closely in 2003," according to the USTR.
Chinese sources argue that the SDPC's inefficiency is due to inexperience and red tape, and not to protectionist factors. They also say private traders were not keen to apply for the quotas because home demand for bulk commodities was sluggish and international prices were higher than domestic ones.
Last year was not a good one to test China's sincerity in implementing the tariff rate quotas scheme, industry analysts say. Only when its grain stocks start to diminish and domestic demand rises can one tell whether the quota system actually works.
Still, foreign traders should not expect China to import as much grain as a few years ago. Shi Haiguang, general manager of the Canadian Wheat Board in Beijing, notes that since 1996, China's wheat imports have been decreasing, thanks to its good harvests and reduced per capita consumption, as people eat more protein and fruit. "It is unlikely that China will go back to importing grain in a big way as in the 1980s and the early 1990s. It has probably imported too much in the past and needs to deplete its stock," he says.
That is bad news for foreign traders, who have had high expectations of China's agricultural market and will press their governments to ask Beijing to buy ore, as promised by the WTO accord.