The recent surge in global grain and most other food prices raises some interesting questions for China. The evidence suggests that price volatility in international markets reflects the low level of trade in many foodstuffs. However, many countries have responded by striving for self-sufficiency, at least in grains.
Thus Malaysia, the world’s leading exporter of palm oil, is planning to increase subsidies to its inefficient rice farmers to reduce import dependence. The illogic of this stance seems lost on its politicians. What, one must ask, would happen to Malaysia if China and India decreed they had to be self-sufficient in vegetable oils?
Yet China too has long made food-grain self-sufficiency a national goal. This is a reflection of past shortages, although in recent years the policy has not been rigidly enforced.
Overall the country has become a small grain importer, exporting rice but importing some wheat, corn and soybeans. At the same time its net food exports have risen thanks to exports of vegetables, fruits, fish and processed foods. That makes sense. China no longer has a comparative advantage in grains but does in higher value-added and labor-intensive crops.
So the issue for the future is whether China wants to see this trend continue, gradually reducing its level of grain sufficiency and relying more on the global markets.
Drying out
There are several reasons for thinking that increased agricultural trade is desirable. The over-use of both river and groundwater in much of northern China points to a future in which farmers must use less water, grow non-grain crops or just stop farming. Water is less of a problem in central and southern China, but young people are keen to avoid the toils of rice farming in favor of a future in the city. There is also a loss of land to urbanization, which may not be compensated by increased yields.
From an international perspective, it would be better if both China and India produced and sold more rice on world markets. With only about 6% of global rice production actually traded, the global market is heavily reliant on the large surpluses of Thailand and Vietnam.
Meanwhile rice deficits elsewhere, particularly the oil-rich Middle East and many countries in Africa, have been growing rapidly.
The small amount traded recently induced a sudden panic when the likes of the Philippines and Nigeria realized that their stocks were insufficient. As prices rose, export bans by Vietnam, India and China aimed at keeping local prices in check just made matters worse for the rest of the world.
China’s own rice consumption is slowly falling as incomes rise and consumer preferences diversify into protein-rich foods such as meat, fish and eggs, as well as to fruits. This could boost the export potential for rice, although it also means an increase in imports of corn, soybeans and palm oil.
Barriers to trade
It would be easier for China to choose a free market route if developed countries were willing to do the same. Voices in the EU are using the current high prices to defend the Common Agricultural Policy, which for years has distorted and depressed world prices by subsidizing EU exports. The US is similarly guilty and is now subsidizing corn for ethanol, allegedly to reduce carbon emissions but in reality to buy farmers’ votes.
Around the world all kinds of subsidies, for consumption or production, or even both, create problems for farm trade and hence for governments trying to plan both agricultural and trade policies. The Doha Round of world trade talks is at a standstill in large part over farm trade.
China has chosen to take a low profile on this issue, having been focused on industrial market liberalization. That is unfortunate, as both China and the US would appear to share a common interest, vis-à-vis both the EU and developed East Asian countries such as Japan and Korea, which are even more protective of their farm sectors.
Beijing might do well to view push for liberalization, to avoid spreading the notion that self-sufficiency, whatever the cost, is desirable. But it seems unlikely to do so in view of its own past record and while the other major trading countries are at loggerheads on the issue.
No one, in China or elsewhere, should forget that the most obsessive pursuit of self-sufficiency has been in North Korea.