Conklin, Neilson C.

English

Research Papers in Economics

 
Agricultural Outlook Forum 2002          Presented: Friday, February 22, 2002 
 
 
CHINA’S ACCESSION TO WTO:  IMPLICATIONS FOR US AGRICULTURAL EXPORTS 
 
Neilson Conklin
1 
Director, Market and Trade Economics Division, 
 Economic Research Service, US Department of Agriculture 
 
 
As the world’s largest agricultural economy and a top producer and consumer of all the major 
agricultural commodities, China’s accession to the WTO and further integration into the world economy 
will lead to a wealthier and more stable international food system.  Farmers in the United States are 
particularly well positioned to benefit from China’s accession to the WTO because the farming systems 
and underlying resource endowments in China and the United States complement one another, providing 
opportunities for mutually beneficial trade. 
 
WTO accession is the latest in a series of liberalizations in China’s economy that will benefit United 
States agricultural exports.  We expect to see a modest increase in China’s imports of important 
commodities in 2002 due to the new trade regime under WTO, but most of the benefits to US farmers 
will be realized several years down the road.  Even before China’s accession to the WTO was 
formalized, US exports of major commodities were expected to increase due to internal market reforms 
and gradual economic liberalization since the 1980s.  WTO accession must be seen in the context of 
China’s broader economic development and its transition from a command to a market economy. 
 
China is still a low-income economy but it has been growing at an unprecedented pace over the last 20 
years and WTO accession bodes well for China to continue this high growth rate for many years.  In 
addition, China has made enormous progress in establishing markets to replace the institutions that 
determined production decisions under the planned economy of the collective era (1958-1978).  Despite 
this progress, China has yet to develop all of the supporting institutions and infrastructure that are 
required by a modern market economy.  Under a more liberalized and competitive trading environment, 
the twin forces of development and transition will move China toward producing goods that bring the 
highest return and importing those that are produced more efficiently elsewhere.  It is this longer-term 
process that holds out the most promising opportunities for agricultural producers in the United States. 
 
China’s WTO Agreement Revisited 
 
As part of the agreement for WTO accession, China made far-reaching commitments to cut agricultural 
tariffs to an average of 17 percent, to eliminate export subsidies, to apply sound science for sanitary and 
phyto-sanitary regulations and to limit potentially trade-distorting domestic crop support. 
 
Central to China’s agricultural policy commitments in the WTO agreement is a system of tariff-rate 
quotas (TRQs) for many of the major agricultural commodities.  Under the TRQ regime, a specified 
quantity of imports – i.e. quota – may enter at minimal tariffs while over-quota imports are charged 
much higher tariffs.  It is important to note that these are not “minimum purchase” agreements, and 
actual imports may fall short of the full quota amounts.  A share of the TRQ for each commodity will be 
set aside for private and other non-state trading enterprises, a provision intended to loosen the control of 
                                                            
1 ERS researchers Fred Gale, James Hansen, Bryan Lohmar, Michael Price, Randall Schnepf, Ralph Seeley, Richard Stillman 
and Francis Tuan participated in the research and contributed to writing of this report.  
China’s state trading enterprises over agricultural trade. The TRQ system is designed to ensure that 
market opportunity rather than bureaucratic decree will determine the level of imports.   
 
China is still working on the details of how the TRQ regime will be implemented, and those details will 
determine just how open China's market will be. China agreed that TRQs will be allocated to end users 
(such as millers, crushers and feed lots) and the quotas will specify whether the user must import its 
quota through a state enterprise or a non-state trader.  Beyond this, China has yet to announce the details 
of TRQ allocation and administration.  Exactly how the quotas will be allocated (first come-first served, 
open bids, or based on historical use), the role of provincial authorities in the allocation, and revision of 
the list of designated state trading enterprises are among the important issues that will have to be 
clarified. It is unknown whether state trading enterprises will respond to market signals or continue to 
trade according to politically determined levels of imports and exports. We will not know just how open 
China will be to imports until these details are worked out, and it may be some time before we can make 
a more complete assessment of accession's impact. 
 
Despite these questions, there is cause for optimism regarding further trade liberalization in China.  
Aside from the TRQ system, China has made substantial commitments to limit trade-distorting policies 
in agriculture that go beyond the commitments of many of China’s trading partners. China has also 
agreed to reforms that will liberalize domestic marketing institutions, giving foreign producers greater 
access to inland markets.  Over time, pressure from domestic users who want access to imported wheat, 
corn, soybeans, and cotton will likely reduce some of the initial rigidity and bureaucracy that may 
plague the TRQ system in its infancy. Self-sufficiency goals that have kept grain imports from rising 
may be relaxed as China’s leaders recognize that farm incomes can be raised without tapping into tight 
fiscal budgets by letting farmers move land out of grains into high-valued, labor-intensive crops that 
China can grow more efficiently.  
 
Effects of WTO Accession 
 
China’s commitment not to use export subsidies is expected to have an immediate impact on the market 
for corn. Over the last several years, China has significantly expanded corn exports to Asian markets, 
competing with U.S. exports.  China’s exports, however, were subsidized since the export price was 
substantially less than price paid by the exporters.  Without subsidies, China’s corn exports could 
decline by over 1 million tons per year compared with the non-WTO baseline scenario, increasing 
opportunities for U.S. exports. Imports to corn-consuming areas in China's south are also expected to 
rise. In 2001, corn prices at ports in southern China were about 15 percent above world prices including 
insurance and freight. ERS expects that annual corn imports after WTO accession will average 3 million 
tons above baseline projections over the projection period. Thus, there could be a total swing of more 
than 4 million tons annually in China's corn trade over the next 10 years.  
 
ERS analysis suggests that WTO accession could boost China’s wheat imports.  Over the last few years, 
wheat imports have been minimal as the government has sought to draw down excessive domestic 
stocks. Millers in China have had difficulty obtaining imported wheat that has high-protein and high-
gluten wheat needed to blend with domestic wheat to make high quality breads and processed foods 
demanded by China’s increasingly wealthy urban consumers. Recently, imported wheat at the 
Guangzhou port in southern China was selling at 40 percent premium to the international price, 
indicating substantial excess demand for imported wheat at international prices.  ERS projections 
indicate that, under WTO, China’s wheat imports will be an average of 2.6 million tons per year higher 
than baseline projections through 2011.  
  
China consumes most of the rice it produces and will continue to do so. However, greater access to 
markets in Japan, Korea, and Taiwan may result in modest increases in japonica rice exports. These 
exports will be offset by modest increases in imports of indica rice to meet growing demand for high-
quality imports and to offset declining domestic indica production as price supports and marketing 
subsidies are gradually phased out in coming years. While these changes are small as a share of world 
consumption, they could have important implications in the thinly traded world rice market. 
 
China's soybean imports have skyrocketed since 1998, reaching over 14 million tons in 2001.  Imports 
could rise further to meet the growing demand for vegetable oil and high-protein feed.  Soybeans have 
already entered China at low tariffs of 3 percent in recent years, so WTO accession will have little direct 
effect. Of greater concern is the potential impact of China's new regulations requiring labeling of 
agricultural genetically modified organisms.  China has announced that any agricultural GMOs imported 
into China after March 20, 2002, will need safety certificates issued by China's Ministry of Agriculture.  
However, information about the application process and other requirements remains sketchy, despite the 
approaching deadline. Thus, many observers expect the GMO regulations to be a major factor slowing 
China's soybean imports this year.  
 
Like many other countries, China has in recent years sought to develop a domestic oilseed crushing 
industry to capture value added from oil and meal production. Although the increased crushing capacity 
has lowered domestic soy oil prices, many observers still feel that China’s crushers, on average, cannot 
match international crushing margins, and that imported oil will likely be competitively priced under the 
new TRQ regime.   
 
Another non-WTO factor that could dampen growth of soy oil, soy meal and soybean imports is China’s 
value-added tax (VAT), which effectively raises the cost of imports. The VAT is officially applied to 
both imports and domestic production of soy oil, meal, and beans, but in practice domestic producers are 
often exempt.  The imports of many non-agricultural commodities are also affected by China’s VAT 
policy and other WTO members may challenge it.  
 
Near-term prospects for increased cotton imports due to WTO accession are not promising due to 
relatively abundant domestic supplies.  Imports have been restricted for several years and the 
government has been selling off excess stocks. China’s cotton production rose by 20 percent increase in 
2001, spurred by a combination of strong demand from textile producers, low prices for grain and other 
alternatives to cotton in early 2001, and adoption of Bt cotton in the eastern provinces.  With this year's 
big harvest, domestic prices have fallen to near world levels. As with wheat, there could be potential for 
sales of high quality cotton to China for blending purposes, but total imports are likely to be well below 
the 818,500 ton TRQ for 2002. In the longer run, China's textile industry is expected to be a major 
beneficiary of WTO accession, which could lead to growth in cotton demand. However, important 
questions remain, including: 
•  How will market forces guide supply in China's newly liberalized cotton industry?   
•  How will production respond to changing relative prices for grain and cotton? and  
•  How will continued adoption of Bt cotton in China affect supply?  
 
The Bottom Line for U.S. Agriculture 
 
The bottom line for U.S. agriculture from China's accession to the WTO is an increase in the total 
foreign demand for U.S. corn, wheat, and oilseeds.  ERS analysis suggests that increased exports 
resulting from accession, coupled with higher crop prices, could lead to an annual average increase in  
export values of nearly a billion dollars over the 2002-2009 period.  Over time, however, higher feed 
prices will lead to slightly higher livestock prices and higher retail food prices. 
 
Higher crop prices will reduce farmers’ dependence on government payments as market returns rise 
while loan deficiency payments and marketing loan gains decline.  On average, annual projected 
expenditures on marketing loan programs are $0.2 billion lower over the 2002-09 period.  At the same 
time, total cash receipts from farm marketings will increase by approximately $2.0 billion annually, on 
average.  Taking into account increased market returns, lower government payments, and some 
increases in farm production expenses, annual net farm income would rise by an average of $0.8 billion 
over the 2002-09 period. 
 
In addition to the increased exports of field crops under China’s TRQ regime, livestock, horticultural, 
and other high-valued products face substantially lower tariffs under WTO accession, and this will allow 
for larger exports to China.  Opportunities to immediately expand exports of some of these items, 
however, may be limited by China’s lack of cold storage and other sophisticated transportation 
infrastructure. As marketing channels develop, these high-value products will gain greater penetration in 
the China market.  China's agreement to open domestic distribution to foreign companies may enhance 
the extent to which imported high-valued products can be marketed to China’s consumers.  It is also 
important to note that China’s low labor costs make domestic production of many of these products 
competitive with producers in other countries, so China’s exports of some high-valued agricultural 
products could increase substantially and compete with US producers on international markets.  
 
Larger Gains will Accrue over Time 
 
Beyond the immediate effects on import levels based on price differences and new trade rules, there are 
underlying forces that will influence China’s trade over a longer time horizon.  Fundamentally, China’s 
endowment of the basic factors of production, (land, labor, and capital) will determine which 
agricultural products are most profitable for China’s farmers to specialize in and which to import from 
other producers.  In addition, underlying economic development will boost food demand and 
commercialize China's subsistence-oriented farm operations.  Finally, while China has made significant 
progress toward the transition from a planned to a market economy, there are still issues remaining in 
this process that will affect future trade. 
 
China’s factor endowments will have the most profound effect on future agricultural trade. China has 
some 40 percent of the world’s farmers but less than 10 percent of the world’s arable land, so China’s 
comparative advantage clearly lies in labor-intensive agricultural products.  Thus, the tendency will be 
for China to import more land-intensive grains and field crops, and export labor-intensive fruits, 
vegetables, and other specialty crops.  
 
The adjustments needed in the structure of production and trade are hampered by the lack of mobility of 
factors of production. Land in China is still collectively owned by villages and leased to farmers. While 
rentals of land are possible, they are not common and it is not easy to transfer land to its highest-valued 
use.  Rural laborers cannot freely move to cities -- where most nonfarm jobs are -- and formal farm 
credit institutions have only begun to emerge.  
 
China’s accession to WTO bodes well for its long-term development prospects. As Chinese incomes 
grow, consumers will demand more meat, fish, fruits, vegetables, processed foods, and restaurant meals. 
Demand for feed grains will rise to support a growing livestock sector.  This process will generate not  
only increased export opportunities for bulk feed grains, but also increased opportunities for exporters of 
high-value and processed agricultural products.   
 
As subsistence-oriented farm households become wealthier and more integrated into the non-agricultural 
economy, they will purchase food rather than growing it themselves and produce commodities that bring 
the highest returns.  This will facilitate movement away from staple grains toward higher-valued labor-
intensive products.  As workers leave agriculture, China's tiny farms may grow bigger and off-farm 
earnings may finance investments in equipment and land improvements.  
 
Lastly, it is important to note that China has already made remarkable progress moving away from a 
planned economy.  It is hard to imagine that a little over 20 years ago all agricultural production in 
China was carried out according to bureaucratic decree.  Today, the government guides production by 
setting procurement prices for a shrinking number of commodities, but most farmers make their own 
decisions about what to produce.  Barriers to transporting goods between regions and provinces have 
fallen significantly and markets are becoming more integrated.  Even grain markets -- the state-owned 
Grain Bureaus still handle more than 70 percent of all marketed grain -- are showing clear patterns of 
integration. 
 
While the government has reduced its role in the economy, it has yet to establish reliable market 
information systems, develop transportation and market infrastructure, build an agricultural finance 
system, and modernize its legal system to clarify property rights, enforce contracts, and resolve disputes.  
Without the institutional infrastructure to provide these essential services, market development will be 
slowed and farmers will be constrained in their ability to take advantage of the opportunities provided by 
international markets. 
 
 
Conclusion 
 
China’s recent accession to the WTO is a positive development for the international agricultural 
economy and for producers in the United States.  Integrating a large and diverse agricultural producer 
and consumer such as China into international markets will serve to rationalize world food production 
on an unprecedented scale.  China’s rapidly growing and urbanizing economy will increase export 
opportunities for farmers in the United States and other countries. 
 
In the big picture, however, formal accession to the WTO is a reflection of broader changes that are 
already underway in China and will continue for years to come.  WTO accession solidifies these 
changes and sets the stage for further reform as China’s economy becomes more transparent and guided 
by the rule of law.  For the same reasons policy makers in China strove to achieve WTO membership, 
they also are working to liberalize markets and integrate China with the world economy in ways that are 
independent of WTO.  Continued economic development and transition to a market economy, along 
with trade liberalization, will provide greater opportunities for agricultural exports to China in the future.  Item
2002-09 2005-07
U.S. agricultural export value (fiscal year)
  Grains and feeds 0.8             0.8           
  Oilseeds and products 0.1             0.1           
  Other exports (0.0)            (0.1)          
  Total exports 0.9             0.9           
U.S. net farm income (calendar year)
  Cash receipts from marketings
    Crops 1.0             1.0           
    Livestock and products 1.0             1.2           
  Other income (0.2)            (0.1)          
  Other adjustments to farm income 0.0             0.1           
  Total production expenses 1.1             1.3           
  Net farm income 0.8             0.9           
U.S. farm program costs (fiscal year)
  Loan deficiency payments and marketing gains (0.2)            (0.2)          
U.S. consumer price index for food 0.4             0.4           
Change from baseline
The effects of China's accession to the WTO
billion dollars
1982-84 = 100

CHINA'S ACCESSION TO WTO: IMPLICATIONS FOR US AGRICULTURAL EXPORTS

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