Agricultural Trade Challenges

Product quality, safety standards and import barriers signala
need to revamp the industry, from the inside out


IT’S A DEAL: Purchasers from Ireland taste food and place orders at the Second China Agricultural Trade Fair

Despite the fact that many experts attribute last year’s unfavorable trade balance in agricultural products to very specific causes, and believe that the situation is likely to improve this year, others are not as optimistic. This is because the Chinese agricultural industry has to contend with internal and external problems, which will keep the pressure on over the next few years.

According to China’s commitments made to the World Trade Organization (WTO), its agricultural products market is to be opened wider in the years ahead, with corresponding tariffs reduced continually. In 2005, tariffs will be reduced to 15.35 percent, compared with the global average of 62 percent. This move will make China one of the countries with the lowest tariffs. Tariffs are expected to drop further to 15 percent in 2008.

Duty-free imports of wheat are likely to exceed 9 million tons this year, accounting for about 10 percent of the total output of domestic wheat production and amounting to more than one quarter of urban consumption. In recent years, international and domestic wheat prices have been largely similar despite the better quality and purity of imports. As a result, competition in the domestic wheat market is likely to become much fiercer in the foreseeable future.

Strengthening the Industry

Some experts pointed out that after China initiated reform and opening-up policies in the late 1970s, the country’s agricultural production rates experienced a landmark shift from long-term shortage to abundance during the more productive farming years. However, they also noted that although competition in the international market has increased, the inherent weaknesses in the Chinese agricultural industry have not been addressed to keep pace with the growing competition.

BREAKING THE GREEN BARRIER: Food companies such as Fengxiang Food Co., Ltd. in Shandong work hard to improve the quality of their produce to break the green barrier imposed by developed countries

Ding Li, Deputy Director of the Agricultural Industrialization Office of the Ministry of Agriculture, said, “In fact, last year’s food shortage was a clear indication of the problems faced by the industry.” Ding added, “Grain imports last year amounted to over 7 million tons, cotton was over 1 million tons, milk powder hundreds of thousands of tons, all in addition to large-scale importations of other agricultural products such as soybean oil and crude rubber. The high import figures of land-intensive agricultural products show that problems within the Chinese agricultural industry have not been completely addressed.”

Zhu Ming, President of the Chinese Academy of Agricultural Engineering under the Ministry of Agriculture, said that the trade deficit of Chinese agricultural products in 2004 was a strong indication that China has to speed up modernization of the industry and build a name as a powerful agricultural country.

According to Zhu Ming, production methods, for instance, are in need of a revamp. Currently, mechanization and labor productivity levels are low, which result in high costs and prices. Statistics show that production costs in China of staple crops such as rice, wheat, corn, soybean, rapeseed and cotton are high, with manpower costs making up some 35 to 53 percent, averaging 45 percent, as compared with no more than 10 percent in developed countries. In terms of product quality, it is generally low, and standardization and safety are issues in China. Furthermore, in developed countries, product reprocessing is over 80 percent, while in China, it is about 20 percent.

Zhu Ming said the industry is in the process of change: from extensive to intensive cultivation; from traditional farming to modern agricultural methods. The fundamentals of agricultural modernization are: to equip the industry with modern technology and to guide it with modern management modes, realizing the specialization, commercialization and socialization aspects of agriculture, and developing and utilizing resources in a scientific and rational way. The key to success lies in the optimum use of agricultural technology.

OPEN MARKET: According to its WTO
commitments, China is to further open up its agricultural products market. Workers in Zhejiang Toyoshima Industry Group process oranges

Other experts have also stated that the agricultural product distribution network is backward and will not help China compete in the international market. Ding Li explained that, faced with market competition, many Chinese farmers still have to cope with the risks individually. However, because forecast information on crop acreage and ongoing industry changes are very limited, these farmers do not get the valid and timely information that they need on crop kind and acreage in order to readjust their planting schedules.

Qin Qingwu, Director with the Chinese Association of Agricultural Economics, suggested that a law pertaining to cooperative economic organizations be enacted to provide farmers with policy and legal support. The purpose of the law, Qin said, would be to have farmers enter the market through rural enterprises or cooperatives, which would be better equipped to manage risks more effectively, and to assist farmers with contracts, among other means of support.

Meanwhile, Wen Yuekuang, Secretary General of the Council for U.S.-China Free Trade Promotion, stated that in the international trade of agricultural products, the lack of a much-needed and integrated association has resulted in the loss of valuable business opportunities for Chinese agricultural import and export companies. According to calculations by the Ministry of Commerce, there are about 10,000 enterprises in the agricultural import and export business, but the annual export volume of each company is only $1 million.

“If 100 of these companies formed an association, their total export volume would exceed $100 million, which would give them more bargaining power in the international market,” Wen said.

In addition, many other experts pointed out that the government should play its due part in helping develop the country’s agriculture, bringing its functions of public service into full play.

Chi Fulin, Director of the China Institute for Reform and Development, said that an agricultural public service system adapted to international and domestic markets should be set up as soon as possible. Such a public service system is also one of the major objectives of government reform efforts.

The system should include the functions such as help for farmers to develop superior quality or specialized products; eradication of low profits and low quality standards;

setting up of an unblocked, efficient and timely information platform for farmers; greater investments in agricultural infrastructure; policy support for high-potential products; forming of special agricultural production areas; support for leading rural enterprises to optimize the agricultural chain; and the building of a risk-control system to protect the interests of farmers.

More Government Support

The Agreement on Agriculture reached at the Uruguay Round of negotiations in 1994 differentiates the domestic agricultural supporting policies into “green box” policies and “amber box” policies.

In an interview conducted by China Economic Times, Cheng Guoqiang, researcher with the Development Research Center of the State Council, said that although the WTO does not encourage the implementation of “amber box” policies, which have a substantial impact on the price of agricultural products and might distort the patterns and flow of trade, it does encourage members to subsidize farmers’ incomes as long as such subsidies do not influence production decisions. In spite of this, most of the developed countries still adopt the “amber box” policies to subsidize their agricultural industries. Moreover, the United States and the European Union, for example, even convert subsidy measures that are originally “amber box” policies into the “green box” category, so as to stimulate the production and export of agricultural products.

The volume of “amber box” subsidies committed by the Chinese Government is equivalent to 8.5 percent of the total national agricultural production. But Chen Xiwen, Deputy Director of the Office of Central Financial Work Leading Group under the Central Committee of the Communist Party of China, explained recently that although the Chinese Government does subsidize farmers to some extent, in effect, the subsidy is far less than the committed 8.5 percent.

China only exercises six of the “green box” policies under the WTO rules: General government services, food security stocks, domestic production aid, natural disaster payment, environmental protection programs, and regional assistance programs. The other six supportive measures widely used by developed countries are not directly relevant to China. Furthermore, the subsidies received by Chinese farmers are much lower than in developed countries. There are fewer assistance measures in place, and existing policies are inefficient and weak. What is most needed in terms of support measures or policies is a subsidy policy that increases farmers’ incomes by means of transfer payment.

Cheng Guoqiang noted that such reforms to domestic agricultural subsidy and other supporting policies should be implemented sooner rather than later. Cheng suggested that first on the list of reform should be strengthening of support for “green box” policies by way of, for example, enhanced agricultural research and development, plant disease control, market information service, infrastructure construction, and restructuring of agricultural industry. At the same time, several key systems should be reinforced and built up, such as the systems for agricultural quality standards, plant disease and pest prevention and control, product quality inspection and quarantine, and market information. These measures would help boost the overall quality of the Chinese agricultural industry and its international standing. Second, the establishment of an “amber box” subsidy mechanism should be expedited. Based on its own conditions and the experiences of other countries, China should put in place a sound price subsidy system within the framework of the WTO that is able to help increase farmers’ incomes and guarantee food security. Third, China should speed up the pace for rural tax and administrative fee reform to lighten farmers’ burden. This reform would provide the most effective subsidy for farmers.

In addition, Cheng suggested that an emergency response mechanism be set up to counter the high agricultural subsidies in place in other countries, and restrictions be imposed on the import of foreign agricultural products that enjoy such subsidies. This is one way, in Cheng’s opinion, of reducing the negative impact of high agricultural subsidies offered by developed countries.

Cheng also suggested that China participate actively in the new round of WTO agricultural negotiations and push for the establishment of new rules and mechanisms that restrict the inordinate subsidies prevalent in developed countries, thereby creating a fairer international trade environment.

Barriers to Agricultural Trade

Liberalization of the international agricultural trade market could do with more impetus. Globally, the industry is typically government-protected. Among the non-tariff trade barriers, the technical or technicalities barriers have been the most commonly used protective measures employed by governments in recent years. They have become key impediments to the growth of China’s agricultural product exports.

Currently, the technical barrier to trade (TBT) can be segmented into five parts: Inspection and quarantine, food labeling, identification, intellectual property rights, and food composition. Of these, inspection and quarantine, and identification are the major barriers to the exports of Chinese agricultural products.

“The export pressure is even greater than before,” lamented Xu Guantong, an official with the Agriculture and Forestry Department of Zhejiang Province. “It is mainly because of the various trade restrictions imposed by developed countries.”

Meanwhile, according to the Chinese Chamber of Commerce of Import and Export of Foodstuff, Native Produce and Animal By-products (CFNA), the export of Chinese tea has fallen victim to “green barriers” in recent years. Countries such as the United States, Japan and EU members have imposed stricter standards on the imports of Chinese tea, which has led to an obvious decrease in China’s export volumes. This year’s total tea export volume for Zhejiang is hundreds of millions of dollars less than in previous years.

A Ministry of Commerce survey of the native food produce and animal by-products industries showed that 89.7 percent of the companies surveyed saw their business affected by the TBT, 82 percent claimed that their market share dropped, and 35 percent said that they had been edged out of the market as a result. In 2003, losses suffered by the Chinese agricultural product trade amounted to $9.5 billion due to TBT.

“At present, it is not only the developed countries like Japan and EU nations that take TBT measures against Chinese products, even some developing countries such as Singapore and Malaysia have begun to block Chinese exports with TBT,” noted a researcher with the Development Research Center of the State Council.

Currently, at least 32 countries and regions have readjusted their standards for 427 kinds of agricultural chemical residues. Further, the EU has hiked the standard by 10 to 100 times. Japan is expected to put into practice a new system of listing agricultural chemicals in May 2006. If the chemical residue of an agricultural product does not meet the set standard, it will not be imported into Japan. Unfortunately, almost all of the products grown in China are on that list. As for chemical residues not on the list, there is a minimum requirement-0.01mg/kg or 0.05mg/kg-that must be satisfied. This means no product is allowed to contain any chemical residue at all.

Apart from trade barriers, anti-dumping measures might also be challenges faced by Chinese import and export companies in the near future. In addition, other measures unfavorable to Chinese exports might include agricultural products.

Another restriction and barrier to the export of Chinese agricultural products is the export quota, which sometimes represents an obvious discrimination against Chinese products. Economist, Xia Youfu with the University of International Business and Economics, presented the following set of figures: In 2003, Russia allowed the United States a meat quota of more than 500,000 tons, while that for China was just 3,000 tons; in 2004, the quota for the United States was over 700,000 tons, while that for China was less than 100,000 tons.

“Many countries are strict with imports, but China is relatively lax in this respect,” Xia Youfu commented. The cruel irony is that poor management poses an obstacle to export, while at the same time it is an ineffective barrier to products flooding the Chinese market. Xia emphasized that the relevant government agencies should adopt proper protective measures. “Our entry into the WTO gave us rights as well as responsibilities. What must be made clear is that we should not be made to only take the responsibilities and give up our rights,” he added.