Fall 2000, Vol. 6 No. 4
In this issue...
Competitiveness and Protection of Chinese Agriculture
John C. Beghin
In the context of the likely accession of China to the World Trade Organization (WTO), it is useful to gauge the protection or taxation affecting the production of China's major agricultural crops and to assess the competitiveness of these crops. Because Chinese agriculture differs by regions, we consider early indica rice, late indica rice, and japonica rice grown in different parts of China, south wheat, north wheat, south corn, north corn, sorghum, soybeans, rapeseed, cotton, tobacco, sugarcane, and a subset of fruits and vegetables. We use 1996 to 1998 data, which are the most recent available data.
Distortions in Chinese Agriculture
China's rapid economic growth and gradual transition toward a market economy have brought about significant changes in production and consumption patterns and trade behavior in agriculture. To a considerable extent, however, the government, still distorts and controls input supply, output procurement, and trade flows, especially in the grain sector. China's leaders, as in many Asian countries, have been defining food security as grain security, thus bringing on policymakers' active interference in grain and oilseed markets and trade, effectively closing their borders beyond preset import quotas levels. Despite the substantial rural and economic reforms toward free domestic markets, which have occurred since 1978, there is still a high degree of state intervention in Chinese agriculture. Cropping patterns are still partly determined by nonmarket influences such as the state purchase contracts and the associated input distribution systems.
The effective protection coefficient (EPC) is a ratio of value-added of a sector in distorted prices (i.e., the prices paid and received by growers) to its value-added in world prices. This coefficient indicates the degree of policy transfer arising with output and tradable input policy distortions. An EPC greater than one indicates that the sector receives a "net" subsidy for its activities. Conversely, if the EPC is less than one, it indicates that the sector is penalized by a net taxation when both tradable input and output distortions are accounted for.
The values of the EPC reported in Table 1 show that there is a big difference in the degree of policy transfer across commodities. Corn, sugarcane, and sorghum enjoy a heavy support on three-year average (1996 to 1998) of 32, 10, and 36 percent, respectively, for their value-added, whereas japonica rice, late indica rice, and leaf tobacco face a net tax of 49, 21, and 17 percent, respectively, on average on their value-added.
Looking at input and output distortions separately reveals that agricultural protection in China is still reminiscent of the import-substitution era and shows systematic patterns of input subsidization and output taxation through foreign exchange rationing and overvalued currency.
A common indicator of competitiveness is the domestic resource cost (DRC), which indicates how much foreign exchange is saved by producing a good domestically instead of importing it. A DRC of less than one indicates that the country is competitive at producing the good; conversely, a DRC greater than one indicates the lack of competitivenessï¿½it is cheaper to import the good than to produce it.
The DRC indicator for various crops is shown in Table 2 and leads to the same conclusions as the protection indicator. Protection goes to crops that are not competitive. The DRC values for competitive activities such japonica rice, cabbage, green beans, tobacco, cotton, apples, and oranges are less than or close to one and clearly are smaller than those for most grains, oilseeds, and sugarcane. Most oilseeds and grain crops are protected and produced inefficiently in China, with the DRC value greater than one, with the notable exception of japonica rice. The results show that government policies on grain self-sufficiency lead to inefficient allocation of resources in Chinese agriculture and that there are significant differences in DRC values between the different types of rice, wheat, and corn. Japonica rice production is more competitive than early indica rice production. North wheat and north corn are produced more efficiently than south wheat.
China has limited arable land and an abundant labor force. These resource endowments give China a certain comparative advantage in labor-intensive goods in world markets. Labor-intensive crops, such as vegetables, tobacco, cotton, and fruits would be better suited for Chinese agriculture than grains. Among grain and oilseed crops, japonica rice has higher comparative advantage and late indica rice and north wheat have lower comparative "disadvantage" over the other crops in the group. Hence, China's grain self-sufficiency policy goes against its comparative advantage, except for japonica rice production.
Efficiency gains should result from the new grain policy that started in 1999, which promotes high-quality rice and wheat production and discourages low-quality rice and wheat production. Over 90 percent of exported rice is low-quality indica rice and only about 5 percent is high-quality japonica, which is produced mostly in Northeast and North China. Over the long term, however, the potential to increase the high-quality grain production likely will face increased water constraints. In the North China plain, both agricultural and nonagricultural uses have put high pressure on available water resources over the past 20 years, resulting in sharply cut river flows and reduced aquifer levels.
The cotton case deserves an additional qualifier. Since 1996, China has expanded its production of cotton and has accumulated large stocks, which are reflected in expectations of low world prices. One can reasonably guess that the DRC for cotton evaluated at 1999 prices would be greater than one and that China would be ill advised to expand its cotton production further. Assessing this conjecture, however, requires data not yet available.
China's accession to the WTO will induce the eventual reduction and elimination of many policies distorting trade, production, and consumption of agricultural commodities that are inconsistent with WTO principles. Reducing domestic and trade distortions would realign relative costs to relative world prices; reduce the production of importables, such as grains and oilseeds; and promote the production of exportables, such as vegetables, fruits, tobacco, and cotton. Hence, with accession to the WTO, China's agricultural trade patterns would be expected to increase China's dependence on world grain and oilseed markets to satisfy domestic demand and to absorb its exportable agricultural production. China's current long-term grain self-sufficiency policy is costly, which suggests that access to the WTO would benefit China as well as the rest of the world.
For more information, see CARD working paper 99-WP 223, "Food Self-Sufficiency, Comparative Advantage, and Agricultural Trade: A Policy Analysis Matrix for Chinese Agriculture" by Cheng Fang and John Beghin, August 1999 (revised version October 2000). ♦