Agricultural Support Policies in Selected Countries
Sanitary and Phytosanitary Measures
From a marketer's perspective, the impact of China's accession to the World Trade Organisation (WTO) is very significant. Increases in purchasing power in the industrialised east of China for foreign imports have been estimated to increase the pre-WTO market from some 120 million people to 250 million people by 2004 (Asiafruit July/August 2000). As a result of this sentiment traders and exporters are closely examining the potential of the Chinese market.
However, much of the discussion and press has focused on the concessions granted to large multinational corporations. Less public is the discussion with respect to the impact on Small to Medium Sized Enterprises (SMEs) and fruit in particular, with the implications on trade.
Further, assessments of the impact of WTO accession on China's agricultural enterprises are few (Huang et.al.and Martin 1999). Those studies that have been undertaken have tended to focus on the grain sector. However, the labour intensive industries, such as fruit and vegetables, are not only high value crops, but they also have had, or have potential for, rapid growth. China's apple industry is a classic example of the former, while some high value vegetable crops, such as broccoli to Japan, are currently experiencing rapid growth in exports.
While the final reform package will not be known until final agreement is reached, there is sufficient information available to make some key observations.
WTO membership requires, amongst other things, certain key areas of agreement. Firstly, there is unconditional Most-Favoured-Nation (MFN) status as per Article I of the General Agreement on Tariffs and Trade (GATT), which requires each member to treat all other members in the same way as it treats its MFN trading partners. Secondly, and closely related to the previous, is reciprocity, i.e. each member has a `right', i.e. access to markets of other trading partners on a MFN basis and an `obligation' to reciprocate with trade concessions to other members. Thirdly, any restrictions on imports must be tariff based, rather than through the use of quotas. The purpose of a tariff is to provide greater commercial certainty by imposing a ceiling that cannot be exceeded, except by negotiations, with compensation for affected trading partners. Fourthly, transparency within the trading regime is required (Martin 1999).
It is also important to point out that there are a wide range of other agreements that WTO membership imposes on member countries. In particular, the importance of State Trading Enterprises (STEs) in China's trading system will come under scrutiny in the final negotiations. The Chinese government has said it will not influence these companies and that market forces will prevail in the purchases and sales made by these organisations. Distribution rights are considered important for many suppliers to China. Under current arrangements, foreign companies are not permitted to engage in direct trade and must use a domestic Chinese agent authorised by the government to handle imports and exports. The other key factor is the final outcome of negotiations on Technical Barriers to Trade and on Sanitary and Phytosanitary Measures (SPSs).
Most industry observers agree that China's reforms in the area of tariffs, as proposed, present few problems. More difficult are the non-tariff barriers.
While this paper is focused on the citrus industry, there is a wide range of issues that must be considered if China's accession is to proceed smoothly. World-wide, the grain and oilseed industries are hoping WTO accession occurs very rapidly, especially the USA grain and oilseed industries. The benefits perceived by these industries are much lower tariffs on a range of agricultural goods, as well as a number of tariff rate quotas (TRQs). TRQs will allow the Chinese government to import fixed quantities of given commodities at low duty, with imports above and beyond these quantities attracting higher duties. Initial TRQs of significance will be 7.3 million mt (metric tonnes) for wheat, 4.5 million mt for maize and 2.66 million mt for rice, rising to 9.64 million mt, 7.2 million mt and 5.32 million mt respectively by 2004. These quantities are only an indication of the extent that China would open its markets. China's domestic demand will be the deciding factor as to how much of the quota would be imported. In 1999/2000 China imported only 1.01million mt of wheat, 0.15 million mt of maize and 0.2 million mt of rice, figures well below the stated TRQs (AgraFood Asia November 2000).
None-the-less, it seems inevitable that imports will compete more strongly with domestic produce, with the hardest-hit areas most likely to be those in the centre and the West, which grow wheat, maize, rice and cotton. In response to the likelihood of stiffer competition, restructuring of the agricultural sector has already commenced, with China abolishing protective prices for spring wheat in northern China, wheat south of the Yangtze river and early rice in the South (AgraFood Asia November 2000).
Many provinces are trying to produce crops of higher quality (either cultivating high-quality varieties or cutting back areas given to inferior varieties) or switching production from grains to more profitable crops such as fruit, vegetables and flowers. The government is also examining methods of subsidising farmers in the traditional growing areas, while still remaining within the constraints imposed by the WTO (AgraFood Asia November 2000).
More recently China has expressed concern at the pressure applied by the USA and the Cairns Group of agricultural exporting countries to limit the current level of subsidies, with the debate centred on how China will be treated once it becomes a WTO member: as a `developed country' (with a 5% de minimis) or as a `developing country (with a 10% de minimis). A de minimis threshold is the amount of domestic support a country may exempt from its calculation of total domestic support and therefore further deductions. The USA and the Cairns Group are insisting that China's de minimis threshold be restricted to 5% thus assigning it `developed country' status. The EU is taking the middle ground on this issue claiming that China should not be held to a different regime than other WTO members (Bridges, 2001).
The reason for this resistance is not the amount of support currently given to farmers but more as a potential `safety net'. Farm support is estimated at some 2%, well within the current de minimis support levels for `developed countries'. However, the general plight of many farmers, especially those producing grain and other staple crops is of concern to the government. A fall-back position would enable the government to give support if necessary. The implications for citrus farmers is considered minimal since support given to this sector in China is considerably less than for grain and other food security crops.
Although China will benefit from entry in the medium to long term, it has been estimated that some 40 million farmers could lose their jobs over the next five years, mainly due to lower tariffs rendering domestic grain production uncompetitive with imports (AgraFood Asia November 2000).
China's original urgency for early entry in the WTO has resulted in many technical points being left out of the negotiations, which focused mainly on broad tariffs and quotas. Hence some important issues, such as who would be responsible for regulating the quality of imports, were left to be decided later, and remain unresolved. China has also imposed separate inspection standards for domestic and foreign products, a loophole that could provide ample opportunity for blocking unwanted imports. The Chinese argue that no member should be subject to more than the WTO's existing rules, and insist that `mutual trust' and `mutual confidence' should be sufficient (AgraFood Asia November 2000).
The major support policies are tariffs, SPSs1 and farmer support. These are discussed for a number of countries and compared with China. The discussion has been limited to a consideration of the impacts on citrus trade.
Firstly, two terms need clarification:
The information on tariff bindings in Table 1 provides details of the rates applying immediately prior to the entry into force of the WTO Agreement (i.e. the bound rates, even though some were not bound until the entry into force of the WTO Agreement), the final bound rate and the implementation period for each country. Reductions for developed countries are being made in six equal annual instalments over the implementation period, commencing with the first reduction on 1 January 1995 and with the final reduction to be implemented on 1 January 2000. Developing countries were able to negotiate the implementation of reduction over a period of up to 10 years (i.e. by 2004).
Table 1
Tariffs on Fresh Oranges - Selected Countries
Country |
Bound tariff |
Applied tariff |
|
Australia |
2% ad valorem reducing to 1% ad valorem in 2000 |
||
Brazil |
55% reducing to 35% in 2004 |
As at 1/1/98: 13% |
|
USA |
2.2c/kg reducing to 1.9c/kg in 2000 |
As at 1/8/97: 2c/kg |
|
Korea* |
99% reducing to 50% by 2000 |
As at 1/1/98: 50% |
|
As at 1/1/98: 79.4% |
Minimum market access for 1998 is 29,006 mt |
||
Canada |
Free |
Free |
|
Chile |
35% reducing to 25% |
As at 1/1/98:11% |
|
Indonesia |
90% reducing to 50% by 2004 |
As at 21/1/98: 50% |
|
Malaysia |
5% + $661.40 reducing to 20% by 2004 |
As at 17/10/97: 10% |
|
Japan |
From 1 June to 30 Nov: 26.6% reducing to 16% by 2000; From 1 Dec to 31 May: 53.1% reducing to 32% by 2000 |
As at 1/1/98: From 1 June to 30 Nov: 18% From 1 Dec to 31 May: 36% |
|
Singapore |
27% reducing to 10% by 2004 |
Free |
|
Hong Kong |
Free |
Free |
|
Thailand |
48% or if higher 40Baht/kg reducing to 40% or if higher 33.50Baht/kg in 2004 |
As at 1/1/98: 48% or if higher 40Baht/kg |
|
South Africa |
5% reducing to 4% by 2000 |
As at 5/9/97: |
|
Philippines |
70% reducing to 45% in three steps ('97, '99, 2003) |
As at 1/1/98: 20% |
|
* Under its Uruguay Round commitments, Korea eliminated on 1 July 1997 import restrictions which had been maintained for balance of payments reasons. Note that the Agreement on Agriculture does not preclude the application of balance of payments measures, but in Korea's case pre-existing balance of payments restrictions had been found to be no longer justifiable. |
|||
Source: Department of Foreign Affairs and Trade, Australia (2000)
The tariff reduction formula negotiated under the Uruguay Round was a simple average tariff cut across all agricultural tariffs of 36% for developed countries (24% for developing countries), with each tariff line to be cut by a minimum of 15% (10% in the case of developing countries). The average provided for under the formula has resulted in variations amongst WTO members in the level of reductions in bindings applicable to individual products.
Under the Uruguay Round negotiations, countries were required to bind tariffs on all agricultural products. For agricultural products that were already subject to customs duties only, reductions are being implemented on the bound duty level where there were already bindings; in the case of previously unbound duties, reductions are being applied on the tariff level which applied as at 1 September 1986.
For agricultural products which were subject to non-tariff measures (e.g. quantitative import restrictions, embargoes, discretionary import licensing), such measures were "tariffied", that is converted to tariff equivalents with reductions in the resulting tariffs.
In addition, where import restrictions were "tariffied", countries are required to open current and/or minimum access opportunities in certain circumstances, according to a formula. Where imports of the particular product were less that 3% of domestic consumption in the 1986-88 base period, access was increased from 1 January 1995 to 3% expanding to 5% by the end of the implementation period. These are minimum access tariff quotas, with the in quota tariffs set at levels designed to allow trade to flow.
As indicated in Table 1, Japan applies a seasonal tariff on citrus products ranging from 18% to 36%. Domestic prices in Japan are high, but a reduction in tariffs would enable exporting countries to further develop this market.
South Korea is providing minimum market access for fresh oranges of 15,000 mt in 1995, rising to 57,017 mt in 2004. The tariff rate applied to the quota is 50%, with imports outside the minimum access level being subject to the binding 99%, reducing to 40% by 2004. At present, above quota tariffs are as high as 152% for mandarins (DFAT 2000)
While the bound rates are very high for citrus, the actual applied rates are minimal. For example, the rate applied to Australian fresh citrus is 5%, while the bound rate which could be applied is 40-50% (ABARE 2000).
Under its Uruguay Round commitments, the European Union (EU) system of ad valorem tariffs and reference prices applicable to fresh oranges has been replaced with arrangements involving reductions in such a way as to minimise their disruptive impact on trade. Tariffs on oranges are being reduced by 20% over the implementation period. In 1996, the tariff quota for fresh oranges was 20,000 mt, at a tariff rate of 10%. Imports above this level are subject to seasonal duties as outlined in Table 2.
Table 2
EU Tariffs on Fresh Oranges
Period |
Tariff |
1 January to 31 March |
From a tariff of 19.3% plus a specific rate of between 0.7 and 8.6 Ecu/100 kg, depending on the variety of fruit and price |
1 to 30 April |
A tariff of 12.6% plus a specific rate of between 0.7 and 8.6 Ecu/100 kg, depending on the variety of fruit and price |
1 to 15 May |
A tariff of 5.8% plus a specific rate of between 0.7 and 8.6 Ecu/100 kg, depending on the variety of fruit and price |
From 16 to 31 May |
A tariff of 3.9% plus a specific rate of between 0.7 and 8.6 Ecu/100 kg, depending on the variety of fruit and price |
1 June to 30 September |
A tariff of 3.9% |
1 to 15 October |
A tariff of 3.7% |
16 October to 30 November |
A tariff of 18.7% |
1 to 31 December |
A tariff of 18.76% plus a specific rate of between 0.7 and 8.6 Ecu/100 kg, depending on the variety of fruit and price |
Source: Department of Foreign Affairs and Trade, Australia (2000)
Given the overall comparison above, China's final bindings are lower than many other countries. Table 3 details the current rates for each major citrus group and indicates the rate at which China will reduce the tariff. For example, accession in 2002 means the rate for oranges will drop from the current base rate of 40% to 22.6%; that is, under current negotiations the bound rate still has to be reached by 2004.
Table 3
Final Tariff Bindings for Citrus Products
HSNO |
Description of Goods |
Base Rate of Duty |
Bound Rate of Duty |
Implementation Period |
Initial Negotiating Right |
2000 |
2001 |
2002 |
2003 |
2004 |
08051000 |
-Oranges, mandarins etc. |
40 |
11 |
2004 |
AR,AU,UY |
34.2 |
28.4 |
22.6 |
16.8 |
11 |
08052010 |
-Chiao-kan |
40 |
12 |
2004 |
AU,UY |
34.4 |
28.8 |
23.2 |
17.6 |
12 |
08052090 |
-Other |
40 |
12 |
2004 |
AU,UY |
34.4 |
28.8 |
23.2 |
17.6 |
12 |
08053000 |
-Lemons & limes |
40 |
11 |
2004 |
AR,AU,CO,UY |
34.2 |
28.4 |
22.6 |
16.8 |
11 |
08054000 |
Grapefruit |
40 |
12 |
2004 |
UY,JP |
34.4 |
28.8 |
23.2 |
17.6 |
12 |
AR-Argentina; AU- Australia; UY-Uruguay; Co-Colombia; JP-Japan |
||||||||||
Source: Department of Foreign Affairs and Trade, Australia (2000)
China has granted Initial Negotiating Rights to Australia, Argentina and Uruguay. The USA apparently did not seek formal access to INR's, so currently they do not retain this status.
Citrus is accepted from areas with fruit fly freedom status. For Australian exports this applies to the Riverland South Australia, Sunraysia New South Wales, Victoria and the Murrumbidgee Irrigation Area New South Wales. Cold sterilisation is only accepted as a fall back treatment in the event of a breach of area freedom from these areas. The USA will not accept cold sterilisation as a frontline treatment from non-fruit fly free areas. A very tough stance is adopted on countries with citrus blackspot (ABARE 2000).
Australia's geographic isolation has enabled it to remain relatively free of pest and diseases. It maintains one of the most stringent quarantine controls in the world, which at times are not based on sound evidence or consistent with the risk involved (USSD 1998).
As Japan is relatively free of exotic pest and diseases, it aggressively pursues a minimal risk import policy in its quarantine and food safety decisions.
A policy of general import prohibitions exists on "all plants and plant products which serve as hosts of injurious insects or pathogens unknown or of restricted occurrence in Japan" (European Commission 1999). Further, Japan's list of non-quarantine organisms is incomplete and does not include many insects that are common in Japan and many exporting countries, such as aphids and mites. Japan's system of zero tolerance means that many products that may carry non-harmful insects are required to undergo needless fumigation.
A phytosanitary certificate is required for all fresh fruit and vegetables.
Also of concern is the lengthy approval procedures for fresh fruit (up to three years). The procedures are costly and lacking in transparency (European Commission 1999).
In the case of Australia, Japan does not recognise mainland area freedom from fruit fly and other pests.
Bans on fruit due to SPSs are common. Australian citrus is banned on quarantine grounds.
Quarantine barriers for fruit into Indonesia are minimal. Fruit fly can have either area freedom or by adoption of a range disinfestation methods. A phytosanitary certificate is required for all plant and plant products.
Producer Support Estimates (PSEs) for citrus are not separately identified in the literature, however citrus, along with other horticultural crops are considered to generally fall under `other commodities'.
Agricultural policy development has arisen to ensure a high degree of food self-sufficiency. Strong government intervention has maintained farm incomes, resulting in the agricultural sector being highly dependent on this intervention. Food self-sufficiency is 86% (vegetables) and 53% (fruit) (MAFF 1998).
The key farm support measures are administered prices, trade measures and supply management regimes, such as the vegetable supply stabilisation fund. There are no export subsidies, credit programs, transport subsidies and tax and investment incentives (USSD 1998). Other commodity PSEs are 61% (OECD 2000).
As with Japan, self-sufficiency in food has been a dominant force in the shaping of agricultural policy. Strong government intervention has maintained farm incomes, resulting in the agricultural sector being highly dependent on government support. The Minister of Agriculture and Forestry (MAF) has indicated that subsidies to farmers and corporate farms will be phased out and converted to loans by 2001. Farmer support is also to be linked to the production period with an in-depth analysis of the business before granting any loan (MAF 1999). However, getting detailed information is extremely difficult (ABARE 2000). Other commodity PSEs are 80% (OECD 2000).
There is little information available on the support measures to Indonesian farmers. Credit facilities are known to be provided to both farmers and farmer co-operatives. The government actively promotes investment in horticulture.
Producers of citrus who have contracts with processors are eligible for the payment of processing aid to ensure processing is more attractive, alternative to withdrawal from the market. As a result, increased volumes of fruit are processed. Export subsidies are also available to compensate the difference between EU prices and world prices. At present only pure orange juice is eligible for this subsidy.
For example, citrus growers in Spain, one of the largest producers and exporters of citrus in the world, have received regional, national and EU support. Measures include:
Assessing the level of support that the Chinese government provides to any particular sector is difficult. Most active support is at the provincial and county level, while the national government provides passive support.
The producer subsidy equivalents are estimated to be 2% for the Chinese agricultural sector and citrus industry is expected to be equal or less than this2. By comparison total subsidies for the industrialised sector including domestic price support and loss making STE's in general represented about 11% of total revenues (ABARE 2000).
Support provided at the provincial or county level tends to vary according to development plans for the counties and provinces. The major forms of support are either direct government support or through STEs or Town and Village Enterprises (TVEs) being the principle "developer" of a project. Where an STE or TVE is involved, they become joint venture partners in the project.
Generally this type of assistance is in the form of establishment support, which includes deferred payments for orchard capital establishments and in some cases, a monthly crop support subsidy. The actual tenure of the farmer can be either a landowner or a share-farmer. The repayments of these funds begin once the crop begins to yield fruit. In many cases, the joint-venture partner has the contract to market all the fruit, ensuring repayment of the loan. In many cases this "proactive" support frequently originates from local government and results in the establishment of large areas planted in a very short period of time.
The other major subsidy to more independent farmers is the sale of seedlings in some provinces. The cost is around Rmb 2/seedling (US$0.24) (Rutledge 2000). Most of the subsidies occur when the local government wants to introduce new varieties or wishes to establish a new region, as with lemons.
More difficult to assess is the reduction in "full" extension, as distinct from extension given by Agricultural Bureau staff, while at the same time relying on the sale of farm inputs. Overall, extension support is probably less than that provided to USA farmers.
As evidenced above, China's accession to WTO will result in significant changes to its agricultural sector. China has agreed to a tariff regime that is a significant reduction on current levels. These new rates are also lower than for many other countries - both developed and developing. In particular, the rates are orders of magnitude lower than those for Japan and South Korea. While China is currently planning to use a tariff rate quota system for a number of major commodities, including wheat, maize, rice, soybean oil, cotton, wool, sugar, palm oil and rapeseed oil, such measures are not to be applied to horticultural products.
For citrus producers in China, WTO accession is likely to have minimal impact. Subsidies are already negligible for most growers. For the majority of farmers who supply the mass market, the impact of higher quality fruit will also be minimal as imported fruit does not target this segment. For product targeting the quality end of the market, competition is likely to strengthen as volumes of imported product increase. Discussions with industry on the impact of WTO entry on the Chinese fruit industry tends to conclude that imported fruits will be limited to the top end of the market, because of high prices, and to the tropical varieties which China can not produce enough of itself. Domestic produce will continue to dominate the mass market. It is believed that it will take some time for the fragmented Chinese farming sector to develop fruits suitable for processing, and therefore, imported orange and grape juices will still have a secure market until this happens (Asiafruit January/February 2001).
The opening up of distribution rights to major suppliers of citrus is seen as a key step in the marketing of produce. With much of the imported produce destined for the supermarket and hotel and restaurant sector, many larger suppliers of citrus to this sector believe their products will be better managed, especially with respect to coolchain management. Better control over distribution will assist in more effective marketing of product against competitors.
However, most agree that SPS's will be the major barrier for countries without formal quarantine approvals. The insistence by China in assessing one product at a time slows the process, with countries seeking access having to prioritise their own products. While most are hopeful that the rate of approval will increase, there is nonetheless a feeling that for the next 5 years, trade by countries without official quarantine access will see little change.
The preparation of this paper has been supported with funds from FAO. Special thanks to Graeme Thomson (DFAT, Australia) for assistance in data collection.
David Hanlon is a director of Resource Consulting Services Pty Ltd, an Australian Agribusiness consulting firm. Over the past decade he has undertaken market research and business entry assessments for a wide range of clients, representing both the public and private sectors. During this period, David has investigated investments in excess of US$350 million within China.
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DFAT (Department of Foreign Affairs and Trade, Australia) 2000, Internal Memorandum.
Huang, J., Chen, C. and Rozelle, S. Trade Liberalization and China's Food Economy in the 21st Century: Implications to China's National Food Security, unpublished.
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MAFF (Ministry of Agriculture, Forestry and Fishery of Japan) 1998, Annual Report on Japanese Agriculture FY 1998, (http://www.maff.go.jp/hakusyo/kaigai/ehakusyo.pdf)
Martin, W. 1999, WTO Accession and China's Agricultural Trade Policies, World Bank.
OECD, 2000, Agricultural Polices in OECD Countries: monitoring and evaluation.
Rutledge, J.D., 2000, China, Peoples Republic of Citrus Annual 2000. USDA FAS publication (GAIN Report #CH0622)
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1 While SPSs are not strictly a support policy, they have the same outcome.
2 Foreign Affairs and Trade, Australia. Internal estimates (pers comm, January 2001)
