The case of China

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Some of the most momentous and farreaching economic reforms have been, and are still, occurring in the People's Republic of China (Table 19). China is unique in several ways. It is the largest remaining centrally planned economy; its population, 1.22 billion people, represents one-quarter of the world's total; its booming economy is rapidly moving towards a market-driven system; and it is heavily involved in world trade, striving to join the world trade system, including the new World Trade Organization WTO).

Underlying the economic reforms in China is a desire to maintain strong growth, allowing the country to turn itself from a poor developing economy dominated by subsistence-level peasant agriculture into a modern industrial economy. Prior to 1978 China was a traditional centrally planned economy. Agricultural activities were organized under the Rural People's Communes, which implemented government directives and managed small-scale enterprises and shops.

Stagnating levels of agricultural production and rising food-grain imports in the 1970s led to the initiation of agricultural reforms, which were essentially to move the food and agricultural sector of the Chinese economy towards a market system. The reforms contributed to a significant increase in agricultural output which enabled China to turn from being a net importer of food and agricultural products to being a net exporter.

TABLE 19
China: selected indicators of economic and agricultural performance

  1986 1987 1988 1989 1990 1991 1992 1993 1994
  (........................percentage changes over previous year......................)
GDP 8.3 11.0 10.8 4.3 3.9 8.0 13.2 13.4 11.8
Agricultural GDP 3.4 5.8 3.9 3.1 7.4 2.4 4.1 4.0 3.5
Inflation rate 7.0 8.8 20.7 16.3 1.3 3.0 5.3 13.0 21.7
Merchandise exports 2.6 34.9 18.2 5.3 19.2 14.4 18.1 8.8 30.5
Merchandise imports -8.7 4.3 27.4 5.3 -13.3 18.5 28.3 34.1 10.5
Agricultural production 2.3 5.2 2.9 2.5 8.1 5.0 3.9 5.1 3.6
Per caput food production 2.7 2.3 1.0 1.5 6.8 2.7 3.5 5.1 3.5
  (.......................................billion US$.......................................)
Agricultural exports 7 864 9 082 10 326 10 479 10 204 11 620 12 045 12 198 ...
Agricultural imports 5 467 7 561 9 763 11 067 9 794 9 429 9 800 8 569 ...
  (............................kilocalories per caput per day.........................)
Dietary energy supply 2 587 2 597 2 567 2 597 2 654 2 679 2 705 ... ...

Source : FAO and Asian Development Bank.

At about the same time as the agricultural policy reforms were initiated, China began to open up its nonagricultural economy. It embarked on an export-led growth strategy, different from that of any other centrally planned economy, which led to a dramatic change in China's role in the international economy.

Thus, while China's total merchandise trade in 1977 represented only 1.4 percent of world trade, its share in 1993 had increased to 4.8 percent. From being only the world's 1 5th-largest exporting country in 1977 it became the sixth-largest in 1993. Over the same period, the country's share in world agricultural imports remained at 2.3 to 2.4 percent, while its share in world agricultural exports rose from 1.7 percent to 3.7 percent.

By the early 1990s China had become a substantial beneficiary of foreign aid, a large borrower on international capital markets and a major recipient of foreign direct investment. In 1993 net foreign direct investments reached almost US$26 billion. China has also taken substantial steps towards the convertibility of its currency.

Economic performances have been spectacular since the beginning of the reforms in 1978. The average annual real rate of GDP growth for the period 1979 to 1993 was more than 9 percent, leading to real GDP multiplying by more than 3.5 times between 1978 and 1993.

Although this outstanding rate of growth brought about significant improvements in the economic well-being of the population, a number of problems emerged. Inflation, for example, has been fueled by loose monetary policy combined with high levels of foreign investment. In addition, the dramatic growth has not been equally shared throughout the country and increasing disparities in income have emerged between the central/western and the eastern regions and between rural and urban areas. While the sweeping changes in agricultural policy contributed to a marked reduction in the absolute poverty level during the first half of the 1980s, the subsequent slowdown in agricultural growth caused the incidence of rural poverty to remain unchanged during the second half of the decade.

The improvement in living standards and consumption patterns was brought about by booming growth in high growth areas. The differences between urban and rural income levels are reflected in their different food consumption patterns. Over the past five years rural areas have remained dependent on high per caput consumption of cereals, whereas in urban areas cereal consumption was only half as high as in rural areas and has tended to decline. Conversely, urban consumers have had much higher per caput consumption of red meat, poultry, eggs and fishery products, and their consumption of these products has also grown faster than it has among rural consumers.

The Chinese experience raises a number of questions for the years to come. First, can China continue its extraordinary economic growth for a sustained period and can it do so without generating excessive inflation? Second, can the positive income and employment effects of high growth be extended to more of the population without further massive rural migration into the already overcrowded cities? Third, can the problems of Chinese agriculture be overcome so that it can continue to satisfy a major portion of the country's food demand as the population grows larger and richer?

Many observers, both within and outside China, are concerned about the impact that the huge population of China will have on both agricultural production and demand for imported cereals and other agricultural commodities. On the production side causes of concern are the rapid loss of cropland in areas of accelerated industrial growth; the serious competition for limited supplies of groundwater in the areas surrounding major cities; cropland erosion and contamination; and the exhaustion of the improved production technology that helped enable such remarkable progress in the 1980s. Per caput cereal production increased by 23 percent between 1978 and 1984, but the 1984 level has not been exceeded in the last decade except very marginally in 1990.

It has been suggested that Chinese demand for imported cereals might become so large in the early part of the coming century that it will constitute a threat to the stability of world prices and supplies available to other importers. A more realistic scenario is that China will become an increasingly active trader in world agricultural markets, producing some agricultural products for export and importing others. If China is able to maintain its export-driven growth at anywhere near its present relatively high rate it will have a major impact on international markets. In any event there is little doubt that China will have an important role in world agricultural trade in the next century.

III. The evolution of international trade rules

The Uruguay round
The agricultural agreement
Import protection
Export competition
Domestic policies
The peace clause
The committee on agriculture
The sanitary and phytosanitary agreement
The impact of the Uruguay round on world trade and commodity prices

At the end of the Second World War economic policy-makers in the leading countries were searching for institutional instruments that would avoid the chaos and economic and trade warfare that had marked the 1930s. They believed that an institution was needed to help countries maintain international monetary stability and to avoid the competitive devaluations that had marked the Great Depression of the 1920s and 1930s. The International Monetary Fund (IMF) was developed for this purpose. The economic policy-makers also recognized the need for an institution to provide capital for the reconstruction and development of national economies. The International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, was created to this end.

The third part of this set of international economic institutions was to be the International Trade Organization (ITO). It was assumed that a repetition of the protectionist spiral of the 1930s could he avoided by developing a set of international trade rules to which all countries would subscribe.

The negotiations for the proposed international trade organization included an interim GATT that was to he enforced by ITO). This set of trade rules was based on two fundamental principles: reciprocity and nondiscrimination. Reciprocity was enacted by agreements whereby one country granted tariff concessions to a trading partner in exchange for similar concessions from the partner. The nondiscrimination principle, embodied in the "most favoured nation" (MFN) clause, states that any concession granted to one contracting party is to he automatically extended to all contracting parties.

GATT also included rules to limit protection of domestic industries from the competition of imported goods, rules to regulate competition in international markets, rules on the tariff levels that countries could apply to imported goods and rules for the settlement of disputes between countries over trade practices. These rules, along with the tariff concessions, have been revised several times in subsequent multilateral trade negotiations.

The proposed ITO never came into being, as the United States' senate did not ratify it. In spite of the international agreements on tariffs and trade rules, this left GATT without an institutional framework within which to operate. One of the major disadvantages of this was the Iack of formal procedures for amending the basic rules to take new issues and problems into account. However, ambiguity had advantages as well as disadvantages, and the Iack of a formal institutional framework allowed the flexibility to consider new approaches and address new issues a flexibility that is often lacking in muItilateral organizations.

Because of the difficulty of amending the basic GATT articles, a number of new agreements were developed that did not have the universal coverage of the basic articles. Indeed, in the Tokyo Round of negotiations in the 1970s new sets of rules were developed in several areas. These additional sets of rules were termed "codes", their acceptance was voluntary and not all contracting parties became signatories. In addition, some of these codes had their own special dispute settlement processes and countries could choose to their own advantage between these processes and the more universal ones of GATT. This complicated system of agreements and procedures was sometimes called "GATT a la carte".

By the early 1980s it had become clear that there were other major problems with the GATT system as it then existed. First, the rules covered a decreasing share of international exchanges as they only covered trade in goods, which had grown less rapidly than trade in services. Second, even within trade in goods there were major sectors that were effectively outside the normal rules, in particular agriculture and textiles. In the case of agriculture the exclusions went back to the beginning of GATT. For textiles, the worldwide Multi-Fibre Agreement was not envisaged in the original agreement, hut bad grown up as a substitute for the web of protectionist controls placed on textile imports by developed countries.

GATT was begun by some 23 countries only. With a few exceptions, centrally planned economies chose not to join the agreement, and China , which had been a founding member, withdrew. The former USSR did not join and built its own trading system with the centrally planned economies of Eastern and Central Europe, the Council for Mutual Economic Assistance (CMEA or sometimes COMECON).

A large number of developing countries also chose to stay out of GATT. In many cases this was because joining would have required the country to remove some of its internal and external controls over trade and investment.

By the mid-1980s the widespread domestic policy reforms and the accompanying trade liberalization undertaken by developing countries had enabled many of them to become members of GATT. The political and economic changes in the former centrally planned economies also induced them to apply for membership if they were not already members and those who were became more active participants. China's application for readmission to GATT, which would allow it to become a charter member of the new World Trade Organization, is likely to have a major and lasting effect on international trade.

The Uruguay round

The Uruguay Round, completed in December 1993 after eight years of multilateral trade negotiations, is especially important for the future of trade. The agreement was approved by the 115 countries that were members of GATT in April 1994; most of these are developing countries. Never before had there been such large-scale participation of developing countries in a multilateral trade negotiation. Ratifying countries agree to abide by a common set of trade rules, although there are special exceptions for developing countries in terms of the timing and types of policy adjustment required.

The agreement sets up a new World Trade Organization (WTO) that supersedes GATT. The new organization will have responsibility for the rules relating to traditional trade in goods, services and trade related intellectual property matters.

The establishment of WTO represents an ingenious way of overcoming the problems that had developed with GATT. Indeed, as a country ratifies the Uruguay Round agreement, thus joining the WTO, it will be accepting the entire package of agreements. One of these is the recognition of WTO and of its functions as the custodian of the agreements. New members of WTO will also be accepting the old GATT rules, as modified by the Uruguay Round negotiations, as well as the new rules concerning trade in services and trade-related intellectual property matters. At the same time, they accept a unified dispute settlement process that will apply to all agreements and, finally, they will agree to a trade policy review mechanism.

A major feature of WTO will be a new dispute settlement mechanism that, like the GATT dispute settlement process, will still attempt to obtain a negotiated resolution to trade disputes. However, the formal dispute settlement procedures have been changed to produce quicker and more certain outcomes in case of failure to reach a negotiated solution. The procedures have been speeded up by setting deadlines for each step. The outcome has been made more certain by removing the possibility for a country to block the consideration and approval of a panel decision that finds its trade policy inconsistent with its international obligations. It has been all too common in recent years for countries to block decisions adverse to their own policies by refusing to allow the consensus needed to approve a panel report. Now a panel report will be automatically approved unless there is a consensus to reject it. To block approval of a panel report under the new system will thus require the agreement of the complaining party. However, a new provision allows for appeal to a special panel of experts to review findings that one of the parties believes to be seriously flawed.

The new dispute settlement procedures should be of special significance to smaller countries and developing countries that have been disadvantaged under the old dispute settlement rules. Large countries or trading blocs have tended to use the consensus requirement to block adverse rulings and, because of their size and economic power, they have been insulated from unilateral retaliation from smaller countries outside GATT rules. At the same time, if smaller countries attempted the same blocking tactics they were often threatened with unilateral retaliation.

The agricultural agreement

The agricultural portion of the original GATT was drafted initially to he consistent with the agricultural policies of the major founders of GATT, especially the United States. At that time the United States' policy involved the maintaining of prices for domestic agricultural products at levels above the world market price. Production controls were operated on several of the supported commodities and import quotas were imposed to prevent the entry of lower-priced foreign products. This system led to the special exemption of agricultural products in Article Xl of GATT, which allowed the use of import quotas for agricultural products that were subject to domestic production controls. This loophole was enlarged in 1955 when the United States threatened to withdraw from GATT unless it was granted a special waiver to Article Xl that would allow it to apply import quotas whenever imports threatened to interfere with domestic price supports, regardless of whether production controls were being used. This was the famous Section 22 waiver, granted temporarily in 1955 and still in effect for several products in early 1995.

In addition, a host of other non-tariff barriers emerged in agricultural trade. These included tile use of variable levies, minimum import prices and voluntary export restraints. Many countries applied quantitative import quotas, which 11 were allowed under the balance -of-payment provisions of GATT only when there was a balance of-payment problem, and left them in place long after the balance-of payment problem had disappeared.

In the previous rounds of multilateral trade negotiations there had never been an attempt to revise the trade rules for agriculture, although there had been various attempts to develop international commodity agreements. In the Kennedy Round of the 1960s and the Tokyo Round of the 1970s, there were attempts to bring commodity agreements into the GATT framework and thus to extend government controls from domestic markets to the international sphere.

Strong export competition in the 1980s set the stage for the agricultural reforms of the Uruguay Round. The expanding markets and commodity boom of the 1970s was quickly replaced by a collapse of the growth in demand in developing countries and in centrally planned economies beset by debt and other economic c-rises. Production stimulated by high farm prices and high levels of subsidies continued to increase as markets contracted. As a result, in the mid-1980s the intemational prices of agricultural commodities fell to the lowest real levels in 50 years. Subsidy costs escalated in those countries that were attempting to support farm incomes. Incomes and export earnings of producers without subsidies and protection fell sharply.

Many countries became convinced that the major causes of falling incomes and escalating subsidy costs were the policies being followed by many of the OECD countries. Moreover, whereas it had been possible to reduce many of the existing government interventions in markets outside agriculture through domestic policy reforms, removal of the major interventions in the agricultural system could only be accomplished through international agreements to remove trade-distorting policies in agriculture. The risks of unilateral removal of intervention in agriculture by a single country were likened to those of unilateral disarmament. It was also pointed out that the agricultural protection programmes in one country were largely intended to offset the adverse effects of the subsidy programmes of other countries.

The rising tide of trade disputes in agriculture in the 1980s led to political pressure for major agricultural reforms in the Uruguay Round. Indeed, the Round started with agricultural reform high on the agendas of many participants, including a significant group that stated they would not complete the negotiations without a satisfactory agreement to reduce trade distortions in agriculture.

One element that created major political pressure for reform was a group of exporters, the Cairns Group, named after the city in Australia where they first met. The group, which included both developed and developing countries, threatened to block agreement on a number of issues of importance to other countries and thus exerted pressure to keep the agricultural reforms as part of the negotiations.

The negotiations turned out to be a contest between the advocates of fundamental reform and those of trade liberalization, with some countries, including the Cairns Group, hoping to get troth (see Box 8). Advocates of reform were striving to get the GATT rules revised to remove the special exceptions for agriculture that accommodated the domestic farm policies of the major trading powers. indeed, the reformers wanted GATT rules for agriculture to go further than rules for non-agricultural industries by barring trade-distorting domestic subsidies as well as special border protection and export subsidies.

The advocates of trade liberalization took a different approach. They argued that countries should have a right to pursue national agricultural policies that suited their own particular agricultural conditions, but that these policies should be gradually modified to limit or reduce their adverse impacts on trade. Advocates of trade liberalization were willing to negotiate increased import quotas for products under quotas, to limit or moderate the levels of internal support, to use production controls to limit surplus output and to apply market-sharing agreements in lieu of competition in export markets. They did not want international rules to limit either the domestic or the international trade policies they could follow in agriculture. The advocates of liberalization generally argued that gradual and moderate liberalization would be enough to restore balance to international markets, whereas the advocates of reform almost always pushed for substantial liberalization in addition to reform.

BOX 8
TRADE REFORM AND TRADE LIBERALIZATION

Trade reform starts with the goal of changing the rules, in this case the GATT rules that set out the acceptable policies countries can use to protect borders, support domestic industries or compete in export markets. Advocates of trade reform believe that comparability and transparency can best be achieved if everyone follows the same rules for policies that have a major impact on trade. The framers of GATT took this approach for industries outside agriculture. Some GATT rules also dealt with situations where a country could deviate from the general rules, such as when a country had balance-of-payment problems.

Trade liberalization is concerned largely with reducing levels of protection. It is measured by the extent to which the barriers maintain internal prices above world prices, changes in world prices are transmitted to internal markets and future levels of protection are predictable. Thus, liberalization can be achieved by enlarging quotas, lowering tariffs or reducing other non-tariff barriers. In the original GATT rules for agriculture, countries were allowed to use quantitative import quotas to protect high internal price levels as long as domestic production controls were in effect to prevent domestic production from displacing imports. Countries using quotas were supposed to maintain the balance between domestic production and imports existing before the quantitative import quotas were imposed. In a similar vein, export subsidies were not to be used to gain more than an equitable share of the world market. Thus these rules were intended to maintain liberal trade regimes. In practice they were so poorly defined that they proved unenforceable.

Import protection

In the end there were more reforms than liberalization in the Uruguay Round. The major reform was of the rules limiting the policies that can be used to provide border protection. There were five elements of the negotiations on import protection. One was the conversion of all import barriers to tariffs: a process known as tariffication. This became effective immediately. The second element was the reduction of existing tariffs and of those resulting from tariffication over an implementation period. The third was the immediate binding of all tariffs on agricultural products (see Box 9). The fourth element was the introduction of a special safeguard provision for agricultural products that was different from the general safeguard rules in GATT. The fifth was the provision of special access arrangements to allow minimum market access.

The new rules required that all quotas, variable levies and other import barriers be converted to common tariffs, as soon as the agreement took effect. These and existing tariffs had then to be reduced by a minimum of 15 percent each over the implementation period with the tariff reductions as a whole having to average 36 percent. Developing countries were required to reduce tariffs by 24 percent and were allowed ten years, instead of six, to implement the cuts. All tariffs were to be bound. Developing countries were also given the option, which many chose, of declaring bound tariffs to replace tariffs that had been unbound. These newly bound tariffs declared by developing countries were not required to be cut.

The tariffication of non-tariff barriers and the prohibition against future use of such non-tariff instruments represents a major reform of the trade rules affecting agriculture. It should bring transparency to barriers that have been hidden from public view and should also expose the high levels of protection enjoyed by agricultural producers in some countries. The question is, did the reform lead to any trade liberalization or do nothing to reduce the levels of protection? Alternatively, in the longer term will the reforms achieved lead to more liberalization than is now apparent.

The years 1986 to 1988 were chosen as the base years for tariffication. However, during that period world prices for many agricultural commodities were the lowest they had been in decades, implying an unusually wide gap between world prices and supported internal prices. Because of the unusual situation in the base period, it became clear that the new tariffs would provide high levels of protection in normal times. In addition, many countries used what was called "dirty tariffication" in that the numbers they used to calculate their tariff equivalents resulted in higher tariffs than more objective calculations might have produced.

BOX 9
TARIFF BINDING

Under GATT rules tariffs may be "bound" or "unbound". Tariff binding means that, if tariffs are increased above the bound level, trading partners may have to be compensated. Unbound tariffs can be increased to any level. The applied rate is the tariff rate that a country actually applies to products entering the country at any given time. The applied rate may be below the bound rate since it reflects the current policy regarding protection. Applied rates often change with world market conditions. In theory the binding of any given tariff rate which was previously unbound represents trade liberalization because it prevents increases to higher levels of tariff. However, when the rates are bound at very high levels tariff binding does not represent significant liberalization.

A recent study showed that, for many products in many countries, the tariff equivalents tabled were significantly higher than the tariff equivalents calculated by OECD and the United States Department of Agriculture (USDA) for the same period. In other words, the reform process often resulted in levels of protection (at least potentially) above even the high levels that had been in effect in the mid-1980s. Even after the agreed-upon tariff cuts have been applied over the implementation period, the final bound tariffs will in many cases provide higher levels of protection than did the old system.

An examination of the tariff reductions across countries indicates a common pattern. Countries reduced tariffs on the least sensitive products by a larger amount than they did on more protected products. Thus very large percentage cuts were made in very low tariffs and minimum percentage cuts were made in high tariffs in order to achieve the agreed-upon average. As a result, the trade-weighted average levels of protection were not lowered as much as the simple averages indicated and the disparity in protection between commodities probably increased.

In addition, for products subject to tariffication, a special safeguard was agreed to operate for the duration of the reform process. The safeguard allows an additional duty to he levied if a country experiences an increase in the quantity of imports that is higher than a specified trigger level or if the import price in the domestic currency falls below a specified trigger price. The formulas for invoking the special safeguard are extremely complicated and it is difficult to judge in advance how much it may be used . The price trigger is very hard to predict since it is dependent on exchange rates.

Many of the developing countries did not apply tariffication , even on products previously subject to non-tariff barriers. Instead, they took advantage of a provision that allowed them merely to declare a new bound tariff where an unbound tariff had existed. Many of these newly declared bound tariffs provided levels Of protection well above the levels that had existed during the base period.

It was recognized that many of the tariffs resulting from the tariffication process would he high enough effectively to block imports. In order to ensure minimum market access and to protect current access levels, countries that converted from non-tariff barriers to tariffs were required to provide a tariff quota amounting to actual imports during the base period or to 3 percent of consumption during that period, whichever was higher. The tariff for this quota quantity was to be low enough not to impede trade. The minimum quantity allowed under this lower tariff had then to be increased to 5 percent of domestic consumption over the implementation period.

There are, however, several problematic aspects of the minimum access agreements as presented in the country schedules. First, countries were allowed to aggregate individual tariff lines into product groups. Thus, as imports of products that exceeded the minimum access levels were grouped with similar products that fell short, in most countries and for most products the actual minimum access turned out to he no more than the current access. Despite an agreement that the minimum access quotas were to he provided on a non-discriminatory basis, countries were allowed to count existing special arrangements as part of their minimum access commitments and to allocate their minimum access to exporters that already had special arrangements with the importing country. For instance the EC counted its sugar imports under the Lomé Convention as meeting its minimum access requirements and the United States did the same for both its meat and its sugar import commitments.

The minimum access commitments will provide relatively little additional access and even less additional trade.

BOX 10
TARIFF QUOTAS

A tariff quota is an instrument that sets up a two-tier tariff designed to allow the import of a specified quantity of a product at a lower tariff. It is often used where the regular tariff is so high as virtually to prohibit trade except under extraordinary circumstances. The introduction of tariff quotas into markets where internal prices are well above world prices creates quota rents for exporters who get the right to share in the protected market or for importers who get special rights to import into the protected market. In many cases the quotas under the tariff quota system are allocated on the basis of special agreements or past participation in import quota regimes. This is the case for most United States and EC tariff quotas established as a result of the Uruguay Round. In some cases bilateral negotiations resulted in special tariff quotas on specific products of interest to the parties concerned which were above and beyond the minimum access agreement.

Access is allowed but not guaranteed, for example, minimum access for maize into net exporting countries such as Thailand and Hungary or for wheat into Canada seem unlikely to produce more trade. There are a few notable exceptions to this generalization, however, such as the minimum access commitments for rice in the Republic of Korea and Japan, which will create a new market for exports of nearly a million tonnes annually by the turn of the century.

When the minimum access commitments for importing countries are examined critically, the prospects of expanding beyond current import levels appear very limited. The probable trade expansion is greatest for rice, but even there it is less than 10 percent of current trade levels.

There is no question that the agreement to move to a system of tariff-only border protection for agricultural trade represents a major reform of world trade policy for agriculture. For the first time the rules regarding border protection for agricultural trade have been brought partially into line with the rules for trade in other goods, and in the long term this is likely to have a substantial impact on national agricultural policies. However, agricultural trade seems likely to remain encumbered by a complex set of tariff quota systems until future negotiations result in substantial cuts in over-quota tariffs.

To achieve this reform of import protection policies, however, advocates of trade reform had to agree to limited import liberalization. In the absence of specific guidelines for the conversion of non-tariff barriers to tariff equivalents, the initial declared tariffs and the final bound tariffs are often very high. As a result, the rate of effective protection has not been reduced for many products in many countries.


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