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II. Asia and the Pacific

REGIONAL OVERVIEW

General economic performance

Economic growth in the Asian economies slowed down somewhat in 2001.

Recent economic performance in Asian developing countries confirms their level of integration into the world economy, their post-crisis strength and their heterogeneity. In 2000, economic performance was strong but weakened after mid-year as a result of the global economic slowdown. Continuing weak external demand, especially for electronic goods, contributed to an overall reduction in growth to about 5.6 percent in 2001.36

As a consequence of the events of 11 September, projected GDP growth for 2002 was revised down for most countries in the area. The region as a whole is projected to grow by 5.6 percent but the impact of the attacks and their aftermath, transmitted through various channels, will be felt by different countries with varying degrees of intensity.

Within Southeast Asia, Indonesia, Malaysia, the Philippines, Thailand and Viet Nam all saw high rates of growth in 2000, with Malaysia recording a particularly strong performance. However, in 2001 lower growth rates are expected in all the major countries in the subregion, in particular Malaysia and Thailand.

Table 9
ANNUAL REAL GDP GROWTH RATES IN SELECTED COUNTRIES OF DEVELOPING ASIA

Country/region

1996

1997

1998

1999

2000

20011

20021

 

(Percentage)

Bangladesh

5 5.3 5 5.4 6 4.7 3.2

China

9.6 8.8 7.8 7.1 8 7.3 6.8

India

7.3 4.9 5.8 6.8 6 4.4 5.2

Indonesia

8 4.5 -13.1 0.8 4.8 3.2 3.5

Malaysia

10 7.3 -7.4 6.1 8.3 0.3 2.5

Pakistan

2.9 1.8 3.1 4.1 3.9 3.7 4.4

Philippines

5.7 5.2 -0.6 3.4 4 2.9 3.2

Thailand

5.9 -1.5 -10.8 4.3 4.4 1.5 2

Viet Nam

9.3 8.2 3.5 4.2 5.5 4.7 4.8

Developing Asia

8.3 6.5 4 6.2 6.8 5.6 5.6

1 Projections.

2 China, excluding Hong Kong Special Administrative Region and Taiwan Province.

Source: IMF. 2001. World Economic Outlook, December. Washington, DC.

In 2000, economic growth reached 8 percent in China, continuing the strong performance of past years. A considerable slowdown in exports has led to a moderate reduction in the growth rate for 2001. Strong domestic demand and foreign investment are expected to contribute to sustained strong growth in 2002.

Table 10
NET PRODUCTION GROWTH RATES IN DEVELOPING ASIA AND THE PACIFIC

Year

Agriculture

Crops

Cereals

Livestock

Food

Non-food

 

(Percentage)

1992-96

4.9 4.1 2.5 7.3 5.3 0.0

1997

4.0 1.6 0.2 7.4 4.0 4.4

1998

2.6 1.5 1.9 5.7 3.3 -8.1

1999

3.3 3.4 3.1 2.1 3.5 -0.1

2000

1.7 0.3 -3.6 4.6 1.7 2.6

20011

1.1 -0.7 -2.3 3.8 0.9 3.6

1 Preliminary.

Source: FAO.

South Asia as a whole has seen lower average growth rates compared with those of Southeast Asia, although still quite respectable in recent years at rates of 5 percent or more, in particular for India and Bangladesh. The region is less exposed, although not completely immune, to the downturn in global trade and economic activity compared with most of the smaller Asian countries. Lower economic growth in 2001 is forecast for Bangladesh, India and Pakistan.

Agricultural performance

Relatively low growth in agricultural output in 2000 seems to have declined further in 2001.

Overall agricultural output growth for the region fell to 1.7 percent in 2000, continuing the trend towards a gradual decline in growth seen over the last few years. The reduced performance was entirely due to lower growth in crop production, which fell to 0.3 percent after the 3.4 percent expansion in 1999. Cereal production fell by 3.6 percent in 2000, with most of the decline linked to the fall in Chinese cereal output. Regional livestock production, on the other hand, expanded by 4.6 percent, compared with 2.1 percent in the previous year.

Preliminary estimates for 2001 point to a further reduction in regional agricultural output growth to about 1 percent, with crop production contracting by almost 1 percent while livestock output is expected to expand by just under 4 percent. Cereal output is forecast to drop by 2.3 percent, reflecting adverse weather conditions in the key grain-producing countries of the region.

The poor performance in 2000 was largely accounted for by South Asia, where agricultural output declined by 0.3 percent after experiencing strong growth of 4-5 percent in the previous year. Crop production declined by 1.2 percent while livestock output rose by 2.8 percent, in line with its performance in 1999. In India, agricultural output fell by 1.1 percent, following its expansion by almost 5 percent the previous year. This was the net result of a decline of 2.1 percent in crop production and a 3 percent increase in livestock output. While output growth in 2000 was relatively robust, at 6.5 and 3.7 percent in Bangladesh and Nepal, respectively, it was a more modest 1.6 and 0.8 percent in Pakistan and Sri Lanka.

Projections for 2001 indicate a further drop in agricultural output of about 1.5 percent. This would be the result of an estimated decline in crop production in the three largest countries of the subregion - India, Pakistan and Bangladesh - where crop output has been negatively affected by unfavourable weather conditions in the major producing areas.

In China, agricultural production growth in 2000, at 2.6 percent, recorded only a modest improvement over the 2.1 percent achieved in 1999. Although still quite respectable, these rates are significantly lower than the levels of 6.4 and 4.2 percent of 1997 and 1998, respectively, and the 6.6 percent average for 1992-96. The lower performance in 2000 was the result of almost stagnant crop production, increasing by only 0.3 percent, and the improved performance of livestock production, which is estimated to have expanded by 5.8 percent. Cereal production declined by almost 10 percent, largely as a result of changes in government price support policies, which led to a decline in area harvested (see the review of Chinese agriculture and the implications of China's accession to the World Trade Organization [WTO] below).

Preliminary projections for 2001 point to Chinese agricultural output expanding at the same rate as in 2000: around 2.5 percent. Again, livestock production, growing at 4-5 percent, would outperform crop production, which is forecast to rise by only 0.5 percent. Cereal production is expected to continue its decline, owing to a further reduction in area harvested and unfavourable weather. Growth for both crop and livestock production is forecast to remain well below the rates that were prevailing prior to 1997.

In East and Southeast Asia, agricultural production slowed down somewhat in 2000, to an estimated 2.9 percent, from the high growth of 4.8 percent achieved in 1999 - a year of recovery following the poor output performance in 1997 and 1998. Indonesia appears to have experienced only modest growth of 1.5 percent, as a result of weak crop production growth of 0.8 percent as opposed to livestock production growth of 5.9 percent. Cambodia, the Republic of Korea, Malaysia and the Philippines all saw production rise by between 2 and 3 percent. In the Democratic People's Republic of Korea, severe drought in 2000, following the coldest winter in decades, contributed to a contraction in output of 3.8 percent, with cereal production in particular declining sharply for the second year in a row. Vietnamese agriculture, however, continued the strong performance of the preceding years with annual output expanding in the range of 4-5 percent.

Preliminary estimates for 2001 suggest a slowdown in agricultural output growth for the subregion to just under 1 percent, with crop production stagnating but livestock output rising by about 4 percent. Most countries in the subregion are expected to follow this pattern. Output is expected to contract sharply in Cambodia, where heavy flooding caused extensive damage to the paddy crop, and somewhat less in the Philippines and Viet Nam. In the Democratic People's Republic of Korea, cereal production in 2001 witnessed a strong recovery after the very poor harvest of the preceding year.

In the developing countries of the Pacific, agricultural production reached 1.6 percent in 2000 after expanding by 3.7 percent in 1999, while preliminary estimates for 2001 point to unchanged levels of agricultural production. This largely reflects the estimated output performance of Papua New Guinea, the subregion's largest agricultural producer, where agricultural production rose by 1 percent in 2000 after expanding by 5.7 percent in 1999, and output is estimated to have stagnated in 2001.

CHINA'S ACCESSION TO THE WORLD TRADE ORGANIZATION AND IMPLICATIONS FOR CHINESE AGRICULTURAL POLICIES

In January 2002 China became a member of the World Trade Organization.

On 10 November 2001, the Ministerial Conference of the World Trade Organization in Doha approved the agreement for China's entry into the WTO. Agriculture has been at the centre of entry negotiations, and the accession agreement includes numerous commitments concerning agriculture. However, there is disagreement over the likely impact of the accession. Some argue that its impact on China's agriculture will be substantial37 while others believe that the overall effects on agriculture will be modest. 38 These diverse views can in part be attributed to a general uncertainty about the likely policy changes that may be induced after WTO accession.39 The following will: briefly review China's current agricultural policies and past performance of the sector; examine the main features of the accession agreement pertaining to agriculture and consider a number of possible ways in which policy-makers may respond.

The changing role of agriculture in the Chinese economy

China's economic liberalization has proceeded for more than two decades. Since economic reforms were initiated in 1978, China's economy has grown substantially. The annual growth rate of GDP was 8.5 percent in 1979-84 and 9.7 percent in 1985-95 (Table 11). Despite the Asian financial crisis, GDP continued growing at 8.2 percent annually between 1996 and 2000. Foreign trade has expanded even more rapidly. The ratio of trade to GDP increased from 13 percent in 1980 to 44 percent in 2000.40

China's economy and agriculture have grown rapidly since economic reforms began in the late 1970s.

Although reform has touched the whole economy since the early 1980s, most of the successive transformations began with, and in some way depended on, growth in the agriculture sector.41 Decollectivization, price increases and the relaxation of local trade restrictions ignited the takeoff of China's agricultural economy after 1978. Grain production increased by 4.7 percent per year in 1978-84 and even higher growth was recorded in horticulture, livestock and aquatic products (Table 11). Although agricultural growth slowed down with the disappearance of the one-off efficiency gains deriving from decollectivization, the country continued to enjoy agricultural growth rates that outpaced the rise in population (Table 11). Even faster growth of the industrial and service sectors followed, leading to a decline in the share of agriculture in GDP from more than 30 percent before 1980 to 16 percent in 2000 (Table 12). At the same time, agriculture's share in total employment fell from 81 percent in 1970 to only 50 percent in 2000.

Table 11
ANNUAL GROWTH RATES OF CHINA'S ECONOMY, 1970-2000

 

Pre-reform 1970-78

Reform period

   

1979-84

1985-95

1996-00

 

(Percentage)

Gross domestic product

4.9 8.5 9.7 8.2

Agriculture

2.7 7.1 4.0 3.4

Industry

6.8 8.2 12.8 9.6

Services

n.a. 11.6 9.7 8.2

Foreign trade

20.5 14.3 15.2 9.8

Import

21.7 12.7 13.4 9.5

Export

19.4 15.9 17.2 10.0

Grain production

2.8 4.7 1.7 0.03

Oil crops

2.1 14.9 4.4 5.6

Fruits

6.6 7.2 12.7 8.6

Red meats

4.4 9.1 8.8 6.5

Fishery

5.0 7.9 13.7 10.2

Rural enterprises output value

n.a. 12.3 24.1 14.0

Population

1.80 1.40 1.37 0.90

Per capita GDP

3.1 7.1 8.3 7.1

Note: Figure for GDP in 1970-78 is the growth rate of national income in real terms. Growth rates are computed using the regression method. Growth rates of individual and groups of commodities are based on production data; sectoral growth rates refer to value added in real terms.

Source: National Bureau of Statistics of China. China Statistical Yearbook, various issues. Beijing, China Statistical Publishing House; Ministry of Agriculture. Agricultural Yearbook of China, various issues. Beijing.

Rapid economic growth, urbanization and the development of food markets have boosted demand for meat, fruit and other non-staple foods, causing major shifts in the structure of agricultural production.42 For example, the share of livestock in agricultural output value more than doubled, from 14 percent to 30 percent, between 1970 and 2000 (Table 12). One of the most significant signs of structural change is the much reduced share of crops (from 82 percent to 56 percent), and particularly that of grains.

Major changes have occurred in external trade also. Whereas the share of primary (mainly agricultural) products in total exports was over 50 percent in 1980, it fell to only 10 percent in 2000 (Table 12). Over the same period, the share of food in total exports fell from 17 percent to 5 percent, while the share of food imports fell from 15 percent to 2 percent. The composition of agricultural trade increasingly reflects China's comparative advantage (Table 12 and Figure 23). Indeed, net exports of land-intensive bulk commodities such as grains, oilseeds and sugar crops have fallen, whereas exports of higher-valued labour-intensive products such as horticultural and animal (including aquaculture) products have risen. The proportion of grain exports in the 1990s (about 20 percent) is less than half of what it was in the early 1980s. By the late 1990s horticultural products and animal and aquatic products accounted for about 80 percent of agricultural exports.43

These trends seem to indicate that China was already moving towards a pattern of production and trade that is more consistent with its domestic resource endowments and comparative advantage - allowing more land-intensive products into the domestic market and stimulating labour-intensive crops for exports. The main impact of the country's entry into the WTO will be to advance these emerging trends.

Table 12
CHANGES IN THE STRUCTURE OF CHINA'S ECONOMY, 1970-2000

 

1970

1980

1985

1990

1995

2000

 

(Percentage)

Share in GDP

 
 
 
 
 
 

Agriculture

40 30 28 27 20 16

Industry

46 49 43 42 49 51

Services

13 21 29 31 31 33

Share in employment

 
 
 
 
 
 

Agriculture

81

69

62

60

52

50

Industry

10

18

21

21

23

22.5

Services

9

13

17

19

25

27.5

Share in exports

 
 
 
 
 
 

Primary products

... 50 51 26 14 10

Foods

... 17 14 11 7 5

Share in imports

 
 
 
 
 
 

Primary products

...

35

13

19

18

21

Foods

...

15

4

6

5

2

Share in agricultural output

 
 
 
 
 
 

Crops

82 76 69 65 58 56

Livestock

14 18 22 26 30 30

Fishery

2 2 3 5 8 11

Forestry

2 4 5 4 3 4

Share of rural population

83

81

76

74

71

64

Source: National Bureau of Statistics of China. China Statistical Yearbook, various issues; China Rural Statistical Yearbook, various issues. Beijing, China Statistical Publishing House.

Major policy reforms affecting agriculture have been implemented over the last two to three decades.

Agricultural policy in the reform period

In spite of these past trends, few can dispute that China's WTO accession poses new challenges to the agriculture sector. However, the nature and depth of the impact will depend on how China's agricultural policy-makers will manage the agriculture sector as the new trade rules take effect. Before examining this in greater detail, a brief review of agricultural policies during the reform era is provided.

Fiscal and financial policies. Although government expenditures in most areas of agriculture have increased gradually during the reform period, the ratio of agricultural investment to agricultural GDP has declined since the late 1970s. In 1978, the government sector invested 7.6 percent of agricultural GDP.44 By 1995, the share had fallen to 3.6 percent. Moreover, significant capital outflows from agriculture to industry and from rural to urban areas occurred during the last two decades through the financial system and government agricultural procurement.45

Foreign exchange and trade policies. China's external economic policies have played a major role in shaping the growth and structure of agriculture for many decades. During the entire pre-reform period (1950-78), China's inward-looking policies and overvalued currency discouraged exports.46 After the reforms were initiated, the real exchange rate was allowed to depreciate by as much as 400 percent between 1978 and 1994. Adjustments in the exchange rates throughout the reform period have increased export competitiveness and contributed to China's export growth record.

Rural development and labour market policies. Shifting the labour force from the farm to the non-farm sector has been crucial to the country's modernization efforts. This has been achieved through the absorption of labour by rural firms and through massive migration to cities. Rural industrialization has played a vital role in generating employment for rural labour, raising agricultural labour productivity and farmers' income. The share of rural enterprises in GDP rose from less than 4 percent in the 1970s to more than 30 percent by 1999. Rural enterprises have dominated the export sector throughout the 1990s.47 And, most importantly, they employ 35 percent of the rural labour that works off-farm. In addition, a large and increasing proportion of the rural labour force (rising from 8 percent in 1990 to 13 percent in 2000)48 also works in the self-employed sector. A recent survey suggests that more than 100 million rural workers also found employment in the urban sector in the late 1990s.49

Food price and marketing policies. Price and market reforms were key components of China's policy shift from a centrally planned to a market economy. The reforms, however, began slowly and have proceeded gradually. Market liberalization began with commodities considered non-strategic, such as vegetables, fruit, fish, livestock, and oil and sugar crops, while little effort was made regarding the major crops. Most of the significant early reforms were done by administrative measures.50 However, as the right to private trading was expanded in the early 1980s, and traders were allowed to buy and sell the surplus of almost all categories of agricultural products, the foundations of the state marketing system began to be undermined.

China's agricultural markets increasingly resemble those in more market-oriented economies.

Since the mid-1980s, market reforms have continued intermittently. Despite periodic swings in the reform process, markets have gradually emerged in rural China. The proportion of retail commodities sold at market prices has continued to rise. The share for agriculture was just 6 percent in 1978 but had risen to 40 percent by 1985, 79 percent by 1995 and 83 percent by 1999.51 Also, the state's intervention was unable to halt the flow of grain across provincial boundaries. A recent study found that agricultural prices for all major commodities, including rice, wheat and, especially, maize and soybean, have moved together across far-reaching localities within China.52 China's markets are becoming more integrated and efficient, and increasingly resemble those in more market-oriented economies.

What have these policies meant in the international context? Tables 13 and 14 show estimated nominal protection rates (NPRs) for major agricultural commodities since 1985. The NPRs estimate the percentage by which domestic prices of agricultural products differ from the border prices for those same products. A positive NPR indicates that domestic prices are above the border price (and that domestic producers receive a subsidy) and a negative NPR that they are below the border price (and that domestic producers are subject to an implicit taxation). Although further adjustment may be required for quality and other factors, these NPRs roughly illustrate the basic nature of policy changes in the past.

In its WTO accession agreement China has committed to further agricultural trade liberalization.

The requirement that farmers submit a mandatory delivery quota at below-market prices has represented an implicit tax on farmers and a subsidy to the urban consumers, who were able to get access to sales at below-market value.53 Between 1990 and 1997, the average price farmers received for compulsorily delivered grains and soybean was between one-eighth and one-third below the border price. Only in recent years have those prices been above the border price. It should be noted that NPRs for rice have been mostly negative throughout this period and for all three sets of prices. On the other hand, wheat and cotton, the nation's main imported farm commodities, received favourable treatment relative to rice. This difference is more acute given the fact that the proportion of production procured at the low quota procurement price is higher for rice. Meat producers, in contrast, still appear to receive less than they would if they could sell their output at international prices (Table 14).

A farmer selling cauliflower and spinach
Today in China the majority of agricultural produce is traded on private markets.

- FAO/22265/A. PROTO

China's WTO accession commitments and provisions related to agriculture

China's commitments affecting the agriculture sector can be classified into three major categories: market access, domestic support and export subsidies. As for market access, China committed itself to lowering tariffs on all agricultural products, increasing access by foreign producers of some commodities through tariff rate quotas (TRQs) and removing quantitative restrictions on others (see Box 2).

Table 13
NOMINAL PROTECTION RATES FOR GRAIN, CHINA, 1978 TO EARLY 2000

Year

Quota procurement price

Negotiated procurement price

Wholesale market price

 

Rice

Wheat

Maize

Soybean

Rice

Wheat

Maize

Soybean

Rice

Wheat

Maize

Soybean

 

(Percentage)

1978-79

-42 15 12 2 -6 72 65 22 10 89 92 40

1980-84

-43 -3 -15 13 2 50 28 25 9 58 46 44

1985-89

-30 4 -13 -13 -5 34 17 15 -4 52 37 39

1990-94

-37 -14 -35 -32 -16 14 -7 7 -7 30 12 26

1995-97

-23 -12 -14 -22 -4 6 3 8 -1 19 20 19

1998-00

-3 10 22 33 -16 9 19 39 -6 26 32 49

1998

2 16 33 8 -16 5 26 37 -6 22 40 37

1999

-6 22 30 53 -19 12 20 59 -9 30 33 67

2000

-4 -7 2 38 -13 9 11 21 -2 26 23 44

Note: Border prices are average prices of exports (rice and sometimes maize) or imports (wheat, soybean and sometimes maize) for the varieties that are comparable with domestic grains. Data for 2000 are from early 2000. Official exchange rates are used to convert border prices.

Source: J. Huang and S. Rozelle. 2001. The nature and extent of current distortions to agricultural incentives in China. Paper presented at the second project meeting on WTO Accession, Policy Reform and Poverty Reduction in China, World Bank Resident Mission, Beijing, 26-27 October 2001.

Table 14
NOMINAL PROTECTION RATES FOR COTTON AND LIVESTOCK PRODUCTS, CHINA, 1997-99

Year

Cotton

Pork

Beef

Chicken

 

(Percentage)

1997

20

-19

-2

-34

1998

11

-25

-10

-37

1999

4

-17

24

-30

1997-99

12

-20

4

-33

Note: Export prices of pork, beef and chicken, and import prices of cotton are used as border prices. Domestic prices are prices at urban wholesale markets. The cotton wholesale price is estimated as the state procurement price multiplied by 1.25. Official exchange rates are used to convert border prices.

Source: J. Huang and S. Rozelle. 2001. The nature and extent of current distortions to agricultural incentives in China. Paper presented at the second project meeting on WTO Accession, Policy Reform and Poverty Reduction in China, World Bank Resident Mission, Beijing, 26-27 October 2001.

The import market access commitments made by China appear to be substantial (Tables 15 and 16). Overall, agricultural import tariffs (in terms of their simple average) will be reduced from about 21 percent in 2001 to 17 percent by 2004 (after having already declined from 42.2 percent in 1992 to 23.6 percent in 1998). Quotas under low tariff will be expanded, while shares of state trading will be reduced significantly.

With a few exceptions (e.g. in the case of some commodities considered "national strategic products"), most agricultural products will come under a tariff-only regime. For this commodity group all non-tariff barriers and licensing and quota procedures will be eliminated and their effective protection will be lowered substantially by January 2002 and fall further by 2004 (Table 15). However, imports will not necessarily grow correspondingly. Indeed, China has a comparative advantage in many of the commodities presented in Table 15.

Table 15
IMPORT TARIFF RATES ON MAJOR AGRICULTURAL PRODUCTS SUBJECT TO TARIFF-ONLY PROTECTION IN CHINA

 

Actual tariff
rates in 2001

Effective as of 1 January

 

 

2002

2004

 

(Percentage)

Barley

114 (3)1

3

3

Soybean

32

3

3

Citrus

40

20

12

Other fruits

30-40

13-20

10-13

Vegetables

30-50

13-29

10-15

Beef

45

23.2

12

Pork

20

18.4

12

Poultry meat

20

18.4

10

Dairy products

50

20-37

10-12

Wine

65

45

14

Tobacco

34

28

10

1 Barley was subjected to licence and import quota; the tariff rate was 3 percent for import within the quota and no above-quota barley with 114 percent tariff was imported in 2001.

2 The tariff rate was as high as 114 percent before 2000 and lowered to 3 percent in early 2000.

Source: China's WTO Protocol of Accession, November 2001.

The real challenge for agricultural products with tariff-only protection will be for crops such as barley, and wine and dairy products. The case of soybean, for which China has little comparative advantage, may also be instructive. Before 2000, the import tariff for soybean was as high as 114 percent; importers required licences; and Chinese farmers met most of the nation's soybean demand. However, in anticipation of China's WTO accession, tariffs were lowered to 3 percent in 2000 and subsequently import quotas were phased out. Prices fell as a consequence and the NPRs declined from 44 percent in early 2000 (Table 13) to less than 15 percent in October 2001. As a result, imports surged from 4.32 million tonnes in 1999 to 10.42 million tonnes in 2000 and are likely to exceed 14 million tonnes in 2001.

Table 16
CHINA'S MARKET ACCESS COMMITMENTS ON FARM PRODUCTS SUBJECT TO TARIFF RATE QUOTAS

 

Import volume (million tonnes)
(State trading share [percent])

Quota
growth

In-quota
tariff

Out-of-quota tariff

 

Actual 2000

Quota 2002

Quota 2004

 

 

2002

2003

2004

       

(Percentage)

(Percentage)

Rice

0.24(100)1
3.76 (50)
5.32 (50)
19
1
74
71
65

Wheat

0.87(100)
8.45 (90)
9.64 (90)
8
1
71
68
65

Maize

0.00(100)
5.70 (67)
7.20 (60)
13
1
71
68
65

Cotton

0.05(100)
0.82 (33)
0.89 (33)
5
1
54.4
47.2
40

Wool2

0.30
0.34
0.37
5
1
38
38
38

Edible oils3

1.79(100)
5.69 (40)
6.81 (10)
15
9
75
71.7
68.3

Sugar4

0.64
1.68
1.95
8
20
90
72
50

1 Figures in parentheses are the share (in percentage terms) of non-state trading in import quota.

2 Designated trading in 2002-04 and phased out thereafter.

3 The tariff rate quota regime will be phased out in 2006. In 2005, import quota will be 7.27 million tonnes with 9 percent in-quota tariff and 65 percent out-of-quota tariff.

4 Phased out quota for state trade.

Source: China's WTO Protocol of Accession, November 2001; National Bureau of Statistics of China. 2001. China Statistical Yearbook. Beijing, China Statistical Publishing House.

Such dramatic movements, however, should be limited for the commodities considered as "national strategic products". Indeed, China's WTO agreement allows the government to manage the trade of rice, wheat, maize, edible oils, sugar, cotton and wool with TRQs.54 As shown in Table 16, while the in-quota tariff is 20 percent for sugar and 9 percent for edible oils, it is only 1 percent for rice, wheat, maize and wool, but the amount brought in at these tariff levels is restricted. The in-quota volumes, however, are set to grow over a three-year period (2002-04) at annual rates ranging from 4 percent to 19 percent. At the same time, tariffs on out-of-quota sales will drop substantially in the first year of accession and fall further between 2002 and 2005.

China will phase out most state-trading monopolies.

After the first four to five years following accession, a number of other changes will take place. For example, China has agreed to phase out its TRQ for edible oils after 2006. State trading monopolies will also be phased out for wool after 2004 and will gradually disappear for most other agricultural products (Table 16). Although China National Cereals, Oil and Foodstuffs Import & Export Corporation will continue to play an important role in rice, wheat and maize trade, there will be an increasing degree of competition from private firms in the importing and exporting of grains in the future.

China's WTO accession agreement also contains a number of other commitments, some of which are specific to China. First, unlike other countries, China must phase out all export subsidies.55 Second, in spite of its status as a developing country, China's de minimis exemption (see Box 2) is equivalent to only 8.5 percent of the value of production of a basic agricultural product for product-specific support and the same percentage of the value of total agricultural production for non-product-specific support (as compared with 10 percent for other developing countries and 5 percent for developed countries). Third, investment and input subsidies for the low-income and resource-poor farmers who are not subject to reduction commitments must be included as part of its aggregate measure of support (AMS) (see Box 2).

China also agreed to a series of specific conditions for anti-dumping and countervailing duties. For a period of 15 years, China will be subject to a different set of rules that will make it easier for countries to bring, prove and enforce dumping cases against the country. However, China will benefit from the same rights in dealing with other countries, as reciprocity.

China's WTO commitments and privileges in other areas of the agreement will also, directly or indirectly, affect its agriculture. For example, for agricultural chemicals, China has committed to replacing quantitative import restrictions on three types of fertilizer (DAP, NPK and urea) by TRQs. Additionally, tariffs will be cut on accession and further cuts will be phased in by 2005 for almost all industrial products (e.g. tractors and pesticides). Furthermore, China will significantly reduce its non-tariff measures and eliminate all quotas, tendering and import licensing on non-farm products by no later than 2005. For textiles and clothing, however, the current "voluntary" export restraints will not be completely phased out until the end of 2008, meaning that exports may not expand as rapidly as they would under a less restrictive regime. Substantial commitments to open up services markets in China have also been made.

Recent policy shifts and likely changes as a result of accession to the WTO

While the agricultural reforms implemented by China since the late 1970s will make it easier for the sector to cope with the changes that will arise in the wake of WTO entry, the country still faces many challenges in meeting its WTO commitments.56 These may, however, at the same time be seen as opportunities to provide an impetus to the ongoing domestic and trade policy reforms. Policy responses to WTO accession are expected to take one of two forms: one consists of policy responses to meet the WTO commitments; the other is represented by policy reforms aimed at boosting the economy and minimizing the adverse shocks of WTO accession.

China is introducing major legislative changes to abide by the WTO rules.

Legislative changes

Many important changes should occur in the area of legislation. China has been given one year from the date of accession to make economic policy institutions, regulations and legislation consistent with the spirit of non-discrimination and transparency of the WTO. Preparations for this had started already in the late 1990s.

To provide general guidance to ministerial and local government authorities for amending or repealing relevant regulations, laws and policies, two important sets of regulations were promulgated in January 2002: the Regulations on Formulation Process of Laws and the Regulations on Formulation Process of Administrative Laws. Essentially a guide for local governments and ministries, these new regulations were issued in order to ensure the transfer of many government functions to the market and to direct the government to take a more regulatory, indirect role in commerce and trade.

Efforts towards creating and implementing this new regulatory framework are widespread. For example, during the last stage of WTO negotiation, each ministry formed a committee to review all laws and regulations under its jurisdiction and make them consistent with the WTO rules and China's accession commitments. Local governments formed similar committees. Several recent experiences involving the amendment of laws and regulations and the creation of new institutions related to agriculture demonstrate the effectiveness of these committees and China's overall commitment to its WTO obligations. For example, China's Patent Law (which was originally issued in 1984 and then amended in 1992) was re-amended on 1 July 2001. Moreover, a new set of regulations on plant variety protection was put into effect in 1999 when China became the 39th member country of the International Union for the Protection of New Varieties of Plants (UPOV).

The Ministry of Agriculture has also repealed several regulations since 2000 subsidizing certain types of enterprise or discriminating between different economic actors in agricultural input industries. The Regulations on the Development of Integrated Agricultural, Industrial and Commercial Enterprises under State Farms (issued in 1983 to assist in the development of state-owned farms) and the Regulations on the Development of Rural Township and Village Owned Enterprises (issued in 1979 to assist collectively owned enterprises) have also been eliminated. Seed management regulations that gave monopoly powers to local seed companies and pesticide field trial rules that discriminated against foreign companies have likewise been abolished.

Despite the substantial efforts outlined above, China still requires considerable institutional reform to allow it to fulfil the legal obligations that it is committed to in its Protocol of Accession to the WTO.

Agricultural trade will have to be further liberalized.

Agricultural trade reforms

Reforms and liberalization in China's trade laws and regulations are perhaps the most advanced. Throughout nearly 20 years of reform, China's foreign trade regime has gradually changed from a highly centralized, planned and import substitution regime to a more decentralized and market-oriented one focusing on export promotion.57 These changes in trade and other policies have progressively transformed China's trade structure in favour of products for which China has a comparative advantage. On the other hand, trade in many agricultural goods will continue to operate under relatively non-transparent state trading arrangements.58 The next few years will be a critical time for China in terms of advancing its trade reform in the agriculture sector, including both tariff and non-tariff measures.

Changes in tariff policies are more straightforward and simple than non-tariff policy reforms. China followed its tariff reduction schedule as specified in the Protocol. On the first day of 2002, the average tariff rate was reduced from 15.3 percent in 2001 to 12 percent. For agricultural products the tariff reduction was from 21 percent to 15.8 percent. Export subsidies were also to be completely phased out on the first day of 2002.

In the light of the past decade's trend towards tariff reduction, the tariff changes resulting from China's WTO accession should present relatively few problems. Significant reforms will, however, be required in the area of non-tariff measures. State trading is a particularly important area to consider when reforming China's agricultural trade policy. China has agreed to eliminate restrictions on trading rights for all products except those under the TRQ trade regime, for which a more gradual approach will be followed in phasing out the state-trading regime (Table 16). Three years after WTO accession, the private sector is supposed to dominate trade in almost all agricultural products. There are, however, provisions allowing the state to remain involved for three commodities: wheat, maize and tobacco.

Technical barriers to trade, sanitary and phytosanitary measures, and institutional arrangements to fulfil the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), including Trade in Counterfeit Goods, are other important issues that China has to deal with.

Domestic agricultural markets must also be reformed further.

Domestic market reform and infrastructure development

After 20 years of reform, China's agriculture has become more market-oriented.59 Traders have moved products around the country with increasing regularity. By the late 1990s, only grain, cotton and, to some extent, silkworm cocoon and tobacco were subject to price interventions. Even in these cases, their markets, especially those for grain, have become increasingly competitive, integrated and efficient over time.60

Despite this progress, China faces many tasks in the direction of further market reform under the WTO regime. A major challenge will be to improve the efficiency of domestic markets while also minimizing the adverse shocks of trade liberalization. The case of grains can be considered indicative of the direction of market reforms. Over the past two decades state-owned grain traders have chronically underperformed as a consequence of imperfect incentives and a number of taxing policy burdens. In spite of reform efforts, many state-owned grain companies were still losing money in the late 1990s. There has also been international criticism of China's marketing practices. WTO negotiators often pointed out that China's traditional food pricing systems had a market-distorting effect. Others argued that the preferential treatment of state-owned grain-trading enterprises violated the WTO's national treatment principles.

Facing these pressures and concerns, China launched a new set of reforms in 2000. As a first step, government control over lower-quality grain trading (e.g. early indica rice and maize in southern China, spring wheat in northern China, and all wheat in southern China) was phased out. Almost immediately, this policy resulted in an adjustment of crop variety patterns in some regions. Producers have begun planting better varieties to improve grain quality. With the successful performance of this grain "varietal" reform in 2000, the government is now officially liberalizing grain markets. This was done first in a subset of grain-deficit, coastal provinces - Zhejiang, Jiangsu, Shanghai, Fujian, Guangdong and Hainan - but it was expected to be extended to all grain-deficit provinces in 2002.

In response to WTO accession, the government has also devised ambitious plans to increase investment in market infrastructure. There is an acknowledged need to establish an effective national marketing information network. The Ministry of Agriculture is attempting to standardize agricultural product quality and promote marketing by farmers. The creation of agricultural technology associations is being examined. All of these moves are part of an effort to shift fiscal resources - which have been used to support China's expensive price subsidization schemes - towards productivity-enhancing investments and improvements in marketing infrastructure. The magnitude of this shift is highlighted by the fact that the total subsidies for price and market interventions reached 40.3 billion yuan renminbi in 2000, representing around 4 percent of the national budget.

Chinese women transplanting rice
Recent policy reforms in the grains sector have led farmers to reduce areas sown to grains and to adopt better varieties.

- FAO/22495/M. TRAMAGNINI

Land-use policy, farm organization and farm enterprises

The implications of China's WTO accession on land use and farm organization are also much debated. Many of the concerns centre on the ability of China's small farms to compete after trade liberalization. Every farm household in China is endowed with land but the average farm size is very small and declining (from 0.56 ha in 1980 to 0.45 ha in 2000).61 Although this structure can be considered positive in terms of social equity and stability, land fragmentation will also constrain the growth of labour productivity and farm income. Some argue that farm size and productivity could be expanded under more secure land-tenure arrangements. Others call for a continuation of policies under which local authorities periodically reallocate land to the farmers to keep land in the hands of all rural residents.

China's small farm size may constrain productivity increases.

Although many policy-makers currently seem to favour relying on more secure tenure rights, they are still searching for complementary measures that will not forego all of the pro-equity benefits of the current land-management regime. Land in rural areas is, by law, collectively owned by the village (about 300 households on average) or a small group (cunmin xiaozu, normally comprising 15-30 households) and is contracted to households.62 One of the most important changes in recent years is the extension of use-contract duration from 15 to 30 years. By 2000, about 98 percent of villages had amended their contract with farmers to reflect the longer duration of use rights.63

The government is now searching for a mechanism that would permit the remaining full-time farmers to gain access to additional cultivated land and increase their income and competitiveness. A new Rural Land Contract Law has recently been prepared for this purpose. Although ownership of land remains with the collective, the law conveys to the contract holders almost all other rights that they would have under a private property system. In particular, the law clearly defines rights to transfer and exchange contracted land. This is an acknowledgement of the ongoing changes; indeed, more and more land in China is being rented.64 The new legislation also allows farmers to use contracted land for collateral to secure commercial loans and allows family members to inherit the land rights during the contracted period.

In an effort to increase China's agricultural productivity, large farm enterprises are also being encouraged, although this remains a controversial issue. Large farms have been supported with incentives such as tax reductions for infrastructure investments, credit subsidies for inputs and financing for food-processing facilities.

The other major attempt to increase farm productivity is the promotion of farmer organizations. Policy-makers now recognize that, given the small scale of China's farms, the creation of effective rural organizations may prove to be one of the most promising options for raising productivity and incomes. It is on this basis that China's 240 million farms have been allowed to form farmers' organizations. The organizations are encouraged to work closely with the government in the areas of technology extension, marketing information and quality control.65

Financial reforms

The financial sector has been reformed more slowly than some other sectors, and the government maintains strong control.66 China's WTO commitments require it to open up gradually the country's financial markets. After a four-year transition period, all regional restrictions will be removed and foreign banks will receive national non-discriminatory treatment. The implications for agriculture are not clear. The sector, in poor regions in particular, could suffer, but it is not certain that the situation will be worse than before the reforms. The financial sector has systematically shifted funds away from farming.67 Throughout the entire reform period, there was a net capital outflow. However, the experiences of other countries suggest that in the short run small, poor farmers will be rationed out of financial markets.68

Agricultural investment and supporting policies

In one of its most fundamental concessions, China agreed to phase out its export subsidies in the first year of WTO accession. Such subsidies have often promoted exports of maize, cotton and other agricultural products and thus indirectly supported domestic prices.

The WTO also exerts strict control over the types and amounts of certain subsidies that member countries can provide. As is the case with other WTO members, China has to circumscribe with care the rules regarding the amount that can be classified as "amber box" policy (see Box 2). China's accession protocol sets the de minimis level of subsidies at 8.5 percent of agricultural gross production value. A study on historical government investment in these areas indicates that the de minimis limit is not likely to be binding for the time being.69 The real impact might begin only sometime in the future, when budget constraints would become less tight after years of further economic growth.

In a post-WTO accession environment, China may give more thought to how it can best use its de minimis conditions. A recent study has shown that although labour-intensive sectors (such as livestock and horticulture) had negative NPRs in late 2001, many land-intensive products (including maize, wheat, oilseed crops and sugar) had positive NPRs ranging from 5 to 40 percent.70 The crops with positive NPRs are almost all under TRQ management - a finding that has important implications for how China may most effectively provide support to its agriculture sector. Instead of continuing market support or subsidies, China could promote productivity-enhancing measures such as agricultural research and transportation and communication investments.

China is shifting its agricultural support from price support towards productivity-enhancing investment.

The impact of WTO accession will differ not only among crops, but also among regions according to their comparative advantage in agricultural production and government policies. In redirecting support to the sector, particular attention may be paid to this differentiated regional impact, with priority attention being called for with regard to the poorest rural areas.

Recent shifts in the government's support to enhancing agricultural productivity seem to indicate that policy changes have already begun. For example, real-term government spending on agricultural research grew annually at about 10 percent in the late 1990s, with public investment in plant biotechnology increasing at an even faster rate.71

Structural adjustments in agriculture are a policy priority.

Agricultural structural adjustment and macropolicies

Structural adjustments in agriculture were considered a central policy goal of the government in 2000 and were further emphasized in 2001. The adjustments include structural changes among agricultural commodities, quality improvement for major commodities, and the promotion of regional specialization. These new policy directions, in part a consequence of China's efforts to prepare for WTO membership, are referred to as the "Strategic Adjustment of Agricultural Structure".72 Key policies and measures to support these adjustments include many of the actions discussed above.

The policy direction is to re-initiate grain-marketing reforms and redirect part of the government's resource allocation from cotton and grain staples towards commodities for which China has a comparative advantage, such as horticulture crops, and to promote regional specialization. The intention is to rely more on indirect measures that are WTO compatible: technology improvement, investments in infrastructure and the creation of a favourable institutional and economic environment.

A number of policies can complement the structural transformation of agriculture and serve to make China more competitive in its post-WTO environment, although these policies are not within the control of those who are directly in charge of agriculture. Agricultural producers must increase the scale of their operation. This requires the transfer of massive amounts of labour into the off-farm sector, in general, and into urban areas, in particular. Hence, policies that promote labour movement will also be good for agricultural income and production. Such policies involve the promotion of employment policies leading to greater urbanization, rural township development and labour market development (by removing the constraints to small enterprise expansion in rural areas). Particular emphasis on the poorest rural areas may also be warranted here.

Conclusions

China has already started preparing itself to adjust to the environment of a post-WTO accession regime. Tariff rates have come down; many laws and regulations have been amended; investment priorities have shifted and policy strategies have changed. The government has many options at its disposal. Even though the WTO protocol that China has agreed to imposes restrictions on its actions, China's authorities can still play an active role in assisting its farming sector. Some of the most obvious and important activities will be to increase support through productivity-enhancing investments that are not limited by the WTO, such as expenditures on agricultural research, road construction and the creation of nationwide information networks, as well as enhancing China's capacity to apply technical barriers to trade and to sanitary and phytosanitary measures and standards.

Even after these investments, China will still have some latitude, fiscal resource constraints notwithstanding, to promote certain sectors. Although land-intensive sectors may face difficulties, China has a comparative advantage in many commodities - horticulture, fruit, livestock and aquaculture - that would be able to compete with imported products and even be exported.

Most fundamentally, the government's response to WTO accession involves an entire shift of paradigm - from direct participation in the economy to assuming a more indirect regulatory role. This would involve the setting up of institutions for effectively creating and managing public goods and regulating markets to compensate for natural market failures. An effective and multifaceted government policy can allow China to take maximum advantage of the benefits and minimize the costs of adverse consequences that will definitely arise.


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