The Nature of Chinas Protectionist Strategies - Essay Example

?Executive summary The implications of China joining the WTO in the Chinese agricultural sector are not easy to establish. This is due to the nature of China’s protectionist strategies, implemented to deal with the issue of food security. China is among the developed countries that have got high tariffs in the agricultural sector. The agricultural sector in China also depends on subsidies and the several types of non-tariff barriers geared toward the protection of the sector. These non-tariff barriers are aimed at protecting China’s internal capacity to economically produce agricultural products. In essence, China’s strategy of protecting the domestic agricultural sector can be seen as an attempt to restrict the importation of agricultural goods from other countries. Different economic models used to analyze the Chinese agricultural sector such as GTAP do not contain any reliable information on the effects of high tariff rates on the Chinese economy. However, several studies have shown that the WTO accession would have positive effects on the Chinese economy. Many economists have asserted that the removal of tariffs and subsidies will have an impact in the production and trade of agricultural goods in the country. Further, several studies on the Chinese agricultural sector show that the country’s agricultural policies have made agricultural producers spend more time in the production of more valuable crops such as wheat, corn and oil seeds as opposed to crops such as fruits and vegetables. It is evident that these policies are aimed at making China self sufficient in the production of wheat, corn and oil seeds. However, several economists have suggested that these policies are extremely expensive to the economy since the prices of most Chinese agricultural products are above the prices in the international market. The policies put in place by the government hinder resources from benefiting some of the most influential sectors of the economy such as agriculture. International Trade Background Information The common accord, instituted in 1978, that was aimed at opening up the Chinese economy was a significant factor in invigorating the country’s economic growth. Faster economic success is normally followed by a relative decrease in the agricultural sector. However, in China, this was initially affected by the implementation of the agricultural domestic accountability system. This system contributed to the substitution of collective agricultural holdings with individually administrated holdings. Later, there was the introduction of less taxation in the agricultural sector, an initiative that was followed by most developed countries in their early years of development (Snape 1991, p. 67). Developments in the agricultural sector grew faster in a similar manner as the other sector of the economy such as industries from 1979 to 1984. However, the benefits of moving to the household responsibility system and the increment of relative prices for farm products were realized later, in the mid 1980s. After the 1980s, agriculture did not experience any significant growth like the service and industrial sectors. The industrial sector experienced faster growth on the eastern seaboard. In addition, trade in the rural townships boomed, which led to rising employment rates. In as much as there was the decline in agriculture’s contribution in the country’s GDP, and employment in the 1980s, there was a subsequent increase in the contribution to GDP in 1990s (World Bank 2005, p. 34). Introduction China is currently a signatory to WTO according to Pigott (2002). This enables the country to take an active part in new rounds of bilateral trade discussions. The country can, for example, demand improved market penetration for its agricultural exports and other products in the global market. If WTO membership improves China’s chances of increasing its access to agricultural products more than other markets in the global market in the future, that would be a significant benefit for China’s especially with respect to agricultural producers and rural areas. However, Chinese farm exports particularly face high barriers in the global market, so the expected benefit is not substantial (Snape 1991, p. 65). Analytical Framework Due to the increasing levels of economic growth in China since the 1980s, China’s per capita income has continued to rise. Apart from the increasing incomes, there has been an increase in the consumption of meat, eggs, and milk. To meet the increasing demand of agricultural products in China, the Chinese government has implemented several strategies and postulated economic policies geared toward improving agricultural production. In addition, the Chinese government has been able to increase capital investment in the agricultural sector and raise the number of production inputs. China is a major producer of grain in the world. However, concerns on how to feed the country’s rising population have emerged, not only internally but also globally. The introduction of the current global trade liberalization strategies will actually have a significant impact in the international trade patterns, especially in agricultural production. One constituent of global trade liberalization strategies involves China’s inclusion into the WTO agreement (Snape 1991, p. 67). Since China became a member of the WTO, the country has continued to apply a hybrid approach in the application of measures aimed at bringing change in the economy. The government started to avoid total direct central planning and state monopolies. The Chinese government continues to forge ahead in a more market driven economy. The Chinese policy implementers have reserved some policy guideline used to guide the country’s agricultural sector. Even so, China has over the years been able to implement open trade measures that honor the WTO requirements. Like most developed countries, China has increasingly lost its comparative advantage in agriculture in the past two decades. This has been brought about by the increasing cost of agricultural inputs. Some grain prices now exceed international price levels. If China adopts a free trade policy in agriculture, the country would experience an improvement in the import of grains and other land intensive products as it would eventually lose its comparative advantage in agriculture. Agricultural prices would remain at international levels and the agricultural sector would decline further and faster as noted by Anderson and Valenzuela (2006, p. 23). As well as food security, economic growth is a major concern for the Chinese government when implementing agricultural policy. As income in non-agricultural sectors increase in the course of industrialization, farmers’ incomes are boosted partially by the increase in the price of their products. This trend can only continue in a closed economy or with the implementation of agricultural trade protection. However, this trend cannot be possible in an economy characterized by free trade in agriculture (OECD 2004, p. 678). As the Chinese economy develops, one of the main objectives of policy making is in the improvement of income distribution. Government policy is necessary to protect farmers considering the immobility of farm land. Most developed countries have opted to protect their agricultural sectors although this is not an efficient economic policy. For the government, there are several objectives to accomplish, not just economic efficiency. Despite the fact that agricultural protection results in inefficient use of agricultural resources, it helps improve income distribution among the population and thus helps maintain social stability. Income equity and social stability are the main reasons most developed economies adopt protectionist agricultural policies after the agricultural sector has lost its sustainability (OECD 2004, p. 678). China is currently experiencing political pressures to shift its agricultural policy from taxation to protection. Several policy makers and economists have proposed measures to be taken to protect the countries agricultural sector. Some policies that have been proposed include price support. Since China joined the WTO later than other developed economies, it does not have as much options as the European Union, Japan, South Korea and Taiwan. The world trading system has been moving in the direction of freer trade in agriculture (Anderson and Valenzuela 2006, p. 24). Several economic analysts have been expecting China to become increasingly dependent on agricultural imports due to the country’s rapid growth in the industrial sector in the past two decades. Some economists have also suggested that China could deprive other major economies of the world of food. However, as reported above, net food import growth has not yet occurred in China, at least not in a sustained way. China has become an important exporter of meat, fish, fruit and vegetables. In the early 1990s, China was also a major exporter of grain and cotton (Anderson and Valenzuela 2006, p. 25). In relation to the WTO accession, China dedicated itself to have no export subsidies, and to limit its internal support to farmers to 8.5 percent of the value of production. Other developing countries of the world committed themselves to 10 percent of the value of production. The commitments made by China to the WTO looked substantial in paper. The import market access commitments stated that tariff rate quotas had to be maintained only on wheat, rice, maize, edible oils, sugar, cotton and wool. These products’ only constitute about one-sixth of China’s agricultural GDP. The quota values were expected to grow over the next three years at annual rates of about 9 to 19 percent. Further, another commitment by China was that its trading monopolies were to disappear except for tobacco (OECD 2005, p. 567). Compared to other developing countries and the industrialized economies of the world, China’s agricultural sector cannot be considered to be protected. Based on the current WTO rules in agriculture, China has to undertake some little policy adjustments in the short run. China does not directly subsidize specific farm products and exports so that no reductions in internal support and export subsidies are needed. China has got the ability to support its agricultural sector without the violation of the Aggregate Measure of Support (AMS) regulations. This does not mean that China has free trade in agriculture. Imports and exports of grain and other agricultural products are controlled by the central government and the domestic grain market is still not liberated. To join the WTO, China needed to implement the WTO’s rules in the agricultural sector. The most important policy adjustment in the current stage is to meet the requirement of market access. This would require China to remove gradually the current restrictions in agricultural trade. In particular, the government needs to remove the state monopoly in grain trade (OECD 2005, p. 567). In the long run, China needs more important policy adjustment in the agricultural sector. The country needs to liberalize trade in agriculture on one hand, and prevent farmers’ relative income from falling on the other. Policy adjustment should be active rather than passive; it should be proactive rather than wait until the situation becomes more serious (OECD 2005, p. 568). To meet the WTO regulations and to improve the domestic income distribution, the country needs to make a series of policy adjustments to improve agricultural productivity. First, the country should increase agricultural investment and change the factor structure of agricultural production. The implication of this is that the country will lose its comparative advantage in agriculture if agricultural production requires higher labor. One way to improve agricultural production capably to compete in the international market is to make necessary reform changes in the agricultural sector. Empirical Analysis Countrywide self satisfaction with agricultural products would decline slightly, predominantly for feed grains and cotton as demand for livestock products grow, driven by the income gains from trade reforms, and as the production of natural fiber-based textiles and clothing industry expand. Most decreases in the farming sector are as a result of outstanding post accession reforms. Further, the reforms are not that severe, especially when compared with development in farm products that would lead to normal economic growth in the economy (Keeney and Hertel 2005, p. 29). Rather than disagree with trade law developments, the government and the policy makers should seek and get the best solutions to tackle any temporary unemployment that might follow reforms. The most efficient policies that can result in some benefits involve savings in rural human capital, rural infrastructure, and agricultural research and development (Hoekman and Olarreaga 2004, p. 13). Another important policy that should be undertaken is reforms in the way land is used (Keeney 2005, p. 41). The Chinese government should consider investing in education and health facilities as these investments would decrease the negative implications of reforms on the prevalence of poverty and food security. Better education and health for farmers’ children not only boost their farm productivity should they take active participation in farming. Further, it would enhance their ability to find more lucrative non-farm employment. In addition, the government could reduce the levels of poverty if it can cut down basic school fees and improve the situation by allocating more resources in the improvement of schools in the rural areas (Keeney 2005, p. 42). Improvements in the transport system would ensure that a bigger share of the resources received from the trade of agricultural products can be passed back to the farmers. This kind of development also makes it easier for farmers to take advantage of the expanding employment opportunities in rural townships. Further, agricultural and research development can help in tackling the problem of both urban and rural poverty. An increase in agricultural productivity could significantly offset the 2-8 percent decrease in agricultural production that is projected in the main scenario to result from WTO accession (Keeney 2005, p. 42). The developments in the land tenure system would not only bring more opportunities to invest in the agricultural sector but also encourage the security of farm households. If developments in the land tenure system are accompanied by developments in the rural financial markets, investments by farmers in the agricultural industries would increase. The developments would increase further if returns were increased through the reduction of levies imposed by the government on the farmers (Gorter 2002, p. 55). Conclusion Considering their possible impacts on the world product prices, tariffs are much more important than subsidies. Chinese agricultural products are higher in price compared to other countries’ products in the international market. The policies put in place by the government hinder resources from benefiting some of the contributors to economic growth including agriculture. Although there is some form of uniformity among countries in the world, the possible implication of cutting down tariffs on agricultural products may affect production. China is a major producer of grain in the world. However, concerns on how to feed the country’s rising population have emerged, not only domestically but also beyond its national borders. The introduction of the current global trade liberalization strategies will actually have a great impact in international trade patterns, especially with respect to agricultural products. The international model of protection of agriculture will have several implications on developing countries such as China. References Anderson, K. and Valenzuela, E. (2006), The WTO’s Doha Cotton Initiative: A tale of two issues, Washington DC; World Bank. Corden, D. (2002), The theory of protection, Oxford: Clarendon Press. Gorter, H. (2002), The AMS and Domestic Support in WTO trade negotiations on agriculture: issues and suggestions for new rules, Washington DC; The World Bank. Hoekman, B. and Olarreaga J. (2004), Agricultural Tariffs versus subsidies: what’s more important for developing countries?, New York: World Bank Economic Review. Keeney, R. (2005), Decoupling and the WTO; Farm factor and household impacts in the United states, Unpublished Ph.D. dissertation, Purdue University, West Lafayette. Keeney, R. and Hertel, T. (2005), “GTAP-AGR: A framework for assessing the implications of Multilateral changes in agricultural policies”, GTAP technical paper no. 24, center for global trade analysis, Purdue University, West Lafayette. OECD (2004), Agricultural policies in OECD Countries; Monitoring and Evaluation, Paris: OECD. OECD (2005), Agricultural Policies in OECD countries: Monitoring and Evaluation, Paris; OECD. Pigott, C. (2002), China in the World Economy: the Domestic Policy Challenges, Paris: OECD Publishing. Snape, R. (1991), “The International Regulation of Subsidies”, The World Economy 14(2): 139-64, June. World Bank (2005), Global monitoring Report 2005, Washington DC: World Bank. Read More