Tag Archives: subsidies

Subsidies As High As An Elephant’s Eye

Harvesting wheat in Shulyu Village in Tangxian County, Hebei Province, June 8, 2014.

FARM SUBSIDIES, STARTING with corn and other grains, are to be withdrawn, state media report. The People’s Daily quotes Chen Xiwen, deputy head of the central agricultural work leading team, as saying, “the price will be decided by the market and [the state] will no longer play the role of subsidising farmers” (via FT).

China’s farmers have produced a string of record grain harvests in the face of natural and man-made disasters and shrinking hectarage. At an estimated 621 million tonnes, last year’s annual grain harvest set another record high for the 12th consecutive year.

However, supply still struggles to keep up with the demands of a richer and growing urban population. Stocks and imports cover the gap. China imported 3m tonnes of wheat, 3.4m tonnes of rice and a record 4.7m tonnes of corn (mostly used for animal feed) last year.

While removing incentives for grain production seems counterintuitive in such circumstances, all the state’s guaranteed minimum purchase prices — currently double world prices — is doing is building up record levels of domestic stocks. The US Department of Agriculture estimates those of corn at the end of the 2015/16 crop year will account for more than half the world total, at 113m tonnes.

Policymakers have long recognised that this structural distortion of China’s domestic agricultural commodities markets is not sustainable. So the removal of subsidies has been expected, though it will have to be implemented in ways that do not risk social instability if rural incomes fall too sharply. Subsidies provide on the order of a 20% top-up to farm incomes. Authorities have just announced a new (if sketchy) agriculture investment programme.

That level of support is not out of line with international averages, but the numbers involved are, inevitably, large. The OECD, the rich-countries think-tank, estimates China’s support to its farmers at 1.8 trillion yuan ($292.6 billion) in 2014, the latest year for which comparative figures are available. That is double the amount of five years previously (other countries have been cutting back farm subsidies over that time) and equivalent to 2.5% of GDP, making it a bill worth trimming.

However, the bigger goal is the critical need to improve agricultural productivity overall as China’s shrinking farmland runs up against the limits of what is needed for China to feed itself. The current five-year plan promotes large-scale farming as a priority. By contrast, most grain farming is inefficiently small-scale and labour-intensive.

On average, each farmer plants half a hectare. In mechanised Europe, the ratio is more than 20 times that and in the Big-Agri United States upwards of 100 times. Furthermore, Chinese farms lose or waste some 35 million tonnes of grain a year in the course of storage, transportation and processing, according to state media.

Grain also needs lots of water, an issue in an increasingly water-scarce country, and an acute one on the evermore arid North China Plain, China’s breadbasket. One of the unintended consequences of grain subsidies has been to discourage small farmers from switching to cash crops that make better use of the available land.

Policymakers see large-scale, efficient and technologically advanced farming as the way to address all those challenges — and cut some hefty import and subsidies bills.

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China Scraps Disasterous Cotton Stockpiling

CHINA’S COTTON INDUSTRY has run head-first into the law of unintended consequences. In 2012, the world’s largest cotton importer bought millions of tones of cotton fibre from local farmers to stockpile in an effort to drive up rural incomes, particularly in Xinjiang. Domestic cotton prices hit 40% above global market prices. China’s textile mills, unable to buy freely on world markets because of import quotas, cried foul — or at least those that had not gone out of business because they were no longer price competitive.  Stocks reached a peak of 10.5m tones, accounting for more than half world inventories and one and two third times 2013’s total crop —  6.3m tonnes, down 7.7% from the previous year, according to official data published this week.

After unloading some of the cotton at a loss over the course of last year and months of head scratching over what to do with all the rest, authorities have now decided to scrap the scheme in favor of direct subsidies to cotton farmers next year starting with a pilot scheme in Xinjiang. Details of the size and scale of the subsidies remain unclear, however. The stockpiling scheme for soy will also cease, but those for wheat, rice, corn, rapeseed and sugar, which have not experienced cotton’s problems, will continue.

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Subsidy Or Welfare Spending?

In an economy such as China’s, standing somewhere uncertain in the transition from being centrally planned to a market economy, is everything a subsidy? The question is raised again both by the World Trade Organization’s surprise ruling that the U.S. had introduced illegal anti-dumping and anti-subsidy duties on some steel exports and by a new World Bank research working paper looking at the effects of a countervailing duties case brought by the United States in 2007 against Chinese imports of coated free sheet paper which were alleged to be being sold at below fair market value because of government subsidies to the Chinese manufacturers.

That case petered out after the U.S.’s International Trade Commission eventually found that no injury had been done to American paper producers. Its significance lies in that it reversed a long-standing American policy of not imposing countervailing and their sister anti-dumping duties on exports from non-market economies (into which category China falls until 2016 under the terms of its joining the WTO), thus opening the door for at least eight such trade actions from a wide range of industries.

Wonk warning: The paper will put any trade policy wonk in pig heaven. You will be neck deep in WTO rules and regs and the arcane arts of diving fair market value and identifying subsidies. If that is what fascinates you, you will find it a fascinating case study. If that’s not you, read on here.

The broader question is how does China, or any other transitioning economy for that matter, implement social and economic development policies it legitimately wants to pursue, as set forth, for example, in the new five-year plan, without distorting trade? What counts as an export subsidy and what is fair game for a countervailing or anti-dumping duty? For example, does the VAT rebate that Chinese farmers get (they effectively pay 5.8%, not the full 13% as part of the push to narrow urban-rural income disparities) count as an export subsidy, as some at the U.S. agriculture department argue? Or discounted land or energy supplies given by central or local governments as an inducement to attract new industry to desired regions, as some in the U.S. steel industry promote. What about a bank loan; the U.S. commerce department has determined that the domestic banking sector doesn’t operate on a commercial basis? Or China’s managed currency, which some in the U.S. Congress want made subject to trade remedies? Even censorship is starting to come under the microscope to examine if it, too, is a trade issue.

China has made great progress in reducing its overt subsidies (tariffs, subsidies and export taxes/rebates), down from 8% of GDP in 1985 to 0.7% by 2005 according to one 2007 study. But there are still a lot of subsidies designed to promote economic and social welfare goals, particularly poverty reduction and environmental protection, some of which are reported to the WTO but which need to be made trade neutral and applied according to universal principles not discriminatorily in line with WTO rules.

It is now a reasonable argument to make that U.S. trade remedy laws have strayed far from their original purpose, and are now being used by special interests to shield themselves from competition. Greg Mankiw, the Harvard University economist who is a former chair of the U.S. President’s Council of Economic Advisers, has said, “Anti-dumping is the ‘third rail’ of U.S. trade politics, with few politicians of either party willing to point out its broadly negative impact.” The World Bank paper quotes recent research that found that each job saved by steel tariffs cam e at the cost of three jobs in steel-using industries and caused economic distortion equal to some $450,000.

The paper suggests three remedies: contesting these cases in the courts or via the WTO disputes mechanism, as in the case of the steel duties–China and its companies now have hordes of trade lawyers in Geneva, Washington and Brussels on retainer; changing the rules on countervailing and anti-dumping duties via the Doha round of trade negotiations, but which would depend on the chimera of the Doha round actually being concluded; and China advancing the date of its recognition as a market economy from 2016, which would come with its own baggage. That, though, would be the idealists’ solution as it would let China provide a model for developing economies designing industrial and development policies intended to achieve social objectives that don’t simultaneously distort trade.

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