Bilateral talks continue over a long list of Trump administration complaints about China’s trade, investor and currency practices. But last week China’s agriculture sector came under pressure, when the World Trade Organization ruled in favor of a 2016 U.S. complaint that China has consistently exceeded its WTO agricultural subsidy limits. Now China must either cut its subsidies to bring them in line with WTO rules, or the United States has the legal right to retaliate.
The world sees China as a manufacturing powerhouse. As my research shows, however, China has emerged as a major agricultural power. The world’s largest agricultural producer and fourth-largest agricultural exporter, China has a huge impact on global agriculture markets because of the size of its consumer market and its importance as an importer.
What are agricultural subsidies, and how does this play into the broader discussion on China’s trade practices? Here’s what you need to know.
Beijing subsidizes the agricultural sector heavily.
Countries provide payments and other support to give their farmers a competitive advantage, but these agricultural subsidies distort global markets and depress prices. Historically, rich countries like the United States were the primary providers of agricultural subsidies. But as China has grown richer, its subsidy levels have increased dramatically.
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China is now the world’s largest subsidizer of agriculture — Beijing provided an estimated $212 billion in farm subsidies in 2016, significantly more than the European Union ($100 billion), United States ($33 billion) or any other country.
Subsidies now make up a significant portion of earnings for Chinese farmers, accounting for 38 percent of their revenue for wheat, 29 percent for corn and 32 percent for rice. By comparison, U.S. subsidies constitute 8 percent of U.S. farm earnings for wheat, 4 percent for corn and 2 percent for rice.
Beijing’s support to China’s agriculture sector includes government purchases at above-market prices, as well as market price support programs, where farmers receive a direct payment from the government if market prices fall below a minimum set price.
Here’s the problem. Because they encourage farmers to produce more than they would otherwise, these subsidies are highly trade-distorting. China’s subsidies artificially boost domestic agricultural production, which displaces imports from entering the Chinese market and lowers global prices. This hurts agricultural producers and exporters around the world.
And there’s another issue: China’s policy of supporting producers by purchasing agricultural commodities at above-market prices has led to the accumulation of massive government stockpiles. By 2016, China had amassed 60 percent of the world’s cotton supplies, over 50 percent of its corn, 40 percent of wheat and 21 percent of soybeans.
To dispose of these large stocks, the government periodically auctions them off at below-acquisition cost. Analysts believe China’s policies exert “a colossal influence” on world prices, given the size of its state reserves. A mass sell-off from China’s sugar reserves in 2016, for example, helped to push the global price of sugar down by almost a quarter.
Why the boom in China’s agricultural subsidies?
Beijing wants to bolster rural incomes and reduce high levels of rural-urban inequality, which the government fears could be politically destabilizing. Economists argue, however, that there are better ways for Beijing to support farmers and promote rural development, including improvements in rural pensions, health care, education and infrastructure.
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But China’s subsidies also reflect the leadership’s push to increase domestic food supply, and reduce reliance on imports. The Chinese government has long had the goal of achieving 95 percent self-sufficiency in wheat and rice, which it sees as strategic commodities essential to China’s food security. In part, this is because Beijing believes the United States and its allies continue to dominate global agricultural markets, potentially shutting China out in the event of a future security conflict.
China argues that it is hypocritical for the United States to criticize agricultural subsidies, when Washington has historically been a heavy subsidizer of its own agriculture sector.
So what’s at stake for the U.S.?
As the world’s biggest agricultural exporter, the United States has a major commercial interest in securing a reduction in Chinese subsidies.
Agriculture accounts for nearly 10 percent of total U.S. exports. This is one of the few sectors of the U.S. economy that runs a trade surplus, helping to reduce the size of the country’s overall trade deficit. U.S. agriculture depends heavily on foreign markets: More than a third of U.S. farm revenue comes from exports.
And China is the largest market for U.S. agricultural exports, which peaked in 2012 at $26 billion. U.S. agricultural exports have since fallen by more than 25 percent, due in large part to the expansion of China’s subsidies. U.S. trade officials believe that U.S. exports would be considerably higher if not for Chinese subsidies and other trade barriers.
And what happens next?
China will almost certainly appeal this ruling. This means the case goes to the WTO’s Appellate Body, which effectively acts as a “supreme court” for trade disputes.
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But the Appellate Body, well, is short of bodies. The Trump administration has been blocking all appointments to the Appellate Body as the terms of its current judges expire. The Appellate Body has been reduced to three judges — the minimum needed to adjudicate a dispute — with the remaining four of its seven seats vacant.
Two of those judges will reach the end of their terms in December, leaving the Appellate Body without enough judges to review cases.
And once an appeal is lodged, a dispute settlement panel decision remains blocked until the decision of the Appellate Body. This means that without a functioning Appellate Body, China may be able to simply block the WTO ruling on its agricultural subsidies, placing the case in legal limbo.
The WTO’s dispute settlement system is designed to enforce trade rules, and most member countries regard this system as one of the strongest and most effective enforcement mechanisms in international law.
What happens next on China’s agricultural subsidies is uncertain. Trump has been openly hostile to the WTO’s rules-based system. The United States has won an important WTO victory against China’s subsidies but — with the Appellate Body in jeopardy — may be unable to enforce it.
Kristen Hopewell is a senior lecturer in international political economy at the University of Edinburgh. She is the author of Breaking the WTO: How Emerging Powers Disrupted the Neoliberal Project (Stanford University Press, 2016).