China refuses to budge on subsidies

The country lost a WTO challenge over its minimum support price program but hasn’t made the necessary adjustments

The country lost a WTO challenge over its minimum support price program but hasn’t made the necessary adjustments

China continues to violate its World Trade Organization commitments regarding agricultural support, says U.S. Wheat Associates.

The country has committed to making changes to its tariff rate quota system following a successful U.S. World Trade Organization challenge on that trade barrier, but it appears reluctant to make comparable adjustments to its minimum support price (MSP) program.

China agreed to an aggregate measure of support threshold of 8.5 percent of the value of production when it joined the WTO.

It is exceeding that threshold by a wide margin on its MSPs alone, according to a recent report on trade barriers prepared by USW.

In addition, it continues to dole out input subsidies and product-specific payments.

The U.S. Trade Representative won a WTO challenge against China’s market price support program in February.

“The action is the most significant taken by the U.S. government to date in addressing the imbalances caused by agricultural subsidies that violate WTO commitments,” said USW in its report.

“(It) should set strong precedent for other advanced developing countries who appear to be exceeding their WTO commitments on domestic support.”

However, USW noted that China’s recently established MSP for the 2020 wheat crop suggests the country does not intend to reduce the price subsidies it provides to the nation’s wheat farmers.

The Dim Sums web blog recently published a story stating that the Agricultural Development Bank of China (ADBC) has financed 75 percent of the country’s wheat sales in 2019, up from 49 percent last year.

The author of the blog suspects the sharp increase is because 31 million tonnes of wheat have been purchased through the government’s MSP program in 2019, the largest total since 2008.

There are no longer formal price supports for corn or soybeans, although the Agricultural Development Bank of China finances purchases for government reserves when markets take a downturn, according to the blog.

According to the Dim Sums blog, the development bank lent US$24.3 billion during the first three quarters of 2019 to finance purchases of 124 million tonnes of grain and oilseeds, an 87 percent increase over the previous year.

“The bank debt is one more seldom-noticed example of a Chinese economy increasingly propped up by debt,” said the author of the blog.

Peter Hall, chief economist of Export Development Canada, said the ADBC situation is a microcosm of a much bigger debt problem dating back to the global financial crisis of 2008.

The country’s share of world trade fell from 65 percent to 45 percent over the following couple of years.

The implications for the economy should have been disastrous, but China kept posting year-over-year growth in its gross domestic product.

“China was able to achieve that by very, very strong doses of public money propping up the economy,” he said.

That reliance on debt has continued for the last 11 years, which has many economists and exporters concerned because it is an unsustainable way to grow an economy.

The worry is that China’s debt-based economy will eventually falter, reducing the purchasing power of the world’s largest commodity trader.

However, one sector that doesn’t have to fret about China’s rising debt load is agriculture, said Hall.

“Food is going to be the last thing that China is going to compromise on,” he said.

“There are lots of other things that can be dialed down before you’re going to compromise the food supply of the country.”

In fact, the demand outlook for imported agricultural products remains strong despite recent political disruptions to trade.

Hall said China’s pork imports are expected to rise by about 15 percent per year for the foreseeable future.

“That is the kind of rate of return that most wealth managers would give their eye teeth for,” he said.

And that forecast was made before the devastation to the country’s hog herd caused by African swine fever.

China’s middle class is expanding by the size of Canada’s population every year, which is fuelling growing demand for meat and crops.

That is why he isn’t overly concerned about China’s MSP program because there is no way domestic production can keep pace with growing demand, even with substantial subsidies.

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