Achieving food security in China - implications of WTO accession

• China Center for Economic Research, China
• Center for Chinese Agricultural Policy, China

Since gaining WTO accession China has begun to liberalise its agricultural trade. In the short term, the impact will be limited. However, global trade liberalisation is likely to increase in the future. Whatever policies the country chooses to adopt in response, there will be changes to the economy - including effects on rural incomes and food security. The Chinese government will therefore need to set up policies to assist disadvantaged groups and help with a smooth transition. The choice of food policy in China will not only have a significant impact on the country's own economic structure, but will also help shape the pattern of world food trade and hence have important implications for major food-exporting countries such as Australia.
Joining the WTO came at a critical point in China's agricultural history. In the mid-1990s, domestic prices for major grain products, including rice, wheat and corn, rose rapidly towards (and even sometimes above) international prices. China could subsidise farmers and maintain prices for its own grains above international levels, or it could tax farmers (as in the past) by forcing its prices below world prices, or it could opt to open its markets to world trade.
The impact of these Government decisions will determine whether internationalisation of the food economy would destabilise the domestic food market; whether the country could earn enough foreign exchange if it had to import grain; and whether freer trade in food would prevent further increases to farmers' incomes and so widen the already large rural-urban gap in the country.

This project studied the implications of China internationalising its food economy, analysed the effect on the country's food policies of China joining the World Trade Organisation (WTO), and devised a set of policies to help improve China's food security.

The project employed and extended its key analytical tool, the 'China Model' (a general equilibrium model of the Chinese economy). The work was divided into three sub-projects. The first involved assessing the impact of WTO accession on policies relating to food security. The researchers estimated the effects of postponing food policy changes (given the prospect that domestic prices would rise further above international ones if the current policies were maintained). This involved a critical literature review of East Asian experiences and identification of feasible food policy options.
The second sub-project analysed the costs and benefits of these suggested options, especially with regard to national welfare, food security and rural incomes. Much of the data had already been gathered in an earlier ACIAR project, ANRE2/1997/021.
Finally, in the third sub-project the team synthesised a set of policies, including domestic and international food trade policies, and other policies (such as macroeconomic, industry, transport, infrastructure and welfare policies) to improve the country's food security and assist the disadvantaged.

A general equilibrium model of the Chinese economy with regional dimensions (CERD) was developed that included the eastern coastal, central and western regions. The model described five agricultural sectors and 39 non-agricultural sectors and distinguished between rural and urban households.
The modelling analysis found that regional income disparity, which has been worsening since 1991 will be reinforced rather than eased by the WTO accession. The eastern coastal region will have much higher gains than the inland regions. The analysis also revealed that the rural-urban inequality will worsen in all regions.
A new version of CERD with disaggregated agricultural sectors predicted that agricultural sectors would be adversely affected by the WTO accession: agricultural output would fall, grain and total food self-sufficiency rates would decline. However, the magnitudes of the impacts were determined to be smaller than initially anticipated.
It was consistently shown that the trade reforms China adopted in order to accede to the WTO will mean substantial structural changes within the agricultural sector. The reforms would seem to result in substantial negative impacts across the sector and a worsening of food security in the sense of reduced access to income. However, it cannot be stated too strongly that the outcomes of the reform have to be analysed from an economy-wide perspective.
In China, as in other rural-based countries, the main factors behind reductions in rural poverty will be the scope for rural households to earn off-farm income and for people to move from rural areas into industrial and services activities in urban centres. Therefore, to a very large extent, the success of the trade reforms will depend upon policies outside of agriculture.
The modelling has also shown that China's monetary policy regime of the fixed yuan and capital controls has increased the rural-urban income gap by raising real wages and reducing employment growth in the non-agricultural sectors. Moving away from this monetary policy regime could lead to a much more rapid relocation of labour out of agriculture and thereby promote a reduction in the rural-urban income gap.
The study found that the entry into the WTO has boosted China's trade in agriculture, especially its agricultural imports. China has had two consecutive years of trade deficit in agricultural trade since 2004. The country has no comparative advantage in land-intensive agricultural production and, as found in the study, the comparative advantage indices of these agricultural products have been speedily declining since China's entry into the WTO. The pattern of China's agricultural trade is consistent with the country's comparative advantage and resource endowments. After the entry into the WTO, this pattern has been strengthened, indicating that China is moving closer to its comparative advantage in agricultural trade with the rest of the world.
The research team studied what economic effects the China-ASEAN Free Trade Area (CAFTA) will have as it is established in two stages before 2010. The study predicted that CAFTA will increase social welfare and promote real GDP in both economies. There will be a large trade creation effect among the CAFTA members, and their total exports will increase during the implementation phase. However, there may be a trade diversion effect as trade between members and other regions decline after CAFTA's creation. But as a whole, total world trade will increase, especially in the second stage of the full implementation of CAFTA.
The integration of the Chinese and ASEAN economies also provides opportunities for other agricultural exporting countries to increase their trade to both markets. These will come in agricultural commodities for which neither China nor ASEAN have a comparative advantage - such as cereals, milk, beef and raw materials.