Will the US's WTO agriculture challenge against China land it in hot water?

Apparently borrowing a page from the Trump playbook, the outgoing Obama administration filed a new trade enforcement action with the World Trade Organization against China earlier this month, alleging that the country has not met its market access commitments to the WTO for rice, wheat and corn.

The challenge at the WTO is the second such complaint by the Obama administration on behalf of the US farmers and marks "...the 15th time that the Obama administration has launched a trade enforcement challenge against the Chinese government at the WTO since 2009," says a statement posted on the Office of the United States Trade Representative.

Specifically, the United States is challenging the tariff-rate quotas (TRQs) for rice, corn and wheat enforced by the Chinese government, adding that China's "market price support" for these products is almost $100 billion in excess of China's committed levels during its accession to the WTO. A TRQ is a trade policy tool that is used by a government to protect a domestically produced commodity or product from competitive imports.

China's drive for food self-sufficiency

China has a policy of supporting its farmers through price floor subsidies for commodities like corn, wheat and rice. The price support policy evolved more than a decade ago, as the Chinese government's response to increased demand for food and grains from its own population, which caused China to import oil and grains in record quantities.

As the Chinese government sought to improve its food security, the subsidies boosted prices of domestically produced grains way above international price levels, and dramatically expanded acreage dedicated to the cultivation of the subsidized grains.

As an example, wheat production in China improved by 35.7% to 95 million mt in a span of 10 years since 2006.

The minimum support price for domestic wheat purchases commenced in 2006 and the TRQ for wheat in 2016 remains unchanged from 2015 at around 9.63 million mt. As with other grains, the bulk of this wheat, around 90%, is purchased by the state players, COFCO and Sinograin, while only about 10% goes to private buyers.

The minimum support price for wheat is set at Yuan 2,360($339.52)/mt, and has been unchanged for the past four years.

Chinese traders claim that only 30% of the TRQ for wheat has been utilized, but the country has also imported some wheat outside the TRQ. An import tax of 55% is imposed on purchases made outside the TRQ system.

In some cases, however, there has been excessive price support, and in the case of corn, it led to oversupply of inventory estimated at $200-250 million mt in late 2015. The Chinese government responded to corn stockpiling problem by discontinuing its corn subsidies in March this year, which led to a sharp reduction in acreage under corn cultivation.

However, the Chinese government's active interest in and guidance of agri-policies is exemplified by these words from a press conference held on May 5 by the Information Office of the Ministry of Agriculture.

"Our plans for this year are firstly, we expect to reduce corn planting area by at least 1.33 mil hectares. Secondly, the soybean planting acreage is expected to increase more than 0.4 mil hectares. Thirdly, increase the planting for more demanded grain variety and lastly, planting for rice, wheat and other grain rations will remain stable."

And while there is no longer an official corn support price, Chinese traders say that an unofficial price floor of about Yuan 1,400/mt, encouraged by the Chinese government, still exists to keep the farmers supported.

Factors at play 

It is an unspoken fact that the Chinese government is going to fight tooth and nail to retain sovereignty over its food security — as would a lot of other nations.

So what does the US action at the WTO achieve (other than winning plaudits from a decidedly skeptical electorate)?

If the US pursues an aggressive trade rebalancing agenda with China, which looks very possible, given the initial tweets coming in from the Trump camp, it could bring China back to the negotiating table.

Getting China to reconsider its trade positions, could lay the field wide open for rebalancing on issues as diverse as the Yuan-US dollar exchange rate, or Chinese steel exports to the US.

However, it should be noted that in 2015, China was the second largest international destination for US agri-exports, according to the USDA website, with exports to China having grown more than 200% in the past decade.

Agriculture Secretary Tom Vilsack has also acknowledged in a statement that, "Through tariff cuts and the removal of other trade barriers, China has gone from a $2-billion-a-year market for U.S. agricultural products to a $20-billion-plus market."

Annoying such an important trade partner, especially one that imports so much agri-produce from the US, may, therefore, not be such a great idea. A Trump-led future of US foreign policy and trade may make for a more Dali-esque set of negotiations with China.

Also not to be taken lightly would be raising China's need for "maintaining face," which may even cloud more rational policy decisions, in the path of American hectoring.

It is strongly to be hoped that the path of gaining share in the agri-market and enriching the US worker may eventually not work to the detriment of the US farmer.

China can be expected to fight its case strongly at the WTO. The only response to the US action was a tersely worded statement posted on China’s Ministry of Commerce website on December 16, which said that the Chinese administration of TRQs was in line with WTO rules; that the Chinese regretted the US action and would handle the dispute at the WTO.

The Chinese government has handled the Twitter provocations from Mr. Trump with relative outward calm. But the recent underwater drone incident in the South China Sea points to potentially firmer responses from the Chinese side.

The path forward for US-China agri-trade relations is going to be interesting. Suppliers from the Black Sea and South America, among other origins, are already waiting in the wings for any opportunity to tap the Chinese market. The hope is that going back to the negotiating table may expand, rather than reduce, the pie for US-China trade.