Introduction
The socio-economic development of most of the Chinese population relies heavily on agriculture. In 1985, agriculture accounted for 29.8 percent of GDP and 62 percent of the country’s total labor force. By 2006, it accounted for 11.8 percent of GDP and 42.6 percent of all jobs (Carter 16). Given the importance of agriculture to China’s development, it is necessary to critically analyze how the country’s accession to the WTO benefits farmers. Since China entered the WTO in 2001, the impact of trade liberalization on farmers has been limited. Nevertheless, recent trends in China’s agricultural trade suggest that farmers are likely to experience the full impact of the accession to the WTO shortly. According to the Stolper-Samuelson Theorem, while trade produces overall gains for a country, the distribution of the gains within a country is neither neutral nor unpredictable (Agarwal 45). More specifically, trade will benefit the owners of the factors with which the economy is relatively well endowed, and hurt the others who own the scarce factors.
China has been performing well economically and joining institutions such as the WTO is a positive sign for the country’s economy. In China, land is considered scarce, while labor is abundant. This paper will first undertake a brief analysis of the major assumptions of the Stolper-Samuelson Theorem and its significance in the context of Chinese agriculture. After a description of the main features of the WTO agreement on agriculture, it will present the current patterns in China’s agricultural trade and their impacts on farmers’ income based on the assumptions of the Stolper-Samuelson Theorem.
The Stolper-Samuelson Theorem
The Stolper-Samuelson Theorem reposes on the Heckscher-Ohlin model, which states that trade flows are determined by comparative advantage and that the latter depends on each country’s resources (Deardorf 56). An economy has a comparative advantage in the production of certain goods if it intensively uses the locally abundant factor of production. Abundant factors of production tend to be cheaper than scarce factors and since the price of goods reflects the cost of inputs, goods that intensively use the abundant factor of production will be cheaper and will constitute the main exports (Deardorf 67). By contrast, goods that intensively use the scarce factors of production will be imported. The Stolper-Samuelson Theorem asserts that under the assumption that productivity remains constant, trade will benefit individuals who own the abundant factors and hurt the others who own the scarce factors (Deardorf 67).
To determine the significance of the theorem for China, the following real situation will be used: China is labor abundant and thus has a comparative advantage in the production of goods that uses labor intensively, fruits in this case; The United States (US) island abundant and thus has a comparative advantage in the production of goods that uses land intensively, wheat for example. More specifically, China is able to produce fruits at a lower opportunity cost than the US due to the abundance of labor. As a result, the difference in comparative advantage leads to different relative prices across countries (Deardorf 89). In this case, the domestic price of fruits in China is lower than the domestic price of fruits in the US and this will lead to trade between both countries. The theorem argues that when each country is open to trade, each faces a new price called the world relative price. This price lies between the price of fruits in China and the price of fruits in the US when they do not trade. Since producers of fruits in China face a higher world relative price, China will produce more fruits and specialize in the production of fruits. With this shift in production towards more fruits, both labor and land will move from the other products, such as wheat for example, to the production of fruits (Deardorf 89). That is, the relative demand for labor in the economy is now more weighted towards fruits than wheat. Due to the increase in the relative price of fruits, the labor in the labor-intensive farming sector will benefit the most from trade because they own the abundant factor of production that is intensively used (Deardorf 91). By contrast, the effect of trade on farmers engaged in land-intensive agricultural production in China is exactly the opposite.
The trend of China’s agricultural trade after WTO Accession
The patterns in China’s agricultural trade since the accession to the WTO have been consistent with its resource endowments and this indicates that China is moving closer to its comparative advantage (Bao 112). Indeed, China’s agricultural exports have been dominated by the exports of labor-intensive products since 2001. In general, labor-intensive products refer to processed agricultural products, livestock products, horticultural products and silk. Within this group, livestock products and horticultural products account for the largest share in exports. According to statistics, Chinese exports of horticultural products have dramatically increased since China entered the WTO (Bhattasali 123). From 2002 to 2005, the exports of labor-intensive agricultural products accounted for 86.1 percent of China’s total agricultural exports. Compared to the decade before the accession to the WTO, the share of labor-intensive agricultural products in China‘s total agricultural exports in the period of 2002 to 2005 increased by 4.91 percent (Bigman 56). Thus, trade liberalization has led to a specialization in the production of labor-intensive agricultural products. As a result, China has decreased its exports of land-intensive agricultural products and increased its imports for those products. Some of the common land-intensive agricultural products that China consumes are actually imported from other countries. Within this commodity group, cereals, edible vegetable oilseeds and vegetable oils account for the largest share in China’s agricultural imports (Bonarriva 143). The imports of soybeans have significantly increased since 2001. Between 1999 and 2001 and between 2002 and 2005, the imports of land-intensive agricultural products accounted for 60.6 percent and 65 percent of China’s total agricultural imports respectively (Boanrriva 153).
However, since about 2004, China’s comparative advantage in agriculture has been declining rapidly because the growth of exports of labor-intensive products has been slower than the growth of imports for these products (Carter 10). For example, from 2001 to 2006, the exports of Chinese aquatic products increased by 113 percent, while the imports of aquatic products rose by 119 percent (Carter 13). Consequently, agricultural imports have surpassed its exports of agricultural products since 2003. Although it is common for a country to see a decline in its comparative advantage in agriculture, it is less normal to see a trade deficit within the sector in which it has a comparative advantage (Carter 16). Indeed, the Stolper-Samuelson Theorem predicts that the growth rate of exports of products for which a country has a comparative advantage should be higher than the rate of imports for these products. But, it is important to note that these predictions hold under the assumption that productivity is constant (Chen & Shungfeng 145). It is reasonable to assume that the productivity for the labor-intensive agricultural sector must have been constrained and therefore trade liberalization in China might not have benefited farmers as much as it was expected, at least in the short term (Chen 109).
Implications for Chinese farmers income
The Chinese commitment towards food security and self-sufficiency in the production of grains have limited the impact of imports and exports of agricultural products on Chinese farmers’ income (Donglin 931). According to the Stolper and Samuelson Theorem, farmers engaged in labor-intensive production should have seen a significant rise in their income. Although they have benefited, they have experienced difficulty in turning their global low-cost production advantage into real income gains. Indeed, the goal to achieve self-sufficiency in grain production has restrained the potential for exports of labor-intensive products (Donglin 937). Since the beginning of China’s economic reforms, self-sufficiency in grain production and food security have been considered top priorities. As China entered into the WTO, self-sufficiency objectives were eased for several products, but the state continued to emphasize self-sufficiency for grains. Indeed, although the share of grain growing area has declined since 2001, it still retains about 70 percent of the total crop growing area (Donglin 938). Furthermore, the demand for land-intensive inputs such as machinery and fertilizer have experienced a significant increase since the accession to the WTO.
The system of Tariff Rate Quota that has been negotiated with the WTO essentially applies to the grain sector (Duncan 231). It seems that China was not willing to introduce significant structural adjustments in its agricultural production system. As a result, China maintained its strategy of quantity increase rather than quality improvement, which is usually designed for low-value-added products. However, as opposed to grains and other land-intensive products, labor-intensive products are high-value-added products (Duncan 212). Put differently, the competitiveness of labor-intensive products is determined not only by the productive capacity of the producers but also their quality. However, due to the lack of restructuration and to the small scale of labor-intensive production, little attention has been paid to food safety and quality issues. As a result, China’s exports of labor-intensive products have been limited by sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT), especially in developed countries (Garnaut 178). It has been observed that the majority of SPS problems being experienced in China are caused by land-intensive products. The most notable land-intensive products associated with SPS problems include vegetables, seafood, and tea. According to the Chinese government, SPS and TBT have resulted in huge direct losses for China’s agricultural exports. In 2001, about US$7 billion worth of Chinese exports were affected by SPS and TBT (Ho 19). China’s recent experiences with SPS barriers have been mainly with its three main trading partners in terms of agricultural exports : the European Union (EU), Japan, and the United States (USA). These three economies accounted for 41 percent, 30 percent, and 24 percent respectively of China’s trade losses attributed to SPS measures in 2002 (Ho 20). Although Chinese farmers had anticipated a large positive impact on their income from the export of labor-intensive agricultural products after accession to the WTO, the growth in their income has been prevented.
The Stolper-Samuelson Theorem predicted important losses for farmers engaged in land-intensive agricultural production (Deardorf 125). However, the commitment towards food security and self-sufficiency in grain production, again, has limited the effects of trade liberalization (Huang 44). land-intensive farming requires a combination of skilled farmers, advanced farming technology, and large tracts of arable land. Thus, the increase in the use of machinery since 2001 is consistent with the idea that China substantially maintained its commitment towards self-sufficiency in the production of grains. The main reason for losing comparative advantage with these agricultural products is the increase in production costs (Miljkovic 14). Given that land and skilled workers are scarce in China, labor costs and capital costs for unit agricultural products are excessively high in China compared to other countries. Therefore, these agricultural products are not well suited for exports because their domestic prices in China are higher than international market prices. Trade patterns for land-intensive products largely behaved along the lines of these theoretical assumptions except for grains (Naughton 113). There was a decline in exports for cotton and soya beans as China remained a net exporter of grains until 2006. Such distortions in trade patterns for similar commodities have been possible until now thanks to certain instruments. More specifically, the government has been resorting to stocks to increase the supply of key agricultural commodities inside the country to dampen their rise. In addition, China has introduced various subsidy programs for grain producers and it has been asserted that the increase in grain production has coincided with certain subsidy programs (Nyberg 244). Given that grain production represents the largest share in land-intensive outputs, the distortion of the Chinese market by the government has diminished the decline in farmers’ incomes within the land-intensive agricultural sector.
However, the sustainability of these policies has come under serious reconsiderations (Organization for Economic Co-operation and Development 12). First, the goal to be self-sufficient in the production of grains inherently conflicts to raise farmers’ income and improving their living standards. Indeed, net cash returns earned by farmers from vegetables and fruits are several times higher than returns from rice, wheat and corn. Furthermore, the sharp rise in international prices for commodities in 2007 and 2008 also demonstrated that this strategy to increase farmers’ income goes against urban consumer welfare objectives. To prevent the domestic price increase, the state decided to shut down exports of grains and other products. While they protected the consumers, they also prevented the farmers from receiving any benefits from the situation (Tisdell 231). Second, the ability of the state to implement those policies has been increasingly constrained. Indeed, the excess stocks of certain commodities accumulated in the late 1990s declined, which limited the ability of China to keep the domestic prices relatively low and to insulate its domestic market. Furthermore, since the government introduced important subsidy programs to sustain the competitiveness of land-intensive products, the funds designed for the support of land-intensive producers have become less available (Yang 201). In the first two decades after reforms, China taxed farmers through price policies as well as explicit taxes and fees. Then, in the late 1990s, China reversed this policy and used the funds collected from the taxes in order to pay above-market prices for quota deliveries.
Since taxes have been recently cut, it implies that programs of support for farmers are becoming increasingly difficult to be implemented. Finally, the ability of the government to support grain producers has become more difficult because most of these policies are not in conformity with the WTO rules (Zhai 2199). As a result of all these constraints, the Chinese grain industry is likely to suffer in the near future, which is also suggested recent trends in the Chinese agricultural trade. The Chinese domestic price for corn remained above the international price for most of the period after the accession to the WTO. Corn exports have been declining shortly after the accession to the WTO. China has also experienced a similar decline in wheat and rice, which points to a decline in exports for the whole grain sector (Josling 67).
Therefore, shortly, grain producers are likely to experience the same fate as producers of land-intensive commodities for which trade liberalization has not been constrained. That is, in the case of cotton and soybeans, the growth of imports of these commodities permitted increased consumption. Then, the growing demand for soybeans and cotton stimulated the growth of imports rather than modifying existing production. Put differently, production area and quality standards stagnated as more and better grade commodities were imported (Josling 67). From 1985-2006, soya beans consumption increased about four times whereas its outputs only rose by 52 percent. Ultimately, since the tariffs of cotton and soybeans were very low after China entered the WTO, the imports of these two commodities changed the domestic trends of prices. Indeed, they contained the rise in prices and costs of labor and other inputs due to the escalating demand (Bao 32).
Although the domestic market price of soya beans and cotton could have increased significantly, it fell because of import expansion and farmers’ profit margins suffered. In addition, cotton and sheep wool imports were in demand from the fast-growing textile industry. Also, oilseeds imports have been favorable for the livestock industry (Ho 35). The overall effect is that imports permitted restructuring of the agricultural sector towards the production of those commodities for which the country has comparative advantage because of its rich and abundant labor force and other unique natural resource endowments. China has the potential to be among the best-performing countries in terms of agricultural trade because all the factors needed to promote international trade are readily available (Chen 24).
Conclusion
Agriculture as an economic sector still makes a substantial contribution to the Chinese. The decision by the Chinese government to join the WTO in the year 2001 opened a lot of opportunities for China to trade its agricultural products at the global market. The Chinese government has put elaborate policies and plans in place to ensure that the benefits of joining the WTO are felt by all the stakeholders within the agricultural sector. Trade liberalization is essential in ensuring that the gains made in agricultural trade are equally distributed (Garnaut 72). China needs to bring on board those farmers with scarce factors so that the impact of accession to the WTO can be felt by everyone. The overall performance of the Chinese economy will entirely depend on how well the country utilized its accession to the WTO (Garnaut 72).
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