China's Trade Policy on Agriculture and Manufactured Products Term Paper

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China Trade Policy

China's agricultural trade policies are driven by its need to feed its massive population. The country has quotas that average 15.8%, with 5.8% of products being duty free and 1087 total tariff lines. These duties sit in line with EU levels, above U.S. levels and below developing world levels. China aims to reduce its agricultural tariff below 15% in the coming years. China supported India's stance on special safeguard mechanisms at the Doha Round, effectively scuttling the deal.

China's manufacturing tariffs are also above developed world levels but below developing world levels. China's tariffs vary significantly on a country-by-country basis; for example 45.4% of non-agricultural trade with the U.S. is duty free. China has become more aggressive with respect to its trade policies in recent years, but generally works within the confines of the WTO dispute resolution mechanism..

Agricultural Policies

China has long worked to lower agricultural duties, in part because of the country's paucity of arable land and water for irrigation. China's agricultural policy therefore is oriented towards the import of land intensive agricultural goods, because it does not have the land to meet domestic demand. This has been a long-standing issue for products such as soybeans and rice, where even in the 1970's China supported the Khmer Rouge in exchange for rice imports from Cambodia. Driving this part of China's agricultural policy is the desire on the part of the central government to prevent famine, which in turn could create substantial social unrest. China began lowering duties on agricultural products in advance of WTO accession because of the long-term nature of these issues. Imports of non-food agricultural products have received different treatment in Chinese trade policy, including a quota on cotton and a steep tariff for cotton imports above that quota level. China has set an objective of lowering tariffs below 15%, and has entered into an agreement with ASEAN to work towards zero agricultural tariffs. Such an agreement would help China with its food security and its influence in the region. The country still maintains, however, critical tariffs and non-tariff barriers on products from Western nations, and has supported safeguards for developing market farmers at the Doha Round.

China has been less proactive with respect to its export trade policies. It was compelled as part of its accession agreement with the WTO to place export caps on certain agricultural products such as grains. China's recent policy has focused on the production of labor-intensive agricultural products. This has resulted in relatively low productivity rates in the agricultural sector, something that the Chinese government is attempting to address going forward. Addressing agricultural productivity will mean investment in equipment, so China is likely to encourage the importation of agricultural equipment or the means to produce such equipment domestically.

China has also moved away from the use of state-run enterprises in the agricultural sector. There remain such enterprises trading in key export commodities such as corn and sugar. Prior to China's accession to the WTO, there was significant concern about the transparency of its state trading agencies (or lack thereof) with respect to the provision of subsidies (Ackerman, 1998). Thus, with China's accession to the WTO, many of these agencies have been privatized in order to improve transparency. However, even the private companies have strong ties to the government, or to government-owned banks such as the Agricultural Bank of China, so there may not have been significant improvements in transparency despite the tariff reductions of recent years.

With respect to the Doha Round, China has taken a roughly middle position. It has set its agricultural tariffs in line with those of the EU, for example, at a level that is lower than most developing nations. It has yet to move to tariff and non-tariff trade barrier levels of the developed world in general, however, and this has led to some criticism of Chinese trade policy. During Doha, China has been critical of some Western nations' policies, for example U.S. cotton protections, which it views as being hypocritical (Wang & Lim, 2009).

However, talks in the Doha Round were productive until the issue of the special safeguard mechanism scuttled the talks. China supported India's view that there should be a threshold at which developing nations can implement protections for their farmers. For its part, the U.S. characterized this effort as supporting tariffs and other barriers, and that China needed to cease acting like a developing nation on account of the size of its economy. With respect to agriculture, however, China is essentially a developing nation. The position that China took was supported by 100 other developing nations. Certainly, a flood of imports into the Chinese agricultural market could create temporary incentives for Chinese farmers that would jeopardize the nation's long-run strategy for agricultural development. Given the scarcity of land and the massive population, it is understandable that China would seek to maintain strong control over its internal agricultural policy by limiting external market influence on the domestic agricultural sector.

China's desire to protect its food security, and its support for India with respect to the special safeguard mechanisms contributed to the failure of negotiations for the Doha Round. The U.S., India and China combined could not come to an agreement with respect to these protections. All of these nations maintain high amount of export subsidies in key industries, each with the desire to protect critical food supplies and cash crop industries. From this perspective, China's policies roughly mirror those of Western nations. It has reduced tariffs on many products, but implemented non-tariff barriers on others. China differs from Western nations in that it lacks transparency with respect to non-tariff barriers and potential export subsidies.

Manufactured Products

In general, China takes a middle road with respect to manufactured products as well, holding tariff rates in between those of the developed and developing worlds. Strategically, there are good reasons for this. China remains an export-dependent market, and in order to facilitate that export trade it needs to give a little in the economic system. China can afford to lower its tariffs somewhat because it has high non-tariff barriers to entry, such as strong government interference in domestic markets, high cultural barriers and a lack of legal and regulatory transparency.

With respect to duties on manufactured products, China differentiates between trade partners. China has a significant amount of trade with the U.S., but has significant duties on Korean and Japanese products. Duties on products from major trade partners like Taiwan and Hong Kong are negligible of non-existent, as China views both of those territories as domestic, and wants to encourage inward capital flows that will ultimately help the economic development of the PRC market.

The high level of duty-free trade with the U.S. is of strategic benefit to China for a couple of reasons. The U.S. is the world's largest consumer, and China's strategy has long been to build an export-oriented economy. Given that China has comparative advantages in labor cost, land cost, and taxation policy, it can produce goods much more cheaply than the U.S. can. Thus, China seeks freer trade with the U.S. market, more so than with other Asian rivals. Korea and Japan are important trading partners, but neither can make or break China's economic strategy the way that the U.S. can.

As China's economic might grows, so does its willingness to engage in trade disputes with its partners. China uses a variety of different strategies to defend its trade interests. In addition to temporary duties, such as those levied on U.S. chicken producers, it has also used the influence of the central government on the state-run or newly-privatized companies. An example of this can be found with the recent dispute concerning rare earths, where China used its influence over its rare earth mining firms to further its political agenda, in contrary to international trade law (Hudson, 2010).

This increasing boldness has also manifested itself at the WTO. China's agricultural stance may have contributed to the failure of the Doha Round in 2008, but it has also become increasingly protective of its manufacturing base in recent trade talks. China has largely taken a back seat role rather than a leadership one in these talks (Wang & Lim, 2009) and Chinese negotiators have been largely unwilling to engage in the negotiation process. The implication of American criticism is that China is behaving more like a minor economic player than the world's second-largest economy (Lynn, 2010). This again, sees China as taking more of a middle line, willing to give some ground on tariffs but more willing to be a trade agitator than to take a leadership position.

Stoler (2006) argues that China has generally been a good WTO citizen. China has not taken the strong leadership role in the WTO that was expected of it at the time of its accession, but the country has worked well with its trade partners to reduce its barriers, and has responded well to the dispute resolution process. It has, however, been unwilling to…

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