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Thursday, 22 May 2008

Agricultural Trade Policy of China

I. Features and market developments

1. China has evolved into an industrialized economy in which the contribution of agriculture to GDP continues to decline; it fell from 13.4% in 2004 to 11.7% in 2006. At the same time, employment in the sector dropped slightly, from 42.7% in 2004 to 39.9% in 2006 (latest year for which data were available). Consequently, labour productivity in agriculture is barely one fifth of the level in the rest of the economy, with the result that average rural incomes have fallen further behind the urban average, thus contributing to the widening gap between rural and urban living standards. Low labour productivity in agriculture reflects, inter alia, its high labour intensity and the lack of mechanization. To raise labour productivity in agriculture, and therefore farm incomes, rural areas need to be further developed, farms mechanized, and more labour (especially surplus) shifted from agriculture to industry and services, where labour productivity and therefore earnings are on average much higher.

2. Against this background, the rural reform process has continued, and the Government intends to continue the reform to improve farmers' welfare and mitigate rural-urban disparities under the Eleventh Five-Year Plan (2006-10), which calls for the creation of a "new socialist countryside". To facilitate the movement of labour, in 2006, the State Council promulgated Certain Opinions on Solving the Problems of Rural Workers, which called for the integration of the urban and rural labour markets. According to the opinions, all regions and departments concerned would have to eliminate any discriminatory regulations and restrictions in regard to hiring rural workers in urban areas, and remove the administrative approvals and administrative fees charged to enterprises employing rural workers.

3. In general, the land tenure system, by which the State owns all land, remains unchanged. However, China's Property Law of 2007 formalizes the individuals' right to use the land. Under the law, farmland continues to be owned by village collectives, which extend contracts to individual households, but the law clarifies rural dwellers’ rights and provides firmer legal guarantee of their land tenure rights. According to the authorities, at present the majority of peasants have rural land tenure certificates, which grant them long-term guaranteed rights to exploit agricultural land.

4. In 2005, crops accounted for 50.8% of total agriculture production, while livestock and fisheries accounted for 32.2% and 10.4%, respectively. Even though grain continues to be China's most important crop, there has been a shift in production from the traditional staples (i.e. rice and wheat) to corn and to other more profitable crops such as fruits and vegetables. This is in line with China's comparative advantage, the change in economic policies, which allows farmers to choose what they plant, and also a response to changes in demand for food as incomes increase in China. There has also been a shift in focus from food to feed in line with changes in food consumption patterns, with demand shifting from staple products, to meat and other animal products. Output of meat increased from 61.3 million tonnes in 2000 to 80.5 million tonnes in 2006 (72.4 in 2004); milk production increased during the same period, from 11.2 million tonnes to 33.0 million tonnes. These changes in turn stimulated demand for feed grains, including corn.

5. Exports of agricultural products grew by 13.3% and imports by 14.3% in 2006. However, the contribution of agriculture to total trade (i.e. exports plus imports) continued to decline, reflecting an increase in trade in other areas. China is a net importer of agricultural products: imports of agricultural raw materials grew by 21.5% in 2006. Imports of cotton, China's second most important agricultural import after oil-bearing crops (mainly soybeans), continued to show impressive growth in 2006 (more than 50%). China is the world's largest producer and importer of cotton. In 2006, some 20% (22% in 2004) of China's agricultural imports originated in the United States. Fish and horticultural products, China's major agricultural export products, which in 2006 accounted for 27.5% and 27.3% of total agricultural exports respectively, have also grown substantially since 2004 by 35% and 45.2%. China's major market for agricultural exports continues to be Japan, which accounts for 26.3% of total agricultural exports.

II. Policy objective and administration

(a) Policy formulation, and institutional and legal framework

6. There seem to have been no changes to the institutions that formulate and implement agricultural policies. At least 16 institutions are in charge of agriculture-related issues; coordination amongst these agencies is difficult because their functions often overlap.

7. The main laws regulating the sector do not seem to have changed since 2004. A new law was recently enacted to ensure the quality and safety of agricultural products, protect public health and promote the development of agriculture and the rural economy. However, specific decrees, notices and regulations are issued by the State Council and other administrative bodies of the Central Government on a yearly basis to implement specific policies.

(b) Policy objectives

8. The Government's key objective in the agriculture sector, as announced in the Eleventh Five-Year Plan, is to build a "new socialist countryside". This will involve, inter alia, a substantial increase in financial support for agriculture and rural development aimed at increasing farmers' incomes (Note.1). The plan also calls for the establishment of a mechanism for the industrial sector to support agriculture, and for cities to support the countryside. However, the traditional objectives of attaining food security and of maintaining a stable domestic production to protect farmers' interests have not been dropped.

Note. 1: Objectives for agriculture in China's 11th Five-Year (2006-10) Plan

The key objective of the 11th Five-Year Plan as regards agriculture is to "build a new socialist countryside". The policies outlined in the plan are aimed at promoting agricultural development and raising farmers' incomes, by:

Increasing productivity in the agriculture sector through: better land management; improving the quality of livestock, poultry and aquatic products; introduction of modern production technologies; improving extension services; and reform of the rural circulation system.

Increasing farmers' incomes through: the development of agric-industry; trade promotion; better managed agricultural enterprises; the creation of co-operatives; a further increase in subsidies for grain, for cultivating improved crop strains, and for purchasing agricultural machinery and tools; and the elimination of any remaining fees or charges imposed on farmers.

Improving services in rural areas through: increased investment in basic infrastructure to ensure an adequate supply of water, availability of paved roads, electrification of rural China, telephone and internet access, and creation of a rural healthcare system.

Improving farmers education through: enforcing the nine-year compulsory education in rural areas; elimination of tuition and incidental fees; and training for farmers.
Increasing public and private investment in rural areas through: an increase in transfers from the central to local governments; and the development of an appropriate, stable, and effective financial system so that private funds can flow into agriculture.

Deepening overall rural reform through: improvement of the household contract responsibility system; reform of public institutions at the town and townships levels; and improvement of fiscal management systems at the county and township levels.

(Source: 11th Five-Year (2006-10) Plan)

9. In 2004, China entered a new era in its approach to agricultural policy, as it began to subsidize rather than tax agriculture. China introduced direct subsidies to farmers, began to phase out agricultural taxes, started subsidizing seed and machinery purchases, and increased spending on rural infrastructure. The new policies reflect China’s new view of agriculture as a sector that has lagged behind. During 2005 and 2006, exemptions of the agricultural tax were extended through the whole of China and finally eliminated, while subsidies were made more widely available.

III. Policy instruments

(a) Border measures

Measures affecting imports

10. Agricultural products (WTO definition) are, with the exception of some poultry parts (HS 07), subject to ad valorem applied tariff rates. The average applied MFN tariff on agricultural products (WTO definition) has not changed since 2005, it remains at 15.3%, the same level as the average bound tariff rate. Tariffs on grain (33.9%), sugar (29.9%) and tobacco (26.9%) still benefit from higher than average protection. Lower tariffs continue to apply to crops in which China has an apparent comparative advantage, such as fruits and animal products.

11. Imports of agricultural products are subject to VAT. The rate levied on agricultural products remains at 13%, 4 percentage points lower than the general VAT rate. Agricultural products produced and sold directly by small-scale farmers are still exempt from VAT.

12. In 2007 tariff-rate quotas (TRQ) applied to grains, sugar, wool, cotton and some fertilizers, covering 45 tariff lines at the eight-digit level (down from 55 lines in 2005). In 2006, China eliminated the TRQs on vegetable oils (HS Chapter 15 soybean oil, palm oil, and rapeseed oil) implementing a tariff only arrangement instead. Imports under TRQs, with the exception of sugar and cotton, remain low and quotas are generally unfilled.

13. The quota allocation process is unchanged and is still managed by the same agencies.

14. The Government still has some influence on imports (and exports) through the state-trading system, which remains in place to ensure the stable supply and price of specific products. Agricultural products subject to state trading comprise grains (corn, rice, and wheat), sugar, tobacco, and cotton. Trade of vegetable oils was liberalized in 2006 when the Tress were removed. Chemical fertilizers are still subject to state trading. With the exception of tobacco, the aforementioned commodities are also subject to TRQs. China's TRQ system includes criteria for allocating part of the quota to a state-trading enterprise (STE) and part to a private enterprise; however, a substantial amount of the quota is still allocated to STEs and remains largely unchanged since 2005. Imports of tobacco remain under state monopoly.

15. Agricultural imports remain subject to licences and import prohibitions. Automatic licensing is in place to monitor imports; non-automatic import licences are to fulfil China's international obligations and to administer TRQs. Goods imported under TRQs are subject to non-automatic licensing. Automatic licensing covers some meat products, edible oils, and tobacco products (33 tariff lines at eight-digit level). The general import prohibition maintained under Article XX, which applied to products such as opium and ivory, has been extended to include, inter alia, human hair and bones. A number of agricultural imports, including meat products, raw hides and skins, plants used to make pharmaceuticals and perfumes, molasses, beverages (mineral water, alcohol and spirits), and yarn waste (46 lines at the eight-digit level) are not granted bonded status to be used as inputs for exports under "processing trade".

Measures affecting exports

16. In 2007, bones and horn–cores, powder, and waste thereof (HS 0506) and raw hides and skins of goats (HS 4103.1010) continued to be subject to export taxes of 40% and 20%, respectively. Deglutinated bones (HS 0506.9090) were subject to an interim export duty rate of 0% for 2007.

17. The agricultural exports subject to state trading are cotton, rice, maize, and tobacco. These products are still subject to export quotas; part of these quotas, with the exception of tobacco, can also be exported by private enterprises, with approval. The requirements for an enterprise to obtain approval were not made available to the Secretariat. State trading for exports is in place to ensure a stable domestic supply of strategic commodities and in turn ensure price stability.

18. In 2007, general export prohibitions applied to eight agricultural products. Some 22 agricultural products (22 lines at the HS 8-digit level) including products of animal origin, beverages (e.g. mineral water and alcoholic spirits), raw fur skins, and silk-worm cocoons if processed "under processing trade" may not be exported. According to the authorities, these prohibitions are in place to reduce exports of products using large amounts of raw materials, low value added goods, or energy-intensive and polluting products.

19. China continues to impose global (i.e. irrespective of destination) and destination-specific export quotas. It seems that the agricultural products subject to export quotas remain largely unchanged since the last review; in 2007, global export quotas applied to cotton, grains (maize, rice, and wheat) and tea, some of which are still subject to state trading. Destination-specific quotas remain in place for exports of live cattle, live swine, and live chicken to the Special Administrative Regions of Hong Kong and Macao. Non-automatic licences are used to distribute these quotas. Other exports, including meat products (31 tariff lines at the HS eight-digit level) are subject to automatic licensing for statistical purposes.

20. China has notified to the WTO that it did not maintain or introduce any export subsidies during 2004-06.

21. Exporters of agricultural products are entitled to VAT rebate at the time of exportation; rebates vary according to commodity and are often lower than the statutory VAT rate, which results on a levy on exports. The VAT on agricultural goods is 13%, but the "usual" export rebate rate for agricultural goods is 5%. Export rebates for products containing agricultural inputs were increased in 2007 from 5% or 11% to 13% as to promote the use of agricultural products.

(b) Internal measures


22. China started to gradually phase out agricultural taxes in 2004. Since then, four taxes levied on agricultural products have been eliminated: the Agriculture Tax was eliminated in January 2006; the Special Agricultural Tax was replaced by a new tax, which is only levied on tobacco leaves, the Animal Husbandry Tax and the Animal Slaughtering Tax were eliminated in 2005 and 2006, respectively. At present, the taxes levied on agricultural products are the tobacco leaf tax (20% of the purchase price for tobacco leaves), the VAT (13%), the deed tax (levied when a land contract is transferred), and the tax on the use of cultivated land or farmland occupation tax (levied when arable land is used for non-agricultural purposes).

23. Most of the fees and charges levied on farmers at the sub-provincial level have also been removed. Since 2006, farmers have only had to pay fees for water and electricity; village levies are still in place but are being reviewed. Total levy collection in 2006 amounted to Y 20 billion, down from Y 43.5 billion in 2004.

24. Agricultural taxes were a major source of revenue for local governments. Thus, to ensure that governments at county and township levels continue to have a stable source of revenue, transfers from the Central Government have increased as compensation for lower sub-national tax revenues. Data provided by the authorities indicate that in 2006, the Central Government transferred Y 75.1 billion to local governments, of which Y 41.9 billion was to compensate for the removal of the Agriculture Tax and the Special Agriculture Tax. There have also been transfers from the provincial and county levels to the townships. The tax reform has been successful: local governments have not had to impose fees to compensate for their reduced fiscal revenues, due to the efforts by governments at the different levels in regards to local public finance. However, despite the removal of most taxes and fees related to agriculture, tax collection in the sector has continued to rise, reaching Y 108.4 billion in 2006 up from Y 90.2 billion in 2004.

25. According to the authorities, the agricultural tax reform has created a fairer tax regime by reducing "farmers' burden", which in turn promotes the creation of a "harmonious society", and have also translated into an increase in farmers' disposable incomes. The latter is in turn expected to stimulate investment in the sector, and consumption.

Support to agriculture

26. China has made no notifications to the WTO Agriculture Committee regarding the support given to the agriculture sector during the period under review; however, some agricultural support programmes were included in China's latest notification to the Committee on Subsidies and Countervailing Measures (Chapter III(4)(i) and (ii)). Support for agriculture has increased since 2004: total expenditure increased from Y 236 billion in 2004 to Y 317 billion in 2006, the latest year for which such data were available. Support includes resources for agricultural production and for capital construction, science and technology promotion funds, and rural relief funds. Expenditures on a "price subsidy" also increased from Y 79.6 billion in 2004 to Y 138.8 billion in 2006.

27. Direct subsidies for grain producers were introduced nationwide in 2004. As this programme is administered at the provincial level, the amount of the subsidies, the standards, and the procedures for granting the subsidies vary across the country. In 2006, the total direct grain subsidy amounted to Y 14.2 billion up from Y 11.6 billion in 2004. The authorities believe that these subsidies have contributed to an increase in grain production and to narrowing the income gap between urban and rural areas. However, it would appear that they have had only a minor impact on production and rural incomes. Moreover, it is difficult to assess the overall impact of these programmes since they are applied in different ways in the different provinces and regions.

28. Since 2004, subsidies have also been available to purchase improved crop strains, agricultural machinery, and tools. In order to increase mechanization, the subsidy to purchase agricultural machinery and tools amounted to Y 800 million in 2006 (up from Y 300 million in 2005). According to the authorities, in 2006, an additional subsidy (Y 12 billion) was granted for grain producers to be "compensated" for price increases of diesel, fertilizer, and other inputs.

29. The State Council's No. 1 Document (2005) stated that China would continue to directly subsidize grain producers, increase subsidies to farmers to purchase improved crop strains, agricultural machinery, and tools, and follow a minimum purchase price policy for rice and wheat in major producing areas. In its 2007 No. 1 Document, the State Council reiterated its support for the agriculture sector.

Price controls and marketing

30. China has progressively liberalized the price of agricultural goods; however, the price of some commodities remains controlled and others are still considered "important reserve materials" and thus subject to some sort of price control. It seems that as of 2007, centrally set government prices apply only to tobacco, and a minimum procurement price scheme remains in place for rice and wheat in major producing areas.

31. China has liberalized most agricultural markets, but the Government still intervenes to stabilize the market, when deemed necessary. As a result, some controls continue in the marketing of cotton, grain, and tobacco. China's tobacco industry is still subject to a state monopoly, with strict controls over production, marketing, and trade of tobacco products. While the circulation of cotton has been substantially liberalized, it is still subject to controls. For instance, in 2005 the NDRC issued a circular to strengthen the administration of the cotton market, regulating market access and prohibiting any further increase of cotton processing, in order to stabilize prices. In addition, a cotton reserve system appears to have been put in place. Purchases of cotton for the reserve are financed by the Agricultural Development Bank of China (ADBC).

32. In June 2004, China announced regulations designed to liberalize grain markets by reducing the state's dominant role. The regulations seem to result from a steady rollback of the monopoly power of state-owned grain bureau over several years. However, the regulations stipulate that the Government can intervene in grain markets when prices are rising rapidly, and that government departments are responsible for ensuring that grain supply and demand is balanced. Thus, it would appear that the governors' grain responsibility system, established in 1995, is still in place. Central and local authorities maintain grain reserves to ensure food security. Local grain bureaux, in consultation with central or local governments, try to stabilize markets by buying or selling as needed.

(Source: Trade Policy Review Body of WTO, 16 April 2008)

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