Overview Objectives

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.

Project Background and Objectives

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.

Progress Reports (Year 1, 2, 3 etc)

Model development

Based on the 44-sector input-output tables of 28 provinces, a general equilibrium model of the Chinese economy with regional dimensions was developed. For the purposes of this study the I/O tables were aggregated into three regions: eastern, central and western. The major modelling activities include: developing a prototype model, updating and verifying the input-output tables and other data.

The model identifies 5 agricultural sectors and 39 non-agricultural sectors. In an aggregated version, the model includes three regions: eastern coastal, central and western. It also distinguishes between rural and urban households. Regional governments are also presented in the model. Four types of labourers - rural agricultural, rural industrial, rural migrant and urban - are modelled.

Modelling work

Modelling work consists of two major tasks:
Using detailed regional crops production data, the crop plantation sector is split into nine sectors: rice, wheat, corn, pulse, other grains, cotton, oilseeds, vegetable and fruits, other crops.
The tariff rate quotas for major agricultural products, namely, rice, wheat, corn and cotton, have been incorporated using the complementarity feature in the new release of GEMPACK.

Modelling of WTO accession and regional development

Regional income disparity in China has been worsening since 1991. Using the general equilibrium model of the Chinese economy with regional details developed under the project, it is found that this trend will be reinforced rather than eased by the WTO accession. The eastern coastal region will have much higher gains than the inland regions. The two inland regions will have similar gains with the central region being only marginally better off than the western region. It is also found that the rural-urban inequality will worsen in all regions.

The results are robust no matter whether the trade balance is fixed or not. However, keeping the trade balance unchanged leads to smaller overall welfare gains and a wider regional income gap than when the trade balance is endogenous.

Lowering the tariff cuts in agriculture reduces the total welfare gains, although it modifies the trend of worsening inequality between rural and urban households and between regions. Increasing government transfer payments from the coastal region to inland regions also reduces overall welfare gains, although regional disparity may be reduced. This is because the coastal region has higher returns than the inland regions.

Modelling of WTO accession and food security

Using a new version of CERD with disaggregated agricultural sectors, it is found that agricultural sectors are adversely affected by the WTO accession: agricultural output falls, grain and total food self-sufficiency rates decline, and rural-urban income inequality worsens. However, the magnitudes of the impacts are smaller than widely anticipated. For most grains, the reduction in production is less than 1 per cent. Grain and food self-sufficiency rate decline by 0.06 and 1.5 per cent, but still lie above the 95 per cent target. The reason for the smaller impact on agriculture is that the protection level of agriculture was already low before the accession.

Although overall food sufficiency is not significantly affected, food security may still be an issue for some households in inland regions whose only income source is agricultural production.

Several approaches to increase the food security or self-sufficiency have been discussed. A direct response to the impact may be to provide support to agricultural sectors and farmers. Support can be provided in many forms, with some conforming the WTO rules, and others not. Earlier work in this project considers a scenario where the level of tariff cut on agricultural commodities is halved because of various forms of new barriers such as labelling requirements, reporting procedures, and so on. The simulation of this scenario using CERD indicates that although such a policy may provide some cushioning effects to agricultural sectors and help to ease the worsening trend of rural-urban income inequality, the overall welfare gain from WTO accession is smaller - the equivalent variation is 6 per cent less than that of the full tariff of the WTO accession commitments.

Support in the form of a production subsidy is considered. It is assumed that the government subsidises farmers in order to keep the grain self-sufficiency rate constant after the WTO accession. Simulation shows that it will cost 7.2 billion yuan to make up for the tiny reduction of 0.06 in the grain self-sufficiency rate. If the target were to restore the total food self-sufficiency rate (down by 1.5 per cent), the cost would be as high as 180 billion yuan.

Modelling of alternative policy options

A policy of increasing transfer payments to inland regions was also simulated. The rationale behind this policy option is that because the economy as a whole benefits from the WTO accession, there is the possibility of transferring income from one group to another to make all better off. However the simulation gives a similar result to the scenario of halving the cut in agricultural tariffs. The improvement in regional and rural-urban household income disparity is achieved at the cost of lower overall welfare gains - being a 1 per cent smaller welfare gain than the full tariff cut scenario. This could happen because increasing transfers to the inland regions are made possible through penalising the coastal regions that have a higher rate of return. The results of this policy simulation imply that any transfer payment scheme should be carefully designed to avoid further distortions in resource allocation.

Another policy option is to increase agricultural R&D to improve agricultural productivity in China, as suggested by many authors. Simulations were conducted to find out how much the productivity improvement is required to keep the grain and food self-sufficiency rates constant after WTO accession. It is found that the required productivity improvement is 0.32 and 2.85 per cent, respectively, for constant grain and total food self-sufficiency rates. To give an idea about what these figures mean, agricultural TFP in the past may be used as a benchmark. Agricultural TFP was 5.1 and 3.91 per cent per annum during the periods 1978-84 and 1984-96. A 2.85 per cent productivity improvement implies that China should almost double the agricultural R&D level.

Model Development
A general equilibrium model of the Chinese economy with regional dimensions (CERD) based on the 44-sector input-output tables of 28 provinces was developed. The model aggregated this information into three regions: eastern, central and western and distinguishes between rural and urban households. Regional governments are also presented in the model.
Modelling of WTO accession and regional development
Regional income disparity in China has been worsening since 1991 a trend that the modelling analysis found will be reinforced rather than eased by the WTO accession. The eastern coastal region will have much higher gains than the inland regions. Rural-urban inequality will worsen in all regions. Lowering the tariff cuts in agriculture reduces the total welfare gains, although it modifies the trend of worsening inequality between rural and urban households and between regions. Increasing government transfer payments from the coastal region to inland regions also reduces overall welfare gains, although regional disparity may be reduced as the coastal region has higher returns than the inland regions.
Modelling of WTO accession and food security
Using a new version of CERD with disaggregated agricultural sectors revealed that agricultural sectors are adversely affected by the WTO accession: agricultural output falls, grain and total food self-sufficiency rates decline, and rural-urban income inequality worsens. However, the magnitudes of the impacts are smaller than widely anticipated. For most grains, the reduction in production is less than 1 per cent. Although overall food sufficiency is not significantly affected, food security may still be an issue for some households in inland regions whose only income source is agricultural production. Simulating a government production subsidy to keep the grain self-sufficiency rate constant after the WTO accession showed that it will cost 7.2 billion yuan to make up for the tiny reduction in the grain self-sufficiency rate. The cost of restoring food self-sufficiency rate would be up to 180 billion yuan.
Modelling of alternative policy options
A policy of increasing transfer payments to inland regions was also simulated, with a similar result to the scenario of halving the cut in agricultural tariffs. The improvement in regional and rural-urban household income disparity is achieved at the cost of lower overall welfare gains - being a 1 per cent smaller welfare gain than the full tariff cut scenario. The results of this policy simulation imply that any transfer payment scheme should be carefully designed to avoid further distortions in resource allocation. Another policy option is to increase agricultural R&D to improve agricultural productivity in China, with simulations conducted to find out the productivity improvement required to keep grain and food self-sufficiency rates constant after WTO accession. The results showed that China should almost double the agricultural R&D level to achieve the necessary growth rate in productivity.
Studies of the likely commodity/regional impacts of China’s agricultural commitments after accession demonstrated that in line with China’s perceived comparative advantage, liberalisation will strengthen the tendency for imports of land-intensive commodities and encourage exports of labour-intensive commodities. Provinces with comparative advantage in both labour- and land-intensive commodities will have relatively small adjustment costs, but provinces without comparative advantage in labour-intensive or land-intensive commodities are likely to have to bear the largest adjustment costs. To minimise adjustment costs, agricultural policies should be changed towards a greater market-orientation, moving from regional self-sufficiency and monopolies in domestic marketing and distribution of bulk agricultural commodities.
In simulations of the WTO accession commitments, crops, food processing, motor vehicles and parts, and machinery sectors are adversely affected by the accession, particularly the motor vehicles and parts sector. The eastern region does by far the best in overall terms because it realises most of the gains in allocative efficiency. Hence, there is an increase in regional income disparity. Rural household incomes increase most in the eastern region as they have the best opportunities for off-farm income. However, across the regions rural household incomes increase less than urban household incomes.
Across the wide range of analysis carried out in this project, it is consistently shown that the trade reforms China adopted in order to accede to the WTO will mean substantial structural changes within the agricultural sector. Therefore, to a very large extent, the success of the trade reforms will depend upon policies outside of agriculture. The analysis carried out has confirmed that structural change driven by productivity growth-which the trade reforms will promote-will lead to agriculture becoming a smaller and smaller part of the economy. As incomes increase, consumption patterns change, and the share of agriculture shrinks, China will become less self-sufficient in many commodities. However, because it has such a large population, China will always have to produce most of the foods it consumes. Trying to hold this development at bay or reverse it would have exorbitant costs.
The gap between urban and rural incomes has widened over the past decade or so. Partly, this is an outcome of the very rapid growth of the urbanised industrial and services sector. Incomes in the agricultural sector have not grown as rapidly as they could because of agricultural policies, such as ineffective and costly price support policies, regional self-sufficiency policies, and monopolistic marketing and distribution of bulk commodities, fertilisers and seeds. China’s accession to the WTO should help to maintain pressure to bring about reforms in these areas.
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 non-agricultural sectors. The results show that moving from this monetary policy regime could lead to a more rapid relocation of labour from agriculture and reduce this income gap. A monetary policy regime change could also reduce the adverse impacts of the WTO trade reforms on the agricultural sector. Modelling with capital controls and the fixed exchange rate in place showed that almost the entire agricultural sector is adversely affected by tariff reductions. Even partial relaxation of the monetary policy regime may reduce this adverse impact. For example, when capital controls are in place but the exchange rate is floated, the ‘other crops’ livestock and fisheries sectors expand.
However, the government is right to undertake any change in its monetary policy regime gradually and cautiously, as shown by the Asian financial crisis. Adoption of a floating exchange rate would be premature, considering the underdeveloped state of China’s financial sector, its only partially reformed banking sector, and its still-vulnerable state-owned enterprises. The priority at this stage should be to accelerate the reforms in each of these areas.

The project extension has three objectives.

Activity 1: Extension of the Research
The review report proposed further work on implications for Chinese agriculture of new preferential trading developments in the Asia-Pacific region. More specifically, the suggestion is to “study the impact on Chinese agriculture of the new preferential trading developments in the Asia-Pacific region, utilising the same CGE model and methodological framework established for the WTO accession projected, adapted where necessary”.

Activity 2: Publication of ACIAR Technical Report
The review report also proposed to publish an ACIAR Technical Report drawing on key publications of the original project, such as

The model documentation
Final summary paper
Translated policy briefs

These items are designed to show the value in maintaining and continuing to use the model.

Activity 3: Maintenance and future use of the CERD CGE model
The research work in Activity 1 will also produce materials which when supported by appropriate training systems will help build sustainable modelling capacity. The project will be linked with other initiatives including

A Crawford Master Class on CGE modelling
A study to develop a project on a similar set of questions facing policy makers in Vietnam.

Due to the delay in visa application, Dr Jun Yang (the main researcher of the project) arrived in Canberra in February 2006. So, there was no formal research work during the period of July - December 2005. However, the project conducted the work of collecting research materials for the modelling work, including data collection and relevant research materials. Dr Chunlai Chen travelled to China twice to visit Centre for Chinese Agricultural Policy of Chinese Academy of Sciences (the Chinese partner of the project) to discuss project implementation, personnel arrangement and relevant issues.

Project Outcomes

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.

Project ID
ADP/1998/128
Project Country
Inactive project countries
Commissioned Organisation
Australian National University, Australia
Project Leader
Dr Chen Chunlai
Email
chunlai.chen@anu.edu.au
Phone
(02) 6125-6565
Fax
61-2-6125 5555
Collaborating Institutions
China Center for Economic Research, China
Center for Chinese Agricultural Policy, China
Project Budget
$833,992.00
Start Date
01/07/2000
Finish Date
30/06/2003
Extension Start Date
01/07/2003
Extension Finish Date
30/09/2006
ACIAR Research Program Manager
Dr Ray Trewin