Commentary: In This Trade Spat, The Chinese Are Right

After a decade of mind games, tirades, and accusations of double-dealing, it has become easy to yawn every time Beijing throws down another gauntlet in a major new trade deal. No matter how much huffing and puffing it does, in the end, China almost always seems to capitulate to U.S. terms as a deadline nears. Then the Beijing backslide begins, and both sides trudge back to the bargaining table, as if nothing was settled. Thus, a year after China's entry into the World Trade Organization looked like a done deal, talks in Geneva have stalled over China's refusal to bend on a key issue.

This time, China may be in the right. The new stumbling block is a demand by the U.S. and 14 other big agriculture exporters that Beijing sharply limit its ability to prop up domestic prices of wheat, rice, and other crops to help its farmers. On the face of it, the U.S. demand seems just. Under WTO rules, major trading nations can subsidize only up to 5% of the total value of their agricultural output. Although the estimated $4 billion Beijing now provides amounts to 2% of output, it wants the freedom to go up to 10% under the more lenient WTO rules for "developing" countries. But according to the Office of the U.S. Trade Representative, Beijing agreed in its 1999 WTO deal to "reduce trade-distorting subsidies," which would include price supports.

Seems like an open-and-shut case of Chinese duplicity. But in fact, based on what little has been disclosed of its written commitments, Beijing is honoring its word--and has made concessions that exceed those of many richer WTO members. It has agreed to end subsidies for agriculture exports. Even the European Union, which spends billions on such perks annually, compared with China's $500 million, refuses to do that. "They're going cold turkey," says Brookings Institution China expert Nicholas R. Lardy. "This is particularly fast, considering China's domestic farm supports already are low, and half its labor force is farmers."

China also is committed to sharply increasing its imports of grain. By 2004, wheat imports are set to leap sixfold from the level of 1998, to 9.6 million tons, at a 1% tariff. Imports of rice and corn will rise even more dramatically, from a combined 500,000 tons to 12.5 million tons. That's enough to provide huge new markets for Western growers--and inflict real pain on millions of Chinese farmers, most of whom lack even tractors and subsist on less than $200 a year. Beijing also pledges to reduce the government grain-import monopoly, guaranteeing private traders will handle at least 10% of wheat imports and 67% of cotton. In short, the deal now on the table is a boon for U.S. agribusiness.

LATITUDE. So why the holdup on price supports? Because China wants the latitude to avert a potential social crisis that's building in the countryside, where three-fourths of its 1.3 billion people live. In contrast to the rising urban wealth, the rural sector remains so impoverished that more than 100 million Chinese have moved from interior provinces to the coast in desperate search of work. Yet market prices for Chinese farm goods keep falling because of productivity gains. Soon, higher imports will push prices down further. The U.S. correctly hung tough when China, a manufacturing export juggernaut with great high-tech aspirations, argued that it should be able to shelter its auto, electronics, and services industries from imports. But in the farm sector, China is hard-core Third World. Former U.S. Trade Representative Charlene Barshefsky agrees there is a dilemma: "The issue is how to strike an appropriate balance between China's general status as a developing economy and its status as a world-class exporter."

The U.S. complaint against China's subsidy policies boils down to technicalities--and a good measure of hypocrisy. The U.S. will spend about $28 billion this year on farm subsidies. Most of this is to pay farmers to keep land idle, which under a WTO rule the U.S. helped write doesn't count as "trade-distorting." But in crops like sugar and peanuts, Washington blatantly distorts trade by sharply limiting imports.

One can still argue it's better economics for Beijing to boost farmers' income with welfare checks than to meddle with the market through price supports. But in a world where no agricultural power is innocent of protecting its own, the U.S. would stand on higher ground if it focused on reducing farm subsidies at home and in Europe. It should not hold up China's WTO entry any longer.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE