Chinese WTO Notification Raises Questions on the Nature of Its Subsidies
Inside U.S. Trade (Published: 4-Nov, Received: 7:41:26 AM) The Chinese official notification of its agricultural subsidies for the calendar years 2005 to 2008, circulated to World Trade Organization members last month, raises a litany of questions regarding the nature of Chinese spending and whether this spending complies with WTO rules, observers said.For U.S. farmers, the correct classification of Chinese subsidies matters because China faces different WTO disciplines on different types of subsidies. For instance, while China can provide an unlimited amount of "green box" subsidies each year, it faces strict limits when it comes to trade-distorting, "amber box" subsidies.
Under its Accession Protocol, Chinese product-specific, "amber box" subsidies cannot exceed 8.5 percent of the value of production for that product in a given year. Non-product-specific, "amber box" subsidies, on the other hand, cannot exceed 8.5 percent of the total value of Chinese agricultural production in a given year.
U.S. observers say there are questions as to whether all of the "green box" subsidies listed in China's notification actually belong in that category. If these subsidies were actually "amber box" subsidies, that could have ramifications for whether China is abiding by WTO rules, they pointed out.
Agricultural leaders in the United States have informally raised the issue of Chinese agricultural subsidies informally with the administration in the past (Inside U.S. Trade, May 14, 2010).
One source said the United States would likely press China on these issues at the next meeting of the WTO Agriculture Committee in Geneva.
One area where this may be relevant is direct payments, which are listed in the "green box" category as one type of "decoupled income support." This means that, according to China, these payments do not influence the type or volume of agricultural production, and are based on production during a base period in the past, not current production.
But some U.S. observers question whether this is actually the case in China. For instance, a 2008 report issued by the U.S. Department of Agriculture's Foreign Agricultural Service (FAS) states that at least some provinces base payments on "quantity produced," a signal that these payments may not qualify for the "green box" category.
Chinese direct payments have increased significantly in the period covered by the notification, from 13.2 billion RMB ($2.07 billion) in 2005 to 23.6 billion RMB ($3.7 billion) in 2008.
One source also noted the large amount of Chinese spending in another "green box" subsidy category, under which China buys up wheat, corn, rice, vegetable and sugar for the purpose of domestic food security. This source said there are at least questions on whether this spending actually belongs in the "green box" category.
According to Annex II of the WTO's Agreement on Agriculture, a government must buy and sell products at market prices in order to have the such a subsidy program qualify for the "green box" category. There is at least some anecdotal indication that China, by contrast, uses the program to control food prices, this source said.
If this were true, China could not classify these subsidies in the "green box" category, but instead would have to count them against its "amber box" disciplines. Chinese spending in this area is substantial: in 2005, spending totaled 44 billion RMB ($6.9 billion), while in 2008 spending totaled 57.9 billion RMB ($9.1 billion).
Another area that may warrant further questioning of China relates to payments for relief from natural disasters. To qualify as "green box" payments, China must follow strict rules in the Agreement on Agriculture, such as that farmers observe at least a 30 percent loss in production compared with historical averages before qualifying for any payment.
Payments in this category experienced the most rapid increase in the period covered by the notification. Payments were only 11.5 billion RMB ($1.8 billion) in 2005, but jumped up to 55.4 billion RMB ($8.7 billion) in 2008, according to the Chinese notification.
In its notification, China does classify some subsidies as either product-specific or non-product-specific "amber box" subsidies, but the supports that are listed fall far below the relevant WTO thresholds for spending levels. According to China, this means it is complying with WTO obligations.
Most of China's "amber box" spending from 2005-2008 occurred in the product-specific category. While spending as captured in the notification appears accurate, there may be a systemic issue that the United States will want to clarify when it next discusses subsidies with China, observers said.
This relates to the way in which China calculates the value of product-specific, "amber box" subsidies for wheat and rice under minimum procurement price schemes.
In China, farmers of these crops can opt to sell them to the government if they choose, and the government offers a guaranteed price. This amounts to a trade-distorting subsidy, because it provides an incentive to produce.
As such, China is obliged to calculate the difference between the price it offers farmers -- the "applied administered price" -- and an "external reference price," which is essentially the average world price from 1996-1998. It then multiplies that difference by the quantity of the product that is "eligible" for the program to get a total subsidy amount.
During the period under review, the price China offered its farmers was actually less than the "external reference price," meaning that the program did not amount to a subsidy. But sources said China has increased the offered price in years since 2008, meaning that this program may now constitute a subsidy.
For instance, one source noted that for wheat, China is now offering a price of about 1,880-1,900 RMB per metric ton, up from the guaranteed price of 1,490 RMB per metric ton in 2008. This means it is more likely that this program is now resulting in positive subsidy outlays, this source said.
U.S. observers also argued that it was not clear whether China was calculating the subsidy amounts under this program in the correct way. At issue is the way in which China determines the "eligible production" for either wheat or rice, which is not specified in the Chinese notification.
U.S. sources argue that the entire wheat or rice crop should count as "eligible production" because the very existence of a government price guarantee props up prices for these crops generally, even for the Chinese farmer who does not choose to sell to the government.
China should not base "eligible production" on only the amount of rice or wheat that Chinese farmers actually sell to the government, sources stressed.
It is not clear how China determined the figure for "eligible production," but its methodology is at least in question, and this is likely something that the United States will pursue with China moving forward, especially since it has such large implications for China's subsidy outlays in this category, and its compliance with WTO rules, sources said.
Annex III of the WTO's Agreement on Agriculture does not strictly define how these subsidies are to be calculated, stating only that the difference between the applied administered price and the external reference price must be multiplied by the "quantity of production eligible to receive the applied administered price."
This issue arose in a WTO legal challenge brought by the United States against South Korea. In its December 2000 decision, the Appellate Body made clear that WTO members cannot simply use the actual quantity purchased under such a subsidy program as the total universe of "quantity of production eligible" to receive the government price.
"Thus, 'production eligible' refers to production that is 'fit or entitled' to be purchased rather than production that was actually purchased. In establishing its program for future market price support, a government is able to define and to limit 'eligible' production. Production actually purchased may often be less than eligible production," it wrote.
(c) 2011 Inside Washington Publishers. All Rights Reserved.
Copyright notice
This is a news service of NewsEdge Corporation ©2011. This content is for your personal use only, subject to Terms and Conditions. No redistribution allowed.
Editor's Picks from Recent eNews
Save the Date for Co-Located 2013 Soy & Grain Trade Summit and Women in Agribusiness Summit
Northstar Agri Industries Announces Oklahoma Expansion Plan
Current Reports in the Resource Library at Soyatech.com
Soyfoods: The U.S. Market 2012
This annual report provides detailed information on the U.S. market by category, sub-category, brand and distribution channel.
Soyfoods: The U.S. Market 2012
This annual report provides detailed information on the U.S. market by category, sub-category, brand and distribution channel.
Copyright © 2000-2013 Soyatech, LLC. • P.O. Box 1307 • Southwest Harbor, ME 04679 • USA