US Initiates WTO Challenge on China's Grain Subsidies

15 September 2016

The US has taken the first step in challenging the legality of China’s alleged grain subsidies under WTO rules, formally requesting consultations with Beijing on the matter in a dispute filing this Tuesday.

A statement from the office of the US Trade Representative said China’s support for rice, wheat, and corn exceeded Beijing’s commitments under the WTO’s Agreement on Agriculture.

“These programmes distort Chinese prices, undercut American farmers, and clearly break the limits China committed to when they joined the WTO,” said US Trade Representative Michael Froman.

However, an emailed statement from Beijing’s Ministry of Commerce said that China “feels regret about the consultation request,” adding that the country had always respected the global trade body’s rules.

Support “displacing imports”

US Agriculture Secretary Tom Vilsack said that, even though reforms such as tariff cuts had meant China had gone from a US$2-billion-a-year market for US agricultural products to a $20-billion-plus market, American producers “could be doing much better.”

“China’s price supports have encouraged wheat, corn, and rice production in China that has displaced imports,” Vilsack said.

With trade a hot topic in this year’s US presidential elections, and with controversy over the future of new trade deals such as the Trans-Pacific Partnership (TPP), US officials are keen to demonstrate that they are determined to enforce existing rules when these are perceived to have been breached.

“When American workers, businesses, and farmers have a fair shot to compete in the global economy, we win.  And when other countries flout the rules to try and undercut American workers and farmers, we hold them accountable,” said US President Barack Obama in a statement on the case.

Trade analysts noted that the US seemed to have taken a decision to challenge China’s support under the WTO Agreement on Agriculture, rather than under its Agreement on Subsidies and Countervailing Measures – possibly as China’s status as a major importing country could mean it might be harder to demonstrate the “injury” to US producers that would be required under the latter.

Value of production

The US claims that China’s subsidies exceed the “de minimis” level which Beijing agreed to respect when it joined the WTO – which was set for China at 8.5 percent of the value of agricultural production.

“China has maintained domestic prices at levels above world market levels since 2012,” the USTR claims in its statement.

Support levels for the products concerned – long-grain Indica rice, short and medium grain Japonica rice, wheat, and corn – amounted to almost US$100 billion in 2015, according to the US government’s analysis.

Last May, an official report from China to the WTO committee on agriculture stated that the country provided CN¥123 billion (US$18 billion) in domestic agricultural support in 2010 – although Beijing has not provided more recent figures on its farm support, which has grown rapidly in recent years. Of this notified support, the products receiving the highest levels of aid were rice, wheat, and maize. (See Bridges Weekly, 13 May 2015)

However, in February 2015 the US law firm DTB Associates presented analysis on behalf of American grain groups which alleged that China provided between US$48 billion and US$117 billion in domestic support. (See Bridges Weekly, 27 February 2015) The methodology used by the group was nonetheless questioned by other trade analysts at the time.

The chair of the agriculture trade negotiations at the WTO, New Zealand Ambassador Vangelis Vitalis, has warned in recent months that data gaps are hampering efforts to negotiate new rules on farm subsidies at the global trade body. (See Bridges Weekly, 12 May 2016)

Domestic reforms

While Beijing has repeatedly underlined its commitment to maintaining support for the farm sector in major policy announcements scheduled to coincide with the Chinese New Year, domestic concerns over rising budgetary costs and growing stockpiles have also led to moves to reform current policies.

A white paper from Beijing this February said that the government would introduce changes to ensure support for the maize sector is more market-oriented, following similar moves for soybeans and cotton. Existing programmes for wheat and rice would be maintained, the government said. (See Bridges Weekly, 4 February 2016)

Trade officials in Geneva questioned how, if at all, the launch of the trade dispute would affect Beijing’s planned domestic reforms.

Public food stockholding

The US statement makes no mention of a deal reached almost three years ago, which saw WTO members agree to refrain from launching trade disputes with developing countries on farm goods purchased at government-set prices under public stockholding schemes for food security purposes. (See Bridges Daily Update, 7 December 2013)

The deal, reached at the WTO’s Bali ministerial conference in 2013, was a response to some developing countries’ concerns that rising food prices could inflate calculations of the level of subsidy they provide to farmers – even if administered prices were in fact set below international market prices.

The new WTO case launched by Washington centres around Beijing’s wheat, rice, and maize procurement at government-set prices.

However, the Bali deal also requires developing countries to inform the WTO committee on agriculture that it risks breaching ceilings on farm subsidies, as well as being up-to-date in their domestic support reporting obligations, and providing additional information on how the schemes operate in practice.

China’s statement in response to the US legal challenge noted that agriculture “is a sector of vital importance” which affects the economic interest of millions of producers.

Beijing has repeatedly emphasised that the levels of per capita support it provides are far lower than in other major economies, including the US.

“This clearly goes beyond China, too,” said Joseph Glauber, senior research fellow at the International Food Policy Research Centre, in comments to Bridges. Glauber noted that a number of other developing countries operate similar schemes which they may now fear are also vulnerable to legal challenge.

Negotiating impact uncertain

Delegates in Geneva told Bridges that it was still unclear how the new dispute could affect ongoing talks to improve global rules on farm subsidies.

The chair of the WTO agriculture talks has previously said that many countries see this issue as a key potential outcome for the next ministerial conference, which is scheduled for the end of 2017. (See Bridges Weekly, 14 March 2016).

Some officials said that the dispute could cast a chill over the talks in the short term, if not longer.

However, others told Bridges that the challenge simply brought to the surface tensions that had long been simmering between the two trading giants.

One official suggested that the case could bring Beijing and Washington back to the negotiating table to try and resolve their differences.

The source noted that Brazil’s legal challenge to US cotton subsidies had succeeded in eventually leading to a negotiated outcome between the two parties, though the process itself took several years. (See Bridges Weekly, 3 October 2014).

However, others said that the impact on the negotiations might depend on how long it took for the case to move through the WTO’s complicated legal process.

“It certainly throws a major spanner in the works,” one source told Bridges.

Another suggested that the challenge was also an opportunity for negotiators to revisit what might be feasible and desirable in the talks in the run-up to the ministerial conference in December 2017.

ICTSD reporting.

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