MNI Analysis: Trump Case Vs China Ag Import Rules Fruitless

--U.S. Case Against China Likely Empty Exercise; Could Provoke Retaliation

--U.S. Case Could Also Accelerate Chinese Ag Reform, Cutting Short-Term Imports 

     BEIJING (MNI) - U.S. President Donald Trump last month increased his

attacks on China's commercial and trade practices, including violations of

intellectual property and technology rights and its exclusionary grain import

regime. While the former had been a familiar issue for years, the latter is

relatively new and little understood. 

     It is unclear what Trump has to gain from this new charge. In fact, it

seems quite possible the effort could backfire in several ways. 

     The office of the U.S. Trade Representative has asked the World Trade

Organization to formally investigate China's possible abuse of its tariff-rate

quotas (TRQs), including  tariffs on wheat, rice and corn. The move was

initiated by the Obama administration last year and filed with the WTO last

December. 

     Two weeks ago on Aug. 31, China blocked the request, as it's allowed to do

under WTO procedures. The Trump administration has the option to make a second

attempt, which by WTO rules will be more difficult for China to stop. If it were

to proceed, the investigation under WTO rules may take up to a year.

     U.S. Trade Representative Robert Lighthizer, a veteran trade lawyer, may

simply be pushing last year's case forward, but the two administrations' motives

seem vastly different.

     At this time last year, President Obama, recognizing the WTO's limitations,

saw the U.S. as at the forefront of a fairer global trade order, pushing for a

new "gold-standard" pact, the Trans-Pacific Partnership (TPP). Trump campaigned

on a protectionist platform, frequently lambasted the WTO, and scuttled the TPP

on his first day in office. 

     Lighthizer, who was the deputy USTR under Ronald Reagan, shares Trump's

critical view of the WTO, arguing the trade body is "poorly equipped" to deal

with a rising China and its trade and industry policies.

     Yet "poking China in the eye" for its agricultural policies may amount to

"an intellectual exercise" that will consume considerable time and legal fees

without yielding any substantial economic benefits, and could provoke

retaliation from China, according to industry and government sources who spoke

to Market News International. 

     At the heart of the issue is China's management of the TRQs. Each October,

the central government openly seeks applications from domestic companies to

import a total of 9.636 million tons of wheat, 7.2 million tons of corn and 5.32

million tons of rice, split between long-grain and short-grain rice varieties.

The firms receiving quotas, announced early the following year, are required to

pay a tariff on these select imports of only 1%. Non-TRQ imports, however, face

tariffs of up to 180%, meaning that exporters, like the U.S., which is by far

the largest, face prohibitive barriers selling to Chinese buyers without quotas.

     Established after multilateral negotiations about 20 years ago, the WTO's

TRQ system allows China to reserve the bulk of the import quotas to state-owned

firms, leaving only 10%, 40% and 50% of wheat, corn, and rice TRQs,

respectively, for local private companies. 

     The reservation system has worked brilliantly for China, effectively

limiting imports. Within the grain-trading community, it is common knowledge

that state-owned trader COFCO Corp. acts as a government agent with limited

self-discretion, buying grain imports largely on orders from policy-planners

when they see domestic supplies as insufficient. 

     China also uses the TRQ system to promote foreign policy and commercial

goals. Some quotas, for example, are used exclusively to import corn from

Ukraine, which uses the shipments to pay for Chinese-financed projects. 

     The U.S. may have a point that China's allocation of these TRQs lacks

transparency, distorts both domestic and global markets, and contravenes the

WTO's principle of gradual trade liberalization. In short, it adds to the chorus

of criticisms that China has not actually achieved market economy status. 

     When China negotiated its way into the WTO, it was treated as a non-market

economy not on par with its Western trading partners because its economy was

centrally planned and in many aspects, controlled by the Communist Party. China

has faced the most anti-dumping charges by other nations due to its enormous

exports; achieving market economy status would make it easier for China to fight

off these charges. 

     Almost 16 years later, China has negotiated hard but has so far failed to

be recognized as a fair economic player.  

     Still, Western market participants will likely be reluctant to help the

USTR forge a new battle against China, an all-powerful agriculture commodity

player that is a top buyer from cotton to rice; its soybean imports alone

account for 60% of the global total traded volume. As an example, U.S. farmers

will not plant seeds that China does not approve.

     Launching an expensive investigation lead to questionable gains. China has

long been a net buyer of grain, even as it restricts imports using the TRQ

requirement, because the enormous profit potential has long spurred traders to

find creative ways to bypass these restrictions.  

     For example, in 2013 China rejected U.S. corn shipments on the grounds they

contained a specific corn variety the Chinese government did not approve. That

prompted Chinese grain users to buy U.S. sorghum, a minor crop not subject to

quotas, as a substitute for corn in feeding pigs and chickens in China. That, in

turn, caused a mini sorghum-planting boom in states such as Texas and Kansas.

The high costs of local corn also prompted China to buy millions of tons of

cheap wheat, mostly from Australia, as a feed substitute. That makes these

smaller supplying countries targets of China's persuasion. 

     Among the U.S. farm lobbyists, the wheat growers are those who complain the

loudest about China, hoping China bows to pressure and opens its market for more

U.S. wheat exports, market insiders said. 

     That may not happen anytime soon. China sees wheat and rice as its most

strategic staple crops, and worries that letting in too many foreign supplies

would depress local planting and leave it open in future to embargos in times of

conflict with the U.S. 

     China has technically approved U.S. rice imports this year. It may be

difficult for the U.S. to win markets that is already dominated by cheap Asian

producers such as Southeast Asian nations and Pakistan.  

     Ironically, putting pressure on China's TRQ system now seems likely to

accelerate Chinese agricultural reform, which could cut the need for imports, at

least in the short run, consultancy Shanghai JC Intelligence Co. told MNI. 

     A fundamental reason China has seen large imports of rice, wheat and corn

in the last decade is not because it suffers shortages of the grains, but rather

due to the side-effects of its policies supporting local producers. 

     While state granaries for years paid high prices and stored local harvests,

traders hunted for cheaper imports. Smuggling in cheap rice through the porous

southern borders shared with Southeastern Asia became a booming business despite

police crackdowns. That in turn forced the government to take in more of the

local harvests. 

     And the price-support policy's high costs put a heavy drain on government

finances, inflating food costs and drawing criticism from many fronts. Dang

Guoying, a researcher with the Chinese Academy of Agricultural Science,

estimated that the protectionist policies cost the economy CNY1.6 trillion

(about $245 billion) each year. 

     China's top decision-makers were not deaf to these criticisms. Starting

around 2013, after the price-support policies helped propel 10 straight years of

higher grain production, the government no longer touted the benefits of self

sufficiency at any cost. 

     After years of debate, reforms began, starting with last year's scrapping

of the stockpiling of corn, considered a less strategic crop. The release of

domestic production into the market caused prices to plummet, in turn cutting

imports. Experts are also recommending reducing government support for wheat and

rice, Shanghai JC said. 

     Whatever the outcome of negotiations between China and the U.S., the

further market-based reform of agricultural goods seems inevitable. That should

make China's agriculture more competitive, and forestall the future criticism

against China's management of the TRQs, according to Shanghai JC.  

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

[TOPICS: M$A$$$,M$Q$$$,M$U$$$,MC$$$$,MI$$$$,MT$$$$,MX$$$$]