FOREIGN COUNTRIES' POLICIES AND PROGRAMS
The Dynamics of Flour Trade are Changing
Earlier this decade, with Egypt leading the way, traditional flour import demand in the Mediterranean basin began to dry up as domestic milling capacities expanded. More recently, Algeria, once one of the worlds largest buyers of flour at over one million tons (grain equivalent), now almost exclusively relies on domestic flour production to meet its needs.
In addition to mill expansion, another factor impacting trade patterns has been the move toward privatization of the flour import sectors. That means import demand should now mostly come from small, quality-conscious, hand-to-mouth buyers, rather than from large, government tenders for deferred shipment. For example, Yemen, the worlds largest buyer, just took steps to eliminate government involvement in imports, which are now left solely to private traders.
That shift to private buying enhances the competitive position of new, export-oriented mills in the Persian Gulf and other regions, which are close to major markets (i.e. cheap freight, quick delivery), and grind a high-quality flour. The advent of those mills should provide stiffer competition to EU millers, which here-to-fore accounted for about two-thirds of world trade, but are at a geographic disadvantage and generally grind a poorer quality product.
In fact, the EU is already feeling the pinch of the new trade patterns. So far in 1999/00 (July/June), flour export licenses awarded are at only 2.1 million tons, nearly 25% under last year at this time, and on pace to be the lowest level in a decade. Moreover, French export milling capacity is shrinking, with perhaps up to one million tons that either has, or will be going off-line.
However, for the moment at least, not all is necessarily doom and gloom for EU millers. Large importers, such as Yemen and Libya are, for the most part, still buying European flour, and new demand has emerged from Indonesia. In addition, EU millers still benefit from: 1.) a well protected domestic market (due to high import tariffs), which keeps both flour and mill-feed prices above world market levels, and 2.) $50+/MT export subsidies. Nonetheless, if current trends continue, it may be only a matter of time when those import markets also dry up, leaving EU export-oriented millers out in the cold.
For more information, contact Paul Gallagher at (202) 690-4298.
U.S., China Make Historical Progress on Grain Trade Issues
The United States and the Peoples Republic of China have recently reached agreement on two key areas for U.S. grain exports: sanitary and phytosanitary (SPS) issues and agricultural market access as contained in the WTO accession package. The most immediate result is that China will lift its SPS ban on wheat--as well as those on citrus, and meat--resolving longstanding disputes between the United States and China.
Ban on U.S. Wheat Lifted and Phytosanitary Issues Addressed
China has banned imports of U.S. wheat and other grains from the Pacific Northwest for over 26 years for scientifically unjustified reasons. The agreement to remove the ban is part of the Agreement on U.S. - China Agricultural Cooperation which opens a market that has been virtually closed to all U.S. wheat for nearly three years due to Tilletia controversal Kuhn (TCK). In signing this agreement, China has acknowledged that TCK smut does not pose a risk to its domestic wheat production, and will allow the import of U.S. wheat and other grains that meet a specific tolerance for TCK (initially set at 30,000 spores per 50 grams).
The agreement also calls for the United States and China to jointly reach final agreement on a tolerance level for TCK spores in wheat and to study the sampling and testing procedures proposed by the United States. However, if after one year agreement on a tolerance is not reached, then the interim level of 30,000 spores per 50-gram sample remains in place. Provided that the wheat received is at or below the tolerance level, China has agreed that no "treatment" or diversion of wheat will occur. Any U.S. port may ship any class of wheat to any port in China and certification of contract terms will be final at loading, as is customary in commercial grain trade.
The main impact of this agreement will be felt longer term. While it provides an immediate reopening of the Chinese market to U.S. wheat, the countrys current wheat import needs are historically low following three of its largest wheat crops in its history.
In the past, the United States often supplied one-third or more of Chinas total wheat imports, even with the ban on West Coast wheat. Imports from the U.S. peaked at 7.3 million tons in 1988/89 when China imported 15.4 million tons from all sources. Although prospects for Chinese wheat imports over the next 10 years are not as high as they were 8 - 10 years ago, USDA does project average imports to rise.
Canada, the United Statess biggest competitor in the Chinese wheat market, will no longer have the West Coast freight advantage it has had for over twenty years. Shipping U.S. wheat from the Pacific Northwest can reduce freight costs to China by 33 to 50 percent, or by as much as $5-10 per ton, relative to other U.S. export origins. Cheaper freight also helps U.S. wheat to be more competitive with Australian white wheat exports to China.
The agreement meets key U.S. objectives: resolving trade barriers, increasing technical cooperation and scientific exchanges, and further developing agricultural sectors. The agreement is expected to increase U.S. agricultural exports to China as well as to increase the cooperation between the U.S. and China in biotechnology, aquaculture, and other technical areas. It includes technical exchanges in several areas, including biotechnology.
Market Access Commitments Relating to WTO Accession
The agricultural market access commitments agreed-upon as part of the WTO accession include measures to address the following problems: trading rights, distribution, high tariffs, quotas, state trading enterprises, and export subsidies.
Areas of agreement include:
Tariff-Rate Quota Administration. As is common in many countries, China will use a tariff-rate quota (TRQ) system and state trading for certain sensitive commodities (including wheat, corn, rice, cotton, and soybean oil). Under this system, a specific quantity of imports will be allowed in at a low duty (10 percent or less) while additional imports will face a higher duty. China made specific commitments to administer these TRQs based on economic rather than political criteria. These commitments are designed to ensure a transparent and consistent system for allocating shares of the TRQ to end users and creating provisions to ensure that quota-holders are not impeded in utilizing their quotas.
A specific share of the TRQ will be reserved for importation through state trading enterprises (such as COFCO) and a specific share will be reserved for importation by any other entity that has a right to trade. If a TRQ share that was reserved to be imported by a trader--state or private--is not contracted for by October for any given year, it can be reallocated and imported directly through any entity that has a right to trade.
The total levels of these TRQs are substantially above present import levels and provide for future growth. U.S. goals were to ensure that the full quota would be available for importation if demand exists in China and to ensure opportunity for private traders to participate. This was accomplished both by allocating an initial share of the quota to private traders and providing for reallocation of quota from state enterprises to private traders if state enterprises do not use the full TRQ amount.
|TRQ in 2004
|Share of TRQ
to Private Sector
|Wheat||7.300||9.636||10%||Import ban on wheat and other grains from the U.S. Pacific Northwest will be removed|
|Corn||4.500||7.200||25%, grows to 40%|
|Rice||2.660||5.320||30%, See explanation in text.|
Wheat. China is the worlds largest wheat producer and has had three huge crops in a row, resulting in a dramatic cut in imports. While Chinas overall imports of wheat may not increase substantially initially, there remains consistent demand for high-quality, competitively priced wheat. The United States will be able to compete in this market because of the lifting of the TCK restriction and the establishment of a transparent, rules-based TRQ system. The TRQ, upon accession, is 7.3 million tons, rising to 9.6 million tons, compared with the projected 1999/00 Chinese import level of 1 million tons. The private sector will initially receive 10% of this quota, with reallocation of any unused state enterprise portion available later in the calendar year.
Corn. China has increased corn production dramatically in the past 10 years (almost 50%), in response to high domestic support prices. Many analysts still expect China to become a substantial corn importer in the future, as rising incomes and demand for meat products outstrip capacity to produce feed grains. However, currently China is a marginal importer (with only a spike of over 4 million tons in 1994/95) and a substantial competitor (exporting around 4 - 6 million tons a year).
WTO accession will limit unfair competition by eliminating export subsidies. The United States, as the worlds largest and most competitive corn producer and exporter, should be the biggest beneficiary of this opening. The United States produces twice as much corn as China, and about 40% of the worlds total production and two-thirds of the worlds exports. The United States has traditionally met around two-thirds of Chinas import needs for corn, but provided nearly all of Chinas corn imports in recent years. The TRQ on accession is 4.5 million tons, rising to 7.2 million tons. Current import level is about 250,000 tons. The private sector will initially receive 25% of this TRQ, rising to 40% by 2004.
Rice. China is the worlds largest, and one of the lowest cost, rice producers. Opening Chinas market is important for reasons of principle (it is important to establish the precedent that no sector be exempt from liberalization), to increase the role of market forces in Chinas rice production, and to open up specific market niches for U.S. exporters. Total world rice trade is around 20 million tons, and U.S. production of short and medium grain rice is about 2 million tons. Also important is Chinas commitment to end export subsidies, which should help us in other Asian markets such as Japan and Korea. The United States exports over 40% of total production.
The rice TRQ on accession is 2.6 million tons, rising to 5.3 million tons. Half of the TRQ will be for short and medium grain rice where the U.S. is most competitive; 50 percent of that TRQ will be reserved for importation through entities other than state trading enterprises. The remaining half of the total TRQ will be for other rice; 10 percent of that TRQ will be reserved for importation through entities other than state trading enterprises. Hence, 30 percent of the TRQ will be available to be imported through private sector companies. For calendar year 2000, USDA projects imports at 400,000 tons and exports at 2.9 million tons.
Barley and Malt. China also will remove the quota on barley, replacing it with a 9 percent tariff. For barley malt, the current tariff of 30% will be reduced to 10% by 2004.
Additional WTO Policy Undertakings Relating to Market Access
Export Subsidies. China has committed to refrain from providing export subsidies for agricultural products. This is particularly important for addressing potential exports of corn and rice which in the past have displaced U.S. product from third-country markets.
Trading Rights and Distribution. Currently in China, the right to engage in trade is strictly limited; only companies that receive specific authorization are allowed to import into China. This limits the ability of U.S. exporters to do business in China, and has limited U.S. exports. China has committed to allow any entity in China to import most products into any part of the country three years after accession. This commitment will be phased-in. A select list of products will be exempt from this rule and some trade will be channeled through China's state trading enterprises (including wheat, corn, rice, and cotton; state trading will be phased out for soybean oil). However, specific commitments to end monopoly import status have also been established. Trading rights for these products will be phased-in, gradually increasing the number of entities allowed to import. Additionally, China has committed to liberalize distribution services for all agricultural products, except tobacco, allowing U.S. companies to distribute and market their products in China.
Domestic Support. China committed to cap and reduce trade-distorting domestic subsidies. The specific level will be defined at further negotiations, but Chinas allowed level of support will be substantially below that established for the European Union, Japan, and the United States. China also committed to provide more transparency to make its domestic support measures more predictable and to give a better understanding of how Chinas farm economy operates.
Sanitary and Phytosanitary Measures. China committed to fully abide by the terms of the WTO Agreement on Sanitary and Phytosanitary Measures, which requires that all animal, plant, and human health import requirements be based on sound science, not political agendas or protectionist concerns.
Next WTO Round. China will remain an observer in the Seattle Round until its accession process has been completed. It will implement its commitments through the year 2004, as will a number of WTO countries, and there will be no restriction on implementation of new commitments that are agreed to in the next Round.
Work remains on other issues before the WTO accession package is complete. The Administration has stated that its goal is to see China accede as quickly as possible. Several other major trading partners, including the EU and Argentina, must still conclude bilateral negotiations before Chinas accession can be considered before the WTO.
Based on reports from USDA, the Office of the United States Trade Representative (USTR), and the Office of Agricultural Affairs, American Embassy, Beijing. For further information, please contact Rick OMeara at (202) 720-4933.
EU "Reforms" Boost Expenditures on Grains
Recent statements out of Brussels about the need to cap agricultural spending at current levels appear inconsistent with their policy actions, including on CAP reform. While the Agenda 2000 reforms will trim expenditures on oilseeds and other products, they will be overshadowed by money spent on the grain sector, which comprises nearly 40 percent of total agricultural spending.
As the chart illustrates, bigger compensatory (producer) payments on about 200 MMT of grain production will more than offset a lower intervention price, which affects only 10-15 MMT. Those compensatory payments were created to protect producer incomes by "compensating for" lower institutional and market prices, and now account for more than three-fourths of total expenditures on grains.
So, any serious attempt to cap agricultural spending really starts with cutting those producer (compensatory) payments. One possible reform already being discussed, degressivity, would steadily reduce the compensatory payment on grains after 2001, when it is set to reach nearly $70/MT under the Agenda 2000 reforms. The need to rein in spending is underscored by the upcoming EU expansion to include new East European members, who will likely demand some sort of producer income payment or protection, which would further strain the budget.
1/ Also includes producers' aid for durum.
Journal of the EU, 1990-97 expenditures, 1998-99 appropriations,
2000-01 forecasts based on provisions of the Agenda 2000 reforms.
For more information, contact Jay Mitchell at 720-6722.
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