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Cablegate: From a Trickle to a Flood: China's Agricultural Subsidies

VZCZCXRO9488
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3052/01 3090542
ZNR UUUUU ZZH
O 050542Z NOV 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6715
INFO RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 04 BEIJING 003052

SENSITIVE
SIPDIS

STATE PASS USDA/ERS
STATE PASS USDA/FAS/OSTA CHINA DESK
STATE PASS USDA/OGA
STATE PASS USTR FOR STRATFORD
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON SENV EAGR CH

SUBJECT: FROM A TRICKLE TO A FLOOD: CHINA'S AGRICULTURAL SUBSIDIES
MULTIPLY

Refs: A. FBIS/OSC #CPP20081019045001

(U) This cable is Sensitive But Unclassified. Please protect
accordingly.

1. (SBU) Production and input subsidies have multiplied rapidly and
the value of support has risen exponentially since the watershed
moment in 2006 when China eliminated its centuries-old agricultural
tax. Agricultural subsidies now play an increasingly important role
in guiding production decisions, and when combined with China's food
security policy, subsidies determine competitiveness of crops within
China and impact trade patterns. Though subsidies will likely
remain within China's international obligations, current trends
suggest that subsidies will soon reach the limits of WTO
agricultural subsidy commitments. END SUMMARY AND COMMENT.

ROLE OF AGRICULUTRAL SUBSIDIES EXPANDS
--------------------------------------

2. (SBU) In recent years, China has made the significant transition
from taxing the rural sector to subsidizing it. 2006 marked a
watershed as China's centuries-old agricultural tax was removed and
the structure of rural taxation and payment for local services and
infrastructure dramatically shifted. Despite allowing farmers to
keep more of their income, the central government feels compelled to
do more to increase assistance to local governments for the loss of
the tax, speed modernization and farm productivity increases, and
close the rural-urban income gap by supplementing rural incomes with
direct and indirect subsidies. China's key public policy documents
(e.g., The Decision of the Third Plenary Session of the 17th Central
Committee of the Communist Party of China in October 2008, Ref A)
confirm the rapid growth of input subsidies, direct payments, price
controls, and subsidized loans. Recent analysis shows that the
largest subsidies are currently being given to the grain, pork, and
dairy sectors, but that additional programs and recipient groups are
being added yearly.

3. (SBU). Despite some Chinese government declarations about the
size of Chinese subsidies, USDA research suggests that the actual
scope and scale has not been included in the current official
estimate. A recent USDA Foreign Agricultural Service (FAS) report
compiled available information on the scope of China's agricultural
subsidies from 2005-2008 based primarily on FAS Global Agricultural
Information Network (GAIN) reports on the primary agricultural
commodities produced in China. Additional information is taken from
the USDA Economic Research Service (ERS), Chinese official press
releases, and local press. The full report, including data and
tables, and all other GAIN reports mentioned in this cable can be
found at www.fas.usda.gov or www.usdachina.cn as CH9028.

OVERVIEW OF CHINA'S DOMESTIC SUPPORT
------------------------------------

4. (SBU) For the past 60 years, China has pushed strong economic
growth through industrialization and developing urban areas. As the
income gap between urban and rural populations widened, policy
makers began looking "backwards" to address rural development and
resolve social issues that are considered potentially disruptive to
stability. The initial step towards improving rural farmers'
lifestyles was to increase farm incomes by removing the
centuries-old agricultural tax, which was removed completely in
2006. At the same time that the agriculture tax was phased out,
subsidies aimed at supplementing agricultural incomes began,
including those for input subsidies, direct payment, loan subsidies,
and price supports.

5. (SBU) On March 5, 2009 at the 11th National People's Conference,
Premier Wen Jiabao addressed the government financial contribution
to the sector by announcing that agriculture spending during 2008
totaled US $87.3 billion (RMB 596 billion), an increase of 38
percent from the previous year. He noted that the spending
including US $15.1 billion (RMB 103 billion) used for direct
subsides, inputs, machinery, and improved crop varieties. In 2009,
these categories of subsidies are slated to increase to $18 billion
(RMB 123 billion).

SOMETHING FOR EVERYBODY
-----------------------

6. (SBU). In January 2009, the Chinese Central Committee of the

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Communist Party issued 2009 Document No. 1 (GAIN CH9026), its annual
summary of efforts planned to address the range of rural issues in
the upcoming year. This document is instructive in describing the
basic objectives of the subsidies and the structures the Chinese
Government intends to pursue. Generally speaking, the priorities
are 1) income support and 2) increased production.

7. (SBU) According to Document No. 1, the following specific goals
are prominent on the list of activities China is encouraging:
- Food Security - in particular grains
- Farmer income support
- Consolidation - especially livestock and agricultural processing
sectors
- Increased Productivity - in all sectors through the use of
innovation, technology, more inputs, and mechanization
- Creation of national champion enterprises
- Increasing rural financial services
- Rationalization and Conservation - encouraging concentration of
certain industries in areas that have geographic or other
comparative advantages and optimizing/conserving use of water and
land resources

8. (SBU). Additionally, Document No. 1 lists the following as the
preferred subsidy formats:
- Price Supports
- Subsidized Credit
- Direct Payments
- Preferential Tax Schemes

LIVESTOCK AND GRAIN THE BIG WINNERS
-----------------------------------

9. (SBU) China's subsidy policy can also be seen as a clear
extension of a top national priority: food security. As such, a
clear majority of China's current subsidies go to grains and animal
protein. The grains sector receives about 95 percent (94 million
RMB of the 103 million RMB) of the direct support reported by the
government in 2008, with most of remainder going to the pork and
dairy sector. In 2009, the scope of the subsidies increased and the
percentage going to non-grains sectors increased.

10. (SBU) As of 2009, the types of commodities/sectors that have
been identified for subsidies are: grains, oilseeds, biofuels,
dairy, pork, tomatoes, walnuts, canned fruit, asparagus, citrus,
hides and skins, and cotton. Many of these sectors compete with
U.S. products in third countries, are exported to the United States,
or compete with U.S. products imported into China. In addition,
China has also significantly increased non-product specific support
that does not directly affect production decisions, programs that
would generally fall in the WTO green box category.

11. (SBU) However, the hidden story is that there are many
subsidies not contained in the government figures. Two of the
programs identified as providing the most benefit to the
agricultural industry are the elimination of the corporate income
tax (GAIN CH8078), the exemptions provided to agriculture under
China's value-added tax (GAIN CH7018), periodic programs to
subsidize exports (ERS Report Source WRS-01-02) and other programs.

SUBSIDY RESEARCH LIMITATIONS
----------------------------

12. (SBU) Overviews of Chinese agricultural policies are an
important source of information on the evolution of Chinese policy,
with FAS commodity reports and ERS reports, such as the April 2009
"China's Ongoing Agricultural Modernization: Challenges Remain After
30 Years of Reform", playing a key role in English language
research. However, there have been very few comprehensive, current
studies on Chinese subsidy policies because their history is fairly
recent and their impact is only beginning to be felt.

13. (SBU) Researchers face several hurdles in this area and make
any analysis of the scope and breadth of Chinese agricultural
subsidies difficult. The following issues should be taken into
account by readers of subsidy research and be considered caveats
relating to the fullness and accuracy of the data in the April 2009
FAS report. While all the programs listed in the FAS report are
confirmed through government sources or government released
information, the following issues are the most common reasons why
certain information is not available or could not be confirmed:

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- Transparency: Most Chinese subsidy program details are not public
information. While the program itself may be announced publically,
implementing regulations are rarely public. The type of information
absent often includes the value of the program, participant
eligibility, number of participants, or how the subsidy is
distributed.
- Uniformity of Eligibility: Unlike many countries, most Chinese
subsidies do not have universal eligibility. There are simply too
many farmers. Unpublished criteria or eligibility differences
between provinces make it difficult to ascertain the total number of
participants or other fixed data points (Ha/animals/kg) to use in
calculating the total subsidy amount.
- Block Grants: Many subsidies are distributed to provinces for
administration. The province is responsible for developing
eligibility and distribution criteria. Depending on the program, it
may be implemented in a different way in each province or even
county.
- Sub-national Subsidies: This information is almost totally absent
save local press releases and on-farm intelligence.
- Loan/Insurance Programs Opaque: Subsidized loans or insurance
subsidies are particularly difficult to analyze due to the use
unpublished loan rates or insurance premiums.

OTHER ONGOING RESEARCH
----------------------

14. (SBU) As more attention is paid to this topic, research is
expanding beyond the long-term work being done by USDA's FAS and ERS
(ERS Report "China's New Farm Subsidies" - WRS-05-01). Recent work
by an International Food Policy Research Institute (IFPRI) "Shadow
Notifications" project has resulted in the publication of a third
party attempt to create a likely China WTO submission. University
academics that specialize in international agriculture, China, and
WTO issues are also starting to follow China's subsidization policy
more closely.

15. (SBU) U.S. industry is also becoming an active observer and
critic of Chinese subsidy policy. For example, the U.S. pork
industry has stated that it believes that China's pork policies
already provide support at or above WTO obligations. Questions on
pork subsidies have been asked by the United States in formal WTO
submissions, without receiving a substantive Chinese reply. The
U.S. pork, dairy, and wheat industries have all commissioned reports
about various parts of the Chinese subsidy and VAT programs that
they suspect do not conform to China's commitments. Since U.S.
agricultural subsidy policy has long faced close observation,
criticism, anti-dumping and safeguard cases, and WTO complaints,
industry feels that close observance of WTO commitments is critical
and has the same view for third countries.

MUM'S THE WORD
--------------

16. (SBU) Though discussion of China's subsidies is beginning to
heat up among researchers, third country governments, and industry,
China has never formally addressed the issue at the WTO. While
China addresses some of its agriculture reporting commitments well,
such as tariff rate quota administration, its adherence to others is
spotty. In the case of agricultural subsidies, China has never
submitted anything about its subsidies to the WTO since it became a
member. While the growth of subsidies is clear to all observers,
both domestic and foreign, few Chinese experts or officials seem to
have a handle on the scope of the growth in subsidies. [Note: Some
Ministry of Agriculture and Ministry of Commerce contacts are very
curious about and can discuss subsidy policies of the United States
and other countries, but they are reluctant or unable to grasp the
scope of what is going on within China. Several MOA contacts asked
for copies of the April 2009 FAS report so they could read it. End
Note.]

TRADE IMPACTS UNCLEAR, BUT CONCERN GROWING
------------------------------------------

17. (SBU) The trade impacts of Chinese subsidies are far from
clear. Given that most subsidies are relatively new, it is unlikely
that subsides have as much impact on U.S. trade as current SPS or
TBT barriers. Nonetheless, industry is very concerned about the
trends in this area. The U.S. industry has three inter-linked
concerns: specialization, displacement of U.S. exports to Asia, and

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reduced access in China.

18. (SBU) The concern about specialization stems from information
that China's provinces and localities focus resources in highly
targeted international market segments. As in industrial areas,
there are several well known examples where Chinese localities have
seen profitable domestic or international markets and encouraged or
provided targeted investment. Subsequently, Chinese producers
monopolize a small segment in a short time and drive out foreign
producers. An example of this fear is the Chinese domination of the
global garlic market. Often, producers of U.S. horticultural crops
or those that use significant manual labor are most concerned about
the combination of cheap labor, targeted subsidies, and lax
agro-chemical standards. U.S. apple and stone fruit producers have
this concern.

19. (SBU) Similarly, industry is concerned that preferential
policies and subsidies will be used to more aggressively export
domestic surplus or by-products. Critics have long complained that
the VAT refund rate is frequently used in China for domestic supply
and price management. As some Chinese researchers have suggested,
industry is concerned that China will ignore its commitments to the
WTO in pursuit of domestic food security. Many in China argue that
the zero subsidy commitment itself was a very bad deal and that it
is not fair in comparison to the bound subsidy limits of more
established WTO members. The first to raise this alarm has been the
U.S. pork industry. In the wake of a deficit year that saw record
pork exports from the U.S. to China, record subsidies and programs
designed to build China's pork production capacity went into place,
dampening U.S. market opportunities.

20. (SBU) As the U.S./China trade relationship grows in importance,
discussion of domestic support payments will likely take on greater
significance to both sides. Since China's accession to the WTO,
agricultural trade has exploded. U.S. exports of agricultural,
fishery, and forestry products to China grew from $2.2 billion in
2001 to $13.2 billion in 2008. Chinese exports to the United States
of these categories of products went from $2.3 billion to $8.5
billion. The level of exports for the United States and China in
the 2006 stood at $7.7 billion and $7.1 billion, respectively. U.S.
exports are primarily made up of bulk or semi-processed commodities,
while China's exports are largely value-added processed products.

COMMENT
-------

20. (SBU) China's political leadership has signaled that
agricultural subsidies will only get bigger. It is important to
increase monitoring of these subsidies to understand their domestic
impact on food security, market access, and Chinese exports. Given
the increased spending, China will soon come to a point where it
will find its WTO agricultural subsidy commitments constraining.
When this happens, an important discussion inside China will be
whether subsidies need to move toward a greater proportion of green
box policies or China seeks ways to change its commitments or derail
further negotiations. This growing realization that its commitments
constrain policy objectives may spark a true review of China's
future us of agricultural subsidies.

HUNTSMAN

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