The Obama Administration announced a trade enforcement action against China at the World Trade Organization (WTO) for its government support activities for corn, rice and wheat. The move was welcomed by many who have said for years that China isn’t playing by the rules and is costing U.S. farmers millions in lost exports and lower prices.

China’s excessive market price support for rice, wheat and corn inflates Chinese prices above market levels, creating artificial government incentives for Chinese farmers to increase production. In describing its action, USTR said “the level of support provided through these programs in excess of China’s commitment was nearly $100 billion.”

The Obama Administration announced a trade enforcement action against China at the World Trade Organization (WTO) for its government support activities for corn, rice and wheat. (Photo: Gil Design/Thinkstock)

“Through tariff cuts and the removal of other trade barriers, China has gone from a $2 billion-a-year market for U.S. agricultural products to a $20 billion-plus market, but we could be doing much better, particularly if our grain exports could compete in China on a level playing field," Agriculture Secretary Tom Vilsack said. "Unfortunately, China’s price supports have encouraged wheat, corn and rice production in China that has displaced imports. When China joined the WTO, it committed to limit this kind of trade-distorting support, which it has failed to do. This has resulted in significant losses to American producers. We see substantial opportunities to meet import demand for grains in China if China is willing to operate a WTO-consistent trade regime.”

USA Rice president and chief executive officer Betsy Ward said this latest action is just the first step in what could be a year-and-a-half-long endeavor, but the news is welcome for the signals it sends. There is no indication yet how China will react to the case.

Role of enforcement

During the press conference announcing the case against China, Vilsack stated, "This case is an important message to all WTO members that they must take their WTO obligations seriously."

Sen. Heidi Heitkamp (D., N.D.) added it’s important for the future of trade for the U.S. to take aggressive action when trade policy fails. “If we do not amp up enforcement, we will have a nation unwilling to do trade negotiations,” Heitkamp warned. “This kind of action is critical to promoting trade policy in the future.”

Rep. Michael Conaway (R., Texas) said foreign subsidies and tariffs undermine support for trade. He hopes that this is just the tip of the iceberg in terms of the predatory practices going on around the world that harm U.S. producers. He said he hopes the government will also vigorously pursue a case against China concerning its cotton policy, which has wreaked havoc on U.S. producers. “Absent this, I fear that our domestic cotton production and all that it means to our nation’s economy will be lost in much the same way we forfeited our textile industry — once the largest manufacturing sector of our economy.” 

Since 2009, USTR has brought 23 enforcement actions, including one against China, at the WTO. The United States has won every single one of those complaints that has been decided by the WTO so far.

Cost to farmers

These programs cost U.S. wheat farmers $650-700 million annually in lost income by pre-empting export opportunities and suppressing global prices, according to a 2016 Iowa State University study sponsored by U.S. Wheat Associates (USW). That loss estimate is actually 19% more than the losses estimated by a similar 2015 study due to the effect of increasing global stocks and resulting market price decline.

A 2014 study by DTB Associates that also was sponsored by USW showed that China’s minimum procurement price of about $10/bu. for wheat, in addition to other subsidies, violates China’s WTO commitments. That market price support is so high that the Chinese government has to purchase and store enormous stocks of domestic wheat. As a result, USDA estimates that by June 2017, China will hold 44% of the world’s wheat stocks, which will be at record levels and will further depress market prices. This also hurts Chinese flour millers who are forced to purchase overpriced domestic wheat from these stocks, and it hurts their customers who must pay more for the flour.

Iowa State University agricultural economist Dr. Dermot Hayes said if China played by the rules, the fewer Chinese farmers would plant wheat because domestic prices would fall and input costs would increase. The result would be a need for China to input more than 9 million metric tons of wheat, which would increase U.S. farm income by 19 cents/bu.

Ward pointed to a 2016 Texas A&M University study that showed that if rice subsidies were removed in China and other advanced developing counties, production in China would decrease by as much as 4%, and imports would increase nearly four-fold as their prices came more in line with world rice prices. "Under those models, U.S. rice exports rose 18%, and farm-gate prices rose 9%," Ward added. "That's real money."