TED Case Studies
529: WHEAT
Wheat and U.S-China Relations
1. The Issue
The purpose of this case study is to examine recent disputes
between the United States and the People's Republic of China as to wheat trading policy which
culminated in an agreement Saturday, April 10, 1999 between U.S. Vice President Al Gore and
Chinese Premier Zhu Rongji. Primary
in this dispute has been China's refusal of American wheat shipments on the grounds that
the shipments have been contaminated with TCK smut wheat fungus. American negotiators have
argued that China's refusals of these shipments represent discriminatory trade practices,
because, on the one hand, the fungus does not present any scientifically justifiable risk to
the health of Chinese consumers or to Chinese wheat cultivators, and on the other hand,
China has accepted smut-infested wheat from other countries without restriction. As of
April 10 China has agreed to lift its ban on wheat imports from the U.S. on TCK grounds; the
agreement does not, however, guarantee Chinese purchases of Northwest wheat in any amount.
Optimistic estimates expect an increase in revenues for Pacific Northwest wheat farmers of
as much as ?100 million as a result of this agreement; implications for international
environmental protocol remain unclear. This analysis will approach the dispute
by focusing on three (3) significant issue areas which bear directly on its resolution: (1)
the nature of the risks associated with wheat smut infestation and international trade in
smut-infested wheat; (2) WTO sanitary and phytosanitary guidelines which have been relevant
in the recent negotiations (and whose interpretation may be impacted by the bilateral
agreement in the event of actual Chinese WTO accession) and (3) a brief discussion
of China's current and projected agricultural situation which may bear upon her willingness
or capacity to accept American wheat imports. This analysis will not focus upon domestic
agriculture in the United States, except for to say that China's large agricultural
import sector places American domestic wheat prices significantly in the hands of Chinese
trade officials. American agricultural producers can expect significant fluctuations in domestic
pricing in connection with Chinese import responsiveness.
2. Description
The Smut Issue
Wheat smut, otherwise known as bunt, or stinking smut of wheat, is caused by one of
two related fungi: Tilletia caries, which is to be found worldwide and is common
in the American Northwest, and T. foetida, which is limited to parts of Europe and
North America. Symptoms of the smut are usually not apparent until the wheat has reached
maturity; smutted wheat, when mature, can be easily identified by a fishy odor. The
fungus develops in the kernels of the wheat; upon maturity, the smutted kernels or "smut
balls" will develop in place of normal kernels and will be filled with a black powder which
is the seed, or "spores," of the fungus. Federal standards in the U.S. identify wheat which
contains roughly 14 average-sized smut balls per 250 grams of wheat as "light smutty;"
wheat samples containing an excess of 30 smut balls per 250g is designated simply as "smutty."
Producers experiencing the bunt can expect lower market prices relative to the severity
of the bunt incidence.
The bunt has been an issue among wheat farmers for centuries; the first recorded use
of copper sulfate to prevent bunt was in 1761. There are currently a large number of
chemical agents on the market which can be used to prevent the bunt, although such treatments
have been occurring on such a limited scale of late in the United States that the bunt is
recurring.
Spreading of the bunt occurs during the flowering season. Bunt sporadia can survive
transportation and can often be windborne. The fungus can survive dormant under the soil for
up to five years. Bunted wheat is not a direct health risk for human consumption, although
the spores can be highly allergenic. Bunt spores released into the air can also be highly
flammable; a number of threshing machines caught fire as a result during the early 20th
century in the U.S. and Canada.
Incidence of the bunt in the American Northwest is currently small in terms of total crop
yields, although it can be quite a serious problem in particular areas which are
heavily infested. China has indicated problems with two forms of the bunt: karnal bunt, and
TCK smut. A shipment of U.S. wheat was rejected in 1997 on the grounds that it contained
the TCK fungus. Karnal bunt has not been common in the United States, although it has
recently been found in small quantities of wheat grown in Arizona. Federal regulations in
the United States prohibit import of wheat from countries where the karnal bunt is known
to occur, such as India, Pakistan, Iraq, and Afghanistan, except under permit from the
USDA for purposes of scientific research.
Phytosanitary Safety and the WTO
China's refusal to accept American wheat as a result of (ostensible) concern over the potential
introduction of wheat smut indigenous to the American Northwest would require, under the
auspices of the WTO's Agreement on the Application of Sanitary and Phytosanitary Measures (SPS),
scientific justification of such a refusal, were such justification requested by the
Americans. The Chinese would be required to show that phytosanitary measures used by
American wheat exporters were insufficient to minimize or eliminate the risk of wheat smut
introduction into China's own wheat industry. Additionally, Chinese regulators would be
required to demonstrate that regulatory measures applied to American wheat shipments are
consistent with those applied to shipments from all wheat-exporting countries with which
China engages in trade; American exporters have pointed out that China has previously
accepted shipments from other countries which were contaminated with the fungus.
The April 10 agreement is quite significant in that it indicates a policy shift on the part
of the Chinese from one of zero tolerance of smut-infested wheat to what appears as a quite
liberal approach to smut infestation; the USTR indicates that China has agreed to accept
shipments which contain less than 30,000 bunt spores per 50 grams of wheat. This may prove
a boon to American wheat producers; however, it may also imply a commensurate decline in U.S. and Chinese
efforts to control the smut. Insofar as the TCK smut can reasonably be expected to have a
meaningful impact on overall wheat output in each country, it may still merit a significant
degree of concern.
China's Agricultural Reform
Agriculture in China has undergone a number of significant changes since the advent of the
Reform Era in 1978. Chinese farmers have, in general, been able to gain from reforms as a
result of privatization. However, government prioritization of growth in urban industrial
sectors has placed a large portion of the country's tax burden on agricultural producers,
and has kept grain prices (as well as farm incomes) relatively low.
From 1978 until 1984, reforms included increases in the
government procurement price of most crops, as well as reductions or abolitions of
procurement quotas, and significant improvement in the quality and availability of
manufactured inputs. Grain produced beyond what was required by government quotas was
permitted to be sold in open markets (and usually at prices higher than the government
procurement price); thereby creating significant incentive for farmers to increase
productivity. Grain production increased during this period from 304.8 million metric tons
(mmt) in 1978 to 407.3 mmt in 1984(Carter p. 16).
Since 1984 the PRC government has shifted the emphasis of the reform process from
agriculture toward urban industrial development. Government interest in keeping urban food
prices (and thus wages) low despite significant increases in procurement (and market) prices for grain brought
urban consumer food subsidies to levels approaching one-quarter of the entire government
budget during the late 1980s. Grain production stagnated during this period; 1988 production
was reported at 394.1 mmt, 13.2 mmt lower than the 1984 level. The agricultural
sector experienced limited recovery during the early 1990s alongside further liberalization
of agricultural markets. These liberalizations were reversed, however, in 1993 and 1994
due to grain price increases at levels which threatened inflation and urban social
instability(Carter p. 44-45).
In March of 1995 Premier Li Peng implemented the "governor's grain bag policy," under
which provincial governors were required by the central government to achieve and
maintain designated quotas with respect to crop yields, sown areas, and reserve
stock holdings in an attempt to avoid declines in grain production in the coastal areas (and
thereby preserve a greater degree of grain self-sufficiency). Carter, Zhong, and Cai argue
that the policy "may temporarily improve grain supply in the coastal provinces at the cost
of efficiency in resource allocation, and may encourage interprovincial blockades on
grain shipment when a particular area suffers from a natural disaster"(Carter p. 44).
Additionally, farmers in lower-income inland areas may expect lower prices on grain shipments
delivered to the coastal regions.
Grain Demand Projections
Lester Brown (1995) has suggested that China's growing population and increasing
standard of living may lead toward a significant world food crisis by 2030. Brown calculates
that grain consumption may increase in China to well above 600 million (non-metric) tons
by that time, while domestic grain production in the country will fall below 300 million
tons. This would create a grain deficit of over 300 million tons (which would exceed total
world grain exports at the time of his writing in 1995 by over 100 million tons). Brown's
thesis is heavily dependent upon the assumption that grain production in China will fall as
a greater percentage of land is devoted to more profitable purposes associated with a more
highly-developed industrial economy; his figures have been disputed by the Chinese government
(among others) on the grounds that improvements in production techniques and more efficient
land use will allow China to increase supply at levels which can compensate for projected
increases in demand. However, the grain bag policy, insofar as it may be regarded as an
attempt to avoid declining grain production in industrializing areas of the country (the
coastal provinces), would appear to offer some support to Brown's conclusions.
Taken in light of China's domestic grain situation, refusal of grain imports from the
American Northwest, if they were politically or economically rather than ecologically
motivated, would appear to serve the purpose of insulating the grain bag policy from the
disruption of low-cost wheat imports from abroad and allowing for relatively higher domestic
grain prices conducive to a maintenance or increase in levels of grain production at less-
than-exorbitant cost to the government. As such, Premier Zhu's willingness to come to
an agreement more favorable to U.S. grain imports may imply a rethinking of the grain bag
policy among Chinese policymakers; it may, on the other hand, simply imply that China will
seek to maintain grain self-sufficiency (and limit U.S. imports) through alternative means.
During the period (1996-97) of China's refusal of American wheat shipments on grounds of
TCK smut infestation, significant changes can be perceived in production and trade patterns in
the United States and China with respect to wheat (although we cannot make definitive
conclusions as to causation); these changes can be observed in tables 1 and 2:
Table 1: Wheat Production, Million Tonnes
| 1995
| 1996
| 1997
|
| United States
| 59.4
| 62.2
| 68.8
|
| China
| 102.2
| 110.6
| 122.6
|
Table 2: Wheat Trading, Million Tonnes
| 1995/96
| 1996/97
|
| U.S. Exports
| 33.7
| 27.0
|
| Chinese Imports
| 14.4
| 5.2
|
American export prices fell during this time from $218/tonne in 1995/96 to
$157/tonne in 1996/97 (US Hard Winter No.2) and from $198/tonne to $158/tonne (US Soft red
Winter No.2). Whether these figures are partially as a result of Chinese refusal of
American wheat imports, or they are merely representative of highly unfavorable market
conditions for American wheat producers during that time which would place an element of
urgency upon prospective wheat sales to China, is somewhat uncertain. However it is clear
that conditions in wheat markets precipitated a U.S.-China conflict of interest at that time.
Regardless of the legitimacy or illegitimacy of Chinese concerns as to wheat smut
infestation, it is perhaps reasonable to suggest that the Chinese government, interested as
it is in maintaining grain self-sufficiency even at the cost of efficient resource allocation,
has an incentive to limit grain imports from the United States and elsewhere. However, if
Brown's predicted increases in China's grain demand are close to the mark, increasing Chinese
grain productivity may be in America's interest as much as China's, even if that means lost
export markets for American producers.
3. Related Cases
U.S.-China Agricultural Trade Cases
CRAWFISH case
CHERRY case
Other Related Agricultural Cases
JAPRICE case
KORRICE case
MAIZE case
APPLE case
China-Related Cases
3GORGES case
USCHINA case
CHINCOAL case
KAIDA case
ASIAFLU case
4. Draft Author:
Peter Wright, March 9, 1999
5. Discourse and Status: DISagreement and INPROGress
China is not yet a member of the WTO, and is therefore not subject to international law
with respect to this issue. However, Premier Zhu's willingness to sign the April 10 agreement
may help China in garnering U.S. support for eventual entry. Under the WTO Agreement on the Application of
Sanitary and Phytosanitary Standards, China would be required to provide scientific justification
for its refusal to accept wheat from the American Northwest on grounds of wheat smut infestation;
this may not turn out to be a crucial issue given the bilateral agreement, although it remains
in the interest of both parties to control crop diseases.
Additionally, China would have to adjust its tariff and subsidy structure to conform with the standards
specified for the category of nation under which it is accepted to the organization (i.e. either a developing
country or an advanced country). China, as a full member of the WTO, could be forced to accept American
wheat imports if its concerns over wheat smut infestation were found to be scientifically unjustifiable.
The USTR indicates that China has agreed to a 17% overall average tariff for agricultural
products upon accession to the WTO alongside a 14.5% tariff for U.S. priority sectors (which
include wheat). China has also agreed to raise its Tariff Rate Quota (TRQ) to 7.3mmt upon
accession and rising to 9.3mmt; these figures represent a substantial increase from 1998/99
reported import levels of roughly 1.5mmt. Of these increased imports 10% will become
immediately available with unused state enterprise allotments becoming available later in the
calendar year. These figures, however, have been quoted as part of the ongoing accession
negotiations and cannot be regarded as binding until a full agreement has been reached.
6. Forum and Scope: USA and BILATERAL
7. Decision Breadth: 2 (USA, China)
8. Legal Standing: Treaty
9. Geographic Locations
a. Geographic Domain: North America
b. Geographic Site: WNAMER (Western North America)
c. Geographic Impact: China
10. Sub-National Factors:
Yes
Impact in the United States is primarily limited to the Pacific Northwestern states of Washington, Oregon, Montana, Idaho, and Wyoming.
Wheat is grown in many areas of China, which can be roughly divided into three regions: the
spring wheat region, the north China winter wheat region, and the south China winter wheat
region. In the spring wheat region, the majority wheat-producing provinces are Heilongjiang,
Inner Mongolia, Gansu, and Xinjiang. The north China winter wheat area, which accounts for
roughly two-thirds of Chinese wheat output, consists most significantly of Shandong, Henan,
Hebei, and Shaanxi provinces. The south China winter wheat region includes Anhui, Jiangsu,
Sichuan, and Hubei provinces. South China winter wheat producers, as a result of a general
dependence in the region on rice as the food crop, produce wheat primarily as a commodity (and
receive higher commodity prices for it there than in other parts of the country).
11. Type of Habitat:
TEMPerate
IMG SRC="images4/fieldicon.jpg"> IV. Trade
Clusters
12. Type of Measure:
Import Ban
13. Direct v. Indirect Impacts:
DIRECT
14. Relation of Trade Measure to Environmental Impact
a. Directly Related to Product: Yes (Wheat)
b. Indirectly Related to Product: No
c. Not Related to Product: No
d. Related to Process: Yes (Infestation)
15. Trade Product Identification:
Wheat
16. Economic Data
17. Impact of Trade Restriction:
High
18. Industry Sector:
Food
19. Exporters and Importers:
USA and China
China's status as a net wheat importer may
hedge against any significant WTO problems for the Chinese resulting from government support of
its domestic wheat industry in the short term; however, China has indicated intentions to
implement a large-scale wheat export program in the near future. The U.S. wheat market,
though, has been identified as highly sensitive to its capacity to export to China. Chinese
refusal of American wheat shipments on any grounds can have a depressing effect on
American domestic wheat prices and can thereby be a threat to American producers. Government
support of Chinese wheat producers probably does not pose the threat of an export glut
due to China's massive domestic food market; however, China's status as a major importer of
American wheat does place American domestic wheat prices significantly in the hands of
the Chinese import sector. Chinese government efforts to encourage domestic wheat production
do act as a disincentive on imports from America, and do therefore have a deflating effect
on wheat prices in this country. The massive size of China's wheat market on both the production
and the consumption side may pose one of two forms of long-term threat to American security.
On the one hand, large increases in Chinese imports of American wheat, while certainly beneficial to American
producers in the short term, could serve to enhance U.S. vulnerability to Chinese protectionist
measures; additionally, per Lester Brown, Chinese grain demand could conceivably reach levels
which would put considerable upward pressure on world grain prices and create security concerns
associated with a world food shortage. Today's agricultural producers, accustomed to chronically
low commodity prices in general and grain prices in particular, may find such a scenario
difficult to envision.
If, on the other hand, China is able to achieve the long-term feat of increasing grain production
at rates substantially exceeding growth in domestic demand, this could have a seriously
adverse affect on domestic U.S. grain prices. Most analysts, however, appear to believe such
a scenario is unlikely.
As of this writing, China has been experiencing severe drought which has provided a serious
threat to projected domestic crop yields. Such conditions may imply increased import demand
of the sort favorable to American producers; these conditions may also have had some small
impact on the willingness of the Beijing government to come to an agreement with the USTR.
U.S. wheat prices are expected to increase moderately despite relatively strong yield outlooks;
these expected increases have been partially attributed to optimism over the possibility of a
U.S.-China resolution of the dispute over Northwest wheat.
20. Environmental Problem Type:
Infestation
21. Name, Type, and Diversity of Species
Name: Wheat
Type: Many
Diversity: Global
22. Resource Impact and Effect:
LOW and PRODuct
23. Urgency and Lifetime:
LOW and 5 Years
24. Substitutes:
Resistant Crops
In addition to chemical fungicides, the planting of wheat varieties resistant to the
smut can also assist in controlling smut incidence. Resistant strains include Blizzard,
Manning, Promontory, and Lewjain.
25. Culture:
NO
26. Trans-Boundary Issues:
NO
27. Rights:
NO
28. Relevant Literature
Brown, Lester R., Who Will Feed China?: Wake-Up Call for a Small Planet, New York:
W. W. Norton and Company, 1995.
Carter, Colin A., Zhong, Funing, and Cai, Fang, China's Ongoing Agricultural Reform,
San Francisco: The 1990 Institute, 1996.
Crook, Frederick W., "China: Is Current Ag Policy A Retreat From Reform?," March 1997,
Internet WWW page, at URL: http://www.econ.ag.gov/epubs/pdf/agout/mar97/ao238k.pdf (version
current at April 13, 1999)
Food and Agriculture Organization of the United Nations, Commodity Market Review 1997-98,
FAO, 1998.
Hogan, Dave, and Burnett, Jim, of The Oregonian, "China ends ban on Northwest wheat,"
Friday, April 9, 1999, Internet WWW page, at URL: http://oregonlive.com/business/00/04/bz040901.html
(version current at April 13, 1999)
Lateline News: "China Urged to Fight Drought," March 22, 1999, Internet WWW page, at URL:
http://lateline.muzi.net/cgi/lateline/news?p=22355 (version current at April 13, 1999)
Prescott, J.M. et al, "Wheat Diseases and Pests: a guide for field identification," Internet
WWW page, at URL: http://greengenes.cit.cornell.edu/wpest.html#fungal (version current at
April 13, 1999)
Sun, Jingzhi, ed., The Economic Geography of China, New York: Oxford University
Press, 1988.
U.S. Department of Agriculture, "China: Grain Supply and Demand: Wheat and Course Grains,"
Internet WWW page, at URL: http://www.fas.usda.gov/grain/circular/1999/99-04/hist_tbl.pdf
(version current at April 13, 1999)
U.S. Department of Agriculture International Agricultural Trade Report, "China: Rumblings
in the Wheat Market; Corn Exports on Hold," July 27, 1998, Internet WWW page, at URL: http://www.fas.usda.gov/grain/highlights/1998/98-07/ch_7_98.pdf
(version current at April 13, 1999)
U.S. Trade Representative Press Release, April 10, 1999, "U.S.-China Sign Bilateral Agriculture Agreement,"
Internet WWW page, at URL: http://www.ustr.gov/releases/1999/04/99-36.pdf (version current
at April 13, 1999)
Watkins, John E., "Bunt of Stinking Smut of Wheat," Revised July 1978 (electronic version completed 1996) Internet WWW page, at
URL: http://www.ianr.unl.edu/pubs/PlantDisease/g169.htm (version current at April 13, 1999)
I. Identification