Geographic Indications and International Trade (GIANT)

GIANT/TED Case Studies

TED 529: WHEAT
Wheat and U.S-China Relations

IDENTIFICATION
LEGAL CLUSTERS
GEOGRAPHIC CLUSTERS
TRADE CLUSTERS
ENVIRONMENT CLUSTERS
OTHER FACTORS

I. Identification

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. These disputes were regarded as resolved by American negotiators as the result of apparent Chinese concessions made during April 10, 1999 WTO accession negotiations between U.S. Vice President Al Gore and Chinese Premier Zhu Rongji. However, an overall agreement as to WTO accession was not successfully reached, and public release by the USTR of a document detailing the concessions has drawn criticism from the Chinese and has cast doubt as to whether or not China intends to abide by the April 10 agreements. Additionally, the recent NATO bombing of China's embassy in Belgrade has threatened a general deterioration in U.S.-China relations.
Primary in the wheat 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. On April 10 China agreed to lift its ban on wheat imports from the U.S. on TCK grounds; the agreement did 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 if the agreement is regarded by Chinese officials as ultimately binding; implications for international environmental protocol remain unclear.

2. Description

The Smut Issue

This analysis will approach the dispute by focusing on four (4) 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); (3) changes in the focus of China's reform process which have impacted U.S.-China agricultural trade; and (4) a brief discussion of China's current and projected agricultural situation which may bear upon her willingness or capacity to accept American wheat imports. The 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 alongside fluctuations in the Chinese willingness to import.
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. China would be required to provide conclusive scientific data indicating significant risk to Chinese consumers or wheat producers which had not been adequately addressed by American producers and exporters. Additionally, Chinese regulatory measures applied to U.S. wheat imports would have to be demonstrably consistent with those applied to imports from other wheat-exporting states.However, the exact conditions which might apply to China in this case as a member of the WTO may depend somewhat upon the final terms of accession; in the meantime, as a non-member, China cannot be compelled to accept American wheat imports through WTO action.

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. Such a profound shift may perhaps be regarded as indicative that the Chinese regard the wheat issue as one of those on which they are most flexible within the context of the overall WTO accession negotiations. 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; while China gains from limiting U.S. wheat imports with respect to grain self-sufficiency, such a policy may also mean high urban food prices (or costly government subsidies) at the same time. China's willingness to concede phytosanitary restrictions on wheat imports may reflect a shift toward prioritization of lower food costs rather than grain self-sufficiency.

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 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

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, so long as it is interested 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, efforts within China to enhance grain production may do relatively little to alter an overall trend toward substantial growth in China's grain demand and a concurrent increase in world prices.

3. Related Cases

bear case

asiaflu case

4. Draft Author:

Peter Wright, May 11, 1999

II. Legal Clusters

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 ofSanitary and Phytosanitary Standards, China would be required to provide scientific justificationfor 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 standardsspecified for the category of nation under which it is accepted to the organization (i.e. either a developingcountry or an advanced country). China, as a full member of the WTO, could be forced to accept Americanwheat 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

III. Geographic Clusters

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

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 mayhedge 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, is somewhat price-sensitive to the willingness of the Chinese to import American wheat. 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 productiondo 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 does prove capable of increasing grain production at rates 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.

China has recently 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.

V. Environment Clusters

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.

VI. Other Factors

25. Culture:

26. Trans-Boundary Issues:

27. Rights:

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)