from Follow the Money

A prediction: China will eventually protect its agricultural sector

May 28, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

You know, the global norm is not free trade in agriculture ...

If China doesn’t want its peasants to compete against subsidized US and European agricultural exports, I suspect that it has a range of possible options. Korea and Japan -- two other East Asian countries with relatively little arable land -- protect their (remaining) farmers like mad.

Formerly agricultural economies with little arable land that shift into manufacturing typically have the highest rates of agricultural protection around. Look at Japan. Look at Norway -- which, in a sense, uses its oil revenues to "buy" traditional Norwegian farms rather than import agricultural goods.

Holding the RMB down to prop up rural incomes by keeping imported agricultural goods cheap is probably not a viable long-term strategy. Chinese farmers certainly could complain that they are competing against subsdized agricultural imports. But China’s policy of spending between 15 and 20% of its GDP to build up its reserves and provide "vendor" financing for its manufactured goods exports can be thought of as a kind of an export subsidy too. The cost of that subsidy are deferred: they only will be realized after the RMB is revalued, but they are still real.

The status quo -- protecting China’s farmers with an undervalued exchange rate and providing what amounts to subsidized financing for its manufactured exports through massive reserve accumulation -- is not, at least in my view, sustainable, either politically or economically. But China clearly wants to avoid creating even stronger incentives for peasants to migrate to urban China (letting peasants actually own land is one idea ... but apparently that is a step to far in a still Communist country).

Free trade purists won’t like aquiescing to more agricultural protection. But keeping trade in manufactured goods relatively free requires a Chinese revaluation -- actually a series of Chinese revaluations that, over time and as Chinese productivity continues to increase, bring Chinese wages and prices more in line with industrial country norms. And a Chinese revaluation -- if it is a real revalution, not a cosmetic one -- may need to be combined with measures to limit the potential impact of now much cheaper rice and grain imports on Chinese farmers.