How does China’s Third Plenum affect corn producers in America? Why would using a genetically modified strand of corn, proven to be resilient against crop-killing pests, hurt farmers’ bottom lines?
China’s leadership has already emphasized one of the biggest challenges the country faces is reducing geographic income disparity. Currently, the urbanites who live primarily on the prosperous east coast of China make three times the income of poor farmers in central and western China.
As the rich have proceeded to get richer, their tastes have changed. Now, China’s burgeoning middle and upper classes are demanding more meat and processed foods, rather than their old diet that primarily consisted of noodles and rice.
The increasing demand for meat has in turn increased demand for livestock feed, which is composed of mostly corn and soybeans. These crops require massive amounts of arable land, something that China severely lacks. Therefore, most Chinese farmers choose to focus on more economic crops, like fruit, which require more labor than land.
The Chinese government fears relying on other countries to feed China’s citizens, and thus has created a set of schemes to support farmers and encourage them to grow crops that may otherwise appear economically unfeasible. These programs can be divided into four categories: direct payments, price supports, agricultural infrastructure projects, and regulatory reforms.
So, although according to competitive advantage, the Chinese should rely on nations with large amounts of arable land like the US to supply them with corn and soybeans, they instead have chosen to subsidize native corn growers.
Although Chinese corn growers are incentivized to grow this important crop, American corn is oftentimes still cheaper than the native Chinese corn. To prevent cheap American corn from flooding the Chinese market and putting the subsidized corn growers out of business, the government has instituted a tariff quota rate (TQR). In addition to this TQR, American farmers also face the Chinese value added tax (VAT), from which Chinese domestic farmers are excluded.
A tariff quota rate (TQR) is simply a tariff combined with a quota. The Chinese government lets its state-owned stockpiling companies and traders like Sinograin determine the amount of corn that they will need for the year’s stockpile. The government incentivizes these state-owned firms to purchase corn grown by the subsidized farmers by paying them for buying this corn, essentially giving them a discount. The amount of corn that is still required is imported and charged a lesser tariff, and any amount of corn more than that amount (the quota) is taxed with what is essentially a prohibitive tariff.
In 2010 and 2011, China relied on the US for 96% of corn imports. In 2012, that percentage rose to 98%. Apparently, Xi Jinping and the new Chinese leadership felt that they were becoming too reliant on the US, as 2013’s percentage dropped to 91%, and December of 2013 saw the US only supplying 76%.
How Did This Happen?
First, China has recently signed agreements to import corn from Argentina, Brazil, and Ukraine. In December of 2013, Ukraine exported 108,866 tons of corn to China. This amount composed the majority of the 24% stake the US lost.
Second, American corn growers have begun using a genetically modified strand of corn produced by Syngenta and known as MIR 162. China requires that all GMOs be registered both in their home country as well as in China. China has yet to accept this new strand of corn that the US is producing, and has been using this as a barrier to entry for over 600,000 tons of American corn since November of last year.
What Does the Future Hold?
Chances are, China won’t start accepting the new strand of corn until late Spring, when most of the quotas have already been filled. Furthermore, it is unlikely that after other countries like Ukraine have established a foothold within the Chinese corn market that the US farmers will be able to reestablish their previously held stake in the market.
Until the Chinese leadership decides that there are better methods to solving income inequality, or that corn self-sufficiency is not necessarily a critical element of national security, I don’t see much hope for the US corn export market.