November 12, 2003



China Restriction On Soybean Imports Arouse Doubts From US Trade Officials


Two years after China entered the World Trade Organization, agreeing to open its markets to foreign goods in exchange for the right to sell more of its products around the globe, a simmering battle over soybeans illustrates why many countries now accuse Beijing of failing to live up to its side of the deal.


The case also underscores the difficult balancing act confronting China's leaders as they make trade policy: Protectionism benefiting one group often harms another by limiting the availability of goods at a time when China's relentless growth is spawning increased dependence on imports. In this case, higher incomes for 35 million soybean farmers are being paid for via higher food prices for the rest of China's 1.3 billion people.


In the central province of Anhui, one of China's poorest, people are now paying one-fourth more for pork and 10% to 15% more for oil than they were three months ago. Farther south, prices have climbed even steeper.


Though China is barred under WTO rules from imposing an outright quota on the quantity of soybeans that can be imported, U.S. officials and global trading companies contend that Beijing has effectively done so through other bureaucratic methods: Shipments have been delayed and barred outright through the manipulation of food-safety standards and arbitrary requirements for administrative permits. They say China is using the same strategy to limit the entry of foreign competitors in many other industries, such as banking, insurance and auto parts.


"Let's don't try and get cute and find different ways to put up nontariff barriers," said U.S. Commerce Secretary Donald L. Evans during his recent trip to China, adding his voice to a chorus of recent criticism from Capitol Hill, the American Chamber of Commerce and the U.S.-China Business Council. "We need to make sure that China understands that trade is a two-way street."


China has dismissed assertions that it is violating WTO rules, insisting that all restrictions on imported soybeans have been imposed for legitimate reasons of food safety. "China has strictly fulfilled its commitments," said Foreign Ministry spokeswoman Zhang Qiyue, speaking at a recent news briefing.


Some Chinese policy makers acknowledge that Beijing does use trade policy and other levers to protect farmers, which then makes China acting similarly as U.S., whom has been doling out agricultural subsidies for generations. In recent trade talks, developing countries stepped up demands that the U.S. slash its farm subsidies and tariffs.


"The United States clearly protects its farmers," said Ke Binsheng, chief of the Research Center for Rural Economy in Beijing, a government institution affiliated with the Ministry of Agriculture.


Likewise, China is intent on propping up incomes for its 500 million farmers. Its transition from communism to a market system has eliminated many government subsidies, and socialized health care and education, stoking rural discontent.


The plight of farmers is of great concern here in Heilongjiang province, where most of China's soybeans are produced. Northeastern farmers are particularly vulnerable to the imports that have accompanied the opening of China's markets.


Unlike warmer, coastal regions to the south, where some farmers now thrive growing specialty crops such as shitake mushrooms for shoppers in Japan, land-locked Heilongjiang endures a Siberian winter chill and sits far from ports. Northeastern growers depend on scarce rail cars to ship their crop to crushing plants on the east coast. In many cases, beans can be shipped to southern Chinese ports by tankers from the U.S. more cheaply and reliably than by rail from Heilongjiang. Chinese soybeans also are less valuable than those from North and South America because they have a lower percentage of oil.


But higher soybean prices have sowed trouble elsewhere in China, highlighting a problem besetting many economies making the transition from communism to the market. That is, while the market now determines prices for most goods, some are still influenced by the government. In this case, Beijing appears to have substantially miscalculated the demand for soybeans, analysts say.


In recent years, livestock producers have expanded production, taking their cue from surges in China's overall consumption of meat amid rising incomes. This has spawned the growth of a mammoth industry to crush soybeans into the meal used to feed livestock, attracting the investment of global conglomerates such as Cargill Inc. and Archer Daniels Midland Co.


Annually, China consumes about 33 million tons of soybeans, which equates to about 16% of global production, according to JC Intelligence. At current rates of growth, it would reach 50 million tons within five years. But China grows only about 16.5 million tons a year. Farming operations in the U.S., Brazil and Argentina have stepped in aggressively to make up the difference. For these countries, China has become the top export destination.


In the year ended in September, China imported about 21.4 million tons of soybeans, as indicated by the Chinese customs data.


China's soybean trade was opened up officially to foreign competition years before its entry to the WTO, but soybeans have nonetheless been a constant point of contention.


Two years ago, China shut down imports with the introduction of new food-safety standards for genetically modified soybeans, which are bioengineered to require less herbicide to control weeds. Under rules drafted in June 2001, imported shipments of such beans required safety certification from Chinese authorities.


However the government did not produce accompanying rules on ways to get certification.


Genetically modified crops have become controversial around the world, forcing many governments to wrestle with questions of whether and how to regulate them. Nonetheless, genetically modified soybeans are widely consumed, and China itself invests aggressively in biotechnology. Thus, U.S. and South American trade officials construed the new measure as an attempt to use a valid area of regulation, food safety, as a way to protect local farmers.


Last year, China's Ministry of Agriculture agreed to issue "interim" safety certificates while it completed its own standards. But these certificates have expired several times, requiring negotiated extensions and making the legality of future shipments always questionable.


This past summer, soybean imports were blocked temporarily over a different issue, claiming that some shipments violated "phyto-sanitary" rules aimed at preventing the import of foods tainted by fungus called phytophthora that could damage China's crops. American officials acknowledge that some of this fungus was indeed present, but add that it is endemic to China, undercutting claims it constitutes a grave threat.


The latest batch of interim safety certificates was set to expire September 20, but the new ones weren't issued until the first week of September. Without a valid safety certificate, an importer couldn't apply for a second required piece of paper -- an "inspection permit" from the General Administration of Quality Supervision, Inspection and Quarantine. This permit was required to gain a mandatory phyto-sanitary inspection upon arrival.


Even after importers applied for this permit, they had to wait as long as a month to receive it, then another several weeks before it became valid. Crushing plants were barred from entering into contracts to buy beans until they had these required documents in hand.


"It's nonsense," said Phillip Laney, China director for the American Soybean Association. "You simply can't do business that way."


Most plants opted to simply break the rules, continuing to sign contracts to buy beans without the required paperwork, several executives said.


Importers and American trade officials argue that the real trigger for the recent conflict was China's discovery of a surge of imported soybeans over the first half of the year.


"They panicked," Mr. Laney said. "There is clearly some sort of secret policy quota the quarantine people must enforce. They are using all these threats to intimidate people into not bringing in soybeans."

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