China is again promising that it has made structural changes to its tariff rate quota (TRQ) system to import corn, wheat and rice, but it’s still not clear if that’s the case as the new deadline approaches for the U.S. to tell the World Trade Organization if it agrees.
China is importing a lot of grain this year, and it appears the country will fill the TRQs as it has promised, but China has not publicly provided details of any structural policy changes to ensure that its large State Trading Enterprises (STEs) will not block imports as they have done in years past.
When China joined the World Trade Organization about 20 years ago, it agreed to erect a 9.64-million-metric-ton quota for wheat, a 7.2-million-metric-ton quota for corn, a 2.66-million-metric-ton quota for long grain rice and a 2.66-million-metric-ton quota for short and medium grain rice. China was not obligated to buy any of the grain from the U.S., but it was generally assumed U.S. farmers would benefit.
The problem was that China was not filling the TRQs and in 2016, during the waning days of the Obama administration, the U.S. filed a WTO complaint. China’s government-run buyers like Cofco were often not buying the grain and then not reallocating the unused TRQ allocations to smaller, private importers.
The WTO ruled in favor of the U.S. last year and China did not appeal the decision. Then, China pledged again to reform its TRQ process in the “phase one” trade pact that was implemented in February.
And then on Feb. 17 — just three days after “phase one” was initiated — China proclaimed in Geneva that it was ready to “achieve full utilization of both the STE and non-STE portions of each TRQ, consistent with market conditions” and that “all unused and returned TRQ amounts will be reallocated and penalties for non-use will be imposed.”
But the Office of the U.S. Trade Representative is not yet convinced, despite China’s dramatic increase in grain imports this year, government officials tell Agri-Pulse. The latest deadline — it’s been postponed twice already — for the U.S. to officially agree or disagree that China has made those policy changes is Nov. 9, and the USTR is poring over China’s promises, document submissions and purchases, the sources say.
As for the purchases, China appears to be in good shape.
The TRQ is for the calendar year, and China had already imported 4.6 million metric tons of corn through July — about a 31% increase from the same seven months last year — and the country’s imports have been maintaining a fast pace on strong demand, according to USDA data.
A lot of that corn is coming from U.S. fields. China made two record-setting purchases of U.S. corn in July that totaled about 3.1 million tons. Chinese buyers purchased nearly 6 million tons of U.S. corn.
Ryan LeGrand, U.S. Grains Council
“The U.S. Grains Council is pleased to see continued corn purchases by China,” Ryan LeGrand, the group's president and CEO, told Agri-Pulse. “Demand there is strong and U.S. sellers have a crop that is readily available and priced right to fill that demand.”
China is also quickly filling its TRQ for wheat, according to USDA’s Foreign Agricultural Service and U.S. Wheat Associates, although the latter stressed it would like to see more of that business go to the U.S.
“We do see good progress on China’s intent to fill its 9.6 million-metric-ton TRQ under its WTO membership,” said USW spokesman Steve Mercer. “The private wheat TRQ has filled and our information suggests the public TRQ contracts put the total up to more than 8 (million metric tons). Obviously, the market has re-opened to U.S. wheat farmers for now and that’s a good thing. We hope that going forward there will be more U.S. wheat and less Canadian, French and Australian wheat in the TRQ.”
FAS analysts in Beijing say industry data shows as much as 3 million tons of foreign wheat arriving in China during the second half of this year in as many as 10 shiploads from Australia, six from France, nine from Canada and six from the U.S.
So far this year, China has bought about 1.5 million tons of U.S. wheat, according to Mercer.
The FAS analysts say they are expecting China’s large state trading companies, which get as much as 90% of the original TRQ allocations, to use the entire allotment for wheat.
“In previous years, the portion of the wheat TRQ allocated to private firms, which is less than one million tons, was filled each year,” FAS said in a report out of Beijing. “However, the much larger portion of the TRQ allocated to state firms typically is underutilized. This year Cofco has said the company will use the entire state quota.”
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But if China’s state-owned enterprises use all their quota allocations, that makes it difficult to know if they would have reallocated any unused quota as they are promising they would do because of the WTO ruling, says David Orden, a professor at Virginia Tech's Department of Agricultural and Applied Economics.
David Orden, Virginia Tech
“China actually needs the grain, so Cofco isn’t conflicted about whether to import the grain or not,” says Orden. “At face value, the U.S. won the WTO case and the TRQs are going to be filled. But it’s muddied by the fact that China’s grain supply has changed to where there’s more need for the grain within their domestic market.”
In contrast to the situation now, it was clear in 2015 that China was not allowing its TRQ system to function the way it was supposed to under the WTO accession plan, says Orden. Back then, China did not need the corn but private importers wanted to buy it from the U.S. because of the price spread. Chinese prices were high because of subsidies, making U.S. corn very attractive, but private importers burned through their small quota and the government was not redistributing its unused quota.
The one TRQ China may not fill this year is for medium grain rice, say FAS and some analysts. The country is expected to import more than the 2.66-million-metric-ton quota for long grain rice, “while the medium-short grain rice TRQ will likely be unfilled once again,” FAS says.
That does not necessarily mean China is not honoring the WTO ruling, says Joe Glauber, a senior fellow at the International Food Policy Research Institute and former USDA Chief Economist.
“Just because you have a TRQ, doesn’t necessarily mean that you fill it,” he told Agri-Pulse. “We have a lot of tariff rate quotas that we don’t fill because we have ample supplies of those commodities.”
But there has been a breakthrough on China rice trade.
A relatively small shipment of 20 metric tons of U.S. medium grain rice arrived in the port of Xiamen, China, last week. That load of California rice, sold by the Archer Daniels Midland Company, was the first-ever commercial shipment of U.S. rice to arrive in China, according to the USA Rice Federation and government officials.
"We hope to see more buyers, both private and government, step forward to purchase U.S. rice,” said Bobby Hanks, chairman of USA Rice.
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