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By Ben Conner, Partner, DTB AgriTrade

Over the last several years, U.S. Wheat Associates (USW) and other industry groups have demonstrated how the policies of a few advanced developing countries are distorting world wheat trade and hurting farmers in the United States and other wheat exporting countries. Chinese government grain policy attracted special attention, leading to two dispute cases at the World Trade Organization (WTO), one on excessive subsidies and one on China’s administration of a tariff rate quota on wheat, corn, and rice. By April 2018, WTO dispute panels had sided with the United States in both cases.

Today, the official settlement process for one of those cases has entered the next phase. On July 26, 2021, the United States asked the WTO Dispute Settlement Body (DSB) for authorization to raise tariffs on imports from China due to its failure to comply with the DSB recommendations on its tariff-rate quota (TRQ) administration. China blocked the request, which puts the matter before an arbitration panel. Simultaneously, China made its own request for another panel to review whether it has brought its policies into compliance.

Very close observers of WTO processes might experience deja vu because this is exactly what happened with the case on China’s subsidies for the same commodities last summer.

The next step is for the WTO to form two panels to review the requests of both China and the United States. The compliance panel will look at whether China’s TRQ administration is now functioning on a “transparent, predictable, and fair basis … using clearly specified administrative procedures,” as required by the DSB recommendations. An arbitration panel will review the U.S. request to raise tariffs and decide whether its methodology is appropriate.

Two Reasons for the Challenge

Why is the U.S. government taking this step forward on this case? After all, China has been importing record amounts of wheat and corn since the signing of the Phase One deal (rice is notably lagging) that included implementation of the WTO recommendations on TRQs and subsidies. There are two main reasons.

Procedurally, the U.S. government had to continue extending the window for China to comply (they had already agreed to seven extensions), allow that window to expire with no further action and forfeit its right to suspend concessions, or request that right within 20 days after the window expired. It chose the third option.

Even though China has allowed higher imports, there is still little clarity on how TRQ shares are allocated and reallocated.

If the process remains opaque and unpredictable, China will not be in compliance with its TRQ obligations, which could prevent imported wheat with qualities supplementing Chinese domestic wheat from reaching the Chinese wheat millers who could use it most effectively. It is encouraging that the U.S. and Chinese governments are continuing this case as it will help resolve disagreements over whether China is in compliance with its TRQ commitments and exert pressure to fix problems with Chinese government grain policy permanently.

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By Dalton Henry, USW Vice President of Policy

Just over a year ago, on Jan. 15, 2020, the U.S.-China “Phase One” agreement was signed, leading to the eventual waiver of China’s retaliatory tariffs against U.S. agricultural products. Those actions opened the door again to the largest wheat consumer in the world after nearly two years in which U.S. wheat producers were all but shut out.

While the final results of the Phase One agreement will not be written for several months, early returns show the agreement paid off in a big way for U.S. wheat producers and their Chinese customers.

The Phase One agreement contained both specific purchase targets for agricultural commodities, and structural changes to China’s import systems. To date, much of the celebration and criticism has centered on the purchase targets — with very little attention paid to the structural changes that in some instances resolved disputes decades in the making.

One dispute of relevance to wheat had been at the center of a WTO case dating back to 2015 on China’s administration of their grain tariff rate quotas (TRQ). In a case the U.S. won in mid-2019, the WTO panel found that China had not administered the quota in such as way as to be “transparent, fair or predictable.” With the WTO case entering compliance at roughly the same time as Phase One agreement was being negotiated, U.S. negotiators included additional language in the agreement to build on the WTO case win and ensure eventual Chinese compliance. That language included stipulations making clear that Chinese “State Trading Enterprises” are subject to the same rules as private companies and specific transparency requirements to make it possible to evaluate Chinese compliance with the allocation and reallocation provisions that are so important to the proper functioning of their TRQ.

With those new rules in place, China is projected to import 9 million metric tons (MMT) of wheat this marketing year — a 25-year high, and almost double their previously highest TRQ purchases. China turned to U.S. wheat producers for a significant portion of that higher import volume. Since the signing of the Phase One agreement, U.S. wheat sales to China have totaled more than 2.8 MMT — nearly 90% above USW’s long-term pre-trade war average. Those imports have come from four different classes of U.S. wheat and helped meet the demand for U.S. wheat from China’s private flour millers. This import volume is likely to make China the fourth largest export market for U.S. producers in marketing year 2020/21, which ends May 31.

Chinese wheat buyers and flour milling managers visited the Wheat Marketing Center in Portland, Ore., in May 2019.

Chinese wheat buyers and flour milling managers visited the Wheat Marketing Center in Portland, Ore., in May 2019 during a Contracting for Wheat Value seminar sponsored by USW. USW/Beijing Country Director Shirley Lu (second from right) translates as Wheat Marketing Center Technical Director Dr. Jayne Bock (third from left) and a colleague demonstrated falling number analysis.

There are likely to be substantial trade negotiations between China and the United States in the coming months — something wheat producers should welcome. The Phase One agreement was never supposed to be an “end-all agreement” — in fact, when it was announced, plans were already in place to start on “Phase Two,” which were eventually scrapped after COVID-19 turned the world on its head.

With a new U.S. administration taking office this week, many in agriculture are watching closely to see which way the political winds will blow those discussions with China. While there may be a desire by some for a “fresh start” in the China relationship, the Biden administration would do well for U.S. agriculture to pick up where Phase One left off and continue to build on the tremendous export potential for China. President-elect Biden’s early statements and plans to keep tariffs in place on Chinese goods until they can be reviewed are an important first step in the right direction.

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Chinese trading concern COFCO, as part of a commitment to purchase U.S. farm products, for the first time in recent history purchased hard red winter (HRW) wheat in marketing years 2019/20 and 2020/21. COFCO has purchased about 672,000 metric tons (MT) of HRW for immediate sale to Chinese flour mills.

On behalf of the farmers we represent, U.S. Wheat Associates (USW) helps buyers and end users make the best use possible of U.S. wheat. Because HRW has not been commonly used in China, the USW team in China decided to sample and test the wheat purchased to demonstrate the usefulness of this versatile class.

A representative sample of HRW for the study came directly from a COFCO shipment taken at a port in southern China’s Guangdong Province.

Thoughtful Test Design

USW Technical Specialist Dr. Ting Liu thoughtfully designed the study. After referring to some customer inquiries and previous studies done on HRW for various regional markets, Dr. Liu and USW Country Director Shirley Lu selected several end use applications to test using different flour blends with HRW that could be measured for performance against locally produced control flours.

The USW team worked closely with local flour mills and the Sino-American Baking School (SABS) in Guangzhou to mill the HRW sample on a Buhler laboratory mill. They analysed the characteristics of single HRW flour and blends with flour from U.S. hard red spring (HRS) and soft white (SW) wheat. Nine end products were produced and tested, including pan and sweet breads, sweet rolls, hamburger buns, baguettes, croissants, pizza dough, noodles and steamed breads.

“After some very intensive work in the test bakery, the hard red winter single flour and blends cooperated so well our team decided to run some tests twice to confirm the stellar results they observed,” said USW Regional Vice President for China and Taiwan Jeff Coey.

Sharing Results

On Aug. 14, 2020, USW conducted an online presentation to share the test results with an estimated 200 contacts from China’s mills and wheat trading organizations. The presentation focused on measured HRW wheat and flour quality, along with results of the baking tests. USW also shared typical HRW quality data from the 2019/20 crop and initial information on conditions of the 2020/21 crop.

In opening remarks to the participants, Coey said “in terms of end use quality, I want to advise you to consider U.S. hard red winter a very reliable medium- to high-gluten strength wheat that should perform well for you in a variety of your most demanding applications.”

Sharing photos and data from end products produced with single and blended flours, USW Beijing colleagues informed Chinese customers about the excellent performance of U.S. HRW in an Aug. 14 webinar.

The USW Beijing team greatly appreciates the cooperation of: COFCO for the chance to sample an actual HRW shipment; the Wheat Marketing Center, Portland, Ore., for data from their previous work on pizza dough and noodle results; the SABS staff who helped USW conduct its tests before its regular course schedule started; and several Chinese flour mills who allowed USW to use their instrumentation to help complete the testing.

Additional specific results or the tests are available from the USW Beijing office and the regional USW office in Hong Kong.

 

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By Dalton Henry, USW Vice President of Policy

Each year, the Office of the U.S. Trade Representative (USTR) compiles and publishes the National Trade Estimates (NTE) report — a comprehensive report detailing barriers that U.S. exporters, including wheat farmers, face in markets around the world.

The first step in compiling the massive report (last year’s came in at 537 pages), is to collect feedback from the export stakeholders. U.S. Wheat Associates (USW) participates in this process each year by consulting with our offices overseas, talking to customers and researching trade barriers. That work culminated last week when USW submitted to USTR its compiled information, covering barriers in a dozen wheat importing countries.

Each year, many of the challenges highlighted in USW’s submission are issues that remain unresolved. This year, however, USW’s reports about on-going concerns with China and India were substantially changed.

The new report on barriers in China reflect the progress made since last year to bring China’s wheat import tariff rate quota (TRQ) and wheat subsidy policies into compliance with the government’s WTO commitments. This year’s report reflects the progress made in those areas as a result of the two WTO cases the United States won last spring, and China’s initial policy proposals to address those WTO rulings.

While the report shows some progress in the China section, it highlights a growing area of concern in India. India runs subsidy programs very similar to China, including minimum purchase prices and input subsidies. USW and USTR have demonstrated previously that India is well outside of its WTO limits in the level of government subsidies. Those subsidies have spurred excess production and subsequent wheat stocks that, once at a critical mass, India must subsidize to dump onto the world market. USDA projects that Indian wheat ending stocks will exceed 20 million metric tons (MMT) for 2019/20 — a level that historical data shows will likely result in India resuming wheat exports in the near future.

USW’s most recent NTE report can be found online here. It provides an overview of the key issues that USW works on every year and supplies USTR with up-to-date information on ongoing problems in wheat trade. In doing so, it fills a vital role in the enforcement of trade rules, something that U.S. farmers and their customers overseas want to see more than ever.

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By Dalton Henry, USW Vice President of Policy

While the trade policy headlines from the month of October have mostly been written about a possible “phase one” trade deal between the United States and China, much less has been said about the recently revised and published China Tariff Rate Quota (TRQ) rules for importing wheat and other agricultural products – though their impact could be nearly as significant for the affected commodities.

China’s TRQ rules were expected to be changed because of the World Trade Organization (WTO) ruling last April that found China had not complied with the terms they agreed to upon joining the WTO in 2001. TRQ’s govern the import of specified levels of products at a specific tariff rate that is lower than the global or Most Favored Nation (MFN) rate. Without TRQ, Chinese importers cannot profitably access the world market for wheat, as China’s MFN tariff is 65%. Restricted fill rates on TRQ over the past decades have proven to be the biggest constraint to growing market share for imported wheat in China. Today, imported wheat rarely exceeds 5% of mill use.

Upon accession to the WTO, China established a 9.64 million metric ton (MMT) TRQ for wheat, but that annual TRQ has never fully filled, despite world wheat prices and market conditions conducive to doing just that. When the United States filed the case at the WTO in 2016, they alleged that China had used a series of policies in administering the TRQ that were not “transparent, predictable or fair” and by doing so they, “…limited opportunities for U.S. farmers to export competitively priced, high-quality grains to customers in China.”

That limitation has had effects beyond the impacts on U.S. farmers though, as it also severely limits Chinese millers’ access to high quality wheat grown outside of China. In especially short supply in the domestic market are both soft wheats – often used for pastries and cakes as well at higher protein spring wheats, which are necessary for pizza crusts and hamburger buns.

When the United States won the WTO case, China agreed not to appeal and that they would come into compliance with the ruling by December 2019. That put the case on a relatively fast track to be completed, spanning just under three years since it was filed, much to the joy of U.S. wheat farmers who had long pushed for U.S. government action to force change in the TRQ administration.

U.S. Wheat Associates (USW) has been reviewing the new measures along with the U.S. government and Chinese flour millers. USW Regional Vice President for China and Taiwan, Jeff Coey, has found several of the new rules promising, especially the announcement’s stated goal for both the state and non-state portions of the TRQ to be fully utilized so long as market conditions allow it. Full utilization of both segments of the TRQ hasn’t previously been stated as a goal, leading to significant optimism about access to wheat supplies in 2020. Other positive changes include the allowance for more state-owned entities to apply for TRQ allocations and for non-state-owned entities to apply for the portion of the TRQ that was previously reserved for the state – essentially giving both groups the potential ability to import for the first time.

The TRQ changes and the need for quality wheat supplies may make China a significant wheat importer in 2020. If the changes are in fact implemented, and Chinese millers can respond to market signals, most of the 9.36 MMT TRQ should be used. The net result of that would be China becoming a top world wheat importer, even as they have adequate domestic wheat stocks on hand. From a quality supplier point of view, this opens many opportunities for the United States to provide technical expertise and assistance to our Chinese customers. While allowing those customers access to lower costs and wheat with specialized end-use applications that distinguishes U.S. wheat from domestic supplies.

As with so many issues in trade policy, only time will tell how effective these announced changes will be in allowing Chinese millers to source imported wheat. Both the U.S. government and U.S. Wheat Associates will be closely monitoring the changes to ensure compliance with the WTO ruling, but for now 2020 looks likely to start off on a better foot for U.S. producers and their Chinese customers.

 

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On Oct. 3, USDA announced that private exporting companies reported export sales of 130,000 metric tons (MT) of U.S. “white wheat” to China. That is welcome news for U.S. wheat farmers.

Chinese imports of U.S. soft white (SW), hard red spring (HRS) and hard red winter (HRW) wheat classes to China were trending up but abruptly ended when China implemented retaliatory tariffs on U.S. wheat and other agricultural commodities in March 2018. Private purchases of approximately 32,000 MT of HRS and 8,000 MT of SW have been the only sale since then.

“We are glad for this purchase ahead of the latest round of trade discussions between the U.S. and China,” said Doug Goyings, USW Chairman and a wheat farmer from Paulding, Ohio. “It remains to be seen if this is the start of a return to steady purchases by China. In the long run, that is what our farmers need along with good progress toward an agreement and continued support for the rules-based trading system that has given them access to more markets.”

USW Chairman Doug Goyings.

“Even though China has huge domestic wheat stocks, they were buying more U.S. wheat because they need it to meet the growing demand there for higher quality wheat foods, until their government retaliated against U.S. tariffs on Chinese goods,” said Vince Peterson, President of U.S. Wheat Associates (USW), the organization funded by farmers and the U.S. government to promote wheat exports. “So, we hope the new purchases signal a potential turn-around.”

USW President Vince Peterson.

Predictable access to markets is key for USW and their customers. Beyond the retaliatory tariffs that China has applied to U.S. commodities, China has been a challenging wheat importer historically. In recent dispute settlement cases at the WTO, the Office of the U.S. Trade Representative (USTR) demonstrated that, with respect to wheat, China’s government has consistently violated the trade rules it agreed to when it joined the WTO. The country’s domestic support for wheat substantially exceeds its WTO limits and it has never fully met its tariff rate quota for imported wheat. Those two policies have serious effects on farm gate wheat prices and trade. Going forward, USW is optimistic that China will eventually comply with the WTO rulings to facilitate more open trade in wheat.

Read more: U.S. Wheat Farmers Have Not Abandoned Customer Service in China

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Headlines on the trade front this week have direct bearing on the U.S. wheat industry’s desire to reaffirm our trade relationship with long-standing customers in Japan and Mexico, and to renew our relationship with customers in China. For now, at least, the news is positive.

U.S. Trade Representative (USTR) Ambassador Robert Lighthizer this week told members of Congress that the Trump Administration hopes to “wrap up” an agricultural trade agreement with Japan “later this year.” That is good news for flour millers in Japan, who do not want to continue paying incremental effective tariffs for U.S. soft white (SW), hard red spring (HRS) and hard red winter (HRW) relative to Canadian and Australian wheat under the new TPP-11 agreement. Repairing this potential breach with Japan is essential for wheat farmers who, with their partnership with the USDA Foreign Agricultural Service have invested countless resources for more than 60 years to serve the demanding Japanese flour and wheat foods industries.

Amb. Lighthizer also reached out to members of Congress who have expressed concerns about the new U.S. Mexico Canada Agreement on Trade (USMCA). In a description of his remarks, Agri-Pulse reported that the USTR “bent over backwards to assure Democrats on the Senate Finance Committee that he was hearing and addressing their concerns, both about enforcing labor rules in Mexico and about whether the trade pact would hamstring efforts to lower pharmaceutical prices.” At the U.S. Wheat Associates (USW) 2019 Mexico Wheat Trade Conference early this month, our colleagues and our customers in Mexico identified that supporting the USMCA will be our shared focus. They took another big step today with news that Mexico’s Senate on Wednesday passed the USMCA, making it the first country to ratify the new trade pact. Mexico’s imports are the foundation of farm family incomes throughout the southern and central U.S. Plains. Losing it because of trade policies beyond their control is unthinkable.

On June 18, President Trump raised expectations for some positive trade outcome from his planned meeting with Chinese President Xi Jinping at the upcoming G-20 summit. He said he had a “long talk” with Pres. Xi and, according to news reports, said “China very much wants to discuss the future and so do we.” In this case, “we” definitely includes U.S. wheat farmers who have been all but shut out of exporting wheat to China following the imposition of retaliatory tariffs in March 2018. Before then, Chinese flour millers and their baking customers were demanding more high-quality U.S. wheat to blend with domestic wheat. Now, China has replaced our wheat with competing supplies of Canadian spring wheat.

As Amb. Lighthizer said during his congressional testimony on negotiations with Japan, “I think we are making headway and we’re in a situation where we if we don’t make headway quickly, people will lose market share and never get those customers back.”

USW continues to support the need to enforce commitments made in multi- and bilateral trade agreements and, given this week’s upbeat news, look forward to a speedy resolution of these challenging situations.

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By Ben Conner, USW Vice President of Policy

It has been my pleasure these past four years to contribute content to this newsletter but, unfortunately, all good things must come to an end, as this will be my last Wheat Letter article as a U.S. Wheat Associates (USW) colleague. I am grateful especially to the half dozen (or so) regular readers of my articles. You may not like agricultural trade policy as much as I do, but it is a critically important part of this industry so thank you for working to understand it.

There are several issues I could have chosen to write about for this final article, but during my tenure at USW there has been no market as affected by trade policy issues as China. One of the first trips I took for USW was to Geneva, Switzerland, and the World Trade Organization (WTO) in 2015. I was there to discuss the market distortions caused by China’s domestic support policies, an issue first identified and pursued by my predecessors at USW. Coupled with those policies was an approach to tariff rate quota (TRQ) administration that had — to that point — dashed our hopes of China becoming the world’s largest importer of high-quality wheat (the TRQ quantity is for 9.636 million metric tons).

More recently, the trade friction between the United States and China has stopped virtually all imports of U.S. wheat in China. The additional 25 percent tariff on U.S. wheat imposed in response to U.S. tariffs has proven to be prohibitive. A market that could now be among our top import markets with steady demand of more than a million metric tons per year was reduced to practically nothing. As I noted before, trade policy matters to farmers and importers alike.

However, USW has always taken a long-term view and our trade policy goals with China are no exception. We encouraged the U.S. government to launch the domestic support and TRQ trade cases not due to any animus towards China, but because we want to be closer trading partners. What was holding us back were policies that are not consistent with WTO rules, a fact confirmed again in the TRQ case by the WTO dispute panel.

The WTO panel determined that China administered its wheat TRQ in a way that was not “transparent, predictable, and fair” using “clearly specified administrative procedures.” The panel sided with the United States on most of its arguments, and came to the following conclusions:

  • Basic eligibility criteria – It is not clear from China’s regulations what would qualify an entity to receive quota allocation for wheat. China admitted to the panel that it relies on the entity not being placed on the Credit China blacklist, rather than the published eligibility criteria, but this is not made clear to applicants.
  • Allocation principles – In determining how China allocates the TRQ, the panel found a disparity between its written principles and practice. TRQ quantities are allocated based on actual import performance, which supersedes all other factors, though China does not make this practice clear to applicants.
  • Reallocation procedures – China has two conflicting measure on reallocation, with one document setting out a first-come, first-serve method for reallocation, but a separate document referencing other allocation principles.
  • Public comment process – China accepts public comments on the TRQ allocation process, but it is not clear at all how these comments are used, and so China fails to meet its obligations to administer TRQs transparently and through clearly specified procedures.
  • Administration of STE and non-STE portions – 90 percent of China’s wheat TRQ allocation goes to state trading enterprises (STEs), i.e. COFCO. If a private entity does not use its TRQ allocation, it must return it to NDRC, but if COFCO doesn’t import 90 percent of the TRQ (it never has) there is no requirement to return unused quota. The panel found that COFCO’s unused quota should be returned and reallocated – so in 2018 COFCO should have returned 6.8 million metric tons (MMT) that could have been reallocated to non-STE end users.
  • Usage requirements – China also inhibits the filling of TRQs by requiring recipients to process in the mill specified in the application or be subject to penalty if the wheat was moved to another mill or sold to another company irrespective of commercial conditions. The panel’s view is that this would cause users to be overly cautious in their applications and import less than they would otherwise.

Bringing these and other policies discussed by the panel policies into compliance and removing retaliatory tariffs should allow China to grow into one of the largest and most consistent markets for U.S. wheat, increasing the availability of high-quality products provided by China’s food processing sector. This is the objective that USW will continue working towards long after I have handed the organization’s policy responsibilities to someone else and, more importantly, long after the trade tensions between our countries subside.

[Editor’s Note: Ben Conner is leaving USW to join DTB Associates, a Washington, D.C., firm providing consulting, legal and business services in trade, agricultural policy and legislation.]

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It is certainly true that the trade relations between the United States and China are in a difficult place. With the latest round of tariff increases announced and imposed, it is certainly possible to imagine that this conflict will not end soon. But we must all remember that negotiations are happening, and reworking the trading relationship between the two largest economies in history was never going to be easy.

In the meantime, U.S. Wheat Associates (USW) stands firmly by the following article by USW President Vince Peterson, “In Spite of Trade Conflicts, U.S. Wheat Farmers Will Not Abandon Customers in China,” published in “Wheat Letter” nine months ago.

USW remains engaged in keeping our once and future customers in China informed about the quality, variety and value of U.S. wheat in anticipation of future opportunities. Upcoming work includes a short course on contracting for wheat value, baking demonstrations in cooperation with the USDA’s Foreign Agricultural Service trade office in Beijing, and additional technical milling support activities in China. The commitment to service there will continue long after this trade conflict has ended. 

In Spite of Trade Conflicts, U.S. Wheat Farmers Will Not Abandon Customers in China

By Vince Peterson, USW President. Originally published August 21, 2018.

Chinese Vice Minister of Agriculture Han Jun recently acknowledged the decades of work that U.S. farmers have put into growing the Chinese market for U.S agriculture. He then warned that this market may never come back to where it was if the trade dispute with the United States continues much longer.

We can guarantee the Vice Minister, and the wheat food industry in China, that U.S. Wheat Associates (USW) and the farmers we represent will not turn our backs on our outstanding customers in China. We remain dedicated to our core mission in China, as we are everywhere in the world, to bring profitability and value to our customers even if that is temporarily more difficult today.

Presumably, Chinese leaders believe that U.S. farmers can persuade the Trump Administration to end this trade war with China. However, U.S. farmers have been clear with their own government that China’s predictable response to the conflict has harmed them and we have supported negotiations to resolve this conflict. While we agree that escalating rounds of tariffs are a bad idea, we also believe that many of the U.S. government complaints about China’s policies are valid.

In our experience, state disruption of the wheat trade has been an enormous problem, severely limiting opportunities and profitability for both U.S. farmers and our wheat food industry customers in China. Through opaque administration of its wheat tariff rate quota (TRQ), China has deprived its flour mills of an average of 6.5 MMT of imported wheat annually over the past decade. In fact, recent import volumes are still well below what China imported in the 1980s and early 1990s; that is, before it joined the World Trade Organization (WTO). One could be forgiven for thinking China was a more promising market before joining the WTO than after; almost entirely because of excessive subsidies to the domestic wheat crop in recent years, as well as tight limits on TRQ access. This is why the U.S. government, under the Obama Administration, initiated two WTO cases on these issues in the fall of 2016. The prosecution of those cases has been continued and pressed forward by the Trump Administration. We are highly supportive of this action.

The Chinese government should recognize that its many years of flouting international commitments and highly interventionist “state capitalism” have led directly to the present conflict. If China had lived up to the commitments made when it joined the WTO, it is highly doubtful that we would still find ourselves in this situation. If Chinese leaders want to avoid further conflict and bolster the international trading system that they claim to defend, China can first start behaving like a responsible economy and adhere to its trade commitments in both letter and spirit. Of course, we are urging the same from the United States, which must also approach China with clear demands and a path towards achieving them.

Nevertheless, we are confident that this trade confrontation will one day be resolved. In the meantime, we will continue to reach out to our customers and friends in China, to reassure them of our unfailing dedication to our work with them. Further, we will make the guarantee that, once this trade dispute is resolved and behind us, we will work harder than ever to continue earning their business as we chart a path, together, to build the commercial channels that hold so much promise for Chinese and American industries and people.

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By Ben Conner, USW Vice President of Policy

On February 19, 2019, the World Trade Organization (WTO) released the final report of the panel in the U.S. case alleging that China has not complied with its domestic support commitments on wheat and rice. While the panel disagreed with a few arguments, it agreed with the accusation that China was far out of compliance due to the operation of the market price support (MPS) program for certain commodities.

U.S. Wheat Associates (USW) believes it is important for its overseas customers and the farmers it represents to better understand why the United States brought this case to the WTO and how the panel reached its conclusion.

Most countries with sizable agriculture sectors provide some domestic support (subsidies or safety net programs) for farmers. The countries that negotiated the WTO Agreement on Agriculture (AoA) established disciplines for domestic support because they had experienced the price suppressing effects of foreign or, in some cases, domestic agricultural subsidies. The WTO members agreed to set limits on the types of support that could impact farmer’s production decisions and, thus, distort trade. A government subsidy that incentivizes the farmer to plant more wheat than barley is one example. On a large enough scale (such as across a country), that additional production can significantly suppress wheat prices for other wheat farmers who are not eligible for these subsidies.

Developed countries like the United States, Japan, and European states provided most agricultural subsidies at the time the AoA was negotiated. Over time, these countries either reformed their programs or have stayed within their limits. However, within the past decade, trade distorting domestic support has shifted significantly to developing countries, with China and India leading the way. Those countries are, in many cases, far out of compliance with their WTO commitments.

The U.S. government recognized that if any countries are allowed to flout WTO rules consistently, the incentive for others to follow the rules collapses. It also kills the potential for productive negotiations, since negotiating partners must be convinced that others will uphold their end of the bargain. Therefore, in 2016, the U.S. launched this case against China both to address the particular concerns in China and to demonstrate that the rules apply to all countries (Australia, Brazil, and Guatemala recently launched similar cases against India over its support for sugar production).

In the China domestic support case, the U.S. legal team chose to focus specifically on a measure called market price support (MPS) to demonstrate that China had breached its commitment on aggregate measurement of support (AMS). MPS sets a commodity’s floor price at which a farmer can sell to a government buyer instead of to a private buyer. This keeps internal prices artificially high and signals farmers to produce more of the supported commodity.

The AoA has a specific formula to calculate how MPS contributes to AMS: the quantity of eligible production multiplied by the difference between the annual support price and a fixed reference price established in the AoA. This was a legal case, so there were arguments about everything, but the most important question was what constitutes eligible production.

China’s argument was that eligible production is only the amount procured by the government. But the panel agreed with the United States, saying eligible production is the “amount of product which qualifies to be purchased from producers,” not the amount that is, in fact, purchased. The only limitations in Chinese rules were that the price supports only applied in six provinces (covering approximately 80 percent of production) and to wheat that met basic quality standards (99 percent of production in those provinces). In 2015, this was 103 MMT out of the 130 MMT produced. In its notification to the WTO for that year, China claimed only 21 MMT. Under that notification, China claimed it was complying; under the panel’s methodology, this quantity put China far out of compliance.

The 2015 support price was 2360 renminbi (RMB) per metric ton (MT) and the panel confirmed that the fixed reference price was 1698 RMB/MT. The difference between the two times the 103 MMT of eligible production equals 68 billion RMB, or 22.4 percent of the value of production. Since China’s WTO limit is 8.5 percent, China’s AMS for wheat in 2015 was nearly triple its allowed limit. This AMS figure only accounts for MPS – the panel did not review a suite of other subsidies available to Chinese wheat farmers that would likely increase the size of China’s AMS violation. The panel made a similar finding for rice and did not make calculations for corn due to technical reasons.

The United States and other countries have been arguing for years that China has a responsibility to bring its programs into compliance so that its farm production decisions are no longer based on artificial price signals or other incentives that violate China’s WTO commitments.

Now they – and thousands of wheat farmers outside China – have a WTO panel decision to back them up.