China is one of the top importers of agricultural products in the world, but it has non-tariff measures that prevent its imports from growing even larger. Economic theory suggests that a country would import products when foreign prices are lower than domestic prices, decreasing domestic prices and narrowing the “wedge” between domestic and international prices. In a newly released USDA Economic Research Service (ERS) report, eight agency economists examine China’s import market potential using a price wedge approach—the difference between domestic and imported prices—for commodities that are imported by China.
“China imported more than $157 billion of agricultural products in 2020, including more than $35 billion from the United States, yet China appears to remain short of its full import potential, especially for certain commodities,” noted the economists. “Strong demand and wide differentials between the prices of commodities in China and imported commodities signal that China could import more.”
For the study, the economists estimated the impact of removing these barriers for the four highest wedges using a global economic model. They discovered that domestic prices in China exceeded foreign prices by large margins for the four commodities considered, as follows: pork (213%), beef (58%), corn (64%) and wheat (42%).
Two scenarios were formulated to provide examples of how removing barriers could affect imports. The first one was a short-run scenario (i.e., a year) where production and trade responses were somewhat limited as resource mobility is restricted. The second scenario was a medium/long-run timeframe (i.e., 5–10 years) where agricultural producers could shift land, labor, and capital.
For beef, the short-run scenario indicated a 25.2% increase would result in China’s imports, while a 43.6% increase would occur in the medium/long-run scenario.
For pork, the economists said the large price wedge implies substantial constraints on imports, and the model estimates triple- digit increases in China’s imports (117% for the short run, 402% for the medium/long run).
“China’s pork prices were unusually high during the 2020 base year, so we also consider smaller price wedges from more typical years. But even these smaller price wedges suggest double-digit increases in imports are possible if trade barriers are eliminated,” the economists noted.
The short-run increase in China’s corn imports was 12.5%, while the medium/long-run scenario showed a 90.9% increase. The economists explained that this would exceed China’s tariff-rate quota (TRQ), with imports beyond the quota subject to a 65% tariff. As such, if the over-quota tariff is applied, results could be overestimated, they said.
“For 2021, China’s imports exceeded the quota, and the over-quota rate was not applied.”
China’s wheat imports were estimated to increase by 48.2% in the short run and 248.9% in the medium/long run. Like corn, wheat has a TRQ, and imports could be constrained by the high over- quota 65% over-quota tariff, they added.
Results prove that removing the price wedges could lead to more imports into China, the economists suggested. “Benefits would be widespread, increasing sales for producers in the United States and other exporting countries and yielding lower food prices for China’s consumers.”
The full USDA report can be accessed here.