China's Most-Favored-Nation Status: U.S. Wheat, Corn, and Soybean Exports

97-639 ENR June 23, 1997 China's Most-Favored-Nation Status: U.S. Wheat, Corn, and Soybean Exports Geo&ey S. Becker Specialist in Agricultural Policy Environment and Natural Resources Policy Division Summary U.S.-China Agricultural Trade Over the last decade, the United States usually has had an agricultural trade surplus with China, which has become an increasingly important--if variable--market (see figure ' On June 18, the House Ways and Means Committee clearcd but did not recommend H.J. Res. 79. Besides this resolution of disapproval, other alternatives that would change or modify MFN status for China, includmg making it permanent rather than year-to-year; are options. For ba&gound on China and hFh1,includmg its legislative basis and implications for trade, see CRS ,;:, Issue Brief 92094, Most-Favored-Nation Srarus ofthi. People$ Republic of China. $j$%& I). In 1993, it was the 21" leading market for L1.S. agricultural exports. In 1994, 1995. and 1996, it was one of the top 10 markets Further, the U.S. Department of Agriculture (USDA) forecasts that exports there will rise moderately in corning years ' Fig. I . Agricultural Trade Between the United States and China Calendar Years 1987-1996 Source: U.S. Ozparbnenl of Agiculture. Economic Research Service. U.S. exports to China have been concentrated among a few commodities (see figure 2). In 1993, most U.S. exports to China; measured by value, were wheat. In 1994, most U.S. exports were cotton, with significant but smaller amounts of wheat, and soybeanslsoybean products. In 1995 and 1996, cotton, wheat, and soybeans/soybean products again were leading exports, with soybeanslsoybean products showing major growth. Corn became a leading export item in 1995, but exports declined dramatically the following year after an unexpectedly good grain harvest in China. .4lthough not shown in figure 2, other areas of recent growth include animal hides and skins, which increased in value fiom about $1 3 million in 1993 to $107 million in 1996; and chicken meat, which increased from about $17 million in 1993 to about $59 million in 1996. Agricullural trade contrasts significantly with the overall L1.S.-China trade picture. The United States trade deficit with China grew from $2.8 billion in 1987 to $39.5 billion in 1996: a faster rate ofincrease than that of any other major U.S. trading partner. For details see CRS Issue Brief 91121: China-US Trade Issues. Fig. 2. U.S. Agricultural Exports to China, 1993-1996 Eeet mam - & ~ r o d u ~ . tOCotton , m ~ r h e rcorn& $ Millions 74.5 Cotton Soybeans & Products I 23.3 I t 2 1994 152.8 645.0 112 8 3.5 166.3 ,I I 1 1995 282.9 828 8 392.0 629.3 4W.8 1 I I 9 9 6 278.1 727.5 635.7 13.8 4 3 7 . L Source: L-S. Department of Agicul!xrp. Economic Rprearch Sewice. China's MFN Status and the C.S. Wheat, Corn, and Soybean Sectorss If the United States denied China bfFN status, and China chose to retaliate, one of its options might be to block some or all U.S. agricultural imports (although sanctions against imports other than farm and food products might also be possible). Over the last 4 years, wheat, com, and soybeans and soybean products accounted for more than half the value of U.S. agricultural exports to China. CRS requested that the W F A Group examine two scenarios. The first scenario assumes that during 1997-1999, China continues its status and annually imports wheat, corn,soybeans, and soybean meal at the highest levels that occurred over the past 4 years. Soybean oil imports were assumed at a somewhat lower (what W F A says is a more typical) level. The 6rst scenario is the baseline. The second scenario shows what would happen if, because of denial of MFN status, China stopped all imports of these commodities from the United States. Under the two scenarios, the WEFA Group examined exports, farm prices, income, and stocks for each commodity, through 1999. 'This section is based on estimates and analysis prepared by the WEFA Group for CRS. It is an update of an analysis WEFA prepared for CRS in May- 1996 (see CRS Rept.96-502 ENR, China's Most-Favored-Nation Srutus: US. Wheat, Corn, and Soybean Exports). The WEFA Group is an economic consulting firm located in Eddystone, Pennsylvania. Forecasts represent each comrndty's markehng year, begimiq June 1 for wheat. September 1 for corn and soybeans, and October 1 for soybean meal and oil. Because the baseline generally follows a period when these exports were enjoying robust growth (in fact, these farm exports tend to fluctuate depending on the size of China's own harvests each year), this first scenario may be considered optimistic. Moreover, the analysis does not predict that China actually would retaliate without MFN by cutting all U.S. imports, but projects what might happen if China did--which can be considered a pessimistic scenario. WEFA also notes that a one-for-one decline in U.S. exports worldwide does not occur if China retaliates. That's because world trade patterns would shift as China purchased wheat, corn; and/or soybean products from other countries, and the United States competes for the markets formerly served by those countries. The U.S. price decrease entices other global buyers to purchase from the United States. Nonetheless, under the scenario, U.S. exports would decline. Table 1. Wheat: WEFA Baseline (MFN) Projections vs. No-MFN Scenario* 199s 1997 1998 1999 1,241.2 1,241.2 0.0 989.7 989.7 0.0 1,043.0 954.8 -78.2 1.1230 1.0351 87.9 1,m.3 1,125.3 -95.0 376.0 376.0 0.0 461.3 461.3 0.0 556.9 614.4 57.5 7W.l 790.8 m.7 808.4 9317 129.3 4.76 4.76 0.W 4.28 4.28 0.W 3.71 362 4.09 3.44 4.15 3.28 4.15 1995 MFN US Wheat Exports (mil. bu.) No MFN US Wheat Exports (mil. bu.) Deence MFN US Wheat Imports (mil. bu.) Nu MFN US Wheat Imports (mil, bu.) Deence MFN US Wheat Endirg Stocks (mil. bu.) M MFN US Wheat Endirg Stocks (mil. bu.) Dtference MFN US A ~ r a g eWheat Farm Price ($mu.) M MFN US Aberage Wheat Farm Price ($/bu.) ~ifference~ 'Marketing years 1 Comparing the baseline to the no-MFN scenario, world exports of U.S. wheat would drop by 78 million bushels in 1997, 88 million bushels in 1998, and 95 million bushels in 1999--7% to 8% annually (table 1). However, U.S. wheat imports also would drop, by 15 million bushels in 1997, 17 million bushels in 1998, and 20 million bushels in 1999, as other countries shifted supplies to China, and world prices increased relative to U.S. prices. U.S. wheat ending stocks would increase and farm prices for wheat decline from the baseline by 9 cents per bushel in 1997 and 15 cents in each of 1998 and 1999. Table 2. Corn: WEFA Baseline (MFN) Projections vs. No-MFN Scenario* MFN US Com Exports (mil. bu.) M MFN US Corn Exporn (mil. bu.) 1 Difference MFN US Corn Ending Stocks (mil. bu.) M MFN US Corn Enbng S l x k s (mil. bu.) Dfirerce MFN US A w g e Com Faml Price ($/tu.) Nu MFN US A w p Corn Farm Price ($Ru.) DiKererce 'Marketing years 3.53 3.53 OW 2.79 2.79 OW 2.53 2.51 a02 242 2.37 005 235 2.30 0.05 The WEFA analysis projects that U.S. corn exports (world) would decline from the baseline by 55 million bushels in 1997, 63 million bushels in 1998, and 7 1 million bushels in 1999 under the no-MFN scenario--about 3% annually (table 2). Ending stocks do rise, but changes in the farm price are considered somewhat modest: a decline by 2 cents per bushel in 1997, and 5 cents in each of 1998 and 1999. Imports do not change, according to WEFA which points out that the United States historically provides 60-70% of world corn trade. As other suppliers shift their corn to China, the United States is expected to fill the markets left by those suppliers. Table 3. Soybeans: WEFA Baseline (MFN) Projections vs. No-MFN Scenario* MFN US Soybean Exports (mil. bu.) No MFN US Soybean Exports (mil. bu.) Difference MFN VS Veal and Cake Expats (mil. shoe tons.) No MFN VS Meal and Cake Expats (mil. short tons.) Difference MFN Oil Exprts (mil. Ibs.) No MFN Oil Exprts (mil. Ibs.) Differerne I 1 MFN US Soybean Erding Stocks (mil. bu.) No MFN US Soybean Erding Stocks (mil. bu.) Difference MFN US Awrage Soybean Fam Price ($/bu.) No MFN US A m g e Soybean Fann Price (5Ibu.) Difference MFN Soybean Oil: In Tanks, FOB Decatur, IL (Ucwt.) No MFN Soybean Oil: In Tanks. FOB Decatur, IL (Ucwt.) Differerne MFN Soybean Meal: 44% Protein, Decatur, IL ($/ton) No MFN Soybean Meal: 44% Pmtein. Decatur, IL ($/ton) 1 Difference 'Marketing years 0.03 OM) 3.15 0.41 0.43 1 U.S. exports and prices for soybeans, soy oil, and soy meal also would decline under the no MFN-scenario (table 3). Soybean exports would decrease by 24 million bushels in 1997, 28 million bushels in 1998, and 34 million bushels in 1999 (3% to 4% annually); farm prices would be 24 cents, 15 cents, and 8 cents per bushel below the baseline in those respective years. Soy meal and cake exports would decline half a million tons each year (8% to 9% annually), and soy oil would be 379 million pounds below baseline in 1997, 369 million pounds lower in 1998, and 349 million pounds lower in 1999 (18% to 20% annually). according to WEFA. WEFA noted that China has been purchasing more soybeans and meal in 1997 than in the past, when it was not a major market, and these higher purchases are assumed. China has been a steady oil customer (purchasing about 30% 0fU.S. oil exports) and would continue to be so under the WEFA baseline. Table 4. Effects of China's MFN Status on Net Farm Income* Mt Farm Income @il.$) MFN Mt Farm lnccme @I.$) m MFN Oflererxe 1 Tdal D i d W - n t Pay&* (bil.$) ' ICE3 1994 1995 1996 197 11998 1% 436 456 0.0 484 48.4 0.0 348 348 0.0 47.6 47.6 0.0 441 43.2 -1.0 443 425 41.2 395 -1.8 -1.7, 13.4 7.9 7.3 7.5 7.7 8.1 79 'Marketing years The decrease in farm prices for wheat, corn: and soybeans under the no-PvlFN scenario would lead to a decline in farm income from the baseline. Because the Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127) replaced traditional acreage reduction programs and income support payments (which were tied to market prices) with fixed transition payments to farmers, only cash receipts change (downward) under WEFA's no-PvlFN scenario. Net farm income (after expenses) declines from the baseline by $1 L i o n (by 2%) in 1997, $1.8 billion (by 4%) in 1998, and $1.7 billion (by 4%) in 1999. The WEFA analysis compares two relatively extreme scenarios for the wheat, corn, and soybean sectors: one where MFRTcontinues and exports remain at or near their highest levels of recent years; and another where MFN is denied, China retaliates, and accepts no U.S. imports of these commodities. However, as WEFA itself suggests, alternative scenarios might be just as likely. For example, Chinese grain imports in fact have varied widely from year to year, increasing when Chinese harvests are poor, and declining when they are good. WEFA observes that China probably will import a small amount of wheat this year and very little corn over the next 2 or 3 years. Also, denial of MFN might not necessarily cause China to impose sanctions on U.S. grain imports; other non-agricultural products might become targets. On the other hand, the WEFA analysis is short-term; it does not examine the longer-term effects. USDA has predicted overall agricultural trade with China to increase substantially over the next decade or more, suggesting that retaliatory actions against U.S. exporters, if taken, might have longer-term effects if other foreign suppliers can step in and develop strong commercial ties with China. crsphpgw