grain versus food: a hidden issue in china's food policy debate

Pergamon World Development Vol. 26, No. 9, pp. 1641-1652, 1998

0 1998 Elsevier Science Ltd All rights reserved. Printed in Great Britain

0305750~98/$19.00+0.00 PII: SO305750X(98)00078-3

Grain Versus Food: A Hidden Issue in China’s Food

Policy Debate’

FENG LU Peking University, Beijing, People’s Republic of China

Summary. - The paper examines the likely pattern of China’s food trade in the future should China’s food trade policy be adjusted to accommodate its comparative advantage. Differing from the common perception that China’s overall food sector will follow the path of grain trade and face an ever-growing trend of net imports, this study has found an evolving pattern of exchanging food for food in China over the last 15 years. The pattern is in part characterized by strong export expansion of selected food products such as vegetables and fruits, aquatic products, etc. The economic rationale behind the pattern is examined through a comparison of relative costs among alternative food products in China. The policy implications of the study are discussed. 0 1998 Elsevier Science Ltd. All rights reserved

Key words - Asia, China, food trade, food policy, grain self-sufficiency

1. INTRODUCTION

China has been acclaimed for its ability to feed over 20 percent of the world’s population with only 7% of the world’s arable land. Nevertheless, as industrialization has gathered full steam over the last decade or so, there is evidence that traditional emphasis on self-sufficiency in grain may eventually become an undesirable policy. As a result, the prospect of China’s further integra- tion into the world food system has attracted much research interests and even become news headlines in recent years.

Previous studies on this subject have focused exclusively on China’s future grain, demand, supply and import requirement- whrle paying little attention to other food products. There seems to be an implicit assumption that the future trend in China’s food trade as a whole will coincide with that of its grain trade. The argument has been made persuasively in many previous studies that there is likely to be a declining trend in China’s comparative advantage in grain production as a result of rapid economic growth. This has often led to further speculation that net imports for China’s food sector as a whole will also increase. Moreover, it has also been suggested that China’s net import of food can be financed by foreign exchanges generated by growth of exports on labor-intensive manufactured products over which China has a comparative advantage.

Bearing in mind that the grain problem has always been a central issue in China’s food policy, the validity of this implicit assumption is questionable. A major limitation of this conventional view relates to its oversight of the hetero- geneity of the food sector. As we know, the food sector covers a host of diversified products which vary in factor proportions and cost structures. Given the factor endowment of China, comparative advantage and competitiveness for different food products are likely to differ. Though China’s grain imports are likely to increase as a result of a decline in the comparative advantage of domestic activity, it is not necessarily true that other major foodstuffs will have their competitiveness eroded and become big net importers at the same time, and/or to same extent. Even in a period of rapid structural change and under a liberalized trade policy environment, there may well be a possibility for certain food products to maintain or even strengthen their competitiveness while the ratio of self-sufficiency for grain and other food items declines.

This paper investigates the likely pattern of China’s food trade in a liberalized trading environment. I begin by examining the assumption against the available empirical evidence. I examine the evolving food trade pattern not only for mainland China since 1980 but also for Taiwan over the last three decades or so. Taiwan’s experience is included because its structure of factor endowments is similar to mainland

1641

1642 WORLD DEVELOPMENT

China’s before its rapid industrialization in the 195Os-1960s. Consequently, its food trade experience during the period of economic transformation is useful in examining the validity of the implicit assumption. What emerges from the data is a remarkably similar pattern of exchanging food for food across the Taiwan Strait rather than steady decline of the self-sufficiency ratio for all food products. The economic causes of the observed food trade pattern are then examined mainly through a comparison of the relative costs of alternative food products in China. Finally, the policy implications of the study are drawn.

2. STRUCTURAL PATTERN OF FOOD TRADE DURING A RAPID

INDUSTRIALIZATION: THE EVIDENCE

(a) Taiwan’s experience

To place the evolving pattern of China’s food trade in context, it is useful to look at Taiwan’s experience. The relevance of Taiwan’s experience is obvious since Taiwan too was a densely populated economy before its rapid industrialization. Taiwan’s food trade pattern over the last decades may suggest potential trends for its mainland counterparts (Gamaut and Ma, 1992).

Taiwan has experienced dramatic economic transformation over the last four decades or so. Its per capita GNP increased from US$197 in 1955 to US$12,439 in 1995. The agricultural share of GDP fell from 47.7% to 3.5% over the same period (Shei, 1983; Asia Pacific Economic Group, 1996). At an early stage of its economic development, Taiwan was a small open economy with abundant labor and scarce cultivated land in relation to the rest of the world. According to

the conventional view, there should have been a strong tendency for the comparative advantage of Taiwan’s food sector to decline as a result of rapid industrialization. This prediction is in part borne out by the massive increase in net imports of cereals and animal foodstuff throughout the period. Starting as a small net exporter in 1965, Taiwan turned into a net grain importer in the 1970s (Table 1). Its net grain imports per annum increased to almost US$l billion in the 1990s. Dairy products and animal foodstuff were also registered as major net import foodstuffs. Mainly due to the massive import of cereals, Taiwan’s overall food self-sufficiency ratio measured in terms of calories declined from 115.7% to about 40% in 1990 (Lin, 1993).

These facts tell only one side of the story. Taiwan’s food exports also expanded enormously. Remarkably, in value terms, Taiwan remained a net exporter for the food sector as a whole, albeit by a shrinking amount, until the 1990~~. Three groups of food items played the leading role in promoting food export. They are meat and preparations (SITC: 01); aquatic products (03) and fruits and vegetables (05) (Table 1). Fruits and vegetables generated over US$lOO million net export revenue as of the mid-1960s the beginning of economic take-off in Taiwan. Nevertheless, their net export revenue peaked in 1980 and declined afterward, even leading to a considerable deficit in 1994. Fish and preparations showed significant net exports in the 1970s. Since then, net export of fish and preparations has increased strongly and reached the record level of US$l billion in 1990. The growth of net exports, however, seems to have peaked in recent years. Finally, meat and preparations are the latest foreign exchange generator in the food sector. Although not a significant net exporter until the early 1980s the

Table 1. Structure of Taiwan’s food trade (selected years from 1965-1994, unit: million VS$)

Year Food total Net exportsa

Export Import Meat and Fish and Fruit and Cereals and Dairy products Feeding preparations preparations vegetables preparations and eggs stuff (SITC: 01) (SITC: 03) (SITC: 05) (SITC: 04) (SITC: 02) (SITC: 08)

1965 229.63 45.85 0.02 0.76 109.99 9.71 -4.94 -0.57 1970 262.54 129.3 5.34 21.12 158.44 -91.22 - 13.43 -9.77 1975 819.88 535.42 -3.25 141.4 258.01 - 368.93 - 48.45 - 45.36 1980 1691.81 1204.34 31.71 494.31 570.98 -645.2 - 109.16 - 114.06 1985 1715.91 1327.35 167.2 730.74 427.41 - 649.75 - 165.57 - 158.22 1990 2660.3 2527.31 526.85 1022.14 220.02 - 984.53 -221.19 - 267.03 1994 3900.94 3422.65 1226.33 952.85 - 42.73 - 937.59 -250.17 - 257.73

aNegative sign implies net imports. Source: UN trade data, International Economic Databank, the Australian National University.

GRAIN VS. FOOD 1643

growth rate of their net export was the highest in the food sector over the last 15 years or so. It is, by far, the largest net exporter in Taiwan’s food sector in recent years.

The evidence clearly demonstrates that Taiwan’s food trade pattern during rapid industrialization was shaped not only by grain imports but also by massive exports of other food products. Several groups of food products enjoyed competitiveness in the world market throughout the period. The cycles of growth and decline in competitiveness for the three export products indicate a dynamic process of rural structural adjustment in Taiwan. Taiwan’s food sector did not lose on all grounds during the period of its rapid industrialization. Instead, what we have observed is a dynamic evolution of exchanging food for food over the last three decades or so.

(b) Evolving pattern of China’s food trade

Mainland China came into the fast lane of economic growth from the late 1970s when it embarked on program of economic reform and opened up to the outside world. In 1995, GDP was almost five times higher than in 1978 and the average growth rate per annum during the period was 9.86% (China Statistical Bureau, 1996). The share of the agricultural sector in GDP declined from 32.4% to 13.3% (Asia Pacific Economic Group, 1996; p. 133). The share of food exports as a percentage of total

exports fell from 16% to about 7% in the same period.

Table 2 presents the evolution of China’s food trade over the last 1.5 years. There are structural features that resemble Taiwan’s experience. On the import side, grain has been the most important item. The share of grains and preparations in total food imports was 59% and 84% in 1995 and 1980, respectively. Though there was a clear increasing trend in China’s food imports, mainly pushed up by imports of grain and sugar, China has developed its position as a net exporter of food in value terms during the period. Starting from the position of an almost balanced trade in the food sector in 1980, net food exports were worth US$2.3 billion in 1985 and reached the peak level of US$3.8 billion in 1995. The reason was simple: in some competitive food products export expansion has been significantly larger than the growth of food imports during the period.

Among 10 categories of two-digit SITC food products, six were net exporters in 1995. All the six groups were net exports in 1980 and retained at the status throughout the period. Neverthe- less, the growth rates among them differed substantially. Apart from the category of “others” (09) that covers diversified items, live animals (00) and coffee, tea etc. (07) have been traditional food export products for China and their export only achieved modest growth rates over the last 15 years. Their average growth rate per annum was 1.8 and 3.1%, respectively. On the other hand, three groups of food products,

Table 2. Structure of food trade in mainland China (selected years from 1980 to 1995, unit: million lJS$)

Commodity (SITC) 1980 1985 1990 1995

Export Import Export Import Export Import Export Import

Live animals ::I 384 5 304 18 430 14 503 37 Meat etc. 361 1 448

3; 791 54 1371 97

Dairy products etc. ii;;

71 5 57 55 81 61 61

Fish etc. 380 13 283 44 1370 102 2853 608 Cereals etc. I::; 423 2458 1065 982 614 2353 285 3629

Vegetables and fruits 746 48 825 52 1759 83 3342 184

Sugar etc. I:;; 221 316 79 274 317 390 379 936

Coffee, tea etc. 328 56 435 40 534 30 516 15 Animal foodstuff etc. (OS) :: l4 241 83 623 182 351 421 Others (09) 2 66 23 107 46 292 82 Total food (0) 2985 2927 3803 1553 6609 3335 9954 6131 Total food as % of total trade 16.47 14.62 13.9 3.68 10.64 6.25 6.69 4.64

Sources: Data for 1980, 1985 and 1990 are from “China Foreign Economic Statistics 1979-1991” (1979-1991 Nian Zhongguo Duiwai Jingji Tongji Daquan), Compiled by Department of Trade and Materials Supply, State Statistics Bureau (Guojia Tongjiju Maoyi Wuzisi), published by China Statistical Information and Consultancy Service Center (Zhongguo Tongju Xingxi Zixun Fuwu Zhongxing), 1992. The data for 1995 are from General Administra- tion of Customs of the People’s Republic of China: “China Monthly Exports and Imports (1995, p. 12)“. Beijing.


meat (Ol), aquatic products (03), vegetables and fruits (05) enjoyed enormous export expansion over the period. The annual growth rates for the three groups were 9.3, 14.4 and 10.5%, all higher than the average annual growth rate of 8.4% for total food exports.

The different growth rates brought about significant changes in the profile of China’s food exports during the period. For example, in 1980 the magnitude of exports of aquatic products (03) was similar to that of live animals (00) and coffee and tea etc. (07), whereas in 1995 the former was more than five times greater than the latter two groups. The position of vegetables and fruits (05) as the leading export products in China’s food sector was further strengthened: its share in total food exports increased to one-third in 1995 from one-quarter in 1980. Due to higher growth rates of these three products, the share of the “big three” in total food exports increased to over 75% in 1995 from about 50% in 1980. This evidence indicates a similarity between mainland China and Taiwan: China’s food export expansion since 1980 was mainly driven by three groups of food products which made similar contributions in Taiwan in earlier decades.

The export specialization index4 of selected food products in 1980 and 1994 are reported in Table 3. In 1994, the index for aquatic products and vegetable and fruits are 1.95 and 1.86. For the food sector as a whole the index is 1.2, implying an overall comparative advantage with the rest of the world according to a conventional interpretation of the index. In comparison with 1980, the index for these products as well as for the total food sector has been reduced significantly over the last 15 years. For example, the index for vegetables and fruit products declined by almost half and that for the total food sector decreased one-third over the period. But the decline of the index for these two food products

is mainly caused by the much faster growth rate for China’s overall exports in relation to the rest of the world. The market share of these products increased substantially (from 2.81% to 5.82% for aquatic products, and from 3.37% to 5.56% for fruit and vegetables). The growth in the world market share indicates that the competitiveness for these food products was actually strengthened in the period.

Most of China’s food exports go to its rich neighboring economies (Table 4). Japan and Hong Kong are by far the most important markets for China. Hong Kong’ has been a traditional food export market for mainland China. The expansion of Hong Kong’s food export market, however, is much slower than other markets such as Japan. In 1994, Japan’s food imports from China were US$4.65 billion, almost half of China’s total food export and about ten times as high as in 1980. Two products played the leading role in expanding Japan’s food market: aquatic products (03), and vegetables and fruits (05). The export value of the two groups reached more than US$3 billion in 1994 from about US$300 million in 1980.

The second group of major importers of China’s food products include other newly industrialized economies (NIEs) plus Malaysia. In 1994, the value of South Korea’s imports of aquatic products (03) and vegetables and fruits (05) from China was about US$lOO million for each. Its total food import bill from China reached over US$900 million that year. Taiwan has been a traditional exporter in aquatic products and vegetables and fruits. The competitiveness of its domestic production in these products, however, has been eroded in recent years as a result of increases in wage and land prices, shortages of labor, and appreciation of Taiwan’s currency. There is evidence that mainland China has a comparative advantage

Table 3. The export specialization index and the world market share of selected food products for China (1980, 1994)

Commodity (SITC) Export specialization index"

1980 1994

World market share

(%)

1980 1994

Live animals and meat (00) and (01) 2.95 0.78 2.7 2.3 Fish and preparations (03) 3.04 1.95 2.8 5.8 Vegetables and fruits 3.65 1.86 3.4 5.6 Total food 1.82 1.21 1.7 3.6

“The index is defined as the ratio of the share of export on certain commodity in total export for one country to the same share for the whole world. According to a conventional interpretation, value of the index over unity implies comparative advantage for the commodity and country in question in relation to the rest of the world, and vice versa. Source: UN trade data, International Economic Databank, the Australian National University.

GRAIN VS. FOOD 1645

Table 4. Main importers of selected food products from China (1980, 1994) (unit: million US$)”

Country or area Total food (0) Meat etc. (01)

1980 1994 1980 1994

Fish etc. (03)

1980 1994

Fruit and veg. (05)

1980 1994

Hong Kong 1096.24 1775.2 168.1 201.86 127.1 289.26 215.42 516.72 Japan 465 4652.6 59.19 347.16 181.99 1683.11 147.5 1436.92 South Korea 913.89 8.49 110.29 119 Taiwan 207.31 5.8 53.13 29.21 Singapore 138.81 297.74 14.71 27.69 5.17 25.8 70.9 174.46 European community 473.91 985.09 93.64 115.91 24.32 128.4 241.86 458.82 United States 65.18 589.85 1.24 1 6.91 283.68 27.68 155.29

“Blank space implies either data not available or amount less than 1000 US$. Source: UN trade data, International Economic Databank, Australian National University. Taiwan’s data are from General Administration of Customs of the People’s Republic of China: “China Monthly Exports and Imports” (1995; p. 12), Beijing.

over Taiwan in these food products. For example, the costs in raising prawns and hogs (two main competitive food products for Taiwan) on the mainland were only about 37% and 35% of those in Taiwan in recent years (Qiu and Duan, 1992). Taiwan started to import a significant amount of these products from mainland China in recent years. The trend may continue should the political relationship across the Strait improve in the future.

The United States and the EEC are traditional grain exporters to China. On the other hand they are also important food importers from China. China’s food exports to the United States increased from US$65.1 million in 1980 to US$589.9 million in 1994 at an average growth rate of 17% per annum. The two competitive products (aquatic products, fruits and vegetables) accounted for 74.4% of exports. In view of the strong competitiveness assumed by the United States in the agricultural sector as a whole, particularly in grains, China’s export expansion of the above foodstuffs into the US market clearly illustrates the point that it is possible for China to increase its exports of some food products while importing other food products, especially grains, during the course of rapid economic growth.

3. COMPARATIVE ADVANTAGE AND CHINA’S FOOD TRADE PATTERN

The evidence from China suggests that in terms of world market competitiveness, different groups of food products showed different trends over the period of rapid structural transformation. The observed phenomenon can be explained on the basis of economic analysis. International trade theory suggests that the

world trade pattern of a commodity is primarily determined by the relative costs in delivering the commodity to the market by participant economies. The comparative advantage is mainly influenced by the factor endowment that an economy assumes in relation to its trading partners. According to the standard theory of comparative advantage, under various assumptions (including no distortions to producer incentives), a country tends to export commodities which require relatively intensive use of the country’s relatively abundant factors of production’.

(a) Factor intensity and cost structure for different food commodities as farm products

It should be noted that the food commodities (vegetables and fruits, aquatic products, meats) whose exports have expanded since 1980 are not purely farm products. Production of these foodstuffs often also involves manufacturing activities with farm and manufactured value- added. In this section, I examine factor inten- sities and cost structures for these food products at the stage of farm activity. Similar issues for the manufacturing stage are dealt with in the following section.

The fundamental feature of China’s factor endowment for food production is a serious shortage of arable land and capital along with an abundance of labor. It is highlighted by the fact that China has to feed 22% of the world’s population with only 7% of the world’s arable land’. On the capital side, in spite of its high economic growth in recent years, China remains a low-income economy facing capital shortages. One noteworthy point here is that China’s agricultural factor endowment is influenced by seasonal patterns of labor demand. In a typical


rural area of China, grain production has been the dominant activity. Labor demand for grain production is highly seasonal. As a result, shortages in labor supply can be observed in the relatively short peak seasons, whereas in long off-peak seasons there is a large labor surplus. To the extent seasonal labor surplus exists*, the opportunity cost of labor at the off-peak season is extremely low. There is a strong incentive for peasants in less developed rural areas to under- take economic activities in the off-peak season, even though the return may be relatively low.

On the basis of the factor endowments, three simple predictions may be made with reference to the comparative advantage or competitiveness of alternative economic activities in China’s rural areas. Among alternative activities requiring high-quality land, other things being equal, those that make intensive use of labor tend to have a comparative advantage or market competitiveness. Second, other things being equal, those activities that only require marginal land of inferior quality or no arable land tend to have a comparative advantage or competitiveness. Third, those activities that can utilize surplus labor in the off-peak season tend to have a comparative advantage or competitiveness. Given these predictions, we can examine factor intensity and cost structure for different foodstuffs as farm products in order to investi- gate whether there is an economic rationale underpinning the pattern of exchanging food for food observed in China over the last 15 years.

To highlight the issue, let us first compare the production costs between grains on one side and vegetables and fruits on the other. Production of

these food products involves traditional agricultural activities. Though different skills are needed for cultivation of grain, vegetable and fruit, the difference in terms of technology among them is not substantial. These skills can be relatively easily acquired by peasants through traditional learning-by-doing, provided there are sufficient incentives for them to do so. There is a substantial difference in labor intensity, however, between production of these two food products. The labor requirement per unit of land for vegetable and fruit production is much higher than that for grain. In 1994, according to China’s cost survey data, average labor input require- ments per mu for vegetables and fruits are 61.5 and 67.1 working days, respectively, whereas that for various grain crops is only 13.6 days (Table 5). The labor demand per unit of arable land for vegetables and fruits was about 4.5 times higher than a similar measurement for grain. The data indicate that given the current technology for agricultural production, vegetable and fruit activities make much more intensive use of labor than does grain production. This tends to give a comparative advantage to China’s vegetable and fruit production.

We cannot compare the activities involved in producing aquatic products and meats with those of grain in terms of labor intensity relative to land because aquatic and meat products do not require arable land as an input. Nevertheless, the data indicate that production of meat and aquatic products such as fish, prawn etc. in China is labor intensive. As shown in Table 5, raising one hog requires an average 20.5 working days while cattle require 57.5 days. Assuming 300

Table 5. Cost structure for selected food products in China (year: 1994, unit: Chinese yuan)”

Labor cost Total output Value

Working days Values

Grains (per mu) 13.61 75.26 312.49 Vegetables (per mu) 61.52 355.59 1915.51 Fruits (per mu) 67.13 406.93 2252.6’7 Hog (per head) 20.53 128.31 840.26 Beef cattle (per head) 57.54 295.76 2378.16 Freshwater fish (per mu) 30.9 278.1 2278.97

“Data for grains are the average figures for six grain crops: paddy, wheat, corn, sorghum, millet and soybean. They are the survey data covering 1356 counties, 9283 farm households and 67016 mu. (Mu is the area measurement used in China. 1 mu = 0.0667 ha.) Data for vegetables are the average measurements for 14 vegetables. The survey data cover 359 counties, 940 farm households and 3325 mu. Data for fruits are the average for apple and orange. Survey data for apple cover 73 counties, 208 farm households and 3523 mu while those for orange cover 37 counties, 181 households and 856 mu. Data on hog and beef cattle refer to those raised by peasant households. The data sample on hog covers 327 counties, 1664 households, 8692 hogs while that on beef cattle covers 21 counties, 72 households, 374 cattle. Fish data cover 76 counties, 243 households and 60427 mu of water. Source: State Planning Commission et al. (1995).

GRAIN VS. FOOD 1641

working days, about 15 hogs or five cattle will keep him or her fully occupied, given the current level of technology in the sector. Of aquatic products, freshwater fish per mu, on average, require 31 working days.

Apart from the intensive use of labor, two additional factors are important to the potential competitiveness of products such as meat, fish, fruit and vegetables. First, as mentioned above, production of meat, fish and fruit either does not require arable land or requires only marginally arable land. This simple fact has crucial implications. To the extent that the argument on the comparative disadvantage of China’s grain production has been made on the basis of China’s scarcity of arable land, it does not apply to production of these two products. Second, highly seasonal demand for labor in grain production usually results in a large-scale surplus labor in the agricultural areas where economic activity is dominated by grain production. Since production of other foods such as meat, fish, vegetables and fruit has different labor demand patterns, these sectors can be organized to increase demand for labor in the off-peak season and therefore contribute to absorbing the vast amount of surplus labor in the Chinese rural areas. Given the low opportunity cost of labor during the off-peak season, motivation for Chinese farmers to engage in these activities is high. This may strengthen China’s competitiveness in these food products.

(b) Factor intensity for selected food commodities as manufactured products

As mentioned above, many exported food items are processed foods or manufactured goods that involve significant processing activities under factory conditions. The combination of farm and manufactured activities for many foodstuffs again has a direct implication on the topic of this study. As we know, manufacturing activity requires no arable land. This suggests a crucial difference in the factor combination between processed food and bulk farm products such as grain. It renders support to the simple argument of this paper: there could well be significant differences between grain and other foods in terms of world market competitiveness for a given country with a given factor endowment.

As for the relationship between the revealed competitiveness of certain foodstuffs for China and the processing activities involved, this section explores two issues. First, it discusses what percentage of food products exported by China falls into the category of processed food.

Then it examines the factor intensity for the Chinese processed food sector by discussing the data on the fixed capital labor ratio for this sector.

As for the first issue, difficulty arises from the conventional international classification system of trade data. As argued by Teitel (1989) and Athukorala and Sen (1996), the SITC data cover the processed foods in the commodity group of primary goods. Processed food along with other commodities are not classified as manufactured goods though they are recognized as industrial products with industrial origins in the international standard industrial classification (ISIC). To identify the share of processed food in total food exports, Teitel (1989) and Athukorala and Sen (1996) suggest crossreferencing the SITC commodity listing at the five-digit level with that of the ISIC at the four-digit level, using the United Nations commodity concordance.

This approach enables us to identify processed foodstuffs from the SITC food export data (see Appendix 1 in Athukorala and Sen, 1996). Using the lists of processed food for different food groups, the export values of processed food and their share in the total food exports for China in 1994 are reported in Table 6. The value of processed food exports was US$6.41 billion. Its share in the total food export was 58%. The data on the ratio of manufacturing value added in the total output value of processed food for China are not available. It was reported that the ratio for Latin America in the 1970s and 1980s was 30.2% (Teitel, 1989: pp. 327-328). Using this figure, a rough estimate of the manufacturing value added for the food exported by China in 1994 was about US$1.93 billion.

Data on the fixed capital to labor ratio for the food manufacturing sector represent a quantitative indicator of the factor intensity for the sector. Table 7 reports the data on the fixed capital labor ratio for different industrial sectors in China in selected years during 1952-92. Food manufacture was the most labor-intensive sector from the 1950s to the 1970s. Though the ratio for the food sector had become slightly higher than for textiles by 1984, it was still one of the most labor-intensive sectors. Nevertheless, by 1992, the picture had changed significantly. The growth rate of the ratio for the food sector was much higher than for most of the other sectors. For example, the ratio for the sectors such as textiles, paper-making, and building materials increased only about by one-half over 1984-92, while that for the food manufacturing sector increased by 1.4 times during the same period. Although capital intensity for the food sector was


Table 6. Value of processed food export and the share in total food export for China in 1994 (1000 US dollars)

Commodity (SITC) Export value of Total food processed food export value

(1) (2)

The ratio of (2)/( 1) %

Live animals Meat etc. Dairy products etc. Fish etc. Cereals etc. Vegetables and fruits Sugar etc. Coffee, tea etc. Animal foodstuff etc. Others Total food

0 715749

20146 2596075

188933 1891322 328056 48699

449267 171199

6409446

463799 0 728444 100

65071 80 2596079 100 1989447 47 3430565 41

328062 100 598592 57 589685 80 171317 67

10961061 58

Source: UN trade data, International Economic Databank, the Australian National University.

still much lower than the utility petroleum- chemical industries in 1992, it became one of the most capital-intensive sectors among light manufacturing industries.

It should be noted that the data for 1952-84 and those for 1992 are from two different sources. The first data set covers 11 industries, whereas the second includes 29 more narrowly defined industries. As the two data sets are not entirely comparable, their implications for the changes in capita1 intensity among different sectors must be treated with caution. On the other hand, the food-manufacturing sector covers a variety of subsectors in which capital

intensity may differ somehow. For the purpose of this study, it would be useful to examine the data on the fixed capital labor ratio for the subsectors related to China’s food export structure. Thus, fresh data are needed to make a more accurate assessment of the issue. Nevertheless, the data do suggest a trend with respect to the relative changes in capita1 intensity for the food processing sector. In view of the fact that China is still a capital-scarce economy, the rapid increase in the capital intensity for the food sector may have some adverse impact on the competitiveness of China’s food exports. Two alternative inferences with respect to the

Table 7. Fixed capital per worker for selected industrial sectors in China (the Chinese yuan; selected years from 1952 to 1992)”

Year

Industry 1952 1957 1965 1978 1984 1992

(1) Metallurgy (2) Electricity (3) Coal (4) Petroleum (5) Chemistry (6) Machinery (7) Building materials (8) Forest (9) Food

(10) Textile (11) Paper making (12) Industries as a whole

5418 24750

3607 19091 3090 2663 1479

1758 2488 4217 2918

9100 16315 16060 21895 NIA 33675 41234 48455 61985 151303*

5180 7765 7678 11615 N/A 21702 23216 37596 60493 105229

4323 10760 11814 15518 31334 4386 8275 8881 11346 N/A 2637 5699 6852 10195 15260 1770 3840 6689 8977 NIA 2460 4436 5434 8895 21797 3203 4469 5731 8721 15453 5583 10000 10175 13187 18385 4473 8401 10501 14393 N/A

“The ratio refers to the sector of power generation. N/A denotes no available consistent data. Source: Data for 1952-1984 are from ‘China Industrial Economic Statistical Materials (Zhongguo Gongye Jingji Tongji Ziliao) (1949-1984), while those for 1992 are from ‘China Industrial Economic Statistical Yearbook (Zhongguo Gongye Jingji Tongji Nianjian) (1993)‘ published in Beijing.

GRAIN VS. FOOD 1649

relationship between China’s food export growth and the food manufacturing activities involved may be drawn from this tentative investigation. First, the manufacturing activities per se may not be a significant factor contributing to China’s export expansion of its competitive food products. Second, though the manufacturing activities involved were once an important factor in this context, this role may have diminished as the relatively higher growth in capital intensity may have potentially weakened China’s comparative advantage of food manufacturing activities. Should either be the case, it has implications for the assessment of sources of comparative advantage for China’s food exports. It suggests that from a factor proportion point of view, China’s food export competitiveness at the current stage of its development mainly comes from agricultural activities rather than the manufacturing process. On the other hand, taking a dynamic perspective, it is also possible for China to increase the comparative advantage in food manufacturing activities in future as rapid economic growth may eventually shift China’s factor endowment in the direction of more capital-intensive activities.

In analyzing the economic causes of the revealed comparative advantage for certain food products in China, this paper focuses on factor endowment through an examination of factor combination and cost structure of alternative food production activities. It should be noted that resource endowment is not the only factor influencing the comparative advantage of a country. Other factors such as distance and domestic consumption patterns have also been long recognized as potential determinants of trade patterns (Linder, 1961; Bhagwati, 1964). These factors are also important to China’s export expansion of the selected value-added food products. As discussed above, China’s food exports mainly went to its neighboring economies such as Japan, Hong Kong, South Korea and Taiwan. Geographical proximity is obviously in China’s favor for expansion of food products in these markets. On the other hand, China’s expansion in food exports since 1980 coincided with unprecedented changes in its domestic food consumption. Apart from direct grain consumption that peaked in the mid-1980s and declined afterwards, other food consumption has experienced enormous growth since the late 1970s. Though the growth in domestic food consumption per se may be competitive with foreign demand for food products, it provides the incentives to build the necessary infrastructures of transport, grading, packing, storage and

communication etc”. This may have a positive impact on technical efficiency and the export competitiveness of China’s food sector.

4. SUMMARY AND POLICY IMPLICATIONS

The paper has examined the likely pattern of China’s food trade in future, should China’s food trade policy be adjusted to accommodate its comparative advantage. In view of the hetero- geneity of food products in factor proportion and cost structure, there may be diversified trade tendencies for different food products in a deregulated environment. Differing from the common perception that China’s overall food sector will follow the path of grain trade and face an ever growing trend in net import, this study has found an evolving pattern of exchanging food for food over the last 15 years. The pattern is in part characterized by strong export expansion of selected food products such as vegetables and fruits, aquatic products etc. The economic rationale behind the observation has been examined through a comparison of relative costs among alternative food productions in China.

The exchanging food for food pattern and the underlying rationale suggest a new choice for China’s future adjustment in its food policy. As for China’s future food trade policy, two choices have often been suggested. The first is to maintain a self-sufficiency policy in grain as well as the total food sector. This is technically possible but costly in economic terms. The second is the free trade option which will, as widely believed, result in large-scale growth of net food imports into China. Food import bills, however, may be paid by foreign exchanges generated by exports of labor-intensive manufactured goods. If the pattern of exchanging food for food could be further developed, it perhaps represents a third option for the Chinese policy adjustments in this context”‘.

Potential benefits of this option for China are obvious. Food exports can have a positive impact on the Chinese economy through strong backward linkages. A particularly important point for China in this context is that food exports can make a significant contribution to income growth in the rural areas due to its large rural resource elements. The rural income is widely recognized as a fundamental issue in China. Given the current structure of resource endowment in China, shifting resources to food products with export competitiveness can at the margin lead to income growth in rural areas. This study identifies three causes for this income


growth effect. First, for those food products requiring arable land such as vegetables etc., their production can make more intensive use of abundant labor per unit of scarce arable land. Second, production of some export food commodities either do not require arable land (i.e., raising animals) or only need marginal land (i.e., fruit). A policy adjustment in favor of food exports can extend the scope to expand agricultural activities by breaking the vital constraint of land scarcity in rural China. Third, largely condi- tioned by grain production activity, demand for labor in rural China tends to be highly seasonal. Other types of food production can be organized to absorb labor surplus in off-peak seasons and therefore increase rural income”.

Making full use of the potential benefits assoc- iated with food export necessitates many policy adjustments. One crucial issue is to reconsider the traditional policy objective of grain self-sufficiency. It is important to understand the linkages through which future food exports may interact with the potential adjustments in the grain self- sufficiency policy. Two points are noteworthy here. First, to defend the traditional grain self- sufficiency policy, China has to maintain a high level of arable land utilization in grain productiont2.

As discussed above, compared with the other foodstuffs requiring arable land (e.g. vegetables) grain production makes use of land much more intensively. To the extent that exports of food products requiring arable land less intensively can be increased, the grain self-sufficiency policy at the margin imposes high opportunity costs for peasants and therefore diminishes the potential income growth in the rural areas. It also imposes

a constraint on China’s agricultural system in responding to changes in the world food market.

Second, China’s grain prices are converging toward world market prices (Garnaut et al., 1996). Adherence to the grain self-sufficiency policy is likely to lead to a protection policy in the grain sector in future. The resulting higher domestic grain prices in relation to international prices may be more detrimental to the prospect of food export growth. The reason is simple: production of many food products for export uses grain as an input. Relatively higher domestic grain prices will inevitably feed into production costs of the foodstuffs and therefore erode China’s export competitiveness in these commodities.

The study may also have policy implications in an international context. Vigorously defending the grain self-sufficiency policy on the grounds of food security at enormous economic costs is not a phenomenon confined to China. Policy makers in many other countries also face a tense conflict between adherence to the grain self-sufficiency policy on the one side and increasing adjustment pressure emanating from changes in the domestic economy and external environment on the other. Bearing in mind that grain self-sufficiency is a complicated issue concerning many economic and political factors, the conventional perspective equating grain and food in economic and policy analysis also helps, to some extent, to overemphasize or exaggerate the necessity and importance of this traditional belief. Careful clarification of the difference between grain and food emphasized in this study may be also of relevance to potential policy adjustments in these economies.

NOTES

1. This paper was prepared during my visit to the 3. The concept of food used in this study covers the Research School of Pacific and Asian Studies at the commodity category of “food and live animals” in the Australian National University from August to United Nations commodity classification (SITC: 0). November 1996 as part of the China Grain Project Alternatively it may be more broadly defined to include sponsored by the Australian Center for International the commodity group “beverage and tobacco” (SITC: Agricultural-Research. I am most grateful to Professor 02) plus “animal and vegetable oil and fats” used as Ross Garnaut and Dr Yiuine Huane for their valuable food (Dart of SITC: 04). comments on the early-draft of yhis paper. I also

\&

greatly benefited from discussions with Dr Prema- 4. The index is defined as the ratio of the share of chandra Athukorala. The responsibility for the export of certain commodities in the total exports for remaining errors is mine. one country to the same share measurement for the

whole world. 2. See World Bank, 1985, 1991; Anderson and Tyers, 1987; China Academy of Agricultural Science, i989; 5. The trade linkage of mainland China with Hong Carter and Zhong, 1991; Chen and Buckwell, 1991; Kong is regarded as part of China’s foreign trade, Garnaut and Ma, 1992; Garnaut et al., 1996; Huang et although the sovereignty of Hong Kong was returned al., 1995; Overseas Economic Cooperation Fund, 1995. to China in July 1997.

GRAIN VS. FOOD 1651

6. Though some empirical tests failed to support the model of comparative advantage in its simplest form, it has been shown that the modified theory of resource endowment is consistent with these trade patterns (Tyers and Anderson, 1992; pp. 38-39).

7. There is evidence that China’s reported arable land has been underestimated. Its actual arable land may be 20-40s larger than what is reported. But China would still be poorly endowed with agricultural land even if this underestimation is taken into account.

8. Although the expansion of town and village enter- prises has absorbed many rural laborers, seasonal labor surplus is still a widespread problem in China’s rural areas, except for a few economically advanced regions such as Guangdong, South Jiangsu etc.

9. I am indebted to one referee’s comment that clari- fies the two-way relationship between the growth of domestic food consumption and export expansion of selected value-added food products.

REFER

Anderson, K. and Tyers, R. (1987) Economic growth and market liberalization in China: implications for agricultural trade, Working Papers in Trade and Development, No. 87/2. Research School of Pacific Studies, the Australian National University, Canberra.

Asia Pacific Economic Group (1996) Asia Pacific Profiles 1996. Research School of Pacific and Asian Studies, the Australian National University, Canberra.

Athukorala, P. and Sen, K. (1996) Processed food export from developing countries: pattern and determinants. Paper prepared for the 25th Australian Annual Conference of Economists, September 1996, the Australian National University, Canberra.

Bhagwati, J. (1964) The pure theory of international trade: a survey. The Economic Journal 74, l-81.

Carter, A. C. and Zhong, F. (1991) China’s past and future role in the grain trade. Economic Develop- ment and Cultural Change 39, 791-814.

Chen, L. and Buckwell, A. (1991) Chinese Grain Economy and Policy. CAB International, UK.

China Academy of Agricultural Science, 1989. Studies on the issue of grain in China (Zhongguo liangshi zhi yanjiu). China Agricultural Science and Technology Press (Zhongguo nongye keji chubanshe), Beijing.

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Garnaut. R. and Ma, G. (1992) Grain in China. Australian Government Publishing Service, Canberra.

10. This does not suggest that the aim should be for the Chinese food sector to balance its external trade. Exchanging food for food does not necessarily mean a trade surplus or even a balanced trade for the food sector.

11. Apart from the desired income effect, food export has two additional spread effects. On the one hand, expansion of food exports generates a derived demand for machinery and production processes. This in turn produces a favorable spread effect on domestic machinery industries. On the other hand, the rural areas and urban food-processing sector may benefit from food export in terms of knowledge spill-over, i.e., learning through interaction with foreign buyers and improving quality standards in the face of stringent export competition.

12. The proportion of the land used in grain production was about 73% in 1995.

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grain versus food: a hidden issue in china's food policy debate

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