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Hit Us Where It Hurts: China’s Ban on U.S. Agricultural Products Grows

Posted in China Business

By Lucas Blaustein*

U.S. agricultural exports to China have increased by 120% since 2008, to nearly 28.9 billion dollars in 2013. Agriculture now accounts for nearly 24% of US-China trade .

Since China’s admittance to the World Trade Organization (WTO), China and the United States have increasingly traded their comparative advantages. Daily, Chinese made iPads, Lenovo computers, Nike sneakers, and other material trappings of American consumerism arrive in U.S. ports, where they are unloaded and then returned filled with U.S. grain products like soybeans and corn. But in November 2013 the system began to break down, as corn exports to China came to a halt.

What caused this halt was the discovery by China’s Inspection and Quarantine Services (CIQS) of an unapproved genetically modified corn varietal called MIR-162 in imported shipments. Import permits began to be denied, and US corn exports to China gradually decreased to nothing. Grain merchandisers and U.S. farmers were horrified, as the fastest growing market for U.S. corn closed its doors.

Agribusiness companies and Chinese importers were quick to react, replacing corn grain as the number one U.S. export to China with a corn based ethanol byproduct called distiller dried grain with solubles (DDGs). For a time it seemed that American grain merchandisers had found a solution to China’s ban on U.S. corn with DDGs, but this “solution” was short-lived. In the spring of this year China stopped returning import permits for DDGs.  After months of confusion, the U.S. Embassy in Beijing on July 24 received a short message stating that “U.S. DDGs imports must now be tested at origination for the unapproved gene MIR-162.” In the space of a day, traded corn prices dropped by more than half.

Shortly thereafter the USDA issued a statement asserting that there is no reliable, affordable method of testing for MIR-162 in DDGs, nor is there even a regulatory body in the United States with the manpower or funding to conduct such a test, even if one existed. In other words, what China did on July 24 was to ban importation of all U.S. corn based products.

Why did China do this?

Sino-U.S. relations are at one of their lowest points since before China’s period of great opening up. In light of recent events involving Apple, Microsoft, GSK, Cisco, KFC, Starbucks and many other American businesses in China, it would not be out of bounds to view China’s ban on U.S. corn imports as punishment for worsening relations. The National Grain and Feed Association (NGFA) estimates that China’s ban has cost U.S. farmers and agribusiness firms nearly three billion dollars. U.S. farmers could be hit especially hard during the upcoming year, with larger than average corn yields anticipated, and more new unapproved GMO varietals in the ground.

But what is often lost from the punitive argument is the Chinese side of this story.

In 2,500 years of historical records, famines were observed in at least one Chinese province every year up until the mid-20th century. While in modern times greetings like, “你吃饭了吗”?, or “have you eaten?” have become a signal of a person’s rural upbringing, they are still indicative of the powerful impact of food insecurity on Chinese psychology. It is this history that leads China continue to emphasize food security in its annual No. 1 Document, which this year made clear that “China should take good control of its own bowl,” by “intensifying support and protection for [domestic] agriculture.”  There are three parts to China’s food security policy: 1) invest in modern agricultural practices and grain storage capacity; 2) develop local GMO varietals to increase crop yields; and 3) protect local grain farmers.

Through investments in modern agricultural practices, total corn production in China has risen rapidly from 165 to 205 million metric tons, a near a 25% increase from 2008 to 2012. China has also built an enormous network of modern computerized grain storage facilities, with nearly 300 million metric tons of storage available. China was a net corn exporter from 2002 to 2006.

China knows GMO technology is critical to increasing crop yields, so investment in GMO technology has surged, despite public fears over negative health effects. Chinese officials are wary of becoming overly reliant on genetically modified seeds from the Western world. Within the last six months eight Chinese Americans and nationals have been arrested on accusations of corporate espionage and theft of American seeds. MIR-162 grain imports may not be allowed into China, but China desperately wants access to the technology that produced the MIR-162 strain.

With lower input costs and better technology, world corn prices have been lower than China’s domestic corn prices for years. For this reason, Chinese companies have imported significant amounts of corn. The easiest way for China to protect local farmers is to force the purchasing of Chinese corn by limiting the amount of foreign corn that enters the Chinese market.

Protection for local farmers, fear of reliance on foreign GMOs, and investments in agriculture are all part of China’s broader food security strategy. Banning U.S. corn for food security reasons is probably as strong an argument for why China banned U.S. corn as punishment for worsening relations.

With Sino-U.S. relations still very poor, another record corn crop this year in China, as well as Ukrainian, Brazilian, and Argentinian corn imports approved, no matter which reason you favor for the ban on American corn products, there is little reason to believe China will lift that import ban any time soon Every day it becomes more likely that only a significant and public response from the United States government, or litigation in the World Trade Organization, will open China back up to US corn product imports.

* Lucas Blaustein is the Container/Feed Ingredient Sales and Marketing Manager for CGB Enterprises. He has a Masters of Agribusiness degree from Texas A&M, and a Bachelors of Economics and Chinese Studies from the University of Houston. Lucas has worked in business and academia domestically and in China with major agribusiness companies like PepsiCo and John Deere and he is fluent in spoken and written Mandarin.

  • Robert Walsh

    1. It’s a non-tarriff trade barrier.
    2. Chinese do not want their own corn strains contaminated with US GMOs. If this were to happen, then Monsanto would be knocking on Chinese farmer’s doors to collect royalties and attempt to keep them from cleaning seed. -And once the local strains are contaminated, nobody knows how to decontaminate them on the scale that would be required.
    3. Chinese do not need GMO technology from the US; they have plenty of their own, but unlike US regulators, they are not willing to unleash it until all of the long-range implications are clear.
    4. GMO in general, and mono cropping in particular are considered poor practice in China.

    Unfortunately when it comes to GMO crops, there is nobody in the middle on the for/against argument. Here in Burma there are supposed to be 359,000 hectares of GMO cotton, and I hope to hell that is not true. From what I have heard from Indian ag people, it did not end well there.

    • Lucas Blaustein

      Robert Walsh:

      You have some great points!

      I greatly respect your concerns over GMOs. This article is not about the merits of benefits of GMOs, but simply an account of the current trade situation, its implications, and possible causes.

      If you are interested in the GMO issue, I would highly recommend Whole Earth Discipline by Stewart Brand, one of the father’s of the original Green Movement.

      From what I have seen on the ground in China, farmers are definitely hungry for GMO’s. I know more than a few Chinese people who work in the GMO industry in China, and it is currently booming, fueled by enormous government investment. Test plots are springing up all over China.

      Mono-cropping is also becoming much more common in China. The entire Heilongjiang region has largely moved towards mono-crop corn, with average farm sizes enormous by Chinese standards. This is also government driven.

  • FOARP

    Nice piece, but the pedant in me has to point out that GSK is a British firm.

    • Lucas Blaustein

      The pedant in you is correct! And the author it grateful.

      I noticed that after it went up. Although the GSK crackdown has netted Americans in its fray, the way that sentence is worded, and among the other brands it makes it seem as though GSK is America, which it not!

      Thank you FOARP!

  • Lucas Blaustein

    As this discussion is still getting a lot of hits, note that 2014 Chinese corn production was downgraded, as China’s Ministry of Water Resources recently announced a significant increase in the 2014 drought in Northeast and North central China.

  • Garrett Kajmowicz

    Would there be a comparable way for the US to retaliate? For example, declaring that some integrated circuits in products from China result in a ban on imports until complete end-to-end certification can be established?

    • Lucas Blaustein

      Garrett:

      If the United States desired, it would be much easier for us to cripple the Chinese economy, than for the Chinese to cripple ours. While you commonly hear, “everything is made in China,” few of the staple items the U.S. consumes are actually made in China, and most items that are actually necessary to our society can be manufactured elsewhere. Think food, fuel, transportation, weapons… (all are of these are domestic or ally nation industries).

      China is still an export driven economy, with no other major export markets for its goods besides the EU and North America. Were the United States to put in place a ban on any number of China sourced items it would cause immediate harm, and potential civil instability in the People’s Republic. The easiest way for the United States to inflict harm on the Chinese economy, would be to ban Chinese companies and individuals from listing on the stock market.

      Few in the United States see economic punishment as a constructive step. Engagement is usually the best way to solve these kinds of difficult problems. However, engagement has been so far unsuccessful between the current U.S. and Chinese administration.

      What the United States must be careful of economically, is providing China with too much access to our market sectors in the hope that China will reciprocate. Two excellent and very recent agricultural examples of the United States opening up or approving a business opportunity to Chinese companies are: 1) the Smithfield acquisition by Shuanghui; and 2) the approval of Chinese chicken processing plants. Both were approved in the hopes of China relieving some of its restrictions on U.S. agricultural products. Sadly, neither the Smithfield or chicken import approval has resulted in similar market openings. Now American chicken companies have been exposed to Chinese competition, with major protein imports to China like beef and pork still mostly banned.

      Telling was what one of the congressmen had to say about the Chinese acquisition of Shuanghui, “we are allowing a Chinese company to do in America, what an America company would not be allowed to do in China.”

  • Megan Cramer

    Very interesting article! I think we can also consider the political motivations — the US corn subsidies are in the billions. These are very clever moves by the Chinese. Although I don’t think that either side is doing anything to ensure a peaceful and cooperative future, which is unfortunate.

  • Irshad Hussan

    http://www.forbes.com/largest-private-companies/list/

    Most of American corps are based on Food, if you want to distroy american imerialism, Dont buy their GMO food.Join the movement!!