U.S. agricultural exports to the Chinese market are surging. Yet the burgeoning trade in food and agricultural goods could eventually face headwinds, especially if Beijing takes further steps to subsidise its rural economy.

The Chinese market is extremely attractive to U.S. agricultural and food producers:

--Beijing entered the WTO with low negotiated tariffs and no export subsidies.
--Domestic support for agriculture is low by Western standards, though calculating the extent of government assistance to the sector is difficult.
--Economic growth has been strong and sustained over the past two decades, and China has recently overtaken Japan as the world's second-largest economy.

Moreover, the Chinese market for U.S. agricultural products is surging:

--China imported $11.2 billion of U.S. farm products in 2009; the projected total for 2010 is at least $14 billion.
--China is a leading importer of soybeans and cotton, both commodities where the U.S. has export capacity. --Feeding a population of 1.3 billion with growing incomes will increase the need for livestock feed, so sales of U.S. soybeans should continue to grow.
--China presently has an export surplus of corn, but may need more of that commodity as diets are upgraded.

Basic farm commodities should continue to find a growing market in China.

Barriers to growth. However, projections of continued growth in agricultural exports to China need to be qualified:

1. Stalled Doha Round. To date, Beijing has shown a willingness to go along with the overall liberalization of trade embodied in the WTO and imposed as a condition of Chinese accession. Yet as China, along with India and Brazil, grows in influence in the multilateral trade system, it will be able to shape the direction of that system. This is the true significance of the Doha Round: As the United States, E.U. and Japan prepare to share leadership of the trade system, it is a key opportunity to lock in a path toward a more open global economy. U.S. exporters that seek only short-run trade opportunities in particular markets ignore at their peril the longer-run impacts of a Doha Round failure.

2. Chinese agricultural policy. Over the past 30 years, China has taken impressive strides to remove the historical bias against agriculture and more recently has begun to institute measures that benefit the farm economy. Elimination of many of the taxes that burdened rural areas and instituting massive investments in rural infrastructure have transformed the farm economy: minimum prices, input subsidies and direct payments have likewise helped to support farm incomes.

However, it is likely that the Chinese authorities may have to do more to mitigate the widening income gap between rural and urban areas. If they follow the path of the West, further subsidies and protective measures may be in store. Reliance on imported farm products from the U.S. could be a casualty of such a policy shift.

3. Chinese consumer tastes. Until now, the tastes of Chinese consumers seem to be following Western patterns, albeit with local distinctions:

--Privatization of the marketing chain, elimination of food rationing, and abolition of price controls stimulated huge investments from foreign retail and processing firms.

--These developments have opened up a new market for branded goods and convenience foods.

However, consumers have also associated imported foods with quality and safety. This introduces a potential concern for U.S. exporters: Chinese consumers may over time emulate the European propensity for preoccupation with food production methods relative to the quality and safety of the product itself. For example, an eventual Chinese backlash against genetically modified soybeans, or a movement toward cage-free chickens would shake the pattern of U.S.-Chinese agricultural trade.

Long-term considerations. Therefore, from Washington's perspective, it is highly desirable that this increased trade be supported by institutional developments--particularly by taking advantage of the opportunity given by the Doha Round to confirm the path toward open food and agricultural markets. Without this assurance, there remains a possibility of future changes in Chinese trade, agricultural and food policy to the detriment of U.S. farm product exports.