The U.S. Trade Representative’s (USTR) office recently released the 2009 USTR Report to Congress on China’s WTO Compliance, the eighth report required under the U.S.-China Relations Act of 2000. As stated in the foreword, “The focus of the report’s analysis continues to be on trade concerns raised by U.S. stakeholders that, in the view of the U.S. Government, merit attention within the WTO context.” Agricultural trade issues occupy 11 of the 81 pages of the body of the report.

U.S. agricultural exports to China have grown rapidly since it joined the WTO in December 2001, increasing from $1.9 billion in 2001 to $12.1 billion in 2008. Exports are down 7 percent for the first 10 months of 2009, which is not surprising with declines in most commodity prices over the past 18 months. U.S. agricultural imports from China increased from $0.8 billion in 2001 to $3.4 billion in 2008.

The agricultural trade issue of least contention is tariffs. The average import tariff for products of most importance to U.S. agriculture declined from 31 percent in 1997 to 14 percent today. Most of the reductions occurred within five years of China joining the WTO, with the remaining tariff reductions completed by 2008. For comparison, the average U.S. agricultural import tariff is 12 percent.

China agreed to tariff rate quotas (TRQs) for major bulk commodities and their operation has been an ongoing problem. The TRQ rules are to be announced before the marketing year begins, have transparency in operation, minimize licensing requirements and be allocated in commercial quantities. Cotton imports have far exceeded the TRQ, while the others have been largely unused.

Regulation of biotech soybeans, corn and cotton has been a problem, but has not resulted in negative outcomes for actual trade flows. China continues to require products be approved in the U.S. before submission for approval in China which causes delays for new biotech events. China’s requirements for “stacked” biotech events are unclear and a cause for concern. Despite these issues, in September of 2008 the Ministry of Agriculture approved the first “second generation” biotech event and several others remain in the regulatory process. USTR will work to ensure the biotech approval process does not create barriers to trade.

The biggest challenges to agricultural trade with China are sanitary and phytosanitary issues, which is typical for many countries. Raw meat, poultry and pork products top the list, with China’s market closed to U.S. beef and products because of BSE-related issues. Poultry import for several states are banned due to Avian Influenza. Pork imports were banned in April 2009 because of concerns about the H1N1 influenza A virus, although actions by the Chinese government in December appear to have removed the ban on pork. All of these restrictions are inconsistent with international standards, and China did not provide risk assessments for maintaining import restrictions.

The report explains, “China’s regulatory authorities continue to administer inspection-related requirements in a seemingly arbitrary manner.” Importers are required to obtain a Quarantine Inspection Permit (QIP) before signing contracts for most agricultural commodities. Issuance of QIPs sometimes slows down or is suspended without notifying traders in advance or explaining the reasons. Shipments of products such as soybeans, meat and poultry sometimes arrive without QIPs, creating delays in discharge and extra costs for importers. The report notes, “QIPs are one of the most important trade policy issues affecting the United States and China’s other agricultural trading partners.”

One of the benefits of an international trade organization like the WTO is the establishment of rules that reduce uncertainties in trade flows. Buyers and sellers can organize supply chains to meet consumers needs while minimizes inventories and operations costs. The uncertainties in the Chinese import regulatory requirements impose additional costs and likely reduce the total volume of agricultural trade between the U.S. and China. Improvements have been made in the last eight years, but the U.S. will continue to press these issues in 2010.

The regulatory bottlenecks may be manifesting themselves in trade flows. When China joined the WTO the assumption was that its 1.3 billion people would demand a wide range of agricultural imports from the U.S. While the dollar value of imports from the U.S. in 2008 was over six times the trade in 2001, the range of products with significant trade continues to be narrow. In 2008 whole soybeans accounted for 59.9 percent of the dollar value of U.S. exports to China and raw cotton 13.4 percent. Bulk commodities in total accounted for 74.6 percent of exports, up from 56.2 percent in 2001, and 8.3 times the 2001 level.

Intermediate products with some processing accounted for 14.4 percent of U.S. exports to China in 2008, down from 29.5 percent in 2001, and 3.0 times the level of 2001. Hides and skins were 49.3 percent of intermediate exports. Consumer-oriented products accounted for 11.0 percent of exports in 2008, down from 14.2 percent in 2001, and 4.8 times the level of 2001. Poultry meat accounted for 33.0 percent of consumer oriented products, followed by red meat at 21.6 percent, dairy products at 13.4 percent and fruits, vegetables and juices at 12.7 percent.

Uncertain import requirements discourage exporters and importers from utilizing supply chains for intermediate and consumer-oriented products that cannot easily be diverted to other markets if the regulatory climate is difficult. Those regulatory programs can also be used by government officials to add costs to the supply chain to discourage imports of products that compete with domestic supplies.

The U.S.-China trade relationship under WTO rules is relatively young. The U.S. and the EU still have sanitary and phytosanitary disputes after decades of working together on trade issues. The U.S. and China have much to gain by reducing costs in supply chains and USTR officials have a full agenda again in 2010.