While developed countries are under pressure to sharply reduce domestic subsidies for agriculture in a new World Trade Organization (WTO) trade agreement, China is reducing taxes on production agriculture and increasing subsidies to farmers. The Chinese Communist Party recently released “2005 No. 1 Document” outlining measures to support rural incomes, the second year in a row that the number one document has addressed this issue. Rural peasants have traditionally provided the backbone of support for national governments and discontent in rural areas has not gone unheeded.

China’s rapid economic growth of the past 10 years has increased average per capita income to over $1,000 per year. That is a benchmark used by many international development agencies to measure a more rapidly developing country and is an important milestone for China as a country. Government statistics show that urban per capita incomes average 3.2 times rural incomes. Average per capita farm income is $353 per year.

After World War II governments in developed countries had similar concerns. Through a combination of out migration of rural people, increased nonfarm jobs in rural areas, larger farms and government payments, farmers and ranchers now have total family incomes equal to the average in urban areas.

China has a government policy of restricting out migration of rural people. With 740 million people considered as part of peasant families and farmland controlled by government authorities with farmers having 30 year contracts, consolidating farms is not a viable option under current policies. Policies do encourage the development of off-farm jobs in rural areas.

A recently released report by the Economic Research Service (ERS) of USDA titled “China’s New Farm Subsidies” by Fred Gale, Bryan Lohmar and Francis Tuan summarizes some of the efforts to improve farm income. For centuries farms were taxed to fund the national government. Those policies began to change in the early 1990s. According to the ERS report, “The government is trying to raise rural incomes while also trying to encourage grain production. Grain typically provides relatively low returns to Chinese farmers.”

The 2004 No. 1 Document reported that agricultural taxes would be eliminated over five years. The typical arrangement is to collect 7 percent of the normal value of production from a household’s land, with an additional 20 percent surcharge to fund village expenses. The taxes were completely eliminated in 2004 in two important corn and soybean provinces, Jilin and Heilongjiang. In early 2005 the government announced that taxes would be eliminated in 25 of the 31 provinces, municipalities and autonomous regions by the end of 2005. ERS estimates that the taxes produced $5-7 billion in revenue, 2-3 percent of the taxes collected in China each year.

Direct subsidies for grain farmers began in 2004. ERS estimates that $1.4 billion were paid based on historical production records with an average of about $7.33 per acre or $2-5 per ton of output. With individual crops often averaging less than one half acre per farm and total acreage usually less than 2 acres per farm, these subsidies are small on a per farm basis.

Spending on subsidies for high quality grain and soybean seeds was reported at $193 million for the 2004 crop, $7-10 per acre planted with improved seeds. About $18 billion was to be spent on infrastructure like irrigation, rural roads and research. The ERS report notes that research shows that only about 30 percent of the money allocated to infrastructure is spent on agricultural production. Loans from rural credit cooperatives increased 28 percent in the first nine months of 2004 to $23.4 billion.

Chinese officials have learned how not to help farm income. In the late 1990s government-owned grain bureaus established “protection” prices above the level of local grain prices. Farmers could sell a set quota at the protection price. When grain prices declined sharply from 1997 to 2001, the grain bureaus were left with large stockpiles of grain. While that program was ended, it may be back again as grain prices have declined recently.

In the transition from taxing agriculture to subsidizing it “black land” has suddenly appeared. This is land that was cultivated, but not taxed, and is now reported to qualify for subsidies. Based on a survey in a major corn and soybean growing area, ERS estimates that over 30 percent of the grain production area may be “black lands.” Similar conditions are believed to exist in other provinces and call into question reported yields and/or total production. This fits the old American adage “if you want to get less of something tax it and if you want to get more of it, subsidize it.”

These payment programs appear to be consistent with China’s WTO commitments. Payments based on historical production qualify as “green box” payments and are not limited. Under the “amber box” (potentially market-distorting) subsidies are limited to 8.5 percent of the value of production, about $30 billion based on the value of production in 2003.

Despite the relatively small payments on a per household basis, it would be a mistake to dismiss these payments. Specialty crops are more profitable than grains and oilseeds. The government is committed to increasing grain output by increasing subsidies to producers. That could lessen soybean imports and maintain China as a corn exporter or limit its future corn import needs.

Trade negotiators will likely be hard pressed to prevent the Chinese government from helping to improve incomes in rural areas given the political importance of such moves and the reality that developed countries used similar efforts over the past 50 years. And yet, if the new WTO agreement is to truly be an agreement that reduces “trade-distorting subsidies,” some definition of that term appropriate for rapidly developing countries will need to be established.