The Central Valley's Stake in the New China

By Jock O'Connell

This is the author's text of an article that appeared in the Forum section of the Sacramento Bee on Sunday, August 13, 2000 under the headline, "Valley's Stake in China."

Subtlety and nuance took a holiday this spring as the U.S. House of Representatives closed in on its May 24 vote on whether to grant Permanent Normal Trade Relations (PNTR) to China.

Amidst the noisome clatter of dueling soundbites, the Seattle coalition of labor unions, environmentalists and human/religious rights activists battled the Clinton administration and a multitude of business interests over a measure intended to speed China's entry in the World Trade Organization and assure American exporters greater access to increasingly affluent Chinese customers.

Here in the Central Valley, acolytes of the trade pact beat the handiest drum: China, with a fast-growing economy and 1.2 billion mouths to feed, represents a potentially colossal market for California's farmers, ranchers, and food processors. "If-every-Chinese-buys-just-one" -- the irrepressible prayer that has limned the dreams of Yankee traders for over two centuries -- anchored the pro-PNTR message.

Expectations were raised extravagantly high. "The passage of PNTR will open the doors to the largest growth market for U.S. agricultural products with ag exports increasing an estimated $2 billion to $3 billion within the first year alone," Lisa Dillabo, the California Farm Bureau Federation's director of international trade, predicted in May. Up and down the state, a chorus of industry spokespersons professed to foresee greatly expanded exports of a veritable cornucopia of Golden State farm products. According to a "fact sheet" issued by the U.S. Department of Agriculture, California vegetables, fruit, nuts and cotton "are expected to reap some of the largest export gains from China's accession to the WTO."

But will China's entry into the WTO really be a bankable boon for California farmers? Before anyone starts counting the profits, sober consideration should be given to a number of risk-factors -- ranging from the mundane to the cataclysmic -- that ought to be factored into any company's export strategy for China.

First of all, the gates won't be thrown open overnight. China will not be the short-term salvation of Central Valley farmers reeling from the bankruptcy of Tri-Valley Growers or from the recent abrupt closures of tomato and sugar beet processing facilities.

Entering into formal agreements is not the same as implementing them. Nor does the lowering of tariffs always result in higher imports. Experienced traders will recall how the Japanese government in the 1970s and 1980s would announce new market opening initiatives every few months with little, if any, practical effect. Indeed, officials at the U.S. Agricultural Trade Office in Shanghai candidly warn that Chinese authorities should be expected to use every possible excuse to prevent imported food products from disrupting China's own agricultural sector. As one official there pointed out: "We have serious on-going issues with the Japanese and the Europeans over agricultural trade. Why expect things to be any different with the Chinese?"

In China's case, the compliance problem is compounded by what a new report from U.S. Trade Representative's Office describes as China's " non-transparent and inconsistent legal system." The report further observes that "governments at all levels have sought to protect emerging and non-competitive sectors from foreign competition." And to anyone who assumes a communist dictatorship controls all of the tentacles of power, the USTR report points out that "resistance at the provincial and local levels of government has restricted the central government's ability to implement trade reforms."

Even under the most favorable conditions, significant market penetration will take considerably longer and require more patience and understanding than is commonly assumed. Over time, solid business relationships between California shippers and Chinese importers will certainly develop. But not before a great deal of patience and understanding is expended in nurturing these links as carefully as any crop. "There's no question that China presents some incredible opportunities; however, it's not going to be instant access to those markets," warns Heather Flower, spokeswoman at Western Growers Association, an Irvine-based trade organization that represents growers, packers and shippers of more than half the nation's vegetables, fruits and nuts.

California ag exporters will also have to cope with the same sclerotic transportation system and lack of adequate storage facilities that have long been the bane of Chinese agriculture. The state-owned enterprises that controlled distribution of farm products were textbook examples of inefficiency, waste and corruption. Steps are being taken to decentralize distribution channels, but many of the firms entering the business are reportedly starting at the low-end of the learning-curve.

Getting imported produce to the areas some distance from China's coast will remain problematic for some time. (In some instances, though, such transportation bottlenecks may not be a important concern. Those Chinese consumers most able to afford the price of California food products -- a Sunkist orange has a street value of $2.50 in Shanghai -- are concentrated in the larger metropolitan areas along the coast.)

Then there is the small matter of competition, not only from other food-exporting nations vying for a piece of the Chinese market, but from the Chinese themselves. China is no longer a nation suffering chronic food shortages and periodic famines. If the country has a serious food production problem today, it is one of overabundance not scarcity. The nation's farmers have been generating surpluses in several key commodities -- most notably wheat, barley, corn and rice -- which have forced lower prices and hence reduced farm earnings. In response, Chinese growers have been increasing their plantings of higher value horticultural crops (vegetables, fresh fruit and flowers). The latest agricultural policy statements issued by the Communist Party and the State Council call for converting even more grain land to other crops, especially in coastal provinces and in areas near the major cities and towns typically targeted by food importers.

This shift in planting practices has obvious significance for anyone hoping to export horticultural products to China. The country is already a major exporter of horticultural goods and has consistently run a positive trade balance in these commodities of more than $1 billion annually during the 1990s. That's why China's entry into the WTO actually may pose a nasty dilemma for farmers in California's Central Valley.

The WTO is customarily advertised as being about liberalizing trade. Actually, much like the North American Free Trade Agreement, the WTO is at least as much about securing a favorable climate for foreign investment.

To a very large extent, the future of China's agricultural trade will hinge on the role multinational firms such as Cargill, Archer Daniels Midland, Monsanto, Nestle, and ConAgra. If, as expected, these types of corporations invest heavily in modernizing China's agricultural sector to take advantage of cheaper and less regulated "manufacturing" environment, the beneficiaries are unlikely to be California farmers. Instead, the real export opportunities for California agribusiness may go instead to those companies that can supply and service items such as farm machinery, food processing equipment, irrigation systems, water-treatment technologies, crop storage facilities, high-yield seeds, fertilizers, and alternative power-generating systems best suited for relatively primitive, rural conditions.

To every economic equation there is a supply-side issue that must be considered. In this instance, if the blossoming of the China trade takes a few years, what will Central Valley farmers be growing then? Clearly, what foods we can export will always be a function of what crops we grow. But as the Central Valley's population increases, as suburban sprawl claims more and more agricultural acreage, as the supply of water becomes more acute, as opposition to the use of pesticides and herbicides mounts, and as farm labor issues become more critical, farmers will be enormous pressure to change the way they do business and the mix of crops they raise. Most of those who dare make predictions about the future of Central Valley farming believe there will be an inexorable movement toward higher-value crops that generally enjoy very limited markets in developing nations.

Finally, no one should underestimate the enormity of the risk China is running by joining the WTO. Most Americans want to believe that economic liberalization in China will foster the emergence democratic institutions and the rule of law. The problem with that hope is that there is no historical evidence of liberalization saving a dictatorship. Anyone expecting a smooth and ordering transition in China simply because the ruling regime appears to be in firm control should recall how surprised even the most astute Kremlinologists were at the suddenness with which the once awesome Soviet empire came so thoroughly unglued in the late 1980s.

China is in the process of managing two complicated transitions. One is from a centrally-planned to a market- oriented economy; the other from a rural and agricultural to an urban and industrialized country. The impact of these transitions is already being felt. In March, the Chinese Ministry of Agriculture released a report estimating that the rural labor force will reach 600 million by 2005. Of that number, only 168 million will actually be needed for agriculture, down from 348 million as recently as 1998. What to do with those 432 million rural workers not needed for farming poses a challenge as sobering as that of finding work for the millions of urban workers being made redundant as China's manufacturing industries seek to become more efficient and competitive. The government estimates that 70 million rural laborers left their homes in 1998 alone to look for work in the cities. Yet China's metropolitan areas are capable of accommodating only six to seven economic refugees per year over the next five years.

Even more ominously, the most recent World Bank update on China points to a growing army of temporary and illegal migrant workers, known as the "floating population," estimated to number 100 million nationwide. These workers tend to be engaged in marginal labor and lack access to housing, medical care, unemployment insurance, and even schooling for their children. In the near-term, opening its domestic markets to foreign competition will only aggravate the problem of unemployment and displacement.

What Beijing is counting on -- indeed, praying for -- is not foreign goods but rather the foreign capital, technology and management expertise that foreign companies can provide. Only in this way will China be able to finesse the prodigious movement of people from rural areas to cities without seeing soaring unemployment, homelessness and a heightened potential for civil unrest. Anyone who assumes that a huge population of sufficiently disgruntled Chinese will remain eternally patient knows nothing of the violent convulsions that have periodically marked Chinese history, especially over the past two centuries.

So whether they are multinational corporations intending to invest in manufacturing operations in China, trading companies looking to link suppliers with new customers, or Central Valley farmers hoping to sell more produce to China's 1.2 billion consumers, anyone planning to do business in China is apt to encounter more pitfalls than profits as the country's leaders manage (or mismanage) a wholly unprecedented economic and social make-over.

What was true in 1794 when the first American vessel entered a Chinese port remains true today: China is no place to do business for those unwilling to assume sizeable risks.

Copyright 2000 by J.A. O'Connell

For other articles by Jock O'Connell, click on Essays