What Drives China’s New Agricultural Subsidies?

Abstract

China’s agricultural policy has undergone a fundamental transformation in the four decades since the introduction of market reforms in 1978 and now involves a wide array of policy instruments that range from output and input subsidies to public infrastructure expenditures. This article analyzes the political-economic determinants of China’s agricultural subsidy changes using producer subsidy equivalents (PSEs) drawn from annual data from 1984 to 2015 on 16 agricultural commodity sectors that include multiple policy instruments. Empirical results indicate that national factors, such as high rates of economic growth and a lower share of agriculture in the economy, have been the primary drivers of increases in PSEs, and that larger, more geographically concentrated agricultural sectors are more likely to be subsidized at a higher PSE rate. Finally, China’s joining the World Trade Organization in December 2001 led to significant increases in PSEs that were not already explained by internal national or commodity-specific factors. In essence, China’s agricultural subsidy programs and levels increasingly resemble those of developed countries, primarily as a result of economic transformation and the ability to structure agricultural policies within the WTO rules. Moreover, this article predicts that agricultural subsidies will trend slightly upward in the next decade and that the strongest opportunities to export to China will be in animal products or grains that are utilized for feed or processed foods, where the levels of subsidies are predicted to increase but remain lower than for traditional food crops.