What negative effects do agricultural subsidy policies have?
Along with rapid economic development, China's agricultural policy has also begun to transform. After 2000, in order to ensure farmers' enthusiasm for grain production, the minimum protective price was continuously raised. By now, this has made China's domestic grain prices far higher than the international market, and inventories of corn and other grains have repeatedly hit new highs.
Taking grain prices in May 2015 as an example, the prices of wheat and corn in China were both more than 2 times higher than international market prices. Chinese agriculture is no longer competitive internationally; if imports were opened, Chinese agriculture would be completely crushed by the international market. There are three main reasons: first, the increase in domestic production costs, mainly because labor costs have risen very rapidly; second, the appreciation of the RMB exchange rate; third, the surge in China's inventories of corn and other grains, which has led the international market to believe that China will reduce imports in the short term and to worry that China will dump excess grain, so international grain prices remain sluggish.
In fact, the problems China now faces with agricultural subsidies were also encountered by Europe, the United States, and Japan. In the 1970s, international grain prices were high. To increase farmers' income and promote the independence of farmers' income, the European Community and Japan successively adopted and strengthened agricultural price support policies, decoupling domestic prices from international prices. As international grain prices declined after the 1980s, due to political pressure, support prices were difficult to lower and were continuously increased, ultimately causing domestic prices to rise continuously above international market prices, which made developed countries lose agricultural competitiveness. At the same time, the fiscal burden required for agricultural subsidies grew heavier by the day, occupying a large amount of government budgets. EU agricultural subsidies accounted for more than 60% of the EU budget at one point around 2000. Price support led to massive overproduction of grain, and grain reserves within the EU surged. In Japan, farmers' agricultural income, especially rice-growing income, fell to less than 1/3 of household income. Agricultural price subsidies provided limited help to farmers' income, but removing subsidies would after all harm farmers' income, so resistance remained strong.
Faced with the reality that domestic prices are increasingly diverging from international market prices and agricultural competitiveness is continuously declining, it is necessary for China to learn from the lessons of Europe and Japan. China's agricultural subsidy policy must be reformed to prevent the agricultural subsidy trap from repeating itself in China.
⟦NL> To reform, we must return to a basic question: why subsidize agriculture? Agriculture has many functions: including the function of ensuring food security, the function of being a source of farmers' income, environmental and ecological functions, and cultural transmission functions. At the current stage, the most important are the function of ensuring food security and the function of being a source of farmers' income. For European countries and others, increasing farmers' income is the main goal of agricultural subsidies. From the perspective of policy making, raising protective purchase prices can satisfy both functions at the same time: it can promote grain production and ensure food security, and it can increase farmers' income, killing two birds with one stone. This is also why protective grain purchase prices are popular in Japan, Europe, and now China. Obviously, the history of Japan and Europe, as well as China's reality, shows that open-ended purchases at continuously rising protective prices will lead to a decline in agricultural competitiveness. More importantly, as international grain prices decline, the fiscal burden of subsidies will increase day by day, thereby squeezing the entire government fiscal system.
The Chinese government has also realized the problem and, for some agricultural products, has transformed the support method and begun implementing target price subsidies, thereby reducing price distortions. However, target price subsidies have two problems: first, after target price subsidies are adopted, the government no longer makes open-ended purchases. The subsidy money is spent, but the government does not hold grain reserves in hand, so it cannot meet the goal of ensuring food security. Second, in actual operation, how should the price difference and subsidy amount be defined? Due to differences in land quality and output, how to calculate subsidies becomes a major problem. Judging from the actual situation of implementing target price subsidies for cotton in Xinjiang, there are many cases of subsidy fraud.
China's agricultural subsidy reform must classify subsidy methods according to objectives. Which subsidies belong to ensuring food security and which support belongs to increasing farmers' income must be clearly defined. For example, to ensure food security, protective price purchases can also be implemented, with the state maintaining a certain amount of reserves, but the purchase volume must have a quota and cannot be open-ended. As for supporting farmers' income, it would be better to learn from Europe and directly issue subsidies according to the area of contracted land or the number of agricultural population, reducing market distortions and transaction costs and letting farmers benefit directly.