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Consecutive farm trade deficits over the past three years have been the biggest change in the country's agricultural sector after China's entry into the World Trade Organization (WTO). The imbalance reached US$4.64 billion in 2004 when the country first experienced such a deficit. The figures were trimmed downed to US$1.14 billion and US$670 million in 2005 and 2006.

How did this happen? Do such farm trade deficits have a big impact on the domestic farm goods market?

The emergence of a trade deficit is a natural result of China opening its agricultural sector to the outside world. China is now one of the countries with the lowest tariffs on agricultural imports. So far, the average tariff on farm products has been 15.3 percent, which is far lower than the world average of 62 percent. Also, with the rapid development of the textile, oil-fat and rubber industries, the demand for relevant agricultural raw material imports has grown substantially.

Meanwhile, China's export of agricultural products, especially labor-intensive ones, continued to increase. But exports have been running into more difficulties. Last year, Japan implemented the positive list system; the European Union implemented the new food safety law and increased the scope of, and standards in, the inspection of noxious substances. Exports of agricultural products such as vegetables, fruits and aquatic products, in which China has an advantage, have been falling. These changes have led to the appearance of a trade deficit in farm trade.

There are worries in some quarters about this trade deficit. There are apprehensions that imports of staple agricultural products, especially cotton and soybeans, may affect the development of domestic production. Two aspects of this issue need to be considered before any conclusion can be reached: whether domestic production is decreasing and whether the potential for domestic production is being restricted.

First, the import of cotton and soybeans has not affected the actual production in China. China imported 113,000 tons of cotton in 2001 but the number increased to 3.81 million tons in 2006. The import of soybeans increased from 13.94 million tons in 2001 to 28.27 million tons in 2006. But as imports increased, domestic production of cotton and soybeans increased too. Imports of these products did not replace domestic production.

Second, the import of cotton and soybeans has not impeded the release of domestic production potentials. On the contrary, insufficient arable land and water resources will emerge as restrictive factors for further expansion of production.

A farm trade deficit is not a bad thing from the point of view of protecting national interests.

It is good to balance China's international payments. Successive trade surpluses in the past and increases in foreign exchange reserves have become an important factor affecting the sustainable healthy development of our economy. Importing agricultural products in large quantities could be a vital channel to balance our international payments in the future.

Also, importing land-intensive agricultural products will help ease the urban-rural and industry-agriculture contradiction in the scramble for resources. China is now in the process of industrialization and urbanization. Industry and agriculture are competing for resources like land and water. On the one hand, agricultural resources are going to industries and cities; on the other hand, agriculture has to meet industrialization and urbanization's demand for agricultural products.

The Ministry of Land and Resources has urged provincial governments across the country to conserve a total of 120 million hectares of arable land till 2020. Agriculture is a major consumer of water. At present, there is an annual shortage of 40 billion cubic of water in China, and more than 400 cities have insufficient supply, with 110 cities facing acute water shortage. As the number of cities and the demand for water increase, the water resources for agriculture may further reduce. If timely measures are not taken, China will face a serious water crisis.

To solve these problems, the mode of industrial expansion should be changed to cut resource consumption and improve production efficiency in agriculture. Also, foreign resources should be fully utilized to support China's industrialization and urbanization. Therefore, when the country's resources such as land, water, oil and gas are in short supply, to import land-intensive agricultural products is like importing such strategic resources. For example, it takes 0.88 hectare of land to produce a ton of cotton and 0.5 hectare to produce a ton of soybean. Thus, we should perceive the import of land-intensive agricultural products from the angle of effectively utilizing strategic resources.

The balance of farm trade will always change. But in the long term, it is more likely to be a trade deficit for China. When the country was short of foreign exchange reserves, exports were seen as a political achievement, especially by local governments, while imports were given the short shrift. In the early stage of industrialization, a vital contribution of agriculture is to provide foreign exchange reserves to support the import of industrial goods. But today, China's foreign exchange reserves exceeds trillions of dollars, ranking at the top in the world.

Therefore, we should have a scientific view of agriculture's functions in earning foreign exchange. In this new stage of industrialization and urbanization, to import more land-intensive agricultural products is an inevitable choice and fits our national strategic interests.

Note: the author is a senior researcher with the Department of Rural Areas under the State Council Research Office

(China Daily May 14, 2007)