Modeling Agricultural Domestic Support Policy in China: recent policy reversals and two future scenarios

This paper reviews recent development of China’s agricultural domestic support policy, especially the switch from taxing farmers and agriculture to providing direct subsidies to grain production and purchased inputs. A model-based quantitative analysis on the effects of these policy changes has been conducted. Simulation results suggest that recent policy changes likely have positively addressed the declared policy objectives in increasing grain production and boosting farm income. Much of the increase in grain production and farm income can be attributed to land reallocation to grain production, cheaper inputs, and extra agricultural employment triggered by the policy changes. Judging from the rural-urban and west-east income gaps in China, the diminishing share of agriculture in China’s economy, and the current political environment, it is expected that the tax cut will be permanent and that government assistance to agriculture and farmers will continue and rise. Two hypothetical future scenarios are simulated. If China uses up all its WTO de minimis support allowances and an assumed Blue Box cap in a manner consistent with its current practices, increased grain production, changing trade pattern seemingly contrary to China’s comparative advantage, increased rural employment, and significantly higher farm income (over 16%) will be expected. If alternative, decoupled payments are provided, China’s agricultural production and trade will remain unchanged, rural employment stays stable. But as a way of transferring income, the decoupled payments will be more efficient.