Economic Tidbits

Tariff-Rate What?

Future Nebraska exports of corn and wheat to China might be affected by ongoing legal wrangling between the two countries over trade. The World Trade Organization (WTO) recently agreed to a U.S. request to review China’s use of import controls for corn, wheat, and rice. The WTO is an international organization which operates a system of trade rules and acts as a forum for settling trade disputes. The request marks the second time since 2016 the U.S. has asked the WTO to review China’s actions.

The U.S. filed a dispute in 2016 arguing China’s use of tariff-rate quotas (TRQs) had restricted market access for U.S. grains. The U.S. argued China’s administration of TRQs was not transparent, predictable, or fair as required under the trade rules. In 2019, the WTO ruled in favor of the U.S. and requested “China to bring its measures into conformity with its obligations” under the WTO agreement.

TRQs are used by countries to control or restrict imports. TRQs combine aspects of quotas, limiting import quantities, with tariffs, taxes on imported goods. Under TRQs a specific quantity of a good which can be imported at a reduced tariff rate is established. However, if the quota amount is exceeded, a higher tariff rate is levied on quantities imported above the quota amount. China’s quota for corn is 7.2 million metric tons (mmt) annually. Imports up to this amount are assessed a tariff rate of one percent. Corn imports in excess of this amount are assessed a tariff rate of 65 percent. The quota for wheat is 9.64 mmt and the tariff rates are the same as those applied to corn. The Chinese also outline specific quota amounts for state enterprises and private companies. For corn, 60 percent of the quota is awarded to state-controlled entities while 90 percent of the wheat quota is awarded to state enterprises.

The U.S. believes China has not complied with the recommendations of the 2019 WTO ruling and argues China’s administration of its TRQs is neither transparent nor predictable. For example, it seems China’s imports of corn last year exceeded the quota amount for the first time since the country joined the WTO. However, it is unclear whether China assessed higher tariffs on imports exceeding the quota from certain countries or if state enterprises were allowed to import corn without paying the higher rate. This lack of transparency and the uncertainty it creates led in part to the U.S. asking the WTO to re-examine the issue. Reuters reports the WTO’s dispute settlement panel usually issues a ruling within six months of agreeing to a review.

Nebraska corn and wheat producers have much at stake in the outcome of the WTO review. China presently is one of the largest markets for U.S. corn and wheat. The outcome will likely set the stage for future trade in these commodities and exports from Nebraska.

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