Producer Benefits from Input Market and Trade Liberalization: The Case of Fertilizer in China

The overall goal of this paper is to assess how input trade liberalization induced by China’s accession to the World Trade Organization (WTO), will affect producers in China. To do so, we identify changes in domestic input marketing and trade policies over the past two decades in order to determine the sources of past input price changes. We also assess the degree to which producers have benefited from these price falls by examining the extent to which China’s input markets can be considered integrated and characterized by low transaction costs. Finally, we draw conjectures about how the new trade liberalization measures will impact future fertilizer prices and benefit farmers in the post-WTO accession period. According to our analysis we find that increased trade and domestic market liberalization for inputs has provided positive benefits to producers through lower input prices. Falling prices for inputs, including fertilizer, have increased profits and provided incentives to increase production. The falling input prices, however, have not occurred due to trade liberalization. At least in the case of fertilizer, prior to WTO there was little trade liberalization. However, the link between fertilizer prices and trade is almost certainly going to change with China’s accession to WTO. Breaking sharply with the past, China’s accession to WTO greatly increased the nation’s commitment to liberalize trade for agricultural inputs. According to our analysis, with the signing of the WTO agreement, given current world market prices, rural producers in China are predicted to benefit from WTO. Because the world-China price gap for many types of fertilizer is sizeable, even if imports are assessed a 13 percent value added tax, it still should be profitable for importers to expand the volume of trade over previous years. From this point of view, rising trade will mean falling prices and with China’s robust markets, rural producers across China should benefit.