Wall Street on the Future of Agbiotech in China

Wall Street on the Future of Agbiotech in China

July 26, 2001 Wall Street Journal
AWSJ: Column: China Looks To Biotech Food

(Editor's Note: Mssrs. Driver and Goettl work at China Food and
Agricultural Services in Beijing.)

There's a new front in China's internal battle over trade: genetically
modified organisms. Ever since Beijing passed some anti-GMO regulations a
few months back, farmers, manufacturers and government have been sparring
over how the products should fit into China's future. But unlike Europe's
activism, China's relationship to biotech will have real consequences for
the country. As Huang Jikun, head of the Center for Chinese Agricultural
Policy, explains, "I haven't seen anyone die of GM crops so far, but every
year nearly 500 people in China die of pesticide poisoning used with
traditional crops."

That endorsement should clarify China's policy for the world. While
countries in the European Union, Japan and Korea have become panic-stricken
over GM products like Starlink corn making it into their food products,
theoretical concern is a luxury China can't afford. In a country with little
arable land, desperately poor farmers and political concern about
over-dependence on other countries to supply its food needs, China must
continue its pursuit of biotechnology tools.

The proposed regulations, if taken to a European extreme, would cause an
industry panic. But unlike Europe, China has no consumer protesters.
Consumer awareness may be growing, but GMO products barely register a
blip on consumers' radar screens. In addition, consumers are unorganized and
have little political clout. China seems certain to continue its pursuit of
biotechnology tools. The question is how to navigate the political

Many observers say the Ministry of Agriculture is trying to get the best of
both worlds. One set of farmers and officials in the MOA want protection
from cheaper and often higher-quality imports and are opposed by commodity
processors and another set of farmers and MOA officials seeking the cheaper
production costs those GMO products provide. Meanwhile, on the one hand,
as the manager of large state farms that grow soybeans and corn, China wants
to restrict imports to boost domestic prices while trying to promote Chinese
corn as "GMO-free" to make export sales to South Korea and Japan. On the
other hand, MOA livestock feeding operations benefit from cheaper soybean
imports, and their own state farms will benefit from using GMO seeds.

Given all that, China can only try to argue for restrictions on scientific
grounds, something they are unlikely to press because the government itself
has been leading research into GMOs for years. From genetically modified
seeds to animal cloning, the Chinese government is aggressively trying to
harness biotechnology in order to increase domestic output and reduce
production costs. And despite current international concerns over issues
such as Starlink corn, China appears committed to developing home grown
techniques as well as encouraging international investment in this area.

All of this must be set against the backdrop of China's imminent entry into
the World Trade Organization. While China may want to limit imports, neither
the MOA nor the central government is likely to play up the biotech
arguments that are so often abused for political purposes elsewhere in the
world. And, of course, any argument China might make for restrictions on GMO
imports as a tool to help protect their farmers would go against World Trade
Organization rules and land them in a bunch of trouble.

There are strong arguments from farmers who don't want any "protection" from
biotech. Genetically modified cottonseed, first introduced to China by
Monsanto several years ago, is perhaps the best-known weapon against cotton
bollworm, which plagued northern China in the mid-1990s. Today more than
700,000 hectares of transgenic cotton grows in China. The resounding success
of GMO cottonseed has sparked farmer interest and government research, and a
Chinese competitor has now developed its own brand of anti-bollworm GMO

As in the United States and Argentina, farmers say lower costs for inputs
such as pesticide more than make up for the more expensive seeds. In fact,
partially due to the success farmers had in 1999 in the Shandong/Henan
border area, cotton acreage increased in 2000 and again in 2001 by an
estimated 10% to 15 %. Since then, the Committee of Genetics Engineering
Safety has received nearly 200 GMO seed patents for potential sale to
Chinese farmers.

If marketplace success for farmers, seed companies and processors was not
enough, further indication that the Ministry of Agriculture will not tamper
with its current pro-GMO formula came in the form of a June report published
on its Internet site. The report first gave a nod to the plight of farmers,
explaining that some farmers would benefit from higher prices and lower
competition should China restrict GMO grains. But the report also said that
such a decision would have gloomy long-term repercussions.

For one, if China wants only GMO-free soybeans, domestic prices would
skyrocket and supplies would fall far short of demand. For another, the
country would suffer a soybean meal shortage that would cripple the animal
feed industry, escalate meat prices and spike the inflation rate. China's
crushing industry would be hit by massive losses. Perhaps most importantly,
the report noted, any attempt to ban GMO grains could affect China's
accession to the WTO, or put the government in a position to be sued in
WTO court once it gets in.

It was not surprising, then, that as they put the finishing touches on the
much-awaited guidelines, Vice-Ministers and MOA planning department
apparatchiks say that the impact of its new regulations will be negligible
and that they will not reduce GMO soybean production or demand.

The problem is that, as with any new Chinese regulation, what matters is
not what is written or said but how it is actually implemented. One of the
biggest worries is that local plant and quarantine officials will look at
the heavy testing and paperwork requirements in the new GMO regulations
and see an opportunity to grab extra fees from importers in return for
expediting the customs clearance process. Arbitrary procedures and fees
imposed by local quarantine and customs officials have long been an
impediment to imports.

In fact, one of the focal points of the recent U.S.-China agricultural
issues agreement for WTO was a promise by Beijing to set up a central office
and hotline for responding to complaints by importers and suppliers when
local officials overstep their authority. But again, it will take a few
actual test cases before anyone will feel confident about how the new rules
will be implemented.

That is where China's impending entry into the WTO will come in handy, both
for foreign exporters and Chinese or foreign crushers in China using foreign
beans. If a company believes the new guidelines might make it difficult or
more expensive to import beans, it could bring a suit at the WTO court. Just
as likely, China would seek to avoid the suit by amending its implementation

But as long as the Chinese government believes it has more to gain from
GMO products than it has to lose, it will act in its own best interests and not
impose significant restrictions on GMO product imports or on GMO research.

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