1. CATP Model, Macroeconomic Assumptions and Simulation Formula Designing

1.1. For assessing impact of accession to WTO and trade liberalization on China's agriculture, this report adopts the China Agricultural and Trade Policy Simulation Model which is based on our research group's improvement on the Country Projections and Policy Analysis Simulation Model (CPPA) developed by the Bureau of Economic Research under U.S. Department of Agriculture (hereinafter referred to as CATP). CATP, a sector balance model, is mainly applied to assessing impact of trade policy reform on the production, consumption of and trade in agricultural products. It may also be used in forecasts on medium and long-term trends. Space limitation prevents us from going into its structure, functioning theory, data and parameters here.

1.2. Assuming macroeconomic variables based on the CATP model. The figures indicate that: (1). China's total population will hit 1.35 billion in 2005, 1.45 billion in 2015 and 1.6 billion in 2030. Meanwhile, its urbanization level will be raised by 1% annually in 2000-2030, with the level reaching 60% and urban population at 0.7 billion by 2030; (2). Its GDP growth rate will be 7.5% in 2000-2005 and 7% in 2005-2015; (3). The exchange rate of RMB against US dollar will stabilize at 8.3:1 in 2000-2005 and possibly shift to 9.0: 1 in 2005-2015; (4). Its annual real growth rate of sci-tech input into agriculture is expected to be at 5%; (5) Its annual real growth rate of investments in agricultural infrastructure is forecasted to reach 4.5%; and (6) Its annual growth rate of wages for farm labor will perhaps be 0.5%. .

1.3. Designing model formulas. For simulating the impact of accession to the WTO and resultant further liberalization of domestic agriculture produce market on the future of China's milk industry, we have designed three variations of formulas, namely: Baseline Formula, WTO I Formula and WTO II Formula. While the Baseline Formula simulates the effect on the prospects of China’s milk industry under the status quo policy, the WTO I Formula intends to project the effect under current terms reached during China’s WTO negotiations. WTO II Formula, however, goes a step further to draw a picture in the event of China’s possible commitment to full-scale trade liberalization in agricultural products in a new round of WTO multilateral trade negotiation.

2. Simulation Results and Analysis.

China’s accession to WTO and the looming agricultural internationalization will surely exert a far-reaching impact on the progress of the milk industry. Simulation results indicate the following major repercussions from the accession.

2.1 While a short-term scenario suggests a drop in the aggregate output of milk products, a long-range prospect, however, would point to a stimulus to the production capacity of this sector. Simulation results show that compared with the Baseline Formula, a WTO I Formula would bring down the total output by 1.46% with the same drop in output value and a WTO II Formula by 2.43 % in a similar manner. Nevertheless, though the adverse effect of trade liberalization will still be felt thereafter in output value, it would help drive up the total production by 1.43% and 8.24% by 2010 under the WTO I and WTO II formulas respectively over the Baseline Formula results. A further respective increase of 6.25% and 18.23% would be possible by 2015. What's more, the total output value would also rise by 3.68% in the same year over the Baseline Formula.

2.2. A minus in welfare to producers and a plus to consumers. Accession to WTO would force down both producer and consumer prices of China's milk products, cutting down the net income of the former, while benefiting the latter. By 2005, the WTO I and WTO II formulas would drive down the producers’ prices by 1.18% and 1.43% respectively, thus reducing the net income of dairy farmers by 26.96% and 34.17% accordingly. By 2010, the corresponding losses would still be 27.96% and 31.26% higher than the baseline scenario results. However, this worsening tendency would be put under check by 2015 with the drop in net income for dairy farmers contracting to 28.04% under the WTO II formula.

In the mean time, decline in producers’ prices would bring advantages to consumers to the tune of 732 million yuan and 908 million yuan under the WTO I and WTO II formulas respectively by 2005. The corresponding figures would then rise to 5.97 billion yuan and 10. 504 billion yuan by 2010, and further to 18.501 billion yuan and 26.403 billion yuan by 2015 in comparison with the results under the Baseline Formula.

2.3. Accession to WTO would lead to rise in consumption of milk products in China. WTO I Formula would translate into a 1.77% increase of overall consumption by 2005, with that for urban consumption per capita up 0.84% and for rural areas up 10.83% when measured against the Baseline Formula. WTO II Formula would show a corresponding increase of 3.7% for total consumption and 1.78% and 21.97% rises in urban and rural consumption per capita by 2005. By 2015, WTO I and WTO II formulas would bring about rises in total consumption of 11.34% and 24.9%, in urban per capita consumption of 10.43% and 19.94%, in rural per capita consumption of 22.73% and 79.4% respectively against the backdrop of the Baseline Formula.

2.4. Accession to WTO would mean rises in China’s net imports of milk products. By 2005, the 787.7 kilo tons under the Baseline Formula would climb to 1172.8 kilo tons and 1460.7 kilo tons under the WTO I and WTO II formulas. By 2010, the corresponding figures of the three variations of formulas would be 931 kilo tons, 1880.8 kilo tons and 2216.1 kilo tons respectively. By 2015, they will further jump to 1103.6 kilo tons, 3008.5 kilo tons and 3434.2 kilo tons respectively.

Meanwhile, WTO I and WTO II formulas would drive imports up by 42.05% and 64.96% over the Baseline Formula by 2005, increasing 87.78% and 120.80% by 2010 and further up by 148.64% and 183.7% respectively by 2015.

Further, exports would fall behind imports of milk products for China. On the export, WTO I and WTO II formulas would yield increases of 0.99% and 18.14% over the Baseline Formula by 2005, 4.28% and 19.72% by 2010. The figures will show further rise of 6.61% and 20.84% by 2015. From this can be seen that in the foreseeable future, milk products in China will be mainly oriented to meeting domestic demand.

To sum up, accession to WTO will push China's milk industry forward to participating in economic globalization, and bring about enormous opportunities and severe challenges. An objective and correct understanding of the impact is needed. We believe the challenges will find their expression mainly in the following aspects: Firstly, compared with the developed countries, China’s milk industry is still in the initial stage so far as the technological level of production and processing is concerned, and the industry lacks competitiveness on the international markets. Secondly, imports of milk products may rise from countries and regions with lower production costs, thus bringing pressure on China's domestic markets of milk products. Finally, direct shock waves from imports of liquid milk would be modest due to restraints of higher transportation cost and storage difficulties. Such processed items as cheese and milk power, however, would be subject to greater repercussions.

On the other hand, the increasingly evident tendency of globalization would bring about enormous expansion opportunities to China’s milk industry. Limitations on and reduction of subsidies to milk production and exports will drive up cost in the developed countries like the EU member countries as WTO agricultural accord goes into effect. World-known enterprises may cut down their production in the developed countries and shift their focus to low-cost countries and regions. This would benefit China’s milk industry by attracting foreign capital, advanced expertise and management skills. It would in turn help China’s milk industry to improve production technology, equipment, product quality and labor productivity. As a result, reorganization and restructuring of the sector will speed up, big enterprise group and name brands will emerge and international competitiveness of the industry will heighten in an all-around way. Meanwhile, more intense market competition would propel transformation of mechanism and speed up reform aimed at higher benefits for domestic enterprises of milk products. All this will raise the competitiveness of China’s milk industry in a fundamental manner.

(Excerpts from research report "Implementation of WTO Agreement: Assessing Economic Impact on China’s Milk Industry," by Chen Guoqiang et al., the Research Department of Rural Economy.)