Revoking China’s Preferred Trade Status Would be Costly for California Agriculture

Colin A. Carter and Sandro Steinbach

The U.S. House Select Committee on the Chinese Communist Party recently issued a report on China’s economic policies. The committee suggested countering perceived economic and security threats with aggressive U.S. trade policy changes aimed at China. A key recommendation is discontinuing the Permanent Normal Trade Relations (PNTR) status, which currently allows China to trade with the U.S. at most-favored-nation tariff rates. Revoking PNTR would likely provoke tit-for-tat trade actions by China, potentially raising China’s agricultural import tariffs by 9.5%, equivalent to the change in U.S. tariffs if China’s PNTR status is revoked. This could result in the value of California’s agricultural exports to China falling by one-third, with associated trade losses of $1 billion annually.

Introduction

There is a growing consensus among some U.S. lawmakers on the need to reassess the U.S.-China trade relationship and possibly ramp up protectionism. This view is partly driven by concerns over some of China’s political actions perceived as threats to U.S. national security and human rights in China. In addition, of concern to the U.S. is that China has not evolved into a market economy, which contradicts many World Trade Organization (WTO) rules and objectives. Calls to revoke China’s Permanent Normal Trade Relations (PNTR) status would significantly raise U.S. import tariffs on products from China. As a result, China would be incentivized to respond by raising its import tariffs, leading to another trade war. This would be bad news for California agriculture because it would lead to lower farm prices, lost export opportunities, and lost jobs, as experienced during the Trump trade wars in 2018/19. China is the world’s largest importer of U.S. agricultural products, and U.S. farmer access to that large market is now again at risk.

The economic relationship between the U.S. and China has evolved considerably since President Nixon’s visit in 1972, leading to formal trade relations and China’s eventual accession to the WTO in 2001. This journey, marked by President Clinton’s enactment of H.R. 4444, granted China the Most Favored Nation (MFN) status, aligning its tariff rates with other WTO members. The legislation resulted in profound changes in global trade dynamics, reducing China’s average import tariffs and resulting in a substantial increase in bilateral trade between the U.S. and China. U.S. exports to China, particularly agriculture, machinery, and technology, have surged over the past two decades.

The rising U.S. criticism of China’s WTO membership centers around non-compliance with WTO regulations and accession commitments. However, we note that the U.S. won all its WTO disputes against China in the last two decades, resulting in China’s economic policy adjustments, demonstrating the WTO’s effectiveness in enforcing compliance. Unfortunately, the WTO Appellate Body became defunct in 2019, mainly due to the U.S. blocking new judge appointments. Since then, the ability to enforce trade rules with China has been severely undermined. Instead of going through the WTO to address those trade concerns, the Trump Administration imposed import tariffs on Chinese imports in response to intellectual property violations. This led to a cycle of retaliatory tariffs, with considerable negative implications for California agriculture. These retaliatory tariffs have affected over $32 billion worth of U.S. agricultural exports at the time of implementation without resulting in China altering its economic practices. The shift from multilateral WTO dispute resolution to unilateral tariff wars reflects a significant change in U.S.-China trade relations, raising questions about the future of international trade norms and enforcement.

Following the 2018/19 trade war, U.S. lawmakers have implemented additional economic restrictions against China. For instance, the passing of the 2021 U.S. Uyghur Forced Labor Protection Act aimed to curtail U.S. imports of goods produced with forced labor in China. The 2022 U.S. export controls on advanced AI semiconductor chips have meaningfully impacted China’s tech capabilities and the modernization of China’s military. Amid these tensions, proposals to revoke China’s PNTR status have gained momentum in Washington, reflecting a strategic shift in U.S.-China economic relations before the Presidential elections. This policy shift signals a critical reassessment of the U.S.-China economic engagement, with potentially significant implications for California farmers. Understanding the potential economic implications of those trade policy proposals is key for policymakers and private stakeholders.

California Agriculture Depends on Access to China’s Market

Since China joined the WTO in December 2001, California’s annual agricultural exports to China expanded from $0.2 billion to more than $2.6 billion in 2023. Figure 1 shows that the share of California agricultural exports to China grew from 2.4% to 9.9% of total California agricultural exports during the same period. The new market access contributed to shifts in California’s agricultural production, with the area of cash crops, such as almonds, grapes, and pistachios, expanding considerably. For example, the almond-bearing acreage increased from 0.6 million in 2002 to 1.4 million in 2023. This period also saw sharp price rises for various export commodities, illustrated by the price of almonds, which increased from $1.11/lb. in 2002 to $4.00/lb. in 2014. However, when the 2018/19 U.S.-China trade war broke out, trade retaliation resulted in declining export prices for various California cash crops. For instance, the price of California almonds plummeted to $1.40/lb. Farmers in the midwestern U.S. were overcompensated with federal government subsidies aimed to offset economic losses during the 2018/19 trade war, while California farmers were undercompensated.

Figure 1: China’s Share of California Food and Agriculture Exports from 2002 to 2023.

Source: Authors own calculations based on data from the U.S. Census Bureau (2024).

Note. We used the 2021 classification of agricultural goods by the USDA FAS (2024). This definition relies on 6,615 HS codes at the tariff line level for the classification mainly listed under HS Chapters 1-24. State export statistics are sourced from the Origin of Movement (OM) Series of the U.S. Census Bureau (2024). This series provides insights into export activities, tracking the state where merchandise begins its transit to the export port. Therefore, the data represent the transportation starting point of exported goods.

Figure 2 shows that California’s dependency on China as a market for agricultural products varies by product group. The figure plots the China share of California agricultural exports in 2002 versus 2023. As mentioned, the export dependency ratio has quadrupled from 2.4% to 9.9% since China’s WTO accession. For certain product groups, the increase is significantly larger. For instance, about 8.4% of horticultural products go to China, a fivefold increase since 2002. The highest export dependencies are observed for cotton, linters, and waste (30.1%), livestock and meats (22.4%), and grains and feeds (12.2%). While the 2018/19 trade war harmed agricultural and food producers, certain industries stand out by having experienced the brunt of the trade losses. Among the severely impacted were tree nut producers. Previous economic studies found that California almond export losses in marketing years 2017/18 to 2021/22 exceeded $755 million, leading to a considerable increase in U.S. almond inventories. This pattern from the previous trade war implies that the potential trade effects of PNTR removal are likely to vary considerably across agricultural product groups.

(a) Share in 2002	(b) Share in 2023

Figure 2: China’s Share of California Agricultural Exports in 2002 versus 2023.

Source: Authors own calculation based on data from the U.S. Census Bureau (2024).

Note. The share was calculated based on the FAS aggregated product groups. Agriculture represents the share for all agricultural and food products according to the 2021 classification of agricultural goods by USDA FAS (2024).

PNTR Removal Could Cost California Agriculture Dearly

Alternative proposals to revoke China’s PNTR status are being considered in Washington, D.C. The leading proposal would elevate tariffs on all Chinese imports from the most favored nation rates (which are known as Column 1 rates) to higher Column 2 rates of the U.S. Harmonized Tariff Schedule. The Column 2 rates are currently exclusive to countries such as Cuba, North Korea, Russia, and Belarus. Cuba and North Korea face complete U.S.-imposed economic embargoes, while Russia and Belarus had their PNTR status withdrawn following the Russian invasion of Ukraine. Table 1 shows the average U.S. import tariff schedule for Columns 1 (most favored nation) and 2 in 2023.

Table 1: Average Harmonized Tariff Schedule Rates.

Source: Authors own calculation based on tariff data from the U.S. International Trade Commission (2024).

Note. A simple average was calculated based on the FAS aggregated product groups. Specific tariffs were transformed into ad valorem equivalents.

Implementing the PNTR revocation would raise the average import tariff on Chinese agricultural products by 9.5%, from 5.1% under Column 1 to 14.6% under Column 2. The impact on import tariffs for other non-agricultural sectors would be larger, with the average import tariff over all sectors going up from 3.9% to 32.5%. Horticultural products, dairy, livestock, and meats would experience steep increases in import tariffs. In addition to the proposal to remove PNTR status and thus elevate U.S. import tariffs on all Chinese imports to the Column 2 rates, another proposal was introduced during a recent debate by the Select Committee to establish a unique tariff regime for Chinese imports, necessitating regular Congressional approval. This outcome could be even worse for California agriculture.

To estimate the potential effects on California agriculture associated with removing China’s PNTR status, we assume a reciprocal and uniform `tit-for-tat’ trade response from China, which means that China would raise its import tariffs on inbound agricultural products by 9.5%. This assumption draws on the trade policy dynamics observed during the 2018/19 U.S.-China trade war, where China responded with equivalent tariff hikes on American agricultural imports. Those retaliatory measures increased China’s agricultural import tariffs by 19.1% in 2018/19. One previous economic study estimated that these tariffs caused a 71% reduction in U.S. agricultural exports to China compared to the 2016/17 levels. Another study estimated a decline in U.S. agricultural exports to China from $18.5 billion in crop year 2017/18 to $7.8 billion in crop year 2018/19, marking a 58% decrease in export value. These figures provide a basis for our estimates in Table 2 of the potential consequences of China’s response to the revocation of its PNTR status.

Table 2 shows the predicted trade effects (in value terms) of possible retaliation from China in response to PNTR removal. We assume China’s new import tariffs would be equivalent to the higher U.S. tariffs they would face in the U.S. market, going up from Column 1 to 2 in Table 1. We show lower and upper bound estimates of trade losses based on the trade war tariff elasticities in the literature, which are -3.04 and -3.72, respectively. These elasticities measure how much trade values respond to a 1% increase in the ad-valorem tariff rate. On average, California’s agricultural export value to China would decline by 28.4% to 34.8% compared to a scenario without PNTR revocation. Based on 2023 California agricultural exports, this would result in trade losses between $0.8 billion and almost $1 billion, equal to about 4% of the value of 2023 California agricultural shipments to all export destinations.

This may sound small, but in international agricultural markets, a relatively small change in trade can have significant price impacts. Interestingly, there are considerable differences between product groups, with horticultural products, livestock and meats, dairy, and grains and feeds facing the brunt of the potential trade damage. Over 60% of the trade losses would be concentrated on horticultural products. Producer groups that rely heavily on China, such as tree nuts, would see major impacts that could further exacerbate existing market challenges caused by the lingering 2018/19 U.S.-China trade war, inventory growth, and sluggish domestic demand.

Table 2: Potential Impact of PNTR Revocation on California Agriculture Exports to China.

Source: Authors own calculation based on column 1 and column 2 tariff data from the U.S. International Trade Commission (2024), 2023 California export data from the U.S. Census Bureau (2024), and retaliatory tariff data from the PRC Ministry of Finance (2024).

Note. Trade war tariff elasticities are from USDA (2019) for the lower bound and Grant et al. (2019) for the upper bound. The elasticities were calculated by dividing the percentage trade effects by the change in retaliatory import tariffs imposed by China. Trade effect of PNTR revocation were calculated using those elasticities (-3.0 and -3.7) and multiplying them with the difference between column 1 and 2 import tariffs for agriculture products assuming tit-for-tat retaliation in response to PNTR revocation. Exports to China from 2023 were used to estimate the trade impact in million $.

Conclusion

Since China joined the WTO over two decades ago, U.S. agricultural exports to China have surged. This market access was handed a significant setback in 2018/19 when the U.S. started a trade war that resulted in major trade retaliation from China. That trade war was highly unsuccessful from the U.S. perspective and resulted in lower farm prices, lost export opportunities, and job losses for California agriculture that continue to impact the industry.

The potential revocation of China’s PNTR status and the associated implications of tariff escalations would further disrupt this trade relationship, risking substantial economic losses for California agriculture due to reduced agricultural exports. This scenario underscores the need for strategic, informed trade policies that consider the complexities of international market dynamics and the pivotal role of trade relations in sustaining the vitality of California's agricultural economy.