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China’s Rising Fruit and Vegetable Exports Challenge U.S. Industries

Onion World
November 2006

By Sophia Huang and Fred Gale
USDA Economic Research Service

Since the 1990s, China has substantially raised its profile in the global market for fruits and vegetables. Total export value of China’s fruits and vegetables (fresh fruit, fresh
vegetables, processed fruit and vegetables, fruit and vegetable juices, pulses, and tree nuts) more than doubled between 1992-94 and 2002-04, from $2.3 billion to $5.1 billion. China has become a leading exporter in some markets where its presence was negligible 10 years earlier. China’s exports go mainly to Asian countries, which also are important markets for U.S. exporters. A sharp decline in U.S. market share has coincided with the surge in Chinese exports in a number of markets.

China’s Rapid Rise in Exports
While most of China’s vegetable exports are processed, fresh vegetable exports nearly tripled between 1992-94 and 2002-04. Fresh vegetables are now the second-largest fruit and vegetable export category, accounting for 16 percent of export value and about 5 percent of global trade. Two products, garlic and mushrooms, account for more than half of fresh vegetable exports, with a combined average value of $481 million per year during 2002-04. Other leading fresh vegetable exports include onions, carrots, and radishes.

China’s export markets for fruits and vegetables are mainly in Asia. More than 40 percent of processed fruit and vegetable exports by value go to Japan. Nearly three-fourths of China’s fresh vegetable exports went to its Asian neighbors in 2002-04. Major markets included Japan (31 percent), Association of Southeast Asian Nations (ASEAN) (25 percent), South Korea (7 percent), and Hong Kong (6 percent). Garlic, mushrooms, onions, carrots, and radishes accounted for over three-fourths of the 2002-04 total.

Points of Rivalry with the United States
China’s emergence as a fruit and vegetable exporter presents a new source of competition for U.S. producers, mainly in three categories: apple juice, fresh apples, and fresh vegetables. China exports apple juice (mainly concentrated) directly to the U.S., Japan, and Canada, and its exports of fresh apples and several types of vegetables compete with U.S. exports in Asian markets. China’s largest export category, processed fruits and vegetables, does not yet pose a serious challenge to the U.S. because the U.S. and China have been exporting mostly different types of processed fruits and vegetables. However, China’s rising exports of fresh vegetables and apples have coincided with falling market share of U.S. exports in Asian markets.

Fresh Vegetable Exports
U.S. fresh vegetable exports go primarily to Canada and Mexico, but Asia is an important market where U.S. products face competition from China. Although trade disputes with the U.S. and other countries over Chinese garlic since the early 1990s have been indicators of China’s growing presence in world markets for fresh vegetables, the main competition between the U.S. and China lies in Asia. Four East Asian markets—Japan and, to a much lesser degree, Taiwan, South Korea, and Hong Kong—are the primary markets outside North America for U.S. fresh vegetable exports. Broccoli, onions, cauliflower, asparagus, and head lettuce account for about 70 percent of U.S. fresh vegetable exports to Asia. Although most products exported by the U.S. are different from those of China, China’s rising fresh vegetable exports to Asia have shown greater variety and
have begun to include many of the major items that the U.S. exports, particularly since the mid-1990s.

Two of the four East Asian markets—Japan (with 69 percent of U.S. exports to Asia) and South Korea (with 6 percent)—are points of competition between the U.S. and China. The other two markets—Taiwan and Hong Kong—have unique trade relationships with China. Taiwan, with a 14-percent share of U.S. fresh vegetable exports to Asia, does not permit entry of most Chinese fresh produce for political, economic and food safety reasons. Hong Kong received 5 percent of U.S. fresh vegetable shipments to Asia in 2002-04, but
its imports of fresh vegetables from China rose steadily following its return to Chinese sovereignty in 1997. Some Hong Kong growers have moved their production to China to reduce production costs. China’s share of Hong Kong’s import market for fresh vegetables reached 73 percent in 2004.

Japan receives most U.S. exports to Asia of broccoli, onions, cauliflower, and asparagus. China’s share of Japan’s import market for fresh vegetables grew from less than 10 percent in 1989-91 to 37 percent in 2002-04. It surpassed the U.S. as the leading supplier to Japan in 1996. The U.S. share, after reaching a peak of 29 percent in 1994, dropped to 19 percent in 2002-04. For example, U.S. garlic growers raised concerns about Chinese garlic imports beginning in the early 1990s. See U.S. Department of Commerce (2004, 2005) for
recent developments.

Onions and, to a lesser degree, broccoli are the major fresh vegetables exported to Japan by both countries at present, but the variety of Chinese exports is broadening. China has substantially increased its market share for nearly all of Japan’s top 10 fresh vegetable imports, including many of the major crops the U.S. exports, from a decade ago.

Similarly, South Korea’s imports of China’s fresh vegetables increased from less than $1 million before 1994 to $66 million in 2004, and China’s market share surged from under 36 percent before 1994 to 75 percent in 2002-04. In fact, China has been the leading supplier of fresh vegetable exports to South Korea for most years since the 1990s. In comparison, the U.S. market share, after peaking in 1996 at 43 percent, generally declined. In addition, as in Japan, the growth of China’s market share in South Korea is broad based, including onions, broccoli, and carrots, although quantities remain small for some of these imports.

Factors Behind China’s Competitiveness

Farmers Respond to Profits
China’s substantial increase in fruit and vegetable production is a major factor behind its fast export growth. Market reforms introduced in the late 1970s gave farmers more freedom in planting decisions, allowing them to divert land from grains to more lucrative cash crops. Fruits and vegetables yield high returns per acre of land—a scarce resource in China—and use more labor, an abundant resource in China. China’s National Development and Reform Commission (NDRC) estimated that vegetable production in China
yielded an average profi t of 1,563 yuan per mu (equivalent to $1,172 per acre).

China’s horticultural crop production has increased dramatically. Fruit orchard area rose from 1.73 million hectares in 1978-80 to 9.44 million hectares in 2002-04. Vegetable area swelled from 3.68 million hectares to 17.62 million hectares (China National Bureau of Statistics). In 2004, China grew 550 million metric tons of vegetables on 17.6 million hectares of land. Apples are China’s most important fruit, with production of 23.7 million tons in 2004, up 3.2 million tons from 2000.

According to data from the Food and Agriculture Organization of the United Nations, China produced nearly half of the world’s vegetables — fi ve times the U.S. share. China also produced 16 percent of the world’s fruit, more than double the U.S. share, including 36 percent of the world’s apples. China’s increase in vegetable acreage between 2000 and 2004 (2.3 million hectares, or 5.7 million acres) exceeded the entire vegetable acreage in the U.S. (3.7 million acres in 2002). China’s production has grown mainly to meet domestic
demand (over 90 percent of fruit and vegetable production is for the domestic market), but the production increase has facilitated China’s increased presence in global fruit and vegetable trade.

Low Production Costs
China’s competitive advantage lies in its low production costs. Survey data reported by NDRC indicate that prices received for vegetables at the farm level were about 5 cents per lb in 2004, and production costs were less than 3 cents per lb. Material inputs accounted for slightly more than half of production costs, and labor costs accounted for less than half. China’s abundant rural labor supply means that wages and labor costs are low. Most work is done by hand, so machinery costs on Chinese fruit and vegetable farms are
also low.

Exporting agricultural products, especially fruits and vegetables, was emphasized as an important way to aid the farm sector in China’s “Number 1 document.” The document is a 2004 policy statement that gave primary importance to addressing the “three rural problems” of low rural incomes, slow rural economic growth, and a weak agricultural sector. The “Number 1 document” set a goal of boosting agricultural exports to $30 billion within 4-5 years by improving quality and safety of products, increasing the scale and competitiveness of processing enterprises, diversifying export markets, and aiding exporters through access to credit and insurance, value-added tax rebates, and other policies facilitating exports (China Ministry of Commerce, 2005). Private enterprises that do not have“ dragon head” status can have diffi culty obtaining bank loans.

Factors That May Slow China’s Exports
While the Chinese fruit and vegetable sector appears to have the potential to become an export juggernaut, several factors may impede China’s export growth.

High Marketing Costs

China’s advantage in production costs does not necessarily translate into competitiveness in fi nal markets. As produce moves through the marketing chain, high markups, losses, waste, and other ineffi ciencies dramatically raise the cost. One Chinese official estimated that about 30 percent of vegetables in China are lost postharvest due to poor storage and that 90 percent of vegetables arrive at market with inadequate grading, washing, or packaging.

While marketing remains a problem, China is improving its market infrastructure rapidly. A vast system of toll roads now connects nearly all major cities and most towns, and the Government is in the midst of a campaign to build roads in rural areas. Since 1995, China’s Government has promoted construction of a “green corridor” network of roads designed to connect areas that produce fresh agricultural produce with urban markets. Many cold storage facilities have been built in recent years.

The emergence of modern supermarket chains with advanced procurement systems is advancing marketing effi ciency greatly. The opening of the wholesale and distribution sectors to foreign competitors in 2005 as a result of China’s commitments as a World Trade Organization member is likely to bring even greater competition and efficiency in marketing as well as increased investment in cold chain facilities (USDA, December 2005).

Growing Domestic Market
Growing domestic demand for fruits and vegetables is providing an increasingly attractive alternative to exports, a factor that may constrain growth in Chinese exports in coming years. Vegetables are a major part of Chinese meals, whether at home or in banquet halls. Chinese consumers are cutting back on consumption of traditional cabbage and other low-end vegetables and diversifying their consumption to include a wider variety of vegetables.

As Chinese household incomes rise, fruit and vegetable consumption will rise. The relationship between income and fruit and vegetable consumption is evident from a comparison of per capita purchases by high-income households in China with the overall average. For example, household survey data for 2000 show that the top 10 percent of households (ranked by disposable income per capita) purchased 19 percent more vegetables and 40 percent more fruit than did the urban per capita average.

Purchases of several important export crops—carrots, onions, garlic, eggplant, celery, and spinach—are especially popular among high-income Chinese households, with purchases by the top 10
percent exceeding the urban average by 20-40 percent.

As the Chinese economy grows, income gains will be spread more widely over the Chinese population. Development of modern food markets is expanding the array of fruits and vegetables available to middle and lower income households, including those in remote inland provinces and rural areas.

Phytosanitary Concerns
In 2002, Chinese vegetables suffered a series of widely publicized setbacks in Japan due to pesticide residues on produce imported by Japan. In 2004, pest problems also interrupted Chinese apple exports to Canada. Food safety has become a much bigger concern in the domestic Chinese market as well.

Chinese fruits and vegetables often have high levels of pesticide residues, heavy metals, and other contaminants. Water, soil, and air are dangerously polluted in many rural
areas as a result of heavy industrialization and lax environmental regulation. Heavy chemical use results from the intensive cultivation of China’s relatively scarce cropland.
Chinese farmers rely on chemical fertilizer to coax high yields out of soil that has little organic matter, and pesticides are applied in high doses to control pest infestations that
result from monocropping (when one type of crop is grown). Farmers generally know little about the proper use of fertilizers and pesticides, and the agricultural extension
service is weak. Pesticides, fertilizers, and seeds purchased by farmers are often fake or mislabeled.

China is trying to raise quality standards through “green food” and “pollution free” production standards promoted by China’s Ministry of Agriculture. These standards prohibit
or limit the use of potentially harmful chemicals by growers and set limits on the presence of contaminants in soil, water, and air in production areas. These standards are
primarily for the domestic market but also are part of a general escalation of quality and safety standards.

Many enterprises are contracting with farmers to produce vegetables for export and increasingly for the domestic market. One of the motivations for contracting is to
gain direct control over the use of chemical substances. Contracts often specify the chemicals to be used, and farmers often obtain chemicals on credit from the contracting
enterprise. One of the purposes of China’s“ dragon head” enterprises is to disseminate information on chemical use and other production techniques to farmers, playing the
role, in effect, of an agricultural extension service.

Currency Appreciation
China’s domestic fruit and vegetable prices and production costs are low when converted to U.S. dollars at the official exchange rate, but an appreciation of the Chinese currency would narrow China’s price advantage on international markets.

Editor’s note: The above material is condensed from an article, “China’s Rising Fruit and Vegetable Exports Challenge U.S. Industries,” written by Sophia Huang and Fred Gale of the USDA Economic Research Service. The full text can be found at: http://ers.usda. gov/publications/fts/feb06/fts32001/fts32001.pdf.

© 2006 Columbia Publishing

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