Trade-Induced Adjustment Cost And China’s Agriculture Trade Policy

China’s WTO accession has brought concerns over its agricultural sector where the realization of comparative advantage by free trade will lead to economic efficiency. However, it has been debated the openness of agricultural markets. Although based on classic trade theory free trade could improve welfare for both trading partners. What we usually see in reality is that governments tend to adopt trade protection policy rather than free trade. What’s the cause to that deviation? One of the most important reasons lie in the none-adjustment cost hypothesis of the trade theory, assuming that production resources in one sector can be reallocated to another sector with ease and no cost, therefore realizing improved resource allocation with no adjustment cost. However, in reality more often than not it is not true, especially so in agricultural sector, where production resources, such as natural resources, financial capital and human capital, are low in mobility. Therefore, any reallocation in one industry of agricultural, usually with low comparative advantage in production and is vulnerable to foreign competition, to another industry of agricultural, which enjoys comparative advantage in production and has expending export potential, involves sizable adjustment costs while reaping the benefit of improved resource reallocation. Sometimes, the trade-induced adjustment cost is so high that the government has to deal with social instability and political pressure. Thus, it could be explained in a certain degree that why export countries and import countries tend to adopt constrained market liberalization policy, and trade protection in certain industries and certain period (for example, post-transition period) is necessary.If the trade policy is considered from the trade-induced adjustment cost, there are two dimensions:one is the import of land-intensive products, the other is the export of labor-intensive products. Among various agricultural products in China, land-intensive products, such as rice, wheat, soybean, maize, cotton and etc, are low in comparative advantages, subject to more competition and are in need for more protection in trade polices. On the other hand, labor-intensive products such as meat products, aquatic products, vegetable and fruits, while enjoying production comparative advantage and has expanding export potential, are suffered with increasing trade barriers, and call for less protection from the importing countries. Understanding the reason of adjustment cost for protection, both trading partners should make a comparison of adjustment cost across the categories of products, and making the best choice of those to be protected as well as those to be less-protected, to meet each other’s best trade interest with least adjustment cost from each side. Therefore, when trade opening policies are under discussion and formulation, trade-induced adjustment cost should also be considered as an important perspective for analysis.Meanwhile, as the object of the adjustment, land resources, financial capital and human capital in the same industry would face different costs because of the relative factor intensity. Comparing with other factors, farm labor, which is also the owner of capita and the manager of land, is much more difficult to find a satisfactory solution when it is affected by foreign competition and has to face the adjustment cost for its lack of education, technology and necessary information. So the shock to the labor factor is particularly worthy of our attention.Therefore, it is of high importance to estimate empirically and compare the adjustment cost of agricultural production both laborer-intensive and land-intensive, to facilitate trade policy formulation strategy and the realization of maximum trade benefit with least adjustment cost. In this paper, the adjustment cost of products and factors. Based on the test of the trade-adjustment cost measurement hypothesis, this paper focuses on major land-intensive products as well as major labor-intensive product and utilizes trade data before and after China’s WTO accession to estimates and makes comparative analysis of trade-induced adjustment cost with different products and factors, serving as a reference for China’s future market liberalization and protection policy development.Fist, the applicability and effectiveness adjustment cost measurement hypothesis——the smooth adjustment hypothesis in Chinese agricultural trade should be tested. This paper focuses on24industries in agriculture from1994-2009before and after China’s accession into the WTO, utilizing S indicator and GL index to provide an empirical analysis and testing to the smooth adjustment hypothesis(SAH) in agriculture based on the adjustment of previous verification equation. The key variables in the regression equation are significant at1%level indicating the preliminary of the applicability and effectiveness of smooth adjustment hypothesis(SAH) in agriculture trade of China.Second, Based on the applicability identification of smooth adjustment hypothesis (SAH), this paper has utilized TAS model and S indicator to provide an analysis, measurement and comparison of trade induced adjustment cost and adjustment pressure for China’s major land-intensive agricultural products, as well as for symbol labor-intensive products respectively. The measurement of adjustment cost for land-intensive products provide moderate and reasonable selection criteria for trade protection; the analysis of adjustment cost for labor-intensive products provides new angle for labor-intensive agriculture products exportation with comparative advantage to avoid variety and target countries with high adjustment cost and high friction cost. After the measurement of specific product, we will go further to production factors level, to analysis the adjustment cost faced by important production factors in agriculture-land, capital and labor. When we measure the adjustment cost of different products in factors level through the combination three elements of land, capital and labor, we find the sorting of adjustment cost index of each product’s factor intensity changes relative to S-index. In some specific industries, the labor’s adjustment cost will be higher than other factors in the same industry, and face more severe adjustment cost.Third, comparing with other factors, farm labor, which is also the owner of capita and the manager of land, is much more difficult to find a satisfactory solution when it is affected by foreign competition and has to face the adjustment cost for its lack of education, technology and necessary information. Therefore, it will catch the eyes of the labor factor’s adjustment cost. Though we have analyzed the labor factor’s trade-induced adjustment cost as an index format, the indices can not be more intuitive to measure of the adjustment costs. So the quantized value of the adjustment cost which is quantized by standard labor should be identified and used in the measurement. The results show that, the farm employment "creation" effect due to labor intensive exports has actually been dominated by the employment "substitution" effect due to increased land intensive imports, resulting in net farm employment substitution rather than creation for most of the years since China’s WTO accession. We further provide key pieces of evidence to rationalize these results, including: shifting agricultural trade balance in favor of net imports of land intensive products, higher absolute unit labor contents in land intensive subsectors rather than in labor intensive subsectors, and continuously reducing labor uses in both land and labor intensive subsectors possibly due to agricultural productivity growth. So for comparable increases in net imports of land intensive products and net exports of labor intensive products, the implied employment substitution effect will be higher than the resulted employment creation effect. Lastly, agricultural productivity growth has generally led to diminishing labor content in both types of agricultural products.With China’s trade liberalization, understanding the adjusting cost of China’s land-intensive agricultural products, and the trade partners’ cost caused by trade with China, is significant as an implication both for policy making in bilateral or regional trade negotiation and for better resource allocation. With China’s trade liberalization, understanding the adjusting cost of China’s agricultural products, and the trade partners’ cost caused by trade with China, is significant as an implication both for policy making in bilateral or regional trade negotiation and for better resource allocation. For the immediate relationship between the market openness and the trade-induced adjustment cost, this paper estimates trade-induced adjusting cost, and compares across various categories of agricultural products, providing a new perspective for trade policy-making reference.