Trade Liberalization and Agricultural Terms of Trade in China: Price Scissors Revisited

With China’s accession to the WTO, concerns have arisen over the possible negative welfare impacts on domestic agricultural producers. The broad concern is that China’s domestic agricultural prices will be pushed down even further, leading to a greater widening of the gap between rural and urban incomes. It is widely believed that declining price ratio of agricultural to industrial products, the so-called “price scissors”, is one of the major reasons for increasing rural-urban income differences over the past decades. Therefore, improving the terms of trade in favor of agricultural products is a broad policy goal in China. But is this possible with the country joining the WTO? While there is a general perception that the price scissors have negatively affected China’s agriculture and that trade liberalization will worsen the situation, empirical work on price scissors in China, and the relationship to openness, is scarce. In this paper, we use data from 1978-2005 to estimate the impact of China’s trade openness on the relative price of domestic agricultural to industrial products. We find that the domestic agricultural-industrial terms of trade have not exhibited a declining trend, and that trade openness in fact exerts positive impacts on the terms of trade in favor of agricultural products. This finding implies that trade openness improves the economic welfare of China’s agricultural producers.