At the beginning of the year, Chinese import duties on 18 agricultural and fishery products from Taiwan fell to zero. The products, ranging from grouper and milkfish to green tea and dragon fruit, were on the early harvest list of the cross-strait Economic Cooperation Framework Agreement (ECFA) and all rank among Taiwan's export hits in China.

Over the past decade, as cross-strait agricultural trade has nearly quadrupled, Taiwan's agricultural trade deficit with China has continued to shrink, falling to its lowest level in a decade last year.

In 2002, Taiwan's deficit with China exceeded US$300 million, but the gap gradually narrowed after 2008 to US$38 million last year. In 2012, Taiwan imported agricultural products worth US$827 million from China, a 6 percent increase over the previous year, while agricultural exports to China – mainly specific farm and fishery products – totaled US$789 million, 17.7 percent more than in 2011.

Chang Su-san, director general of the Council of Agriculture's Department of International Affairs, points out that live grouper from Taiwan was a hot-seller in China last year with total exports of US$130 million, the highest amount generated by a single item. Since 2010 China has been Taiwan's second largest export market for agricultural products behind Japan.

But these positive steps forward mask the substantial risks Taiwan is taking in trying to win market share in China. A big chunk of Taiwan's agricultural exports are politically driven purchases made by Beijing to win support among the island's rural population, meaning the products do not need to stand the test of market forces. On the other hand, China has been able to deeply penetrate Taiwan's market and gradually gain market share because of its economies of scale and competitive prices.

Chinese Farm Imports Hurt Taiwanese Farmers

Taiwan currently allows imports of more than 1,400 agricultural products from China. Another 830 items, such as cauliflower, tomatoes, grapes and pineapples, remain prohibited but Taiwan could open its doors to those products under pressure from China in trade negotiations. "These products are all grown by small farmers, it's them who would be dealt the strongest blow," notes the COA's Chang.

The import ban, however, only applies to fresh and chilled produce but not to fruit or vegetables in frozen, dehydrated or canned form. Consequently, imports of processed agricultural products from China remain on the rise.

The import tide is most obvious for tomatoes, cauliflower and peas. Over the past decade, tomato imports from China increased more than 20-fold, and imports of cauliflower and peas tripled. At the same time, Taiwan's domestic production of string beans (snap beans) and peas dropped by half.

In 2011, 5,077 tons of string beans, the equivalent of 40 percent of Taiwan's total string bean production that year, were imported from China, reflecting the substantial degree to which imported vegetables from China have begun to substitute locally grown produce.

"Taiwan's farm exports to China mostly consist of high-priced grouper and fruits, but most Chinese imports are fruit and vegetables that people eat on a daily basis. This will no doubt have an impact on Taiwanese farmers," warns Chen Chi-chung, a professor at the Department of Applied Economics of National Chung Hsing University, who hails from a farming family in Wandan, Pingdong County in southern Taiwan.

He points out that the profits Taiwan reaped over the past few years thanks to Chinese concessions in connection with the ECFA are only temporary. Chen believes that over the long term, as cross-strait trade is further liberalized, Taiwanese farm products will inevitably lose ground in the market.

"China's southern coastal area can virtually produce all the vegetables and fruits that are grown in Taiwan. They can be produced on a much bigger scale and at dramatically lower prices," Chen observes. Should the Taiwanese market be opened further to Chinese farm imports in the future, the resulting impact should not be underestimated, he warns.

Another example is cereal products. The annual volume of cereal products imported from China has tripled from 40,000 tons to 120,000 tons within the past five years.

Similarly, imports of tea from China have already surpassed 5,000 tons per year. "Do you know how much tea Taiwan grows per year? 17,000 tons. Imports amount to one-third (of our annual production). This means that one-third of what we consume domestically comes from over there," notes Chen, citing statistics.

Dramatically Shrinking Fruit and Vegetable Production

Based on research commissioned by the COA, Chinese agricultural products will cost less than half of what local produce costs if import duties are further reduced. The resulting substitution of locally grown produce with cheaper fruit and vegetable imports would cause Taiwan's agricultural production to shrink by an estimated NT$3.2 billion per year. To put it more concretely, the livelihoods of more than 20,000 local farmers would be jeopardized.

"If we continue down this road, will Taiwan's agriculture still be alive in 20 years?" asks Chen somberly.

"Inevitably farmers will feel the brunt of trade liberalization," declares Hsu Shih-hsun, a professor at the Department of Agricultural Economics of National Taiwan University. He believes that Taiwanese agriculture is headed for a precarious future unless some new thinking takes hold in the sector.

The ECFA first paved the road, and now 830 categories of Chinese farm products are getting ready to knock at Taiwan's doors. Scholars suggest that Taiwan's agricultural sector must quickly respond to market liberalization and be well prepared before more low-priced farm products come calling.

Countermeasure No. 1 : Clear country of origin labeling would give consumers the option to support domestic products.

Taiwan produces 17,000 tons of tea per year but imports another 30,000 tons of tea from countries around the globe. Chen suspects that many products labeled as made in Taiwan are actually sourced from an array of nations as vast as the United Nations.

Chen suggests that labeling requirements should be implemented for all food categories. Besides country of origin, their respective ratios from each country should also be clearly labeled. Moreover, a strict inspection system should be introduced to enforce compliance with the labeling program. With information transparency, consumers who want to support domestic produce would have a real choice.

Countermeasure No. 2 : With strengthened quarantine and inspection standards a clear line could be drawn between domestic and imported products.

Quarantine and inspection is the biggest non-tariff barrier in agricultural trade. Chen points out that many Chinese farm products originate from pest- or disease-infested areas. At the same time, China has laxer regulations than Taiwan with regard to use of agricultural chemicals. Stricter quarantine and inspection standards for agricultural products would not only safeguard consumer safety but also effectively segment the market into local and imported produce.

In addition to taking short-term measures to stem the influx of falsely labeled or potentially unsafe farm products, however, Taiwan must think more strategically. Before the massive wave of cheap agricultural goods from China hits the country, Taiwan should invest more resources in agriculture, reconsider its operating strategy, and educate local consumers to promote the transformation of Taiwan's agricultural sector.

Three Strategies for Transforming Agriculture

Long-term strategy No. 1: Safeguarding high-quality exports through contract farming.

New Zealand uses contract farming for its kiwi fruit exports. The harvested fruit is bought at a previously agreed guaranteed price. Under such contract farming agreements, the farmers usually earn a higher profit than the average farmer, while consumers enjoy products of consistent quality.

"Exports of edamame beans from Taiwan have been doing exceptionally well in recent years thanks to contract farming," explains the COA's Chang.

Although Japan levies a 6 percent duty on imported edamame beans, the beans from Taiwan have grabbed a 42 percent market share in Japan, because there are no concerns about food safety, and the quality is stable.

Long-term strategy No. 2: Using entrepreneurial thinking to build an agricultural sector chain.

"Modern agriculture must adopt iPhone thinking," posits Hsu. When a mobile phone maker releases a new handset, the company that created the brand and developed the model makes the biggest profits rather than the manufacturer of its parts and components. Agribusinesses must be managed based on a similar approach, Hsu says.

Upgrading Taiwan's agricultural sector depends on R&D, which will lead to reduced consumption of natural resources and also astoundingly high profits, Hsu explains, citing carrots grown for sale in Japan as an example.

Taiwanese farmers pay NT$5,000 for a small vial of seeds. In Changhua, farmers work hard growing the carrots for slim profits but still have to buy the test instruments used in carrot cultivation from Japan. Taiwan provides its soil, water, and labor for meager margins, while paying heavily for know-how.

Hsu argues that the crux of the problem is the COA's lack of understanding of the industry chain concept. Instead the government agency only cares about selling primary base commodities and looking after farmers' welfare. But it overlooks the fact that value can only be added to agricultural products if they are processed, such as turning rice into rice crackers.

Long-term strategy No. 3: Educating local consumers to support locally grown fruit and vegetables.

Chang believes that consumer attitudes and behavior need to be changed from the bottom up, starting with school age children.

"If they get into the habit of eating locally grown produce, they will continue to support it as grown-ups," predicts Chang, pointing to school lunches in elementary and junior high schools.

Actually, if Taiwan wants to make a fortune by exporting farm products to China, it probably has only a few years left to do so. But policymakers must still figure out how to strengthen the country's agricultural base and how to ensure that locally grown farm products can be consumed safely. Otherwise, there will be no stopping the sweeping tide of trade liberalization.

Translated from the Chinese by Susanne Ganz