Voluntary Report - public distribution

**Date:** 4/21/2004

**GAIN Report Number:** CH4807

CH3807

**China, Peoples Republic of**

**Market Development Reports**

**High Value Ag Products: What Is China Really Importing?**

**2004**

**Approved by:**

![](media/image1.wmf)Ross Kreamer

U.S. Consulate

**Prepared by:**

Ralph Bean

**Report Highlights:**

On-the-ground evidence in Shanghai indicates that China is importing a
growing variety of high value added products from the U.S., primarily
for use in manufacturing. Close examination of the trade statistics
confirms this, and reveals several important trends in China's imports
from the U.S. China's high-value imports are undergoing a transformation
mirroring that of the economy as a whole.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai ATO \[CH2\]

\[CH\]

![](media/image2.wmf){width="3.661811023622047in"
height="2.9673228346456693in"}**What Lies Beneath**

China's imports of processed food and intermediate agricultural products
have grown quickly over the past five years. At the same time, however,
the content of these imports has shifted sharply, with highly
specialized and high value products gaining ground at a blistering pace.
This movement into specialized imports has led to an increase in the
number of types of products being imported and placed existing
classification schemes under pressure. Broad classifications, though
useful, often conceal as much as they reveal. To see what China is
really importing from the U.S., and what it means for future exports, it
has become more important than ever to delve beneath the surface of the
trade statistics and see what lies beneath.

# A Banner Year

2003 was a banner year for U.S. exports of high-value agricultural goods
to China. Exports of intermediate products jumped by almost 42% to reach
\$863 million, while consumer-oriented goods increased by over 55% for a
total of \$439 million in 2003. Over the past six years, U.S. exports of
consumer-oriented products to China have increased at average rate of
30% per year. At the same time, the mix of commodities being exported
has changed, in many cases moving into more highly-specialized items.
Most of these products fall into one of three types: commodities for
processing, ingredients for food production and high-value consumer
goods. All reflect the increasing sophistication of China's processing
industries and consumers.

###### Consumer-Oriented Goods

China's imports of consumer-oriented products from the U.S. have grown
rapidly, nearly quadrupling in size over the past six years. Although
this category includes poultry, processed fruits and vegetables, and
beef, it is now dominated by 'other consumer oriented.' This grab-bag
category has been a significant component in China's imports from the
U.S. for a number of years, but in 2003, imports of 'other' more than
doubled, reaching \$136 million and accounting for more trade than
poultry and beef combined. The sheer size of this category, not to
mention its explosive growth, makes close examination imperative. A
number of other other categories of consumer goods also merit close
examination for the trends they conceal.

*Other* -- The \$93 million mystery. Of the \$136 million in trade
accounted for by this category, over \$93 million (68%) falls under a
single tariff line: the poetically named "other food preparations, not
elsewhere specified, not canned, not frozen, not including sugar," HTS
code 2106907090. The next largest component item, ginseng root (wild and
cultivated combined), remains a distant second at less than \$20
million. (Industry sources claim that as much as half of U.S. cultivated
ginseng exports actually originate in Canada). Efforts to track down the
exact content of 'other' have yielded only the sparsest insights. The
category may include mixtures of different fruits and vegetables,
provided they are 'transformed' into a sauce or soup---and are not
canned or frozen or contain sugar. Bulk or bottled products may fit into
this category, but not jellies or jams (which contain added sugar).
Similar mixtures including mixed meat or dairy products are also
possibilities. One source notes that certain types of fortified
concentrated orange juice may be part of this, since the addition of
extra calcium, etc., may cause the product to fall outside the normal
classification for orange juice concentrate. Attempts to track the
content using Chinese Customs data yielded similar results. Despite
ATO's best efforts, the exact composition of this \$93 million in trade
remains a frustrating mystery.

*Processed Fruits and Vegetables* -- Frozen potatoes are the primary
component in this category, accounting for nearly half of sales and with
a growth rate of 12% in 2003. Raisins and frozen sweet corn showed the
fastest growth among major products at 98% and 89%, respectively, with
sales at \$5.9 and \$6.6 million. The biggest surprise in 2003 was a
massive surge in imports of strawberry products. Frozen strawberry
imports jumped from a mere \$18,000 in 2002 to nearly \$3 million in
2003. Likewise, prepared and preserved strawberry exports jumped from
\$0 in 2002 to \$923,000 in 2003. Anecdotal evidence indicates that
frozen strawberries are being imported for processing into dried
strawberry chips, then re-exported. Prepared and preserved peaches
imports also jumped, going from \$0 to nearly \$1.6 million in 2003.

![](media/image6.wmf){width="3.2181102362204723in"
height="1.75in"}*Fresh Fruit* -- Although oranges continue to dominate,
the biggest surprise was, once again, strawberries. U.S. Customs data
show a massive surge in fresh strawberry imports from \$350,000 to over
\$5 million. There is no import protocol for fresh strawberries to
China, however, and China Customs does not show a corresponding rise, so
this is most likely the result of an error in the data. Examination of
trade data for Hong Kong and Taiwan indicate that the shipment to these
destinations were not accidentally attributed to mainland China. Where
the confusion lies, in the product or the destination, remains unknown.

*Breakfast Cereals* -- Although small, this category is notable for a
hidden trend. The bulk is not composed of breakfast cereal at all, but
of baking mixes and dough, which at over \$1 million, account for more
than half of the total. Other types of frozen pastry products and breads
appear are scattered across different categories, helping to conceal the
fact that all have seen substantial increases in exports. Although still
a relatively small item, it is clear that pastry products are becoming
an increasingly popular export item for the China markets. Anecdotal
evidence implies that demand is being driven by the growing number of
coffee shops that stock western-style pastries and the bakeries that
supply them. (Exports of coffee-related items such as creamers are also
growing). Dough and mix imports are likely to continue growing: Mrs.
Field's has set up shop in the Shanghai area, and is reportedly
importing frozen dough directly from the U.S.

###### Intermediate Products

Exports of intermediate products to China collapsed in 1999, but have
gradually recovered over recent years and now exceed 1998 levels. Prior
to 1999, exports were dominated by soybean oil and meal. The collapse in
soy products imports was a partly a result of the development of China's
domestic soy processing industry, which led to a switch in imports from
processed products to whole soybeans for processing. China's soybean
imports from all destinations skyrocketed beginning in 1999. The
recovery in intermediate products exports since then has been led by
hides and skins . . . and by 'other' intermediate commodities. As a
result, the specific content of intermediate commodities exports has
undergone a complete transformation, with bovine hides now the largest
single product, followed by 'other.' The vast majority of the hides are
destined for China's burgeoning manufacturers of footwear, clothing and
furniture. Although large quantities of the finished products remain in
China, the bulk are exported. 'Other intermediate' is now the second
largest category behind hides, accounting for nearly a quarter of a
billion dollars in U.S. exports in 2003. In fact, excluding hides and
skins, 'other' now accounts for more trade than all other intermediate
products combined. What little is left after subtracting these two,
consists largely of planting seeds, animal fats and sweetners.

Thankfully, unlike consumer-oriented products, the 'other products'
category for intermediate products yields more readily to analysis. No
single type of product dominates, although processed proteins constitute
two of the top five. Essences and aromatic substances for use in food
and non-food products are also prominent, along with chicken offal
(mostly feet) and guts, bladders and stomachs from livestock. Many, such
as the protein products and essences, are specialized products for use
in food processing or manufacturing. The essences and vegetable saps,
for example, break down further into dozens of specific tariff lines
including mint oils, hops extracts and other items. To give an idea of
how important these specialized products are becoming to U.S. exports,
consider that that in 2003 exports to the U.S. of a single tariff line,

'concentrated and textured protein

substances' from the U.S. amounted to

nearly as much as its imports of U.S.

![](media/image7.wmf)wheat. (Many of these products are also used in
non-food applications: aromatic substances are used in aromatic candles,
soaps and shampoos, while some of the essences can be used in products
such as toothpaste. Another point to note is the dominance of proteins,
not just in the form of processed ingredients, but in poultry offal,
poultry meal and livestock offal. Taken in combination with China's
imports of U.S. meat and poultry in the consumer-oriented category and
massive imports of soybeans, China's demand for protein of all types
takes on new dimensions.

# The Importance of Being 'Other'

It is no coincidence that 'other' products have become so prominent in
U.S. food exports to China, nor that these categories are among the
fastest growing. For both intermediate goods and consumer-oriented
products, this growth reflects the increasing complexity and uneven
growth of China's economy. Many of the products in demand are so
specialized as to defy easy classification, creating a sudden jump in
imports of 'other' products.

Consumer-oriented imports are increasingly leaning in two directions.
The first consists of traditional high-value items in short supply, such
as offal, high quality meat and poultry products and nuts. The second
consists of 'niche' products for which demand exists, but is not
concentrated enough to support the development of a domestic industry.
This includes 'foreign' taste foods and specialty products (infant
formula, fortified foods, etc.). Premium and exotic products, for which
consistent but scattered demand exists, also fit into this category.
Demand may shift between specific products, but overall likely to
continue growing. Anecdotal evidence seems to indicate that this is
where most of the \$93 million in 'other food preparations' falls, but
until more information becomes available there is no way to be certain.
The consumer-oriented products category also, however, includes a number
of products like whey, that are used as ingredients, and subject to
different market forces.

Ingredients for use in manufacturing are also driving growth in 'other'
intermediate products, the bulk of which consists of protein products
and essences and flavorings. This demand in turn appears to be driven by
fast but uneven growth of China's food processing industries. In many
cases, food manufacturers' capabilities have outstripped those of the
supporting industries that supply their ingredients. Anecdotal evidence
indicates that these supporting industries are developing quickly, and
the window for exporting some of these specialized ingredients may be
narrowing. Others, however, like certain essences and flavorings, are
likely to remain a long-term growth market.

**Tables**

  ------------------- -------- -------- -------- -------- -------- --------- ------- -------
  Table 1. U.S.                                                                      
  Exports of                                                                         
  Consumer-Oriented                                                                  
  Ag Products to                                                                     
  China, 1998 -- 2003                                                                

                      Year                                                   \% of   
                                                                             total   

                      1998     1999     2000     2001     2002     2003      1998    2003

  Other Cons.         19,313   18,334   34,583   58,354   41,975   135,645   15.9%   30.9%
  Oriented                                                                           

  Poultry             28,889   42,093   35,994   29,575   42,621   72,272    23.7%   16.4%

  Processed Frt & Veg 9,337    15,883   25,734   34,134   43,328   59,498    7.7%    13.5%

  Red Meat F/C/F      15,278   15,192   22,099   40,532   45,805   46,867    12.6%   10.7%

  Dairy               13,908   17,748   22,302   40,267   32,135   38,869    11.4%   8.8%

  Fresh Fruit         11,333   1,866    23,147   29,059   24,280   33,335    9.3%    7.6%

  Snack Foods         8,549    14,020   20,425   18,208   15,305   17,811    7.0%    4.1%

  Tree Nuts           2,337    3,702    8,895    10,164   18,554   15,080    1.9%    3.4%

  Pet Food            490      977      1454     3,390    5,822    6,540     0.4%    1.5%

  Fruit & Veg. Juices 1,490    1,734    1,223    2,451    5,347    4,248     1.2%    1.0%

  Wine & Beer         2,404    3,826    1,420    2,697    3,260    2,828     2.0%    0.6%

  Breakfast Cereal    508      323      661      861      1,459    2,085     0.4%    0.5%

  Fresh Vegetables    3,735    3,657    5,080    3,005    788      1,662     3.1%    0.4%

  Red Meat P/P        2918     1,125    863      783      200      1,240     2.4%    0.3%

  Eggs                139      340      266      1,118    523      870       0.1%    0.2%

  Nursery Products    1,029    1,358    1,129    1,025    1,462    598       0.8%    0.1%

  Source: U.S.                                                                       
  Customs Data                                                                       
  ------------------- -------- -------- -------- -------- -------- --------- ------- -------

+-------------+---------+-----+-----+------+------+-----------------+
| Table 2.    |         |     |     |      |      |                 |
| Key         |         |     |     |      |      |                 |
| components  |         |     |     |      |      |                 |
| of 'Other   |         |     |     |      |      |                 |
| i           |         |     |     |      |      |                 |
| ntermediate |         |     |     |      |      |                 |
| products'   |         |     |     |      |      |                 |
| including   |         |     |     |      |      |                 |
| Chinese     |         |     |     |      |      |                 |
| tariffs and |         |     |     |      |      |                 |
| taxes and   |         |     |     |      |      |                 |
| tariff code |         |     |     |      |      |                 |
| equivalents |         |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Product     | Tariff  | 2   | 2   | Gr   | Tar  | Comments        |
|             |         | 002 | 003 | owth | iff/ |                 |
|             | line(s) |     |     |      |      |                 |
|             |         | E   | E   | (%)  | VAT  |                 |
|             |         | xpo | xpo |      | (%)  |                 |
|             |         | rts | rts |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Conc. And   | 210     | 11, | 31, | 171  | 1    |                 |
| textured    | 6100000 | 679 | 675 |      | 0/17 |                 |
| protein     |         |     |     |      |      |                 |
| substances  |         |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Odoriferous | 330     | 14, | 31, | 116  | 1    | Matches China   |
| substances  | 2100000 | 488 | 294 |      | 5/17 | Customs line    |
| and         |         |     |     |      |      | 3302101000.     |
| mixtures,   |         |     |     |      |      |                 |
| for use in  |         |     |     |      |      |                 |
| food        |         |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Chicken     | 020     | 6,  | 29, | 389  | RMB  | No exact match. |
| feet and    | 7140045 | 051 | 599 |      | 0.5  | Used 'frozen    |
| other offal |         |     |     |      | per  | chicken offal   |
|             |         |     |     |      | kilo | other than      |
|             |         |     |     |      | /13% | wingtips'       |
|             |         |     |     |      |      | (0207.1411.00)  |
+-------------+---------+-----+-----+------+------+-----------------+
| Protein     | 350     | 8,  | 22, | 186  | 3/17 | Peptones and    |
| isolates    | 4001000 | 026 | 923 |      |      | other proteins, |
|             |         |     |     |      |      | NES             |
+-------------+---------+-----+-----+------+------+-----------------+
| Animal/veg. | 151     | 6,  | 21, | 113  | 1    |                 |
| fats & oils | 8000000 | 901 | 587 |      | 0/17 |                 |
| nesoi       |         |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Guts,       | 050     | 15, | 20, | 32   | 18-2 | No exact match, |
| bladders &  | 4000020 | 475 | 475 |      | 0/13 | but tariffs     |
| stomachs,   |         |     |     |      |      | under 0504      |
| not ovine   | 050     |     |     |      |      | generally run   |
|             | 4000040 |     |     |      |      | 18-20%          |
+-------------+---------+-----+-----+------+------+-----------------+
| Edible gel  | 350     | 8,  | 16, | 87   | 1    | No exact        |
| & photo     | 3005040 | 609 | 120 |      | 2/17 | equivalent      |
| gel, nesoi  |         |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Flour and   | 230     | 28, | 14, | -50  | 2/13 | No exact match. |
| meal from   | 1100000 | 810 | 311 |      |      | Used            |
| poultry     |         |     |     |      |      | 2301.1019.00    |
| meat        |         |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+
| Essential   | 330     | 16, | 13, | -21  | 20\  | \* Citronella,  |
| oils        | 1xxxxxx | 810 | 302 |      | */17 | sassafras and   |
| (           |         |     |     |      |      | 'other mint'    |
| peppermint, |         |     |     |      |      | have lower      |
| etc.)       |         |     |     |      |      | tariffs.        |
+-------------+---------+-----+-----+------+------+-----------------+
| Vegetable   | 130     | 4,  | 10, | 149  | Mo   | No exact match. |
| saps &      | 2120000 | 364 | 880 |      | stly | The closest     |
| extracts    |         |     |     |      | 2    | Chinese         |
| (incl.      | 130     |     |     |      | 0/17 | category        |
| hops)       | 2130000 |     |     |      |      | includes        |
|             |         |     |     |      |      | ephedra and     |
|             | 130     |     |     |      |      | lacquer.        |
|             | 2190000 |     |     |      |      |                 |
+-------------+---------+-----+-----+------+------+-----------------+