For Southeast Asian countries, the impacts of exporting fresh fruit to China appear to be different than exporting to Europe and North America. In fruit production networks centered on China, the weak power of supermarket retailers and the diminished weight of private standards yield more power to wholesalers and brokers. These characteristics of production networks provide smallholders access to export opportunities. Moreover, the spot-transaction nature of the networks encourages diverse Chinese entrepreneurs to invest individually in various network segments, and their repatriation may hinder capital accumulation in Southeast Asian production regions.

China’s Growing Appetite for Southeast Asian Tropical Fruit

Since the 1990s, exports of fresh fruits and vegetables (FFV) from developing countries to Europe and North America have been touted as a driver of rural development. However, overtaking European countries, China has become a major export destination for fresh fruit, particularly tropical fruits such as durian, longan, and mangosteen. Changes in dietary habits caused by rising income levels, combined with improved overland connectivity in the Greater Mekong subregion, have increased the fresh fruit imports from mainland Southeast Asia across land borders into China’s southwestern provinces of Guangxi and Yunnan. In 2020, China ranked second only to the United States as an importer of fresh fruits, with Thailand and Vietnam providing the bulk of its imports. Despite its significance, this regional trade has not been thoroughly studied. Through the lens of the Global Production Network (GPN) analysis, our project team in 2018–19 explored how China-centric fresh fruit production networks differed from patterns found for European and North American imports.

Fresh Fruit Exports from Developing Countries to Europe and North America

Extensive research on FFV exports from developing countries to Europe and North America reveals two features of production networks (among others, Dolan and Humphrey 2000; Reardon et al. 2009). The first is the consolidation and internationalization of supermarket retailing. Consolidated supermarket chains have the purchasing power necessary to coordinate logistics with transport and trading firms to acquire perishable fruit from developing countries. Second, large supermarket retailers individually and collectively impose requirements on suppliers—private standards—in addition to statutory regulations, such as sanitary and phytosanitary measures, which serve as rules governing the production networks.

These two characteristics shape the production networks of fresh fruit imports of Europe and North America in such a way that large supermarket chains serve as the link between production regions and consumer markets. These downstream players control the upstream agricultural production through contracts with trading firms or direct contract farming with producers to ensure products meet their specifications. Adherence to private standards enables producers in developing countries to access affluent markets and capture high values. However, compliance with private standards occasionally necessitates producers to have management capacity, make investments, and undergo certification audits. Smallholders are eventually dissuaded by high compliance costs and marginalized from production networks. We investigated whether these patterns of FFV trade also apply to China’s imports of fresh fruit from Southeast Asia.

Case Study Approach to Unveil Informal Trade in China-centric Production Networks

Employing case study approach to China’s fresh fruit imports from various Southeast Asian countries, our team conducted GPN analysis of the production networks. Case study approach is based on the premise that China-centric production networks engage in informal cross-border trade that would not be captured in trade statistics. Covering perennial (dragon fruit, durian, longan, and mango) and annual (watermelon) crops in Laos, Myanmar, Thailand, and Vietnam, our case studies illuminate the constellation of local and Chinese actors in the production networks. Although distinctive characteristics of individual fruits and the economic conditions of individual countries create diverse fresh fruit production networks, we highlight some common features across different production networks.

Prominent Features of China-centric Production Networks

Remarkable features of China-centric fresh fruit production networks include (1) the weak influence of supermarket retailers and (2) the diminished significance of private standards as rules governing the networks. In China, the retail sector is less consolidated than in Europe and North America; that is, the supermarket revolution is underway, whereas traditional retailers are still prevalent for food products including fresh fruit. Moreover, improved land connectivity between China and its neighboring Southeast Asia has reduced the barrier for small businesses and brokers to engage in cross-border trade. As for private standards, the possibility of fraudulent certification creates skepticism among consumers, which dilutes the price premium that private standards should otherwise generate.

Consequently, China-centric production networks position wholesalers and brokers as lead firms that rapidly aggregate a large volume of products at competitive prices from upstream producers and distribute them to downstream retailers. In contrast to the production networks of Europe and North America, which control the credence attributes of products through business-to-business contracts and contract farming, spot transactions are prevalent in China, making export markets accessible to smallholders. For Myanmar’s watermelon exports, for instance, the designated wholesale market located on the Myanmar side of the borderland with China—the meeting point of Myanmar and Chinese brokers—is the pivotal node aggregating products for cross-border trade.

The presence of Chinese investment in the production regions of Southeast Asian countries is a further distinguishing feature of fresh fruit production networks centered on China. For the durian and longan networks in Thailand and the dragon fruit network in Vietnam, Chinese investments are perversive in packing houses in production regions—the frontiers of fruit procurement. This is in stark contrast to the production networks of Europe and North America’s fresh fruit imports, in which large supermarket retailers control agricultural production through contracts rather than ownership of upstream entities. Furthermore, such Chinese investments do not always result from the vertical integration of downstream players into the upstream, but rather from the entrepreneurial endeavors of Chinese entities with no capital ties to downstream entities. This behavior of Chinese entrepreneurs can be explained by a statement made by a Thai fruit trader: “Chinese traders prefer doing business with Chinese.” The Chinese language and their shared values form the basis of their relationship. When acquiring massive quantities of fresh fruit, Chinese investment frequently overpowered and marginalized local firms. As a result of Chinese investment in the production regions of Thailand and Vietnam, local packing houses have ceased operations or become subcontractors of Chinese firms to acquire fruit at predetermined piece rates. By extracting and repatriating profits from the production regions, Chinese investments in packing houses have altered the allocation of economic return between source countries and China.

Multifaceted Impacts on Southeast Asian Rural Economies

Overall, fresh fruit exports to China have facilitated access to export markets for producers, including smallholders in rural areas, particularly in landlocked provinces near the Chinese border. However, the entrepreneurship of Chinese entities has led to investments in fruit marketing in the production regions, and their profit extraction competes with that of local firms, thereby limiting the scope of spillover effects on local economies.

It remains to be seen whether China will adopt fresh fruit production networks similar to those of Europe and North America. China’s retail sector development may not necessarily follow the same path as its counterparts in Europe and North America. In China, the consolidation of the supermarket sector is in progress; meanwhile, e-commerce (e.g., Alibaba’s online sale of Thai fruit) and new retail business models (e.g., Pagoda, a convenience-store-style retailer of fresh fruit) are also developing. We must monitor the impact of these changes in China’s retail sector on the allocation of economic return in the fresh fruit production networks comprising mainland Southeast Asia.

Author's Note:

This column is based on the research project of Institute of Developing Economies, JETRO, in 2018–19 and the publication below.

Kubo, Koji. 2021. “Myanmar’s Watermelon Exports to China: Impacts of Unofficial Investment by Chinese on the Diffusion of a Horticultural Crop.” In Global Production Networks and Rural Development: Southeast Asia as a Fruit Supplier to China, edited by Bill Pritchard, 63–81. Cheltenham: Edward Elgar. https://www.ide.go.jp/English/Publish/Books/Eng_Books/Extpub/033.html

References

Dolan, Catherine, and John Humphrey. 2000. “Governance and Trade in Fresh Vegetables: the Impact of UK Supermarkets on the African Horticulture Industry.” Journal of Development Studies 37(2): 147–76.

Reardon, Thomas, Christopher B. Barrett, Julio A. Berdegué, and Johan F. M. Swinnen. 2009. “Agrifood Industry Transformation and Small Farmers in Developing Countries.” World Development 37(11): 1717–27.

* Thumbnail photo: Harvesting watermelons for the Chinese market in Sagaing Region, Myanmar, photo by Koji Kubo.
** The views expressed in the columns are those of the author and do not represent the views of IDE or the institutions with which the author is affiliated.