The United States and China have again entered a period of friction, as the U.S. trade deficit with the country has grown. As the battle heats up, one is reminded of all the drama, press and hype that surrounded the Japanese trade deficit with the United States in the 1980s. The issue became a major focus for the cotton sector last week, as the U.S. government reacted to the increase in U.S. textile and apparel imports from China during the first quarter of 2005.
The Bush administration has announced that it is initiating safeguard proceedings on three apparel product categories. The proceedings will determine whether imports of certain Chinese origin textile and apparel products are contributing to the disruption of the U.S. market. The product groups are cotton knit shirts and blouses (category 338/339), cotton trousers (category 347/348), cotton and man-made fiber underwear (category 352/652).
This move has been followed by the U.S. coalition of textile, apparel and fiber-producing trade associations announcing that they have filed seven safeguard petitions, covering fourteen categories of products. They are cotton/man-made non-knit shirts (340/640), cotton/man-made sweaters (345/645/646), cotton/man-made brassieres (349/649), cotton/man-made dressing gowns (350/650), other synthetic filament fabric (620), man-made knit shirts (638/639) and man-made trousers (647/648). These moves are all permitted under the provisions of the China Accession Agreement to the WTO.
In reality, the entire safeguard process benefits the remaining U.S. textile industry very little; a sizable amount of the increased U.S. imports from China are products shipped through other countries that now come direct. The safeguard provisions will mean this practice will likely be reinstated. In past cases when the safeguard provisions were applied and a 7 percent growth gap was placed on a Chinese product, imports from China were limited, but the imports simply shifted to other countries such as Bangladesh, India, etc. No additional sourcing of domestic textile and apparel products was noted. To a small degree, it may have aided the fabric exports to Central America.
One clear loser in this mostly political game is the U.S. cotton farmer. Three powerhouses — China, India and Pakistan, are driving the expanding global consumption of cotton. These three countries will consume 59 percent of 2004-05 global cotton use, and that percentage will grow in 2005-06. All three import cotton; however, over 90 percent of domestic cotton use in two of these countries came from domestically produced cotton. China, alone, is the major importer; it will account for 26.64 percent of total global import volume in 2004-05.
Both India and Pakistan have the capacity to increase cotton production in years to come. India already has the largest volume of cotton acreage in the world; it only has to increase yields. Only in the economic powerhouse of China is cotton production increases likely to be limited. Land available for agricultural production in east and central China is shrinking. The Chinese Ministry of Land and Resources estimates that China's farmland under tillage for agriculture has declined 5 million hectares (about 12.4 million acres) between 1995 and 2002. In 2003 and 2004, another 5 million hectares of land were believed to have been lost to development. This can be seen in the acreage devoted to cotton, which has fallen significantly from the early 1990s, when acreage neared 7 million hectares (about 17.3 million acres).
Thus, China has limited capacity to increase cotton acreage outside Xinjiang. This means that future growth in cotton consumption will come from imported cotton. Over the last few years, China's cotton sector has opened up and a free market is evolving. For the cotton grower, the marketplace is now determining the price he receives for his cotton, not the government; this has revealed the average cost of production. For example, in 2004-05, farm grade lint prices the equivalent of 58 to 60 U.S. cents per pound resulted in only meager profits. 2005-06 acreage is dropping as a result.
In 2005-06, an early look at China's cotton production suggests output near 24 million to 25 million bales. Cotton use, in contrast, should be at 41 million to 42 million bales; this means imports could reach 16 million bales. U.S. cotton growers are in a unique position to meet that demand; however, the current safeguard action makes sales more difficult.
First, there was the situation in 2003-04 when buyers were not pleased with the quality of the U.S. cotton they received. Now in 2004-05, the U.S. action has further angered the largest cotton importer in the world. To the Integrated Chinese Mill Group, the U.S. action means it will face greater difficulty in securing sourcing arrangements with U.S retailers. It will force U.S. retailers to extend sourcing arrangements with other regions; India will likely be one of the largest benefactors. Many Chinese mill groups have spent millions to modernize plants and to expand, anticipating further growth with the U.S. retailer.
For U.S. cotton farmers, this ultimately means they will be facing a much more difficult time buying brand loyalty with their biggest customer. In 2005-06, Chinese mills will likely consume more U.S. cotton than domestic mills. The safeguard actions will make brand loyalty for U.S. cotton much more difficult to achieve among the Chinese mills.
Ed Jernigan is chairman and CEO of Globecot, Inc., which is based in Nashville, Tenn. Globecot is an international marketing information services and cotton trading firm.