The Wall Street Journal recently carried a blogpost highlighting a case ofChinese investment in the US cotton processing industry in South Carolina. While it is clearly welcome news for the economy of South Carolina, unwrapping the detail reveals that the key drivers for this investment are to be found in China, rather than the United States.
On the one hand, the input costs of cotton production derive mainly from raw materials and energy, both of which are cheaper in the US than in China. But on the other hand, Chinese intervention in the domestic cotton market combined with quotas restricting imports of raw cotton, give Chinese textiles companies an invidious choice. Government stockpiling of domestically produced cotton drives up the price, and import quotas keep it expensive, protecting farmers’ incomes. Add to this the recent export from China of cotton and textiles manufacturing to lower cost destinations in South East Asia and it becomes apparent that this is not simply a case of ‘on-shoringΆ but something more complex.
Since the year 2000, ChinaΆs agricultural production – despite solid productivity gains – has not kept pace with domestic demand, meaning that China has gone from a position of approximate net food security, to being the largest food importer in the world (I wrote about this here), with the US becoming the largest single agricultural exporter to China. At the same time, China has actively encouraged vertical integration in the food sector as part of its ΅Go OutΆ strategy of overseas capital investment.
ALCOLU, SC – FEBRUARY 25: A cotton field alongside Interstate 95 February 25, 2016 in Alcolu, South Carolina. According to the South Carolina Department of AgricultureΆs 2015 findings, the state agriculture and forestry has grown 23 percent since 2006 with an economic impact of $41.7 billion yearly, supporting 212,000 jobs. (Photo by Mark Makela/Getty Images)
While cotton isnΆt food, it is an agricultural product and subject to some of the same supply pressures, namely availability of arable land. With cotton, however, China is at the centre of global markets, being traditionally the largest producer, consumer and importer. Look closely at the statistics though, and you will see precipitate recent declines in imports, from a high of over 5 million tonnes in 2011/12 to a forecast of only 1.2 million tonnes this year. Some think China may stop importing cotton entirely by 2018.
The reasons for this are not obscure. Since 2011 China has built up a significant stockpile of cotton as part of its price support operations for its agricultural sector. This has led to higher input costs in ChinaΆs cotton processing industry, and with no barriers to the import of yarn (processed cotton) Chinese cotton companies have taken the hint and set up shop where they can access cheaper raw materials, moving plant and machinery out of China. South Carolina, where cotton is plentiful and energy is cheap, is merely one of many destinations.
The fact that this investment is partly a consequence of protectionist measures within China as well as free trade commitments for processed cotton products shows that the detail of trade relations is often at odds with the overarching narrative. But it also shows that ChinaΆs efforts to protect certain sectors – for understandable political reasons – impose wider costs on a more developed Chinese economy.
Furthermore, the direction of cotton production in China is moving westwards to Xinjiang, where larger farms can benefit from scale economies, labour costs are lower, and transport subsidies are available to ship raw materials to factories in the East. Add to this the preferential loans available to Chinese cotton processors if they buy domestically produced cotton, and you get a detailed sketch of how protectionist policies work in China.
That these extensive measures have been unable to prevent the export of cotton processing from China, however, suggests that the future of cotton in China may not be altogether secure. See it in the context of an evolving agricultural sector where import restrictions and price supports are being slowly relaxed for products like soybeans which are far cheaper to produce elsewhere, and it may come to fit a broader pattern.
It may take many years, but if China eventually stops price support operations for cotton, then cotton production will inevitably migrate to where it is most efficient and productive, and just as with American soybean producers, South Carolina has much more to gain from that than a few dozen processing jobs.
