China sanctions threat to U.S. cotton

Cotton growers in the Southeast have survived floods, droughts, chronic low prices, increasing production costs and are coping with herbicide resistance, but whether they can survive the new leadership in the U.S. House and Senate remains to be seen.

It's no secret to cotton growers in the Southeast that a majority of their crop goes to China, and in return a high percentage of the crop comes back in low cost, Chinese textile products.

While the outgoing U.S. Congress has been supportive of fewer trade restrictions and have passed trade guidelines making trade with China lucrative for both countries, the makeup of the new Congress may not be so supportive.

Nancy Pelosi, the new Speaker of the House, once got into a tussle with Chinese guards in Beijing when she tried to post free trade banners in Tiananmen Square. Congresswoman Pelosi has called the U.S. China Policy “a disgrace”. She has been active for nearly 20 years in efforts to curb Chinese human rights violations and has advocated tying human rights policy to U.S.-China trade.

A recent university study found that 16 House seats and five Senate seats switched from pro-trade to trade cynics. The study conducted by a Swiss university contends the environment is no longer conducive in the U.S. Congress to pass more free trade legislation.

Though the DOHA round of WTO trade talks ended in July, many groups continue to meet informally in efforts to get some type formal negotiation back on track. One of the leading proponents has been the Agriculture Committee, which has continued the so called ‘quiet diplomacy’ since DOHA talks ended in July.

Sallie James, an economist at the CATO Institute for Foreign Trade, explains that trade negotiations are vitally important to U.S. farmers. “The WTO decision on U.S. cotton subsidies has proven U.S. subsidies are vulnerable to litigation. U.S. farmers and their legislative supporters can either reform farm support programs via negotiations or expect enforced reforms via WTO disputes,” she says.

Desmond Lachman, an economist for the American Enterprise Institute, contends the current U.S. trade policy for China isn't working. He says China has over the past decade or so deliberately undervalued its currency and has built up a $250 billion surplus in trade worldwide. The biggest contributor to that surplus ($166 billion) is the United States.

Though exactly what Congresswoman Pelosi's get tough policy on China will be is still in question, James says it could include some form of punitive tariffs. Such tariffs could provide a quick boost in revenue for U.S. cotton growers, but in the long-term could kill the proverbial golden goose.

In response to the economist's contention that the Chinese were under-valuing the Yuan by 15-40 percent, senators from New York and South Carolina sponsored a bill to place a 27.5 percent tariff on all goods coming into the U.S. from China.

The bill never came to a vote in the Senate as cooler heads prevailed in Congress. The new Democratic leadership in Congress has rekindled the 27.5 percent tariff, which is an average of the economist's prediction that China has deliberately undervalued its currency from 15-40 percent.

Should the U.S. Congress decide to place such a tariff on Chinese goods coming into the U.S., it would certainly fit into the “big stick” policy that at one time ruled U.S. trade policy. “The problem is you have this big stick, but placing a tariff on China would be like hitting yourself with the stick,” James contends.

Such a tariff may also be in violation of the WTO findings. If such a tariff was placed on China, the Chinese could appeal to the WTO. They could also tax U.S. goods, including cotton, though that would certainly not be in their best economic interest. A more likely response would be to look elsewhere for cotton.

Currently 8.5 million bales of U.S. grown cotton is exported to China annually. Either increased tariffs or increasing the value of the Chinese Yuan could lead China to look elsewhere for cotton, or more likely to increase efforts to grow more cotton domestically. Currently, China uses about 50 million bales of cotton annually, or about 40 percent of the world supply.

By contrast, China harvests slightly less than 30 million bales of cotton annually, providing a large market for foreign cotton exports. Though China has the land-base and the labor to increase cotton production dramatically, there have been only steady increases in production, despite dramatic increases in usage over the past 10-20 years.

Worldwide cotton production has increased from approximately 61 million bales in 1977 to 87 million bales in 1997, and to a projected 121 billion bales in 2007. U.S. domestic use has dwindled to less than six million bales annually, leaving nearly 16 million bales to be sold in foreign markets. By far the largest market is China.

The National Cotton Council of America and the China Cotton Association recently signed a “Memorandum of Understanding” promising cooperation between the countries' cotton industries.

“This memorandum signals a spirit of cooperation and good will,” says Allen Helms, chairman of the National Cotton Council and a cotton grower from Clarkedale, Ark. “We look forward to a successful future of mutually beneficial trade and increased cooperation among the U.S. and Chinese cotton industries, he adds”

China is infinitely more capitalistic now than in the strict days of Mao. However, the government still tightly controls agricultural production. Should trade sanctions artificially drive up the cost of cotton, the government has the authority, if not the infrastructure, to take millions of acres out of production of one crop and put it into production of another.

James, an Australian with a Ph.D in economics from the University of Perth, says threatening China simply won't work. She contends a U.S. get tough policy on China could have catastrophic consequences for U.S. farmers. With Chinese exports now constituting over 30 percent of their total economic output, restrictive trade with the U.S. would be equally, if not of greater damage to China.

James contends a hard line on China trade would undermine the spirit of partnership and mutual benefit that has been built between the Chinese and a number of U.S. industries, including cotton.

Most U.S. cotton growers are keenly aware of the upcoming debate on the U.S. farm bill. Cotton fared well in the 2002 farm bill, but economic conditions were dramatically more favorable at that time. The future of U.S. cotton production is directly geared to the 2007 farm bill, but perhaps even more directly tied to Congressional trade policies.

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