China’s cotton policy spurs yarn imports, drives mills overseas

Published on Author dillard

This Reuters article details the issue of Chinese new policy of stockpiling cotton in order to keep prices high enough for farmers to turn a profit. The high prices have resulted in an increase in China’s imports of yarn by nearly a third in 2013. Also, the high prices have pushed production to southeast Asia including. Since domestic yarn prices are comparatively higher, producers elect to import their yarn resulting in a loss of profit for domestic textile mills. This loss in profit for textile mills has spawn a shift in one of the world’s largest textile industries. Many Chinese are selling their spinning machines to sources outside countries such as Malaysia, Pakistan, and Singapore. Textile production has become increasingly ideal in countries where cotton is less expensive portending a shift in the industry away from China. Will this shift inevitably cause the demise of the textile industry in China? Will the stockpiling allow for Chinas textile industry to operate as it has in the past or will comparative advantage cause a complete relocation?

-Will Andrews and James Dillard

One Response to China’s cotton policy spurs yarn imports, drives mills overseas

  1. As per our discussion of agriculture, the future of farming is grim, demand and supply and income elasticities are such as to make it hard for those working the land to boost their incomes. Hence the political pressure to introduce price supports, which we find in the US, Japan and Europe, even though China does not have an electoral system in place.

    Now (as per empirical trade theory) the impact of tariffs cascades to affect downstream industries. This is a concrete example of that general issue, where higher input prices help one group to the detriment of another. When the downstream sector has market power, part of this can show up as a compression of profit margins. But when the downstream sector is already competitive so that (economic) profits are near zero, then what we get is exit and (as here) imports.