COTTON AND WOOL YEARBOOK January 11, 2001 November 2000, ERS-CWS-2000 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- COTTON AND WOOL YEARBOOK is published annually by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. This release contains only the text of the COTTON AND WOOL YEARBOOK -- tables and graphics are not included. Printed copies of this yearbook will be available from the ERS-NASS order desk in about 3-4 weeks. Call toll-free, 1-800-999-6779 and ask for stock # ERS- CWS-2000, $21. ERS-ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Summary U.S. cotton production in 2000 is forecast at 17.51 million bales, 3 percent above last seasons 16.97 million. This seasons output is based on larger area and a higher national yield. U.S. cotton planted area jumped nearly 700,000 acres from 1999 to 15.5 million this season, the second largest cotton area in nearly four decades. However, drought conditions this past summer took its toll on the cotton crop in many areas across the United States. As a result, abandonment reached 13 percent this season, about double the normal level, and harvested cotton area is estimated at 13.5 million acres, only 100,000 acres above 1999. The national yield is projected to rise 15 pounds this season to average 622 pounds per harvested acre, similar to 1998. U.S. cotton exports in 2000/01 (August/July marketing year) are projected to continue the rebound that began last season. Shipments are expected to reach 7.6 million bales this season, as the global economy continues to improve and world consumption is forecast to reach a record. Although U.S. export commitments as of early November equaled those of a year ago, shipments are forecast to rise 13 percent from 1999/2000. With world trade expected to decline slightly this season, the United States is forecast to capture a larger share of the global market. During 2000/01, the U.S. share of world trade is projected at about 29 percent, up from 25 percent a year earlier. In contrast, U.S. cotton mill use is forecast to decline slightly (2 percent) again this season to 10 million bales. The continued growth of U.S. cotton textile and apparel imports, along with a slowdown in the robust U.S. economic growth of the last several years, are expected to keep mill use from reaching last seasons demand. In 2000, U.S. cotton textile and apparel trade is forecast to reach a record, further widening the trade deficit. While exports are expected to rise for the 16th consecutive year, imports will expand for the 12th year in a row. In addition, total domestic consumption (mill use plus net textile trade) will surpass last years record of 9.6 billion pounds, and may also exceed 1999s per capita consumption of 35.1 pounds. Similar to the cotton stocks of the previous two seasons, U.S. 2000/01 beginning stocks were estimated at 3.9 million bales. While a larger crop is forecast this season, imports of foreign cotton are expected to be small once again in 2000/01. As a result, total U.S. cotton supply is projected at 21.5 million bales, 500,000 above last season. Meanwhile, U.S. demand is also forecast to rise to 17.6 million bales, 600,000 above 1999/2000. Based on these supply and demand estimates, U.S. ending stocks for 2000/01 are projected to remain near the beginning level. With stocks about unchanged and demand forecast higher this season, the stocks-to-use ratio is expected to decline slightly to 22 percent, the lowest in 3 years. World cotton production in 2000/01 is forecast at 86.7 million bales, 400,000 bales below a year earlier, as the larger U.S. crop is more than offset by a decline in foreign production. Projected at 69.2 million bales, foreign production is forecast to decline for the third consecutive season. Production decreases in Central Asia, the African Franc Zone, and Pakistan more than offset increases in China and the Southern Hemisphere. In contrast, world cotton consumption in 2000/01 is projected at a record 92.5 million bales, more than 1 million above last season. Although lower mill use is expected in the United States, consumption in China, India, and Pakistan--the largest foreign consumers--is forecast to rise a combined total of nearly 1 million bales and account for 75 percent of the projected increase in global consumption in 2000/01. A number of other countries, including Turkey, Mexico, and Indonesia, are also forecast to use more cotton this season as world economic growth continues. World cotton exports, on the other hand, are projected to decline 2 percent in 2000/01 to 26.7 million bales. Foreign shipments are expected to total only 19.1 million bales, the lowest since 1994/95 when a similar quantity was exported. Chinas decrease of 1 million bales in expected shipments from a year ago accounts for the majority of the 1.4-million-bale foreign decline this season. With the decline in world production and the increase in consumption, stocks are projected to fall this season to 35.1 million, the lowest in 6 years. With U.S. stocks about unchanged, foreign stocks in 2000/01 are forecast to drop to 31.2 million bales, 5.5 million below last season and 10 million below stocks of only 2 years ago. Similar to exports, China accounts for the majority of the stock changes over the last two seasons. Chinas stocks are projected to fall 4.5 million bales during the 2000/01 season, while smaller declines are seen for others, including Uzbekistan and Pakistan. By seasons end, however, China is forecast to hold only 30 percent of the global cotton stocks, well below the 47 percent held in 1998/99. U.S. Cotton Situation and Outlook U.S. Cotton Review, 1999/2000 The 1999/2000 (August/July) season began with U.S. cotton stocks reported at 3.94 million bales, similar to the previous two seasons. The 1999 crop was the fourth planted under the Federal Agriculture Improvement and Reform (FAIR) Act, which provides total planting flexibility to U.S. producers. In 1999, this flexibility and the market signals near planting time were favorable for cotton and enticed many producers to shift acreage back into this crop. As a result, each region in the United States planted more area to cotton than a year earlier. In the United States, 1999 cotton acreage rose to nearly 14.9 million acres, 11 percent above the 13.4 million planted in 1998. In addition, the national abandonment rate was cut in half from the previous year to 10 percent. This resulted in a cotton harvested area of 13.4 million acres, 26 percent higher than in 1998 but similar to 1997. With more harvested area, the U.S. yield averaged only 607 pounds per harvested acre, 18 pounds below 1998 and the lowest national yield since 1995. As a result, 1999 cotton production totaled 17 million bales, 3 million above 1998 but near the average size of the cotton crops produced since the FAIR Act began. In 1999/2000, U.S. cotton demand expanded to equal production at 17 million bales, 15 percent higher than 1998/99s decade low, as exports improved significantly while domestic mill use declined slightly. U.S. cotton mill consumption last season dropped to 10.2 million bales, about 200,000 below 1998/99 and the lowest since the 1991 season. The decline resulted from the strength of the dollar that has provided U.S. consumers with relatively inexpensive cotton textile and apparel imports, keeping U.S. mills from expanding their cotton usage in 1999/2000. U.S. raw cotton exports increased nearly 2.5 million bales in 1999/2000 to nearly 6.8 million. A reduction in foreign production and a rebound in world cotton use provided the boost for U.S. shipments last season. With world trade expanding to over 27 million bales, the United States benefited by rising more than 50 percent from 1998/99. As a result, the U.S. share of global trade rose from 18 percent and returned to the long-term average of about 25 percent. With U.S. cotton supply at 21 million bales in 1999/2000 and total demand at 17 million, stocks at the close of last season were nearly identical to the beginning level. Ending stocks were placed at 3.9 million bales, resulting in a stocks-to-use ratio of 23 percent. Despite an increase in demand and unchanged stocks, the average upland price received by producers declined from 60 cents per pound in 1998/99 to 45 cents. However, last seasons cotton program provided an average of about 18 cents per pound in loan deficiency payments (LDPs) that helped support cotton producers in 1999/2000. The extra-long staple (ELS) price was also lower at 85.2 cents per pound last season, compared with 92 cents in 1998/99. Supply Outlook for 2000/01 As planting time for the 2000 crop approached, U.S. cotton prices were slightly better than the previous year. However, prices for competing crops--like soybeans and corn--were also above year- earlier levels. In the end, though, the cotton marketing loan program--which supplied a significant portion of cotton producers incomes in 1999--and the insurance program for cotton provided an incentive for U.S. farmers to plant additional area to cotton in 2000. Favorable springtime weather allowed producers to plant 15.5 million acres of cotton this season, 4 percent more than in 1999 and the second largest U.S. cotton area in nearly four decades. Upland cotton area this season is estimated at nearly 15.4 million acres, compared with 14.6 million in 1999. In contrast, ELS acreage dropped significantly to 182,000 acres, a decrease of more than 100,000 acres from 1999. Last seasons record ELS yield pushed the crop size well above demand and more than doubled the stocks, creating an incentive to move some ELS area to upland in 2000. The increase in total cotton acreage this season, however, was nearly offset by the above average national abandonment. Based on the November estimates, abandonment was forecast at 13 percent--2 million acres--above 1999s 10 percent. Harvested area this season is estimated at 13.5 million acres, only 100,000 more than in 1999 (table A). After a favorable start to the growing season and although U.S. cotton crop conditions were similar to a year ago for most of the season, this summers drought across much of the Cotton Belt limited the potential of the 2000 crop. Based on November 1st conditions, the 2000 U.S. cotton crop was estimated at 17.5 million bales, well below the USDAs August forecast of 19.2 million bales but 3 percent higher than last seasons final production estimate. Compared with 1999, this seasons larger output is based primarily on a yield increase. The U.S. average cotton yield is currently projected at 622 pounds per harvested acre, 15 pounds above 1999 but still below the previous 5-year average of 629 pounds (fig.1). Upland production is forecast at 17.1 million bales in 2000, with an average yield projected at 615 pounds per harvested acre. On a regional basis, forecast production is higher in three of the four regions. Twenty-percent gains in the Southeast and West regions combine for a 1.2-million-bale increase in production this season. In addition, a gain of nearly 300,000 bales in the Delta region is forecast for 2000. On the other hand, the Southwest regions production is projected to decrease nearly 700,000 bales or 13 percent from 1999. Also, ELS output is forecast at 415,800 bales, down more than 250,000 bales from last season and the smallest ELS crop since 1995. California still dominates ELS production, accounting for over 80 percent of the area and nearly 90 percent of the output. The national ELS yield is estimated at a record 1,160 pounds per harvested acre. By mid- November, 77 percent of the total U.S. cotton crop had been harvested, compared with the 5-year average of 74 percent. Similar to the previous two seasons, U.S. cotton stocks on August 1, 2000, were 3.9 million bales. And like 1999/2000, only a small volume of raw cotton imports are expected to enter the United States this season, as current production may mitigate the need for the limited foreign supplies available this season. Also, U.S. and world prices are once again closely aligned this season. As a result, total U.S. cotton supply in 2000/01 is projected at 21.5 million bales, 2 percent, or 500,000 bales, above 1999/2000. Demand Outlook for 2000/01 The U.S. demand outlook for 2000/01 is forecast to improve modestly from a year ago. This season, total cotton use is projected at 17.6 million bales, about 4 percent above 1999/2000, with an increase in exports offsetting a decline in mill use. U.S. exports are projected to continue their rebound this season from 1998/99s decade-low shipment level. Supporting an increase in U.S. exports during 2000/01 is the expected record world cotton use associated with the improving world economy. Also, a further reduction in foreign production prospects this season, coupled with declining stock levels outside the United States, is supportive of larger U.S. shipments. In addition, U.S. cotton prices have been competitive again this season. While higher prices have been recorded this season, both U.S. and world prices have moved together (table B). Between August and October, A- Index prices averaged near 61 cents per pound, while the comparable U.S. quote was near 67 cents. In November, however, the A-Index rose to 64 cents with the U.S. price up only 2 cents. Currently, 2000/01 U.S. cotton exports are projected to rise nearly 13 percent from last season to 7.6 million bales, the highest since 1995/96. Upland shipments are forecast to exceed 7.1 million bales, while ELS exports are expected to reach a record 475,000 bales this season. With U.S. exports expanding further in 2000/01 and prospects for global trade slightly lower this season at 26.7 million bales, the U.S. share of world trade will rise. As of November, the U.S. share of global trade is estimated at 28.5 percent for this season, above 1999/2000s 25 percent and the largest in six seasons (fig. 2). Based on U.S. Export Sales data through early November, U.S. cotton export commitments (shipments plus outstanding sales) equal that of a year earlier at 4.2 million 480-pound bales. Upland cotton shipments to date have totaled 1.1 million bales, compared with only about 650,000 bales in 1999/2000. However, upland outstanding sales so far this season, at 2.7 million bales, are half a million below a year ago. Both ELS shipments and outstanding sales are above year-earlier levels. As of early November, ELS exports approached 100,000 bales, compared with last seasons 40,000 bales. Also, outstanding sales are running ahead of last season by early November 2000, bringing ELS commitments to 362,000 bales, or 76 percent of the current export forecast. U.S. cotton mill consumption, on the other hand, is projected to reach only 10 million bales in 2000/01, 2 percent or 200,000 bales below last season (fig. 3). The continued growth of U.S. cotton textile and apparel imports has placed tremendous pressure on the U.S. spinning industry over the last several years and is expected to continue this season. Along with a slowdown in the U.S. economy, the import competition has forced some mills to limit output, relocate, or close altogether. Upland mill use is forecast at about 9.9 million bales in 2000/01, while ELS consumption is estimated at 135,000 bales. Based on the first 3 months of data from the Department of Commerce, the seasonally adjusted annual rate of cotton consumption averaged only 9.8 million bales. Actual cotton mill use for August through October 2000 totaled 2.57 million bales, compared with 2.60 million a year earlier. Cotton mill use, like manmade fiber use, has fallen from a year ago, but manmade use has declined faster during the first 3 months of 2000/01. Consequently, cottons share of fiber consumption on the cotton system has risen slightly from a year earlier to 79 percent, compared with a 1999/2000 average share of 78.4 percent. Based on these projections of U.S. cotton supply and demand, ending stocks for the 2000/01 marketing year are estimated to remain about unchanged at 3.9 million bales, similar to the previous three seasons. However, with the higher use projected this season compared with the last 2 years, the ratio of stocks to use is expected to decline slightly. In 2000/01, the stocks- to-use ratio is forecast at 22 percent, down from 23 percent a year earlier (fig. 4). While upland cotton stocks are forecast to rise slightly this season, ELS stocks are projected to drop dramatically due to the significant reduction in ELS area and production this season. ELS ending stocks are projected to fall from 250,000 bales a year ago to only 86,000 bales by the end of 2000/01, a stocks-to-use ratio of about 14 percent. U.S. Textile Trade and Domestic Consumption The volume of U.S. textile trade has risen once again in calendar year 2000. Due to the continued liberalization of world trade in textile and apparel products, the U.S. trade deficit will increase again in 2000, as import gains continue to exceed export gains. In calendar 1999, the textile trade deficit for all fibers reached a record of 7.4 billion (raw-fiber equivalent) pounds, 15 percent above 1998. Textile exports during the first 9 months of 2000 increased to 3.99 billion pounds, compared with 3.45 billion in 1999. However, textile imports through September 2000 advanced to 10.3 billion pounds, 14 percent above the 9 billion recorded in 1999. As a result, the textile trade deficit for all fibers during the first 9 months of 2000 approached 6.3 billion pounds, 12 percent above the same period in 1999. Similarly, cotton textile trade for January through September 2000 has expanded. Cotton textile exports are approximately 16 percent ahead of a year ago, reaching 1.8 billion pounds by the end of September. Meanwhile, cotton textile imports have risen also, increasing 14 percent to 5.7 billion pounds during the first 9 months of 2000. For calendar 2000, cotton textile exports will increase for the 16th consecutive year while imports rise for the 12th year. Exports for the 12 months will likely exceed the equivalent of 5 million bales (2.4 billion pounds), 17 percent above 1999. On the other hand, U.S. cotton textile imports may reach the equivalent of 16 million bales (7.7 billion pounds), 15 percent more than last year. With the quantity of imports expanding faster than exports, the U.S. cotton textile trade deficit will jump again in 2000 to the equivalent of 11 million bales of raw cotton (fig. 5). Meanwhile, total U.S. fiber mill use is expected to rebound slightly after two consecutive years of decline. Mill use of all fibers in 2000 should total approximately 16.5 billion pounds. However, with U.S. cotton mill use forecast to decline from the level reached in 1999, cottons share of total fiber mill use will likely remain below 30 percent for the second year in a row. On the other hand, manmade fiber mill use is expected to rise slightly, accounting for about 70 percent of the total in 2000. With cotton mill use lower and the continued strength of textile imports, calendar 2000 will be the third consecutive year in which the raw-fiber equivalent of cotton textile and apparel imports exceed the quantity of cotton consumed by domestic mills. While this trend is not likely to be reversed, more U.S. cotton is contained in these finished products than ever before, due largely to the North American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative (CBI). Total domestic consumption (mill use plus net textile trade) of cotton is projected to rise again in 2000. Based on data for the first 9 months of the year, domestic consumption totaled about 7.6 billion pounds, 5 percent higher than in 1999. By years end, domestic consumption of cotton is likely to approach 10 billion pounds, a record high. In addition, the U.S. per capita consumption of cotton could slightly exceed last years 35.1 pounds. However, only about 18 pounds of this total are being produced in U.S. mills (fig. 6). World Cotton Situation and Outlook Improved Foreign Outlook as New Decade Begins As the global cotton economy leaves the 1990s behind and enters the first decade of the 2000s, global consumption of cotton is once more on the rebound. The 1990s saw stagnation in world cotton consumption as global economic growth slowed during the early 1990s, the Soviet Unions textile industry collapsed, polyester consumption soared in the late 1990s, and the Asian financial crisis sent a shock wave through the Asian-dominated textile industry. The 1990s were in particular a period of stagnation for consumption in China and Pakistan, the two leading sources of increased consumption during the 1980s. Now, during 1999/2000 and 2000/01, China and Pakistan again lead the world in rebounding consumption. Furthermore, polyester consumption gains have slowed and cotton/polyester price ratios have returned to more average levels. The textile industry of Russia has begun to grow slowly once more, and for the moment at least, world cotton consumption seems to be on an upward path, and U.S. exports are a beneficiary. Foreign consumption in 2000/01 is forecast 1.9 percent higher than the year before, at a record high of 82.5 million bales. This follows an 8.5-percent year-to-year gain during 1999/2000, and foreign cotton consumption is expected to realize its largest 2-year gain since the late 1980s. Foreign production in 2000/01 is forecast 1 percent lower than the year before, at 69.2 million bales, its third consecutive year-to-year decline. Weather- reduced crops in Central Asia--and reduced production in Mexico, Pakistan, Mali, and Turkey--are offsetting larger crops in China and the Southern Hemisphere. Total foreign production is expected to be its lowest since 1994/95 and about 1 million bales below its 1990s average level. As foreign consumption outpaces production for the second consecutive year, foreign ending stocks in 2000/01 are expected to drop 5.5 million bales, to 31.2 million. World ending stocks are also expected to decline 5.5 million bales, to 35.1 million. As a share of consumption, this would be the smallest world ending stocks in 6 years, and world cotton prices through September 2000 have rebounded 40 percent since December 1999. At 62 cents/pound, the September 2000 A-index remained well below its 72 cents/pound average of the 1990s, but 17 percent above its 1999/2000 season average. Much of the decline in stocks is occurring in China, but stocks outside of China are expected to decline for the first time since 1994/95. U.S. cotton exports are forecast to increase significantly in 2000/01 to 7.6 million bales, or 13 percent above the previous season. Smaller crops in Central Asia and West Africa--the principle competitors for U.S. exports--and an improved world mill use outlook are expected to boost demand for U.S. cotton this season. The United States is beginning the new decade with a second consecutive year of growing export volume and export share, just as it was 10 years earlier. But 10 years earlier, the leading markets for U.S. cotton were China and Japan, whereas in 2000/01 Mexico and Turkey are expected to rank first and second. A Decade of Change for the World Cotton Economy The shift in U.S. export markets illustrates that, while in some respects the current decades start harks back to 1990, in other respects, the changes since then have been profound. For example, the transformation of South Korea, Taiwan, and Hong Kong from low-wage countries to middle-income Newly Industrialized Countries (NICs), and the expansion of world trade in apparel have led to a continued decline in textile consumption of cotton fiber in the NICs, Japan, and the European Union. As a group, these countries share of world consumption during 1999/2000 and 2000/01 is estimated at 10 percent, compared with 17 percent 10 years earlier. This trend predates the 1990s, and reflects the growing importance of lower-income countries in the production of apparel and, more recently, textiles. Despite this trend, the United States proved the exception among the most wealthy countries by increasing the cotton used by its textile industry during the 1990s. U.S. consumer demand for cotton products soared more than 60 percent during the 1990s, as the U.S. economy expanded and consumer promotion--under the worlds only significant promotion program for consumer demand of cotton--drove cottons share of U.S. fiber demand steadily upward. Much of the U.S. consumers 20-million-bale demand for clothing and other products is met by imports--about half on a net basis--but the U.S. cotton textile industry grew during the 1990s with its domestic market, and with opportunities provided by free trade with Canada and Mexico. NAFTA enabled U.S. textile mills to indirectly meet a growing share of U.S. consumer demand for apparel by effectively partnering with Mexico, either through investment or trade. Capital-intensive intermediate textile products produced in the United States find a ready market in Mexico, as NAFTA gives labor-intensive apparel producers in Mexico preferential access to the United States not available to Asian exporters. Mexicos apparel production and exports to the United States have soared, and U.S. mills used raw cotton to supply much of fabric used for Mexicos exports. The Caribbean and Central America enjoyed similar preferences during the 1990s--recently upgraded to NAFTA-parity--and together Canada, Mexico, and the Caribbean Basin were the source of almost 60 percent of the increase in U.S. cotton products imports during the 1990s. Mexicos cotton use has also grown significantly, and Mexico is now the largest customer for U.S. cotton exports and the worlds largest cotton importer. The United States and Mexico were not alone in liberalizing trade, as economic reform has been the rule rather than the exception around the world in the last decade. The economic liberalization that drove Russian cotton textile production down 85 percent during the 1990s and drove NAFTA cotton textile output 34 percent higher, also wrought changes elsewhere, and cotton production felt those effects as well as consumption. Debt problems and economic contraction throughout much of the Developing World during the 1980s--and the contrasting stellar performance of the export-oriented NICs--in part led India and much of Latin America to abandon the constraints that previously oriented their economies away from trade. The 1990s saw the results of this policy transformation, and Indias cotton consumption soared as domestic economic growth and textile exports responded positively. Indias cotton consumption rose 4.6 million bales during the 1990s, and production rose 3.2 million bales. In 2000/01, Indias consumption is expected to continue rising, but production is expected to be unchanged from the year before, in part due to problems with the monsoon in Gujarat. In contrast with India, liberalization in Latin America meant that many countries that formerly protected cotton growers from competition removed those barriers, and production fell despite rising consumption. Latin Americas production fell as much as 3.2 million bales during the 1990s, even as consumption rose 2.5 million bales. A more limited degree of liberalization in Central Asia, following independence from the Soviet Union, also resulted in lower cotton production--down 4.6 million bales between 1990 and 2000. Central Asias production has stabilized since 1996, but a 500,000-bale decline from the year before is foreseen in 2000/01 due to an unprecedented drought in the region. China Liberalizes Its Cotton Sector and Textile Competition Intensifies Chinas efforts to liberalize its economy predate the 1980s Debt Crisis. As it began to open its economy to trade during the 1980s, its share of world clothing exports more than doubled and it became the worlds largest cotton producer. However, cotton productions liberalization has only caught up with the rest of its economy in the last 2 years, and cotton consumption recently rose sharply as a result. In 1999/2000--more than a decade after liberalizing other crops--China sanctioned farmers limited sale of cotton to non-government buyers and dropped the price floor that guaranteed government procurement prices provided during much of the 1990s. China last experimented such measures at the beginning of the 1990s, but a sharp contraction in output in Chinas leading producing region immediately forced a reversal in 1993. In contrast with the early 1990s, Chinas crop is now forecast slightly higher in 2000/01 compared with 1999/2000. Chinas cotton producers correctly foresaw that Chinas early season 2000/01 price strength would be sustained through to harvest. Also, weather has been relatively favorable, and the use of genetically modified cotton in Eastern China helped avoid the substantial losses to bollworms that plagued provinces like Shandong and Hebei in the early 1990s. At 18 million bales, Chinas 2000/01 crop is forecast 400,000 bales above its 1999/2000 level. Prices in China initially declined after withdrawal of government guarantees, but rose as consumption rose sharply. Chinas cotton consumption had actually been falling throughout much of the 1990s, even as the economy grew and clothing exports soared. High cotton prices--due in part to low cotton yields during the early 1990s--and broader problems with the economys state-owned sector drove much of the textile industry from profits to losses. The 1990s ended with a drive to remove about a fourth of the spindles available for spinning cotton in China, and finally a 30-40 percent drop in the farm price of cotton from peak government support levels. These lower procurement prices, a customs service crack-down on smuggling chemical fibers, an improving economy in China, and an improved world economy and textile exports led to a surge in cotton consumption in 1999/2000. Chinas rebound during 1999/2000 was extraordinary: a 3-million-bale increase in consumption in one year completely offset the 2.7-million-bale decline that had stretched out over the previous 7 years. Government figures on Chinas yarn output, and continued increases in textile exports, suggest consumption should continue to grow in 2000/01. During the first 8 months of 2000, Chinas clothing exports rose 38 percent compared with a year earlier, and its cotton fabric exports rose 28 percent on a net basis. At 22.5 million bales, Chinas 2000/01 consumption is forecast at a record-high level for the second consecutive year. To sustain this consumption, Chinas Government has auctioned about 6.5 million bales through the newly formed China National Cotton Exchange as of mid-November. Most of this cotton was from government stocks. Chinas inventory levels were a closely- guarded secret for many years, and much uncertainty remains. Through October, the government has continued to release cotton through auctions to control prices driven upward by growing textile industry demand. China may also be seeking to minimize government stocks ahead of World Trade Organization (WTO) accession, so it is unclear what the current willingness to release stocks says about future stock and trade policies. The question for the rest of 2000/01 is whether this rising consumption and falling stocks will again necessitate large imports. China cotton imports are currently forecast to exactly match its exports, and any change in Chinas net trade position has important ramifications for the rest of the world. Pakistans and Chinas Exports Replacing Other Textiles Unlike Chinas, Pakistans textile industry did continue to grow during the 1990s, but compared with its performance during the 1980s--when consumption grew 178 percent--an increase of 24 percent through 1998 was relatively sluggish. Pakistans production actually fell during 1990-98, as disease forced the abandonment of high-yielding varieties early in the 1990s. Recurring insect problems and poor weather continued to depress cotton production afterwards. The textile industry suffered a further blow as obligations under WTO membership forced the end of export restraints on raw fiber--ending the domestic industrys preferential access to locally produced cotton. However, rebounding production since 1998 has spurred the reopening of formerly shuttered textile enterprises and further investment that has again increased the capacity of the industry. A 1- million-bale increase in consumption over 2 years is now expected for 2000/01, a 14-percent increase. About two-thirds of Pakistans textile output is exported, and during July-September 2000, Pakistans yarn exports were about 20 percent higher than during a year earlier. Similarly, Chinas 17 percent increase in cotton consumption over the last 2 years is translating into significant competition for textile industries in other countries. China accounts for about 20 percent of the nearly $200 billion worth of clothing annually exported around the world, and its exports are undoubtedly increasing faster than world demand. While world gross domestic product (GDP) is likely to expand by 4.2 percent in 2000 and 3.5 percent in 2001--well above the 2.8 percent average growth of 1995-99--world cotton consumption is only expected to increase by 1.6 percent from the year before in 2000/01. China alone accounted for 70 percent of Japans January-July 2000 textile and apparel import gains from the year before, and about 50 percent of Koreas. As a result, Koreas yarn stocks for the beginning of 2000/01 are reportedly 50 percent above 1999/2000, and cotton mill consumption there is likely to shrink. Competition from lower income countries is also expected to reduce mill consumption in Taiwan as local firms shift spinning to subsidiaries in Vietnam and China. India and Southeast Asia are expected to continue exporting increasing amounts of textiles and consuming more cotton during 2000/01--due in part to a return of currency depreciation to the regions. But lower cotton consumption is foreseen for the industries of Japan, Eastern Europe, and the United States, as textile exports from developing Asian countries continue to rise. Southern Hemisphere Profits from Rebounding Cotton Prices Brazil offers a final example of how recent developments are in some respects reminiscent of circumstances seen a decade ago, and in other respects reflect profound changes since 1990. World cotton prices have rebounded sharply since their lows in December 1999--up 40 percent as of September 2000. In contrast, the world price of corn has actually fallen during that time, and soybeans have risen only 5 percent. Low cotton prices earlier in the season had helped reduce expected production in Mexico and West Africa by a total of 700,000 bales, but price movements since then have provided an opportunity for the Southern Hemisphere. The response to this opportunity is expected record production in Australia and a crop in Brazil that is forecast 164 percent above the level of 4 years earlier. Brazils increase since 1996--the largest of any country--leaves its expected crop of 3.4 million bales about equal to its output at the beginning of the 1990s. While the magnitude of Brazils crop is similar to 1990/91, changes have been substantial. Brazils economic reforms there during the 1990s have seen first a reduction in the hand-picked harvests of Parana and Sao Paulo during the first half of the decade, and then a surge in the mechanized crops of Mato Grosso and northern Bahia since 1996. Similarly, while world cotton consumption is again growing, and growing in some familiar locations, the world textile industry is considerably different, and the United States is exporting to different customers in many cases than 10 years ago. During the coming decade, the reform of world textile and apparel trade under the WTO in 2005 and the continued expansion of clothing output by developing country exporters suggest further changes are ahead. Higher Foreign ELS Consumption, Lower Production Expected According to the International Cotton Advisory Committee (ICAC), 2000/01 foreign ELS producers consumption is projected 7 percent above last season at 1.6 million bales (table D). While consumption in Egypt is expected to decline this season, a 130- percent increase in China is expected to bring foreign producers consumption back up to its 1998/99 level. Egypts production is expected to decline as well as its consumption, but Chinas output is expected to remain unchanged after increasing 81 percent in 1999/2000. Little change is foreseen for consumption or production by producers outside of Egypt and China in 2000/01. Like consumption, ELS exports in foreign-producing countries are expected above a year ago. The ICAC estimates an increase of 4 percent in 2000/01, with China's lower shipments more than offset by increases from Sudan and Central Asia. With consumption and exports higher, and production lower, foreign producers ELS ending stocks are expected to fall 262,000 bales to 772,000 bales, their lowest since 1995/96. U.S. and World Wool Situation and Outlook U.S. Wool Production and Mill Use Continue Decline U.S. sheep numbers and wool production declined for the tenth consecutive year in 1999. The U.S. farm price for shorn wool averaged 38 cents per pound (greasy) in 1999, 63 percent below a year earlier. Sheep numbers on July 1, 2000 were 5.0 million head, 6 percent below July 1999 and 50 percent below 1990. Shorn sheep during 2000 are expected to decline to 5.9 million head, compared with 6.2 million in 1999. Wool production is estimated at 25.0 million pounds, clean (46.5 million, greasy) for the 1999 marketing year (table E). Lower sheep numbers in 2000 imply production this year could decline to near 24 million pounds, clean, 4 percent below 1999. Expected production this year would be the lowest on record and significantly below the early 1990s (fig. 9). During 1999, U.S. raw wool imports totaled 43.1 million pounds, clean, 39 percent below a year earlier (table F). During 1999, imports of fine wool represented 49 percent of total shipments. Imports of unimproved and other grades not-finer-than 46s totaled 22 million pounds in 1999. Shipments from New Zealand represented 81 percent of these coarser grades, while Australia accounted for 83 percent of the finer wools last year. With beginning stocks of 35.5 million pounds, total 1999 supplies were 133.6 million pounds, clean, 15 percent below a year earlier. Raw wool mill consumption totaled 84.5 million pounds, over 30 million below 1998. Apparel wool consumption, at 69.7 million pounds, was 29 percent below a year earlier, while carpet mill use was 14 million pounds below 1998 at 14.8 million (table G). In 1999, the woolen system used 29.2 million pounds and the worsted system, used 34.4 million. Raw wool exports during 1999 were 3.7 million pounds, clean, compared with 1.7 million a year earlier. Shorn wool shipments were 3.2 million pounds and not-shorn (pulled) exports were 270,900 pounds. Carbonized wool exports totaled 173,700 pounds, compared with 86,100 pounds in 1998. The majority of shorn wool exports went to Germany, Mexico, and Italy. The majority of not- shorn wool went primarily to Canada. U.S. prices for clean, mill-delivered territory raw wool declined during 1999, compared with the previous year. Finer grades 64s and 62s averaged $1.10 and $0.97 per pound, respectively. The 60s and 58s averaged $0.85 and $0.74 per pound. Both the finer and coarser grades are down about 15 cents per pound from 1998. Current domestic prices of Australian raw wool of all grades averaged below market prices of a year earlier. Prices for Australias finest wool--the 80s averaged $2.53 cents per pound in 1999, only 7 cents below 1998. For all other grades, prices declined about 30 cents per pound compared with a year earlier. The 70s averaged $1.92 per pound and the 64s averaged $1.84 per pound. Declining World Wool Production and Stocks Highlight the 1999 Season World wool production continued the long-term downward trend falling to 3.0 billion pounds, the lowest in the 1990s. Wool production declined despite sheep numbers increasing by 3 million head to 1.005 billion. Lower production occurred primarily in Australia, Uruguay, and Argentina. However, production increased slightly in China and New Zealand. World exports of raw wool, at 1.3 billion pounds, increased nearly 14 percent from 1998 shipments. Australian wool exports increased 24 million pounds to 360 million, clean. World wool consumption declined for the eighth consecutive year in 1999. Raw wool consumption, at 2.8 billion pounds, clean, was down 13 million pounds from a year earlier. World wool carryover supplies declined in 1999 after increasing the previous year. At the end of the season, stocks had decreased to 412 million pounds, clean, 28 percent below 1998. The Wool International (WI) stockpile accounted for 41 percent of world carryover supplies in 1999, compared with 61 percent in 1998. The WI stockpile is expected to be eliminated by the 2002 season. World wool prices generally increased during the 1999 season. The Australian market indicator increased from A554 cents per kilogram in July 1999 to above A700 cents during April, May, and June 2000. For the season, the Australian indicator averaged A620 cents per kilogram, 18 percent above the 1998 marketing year. The New Zealand market indicator followed a similar trend, establishing a low of NZ357 cents per kilogram in July 1999 and increasing to above NZ400 cents during May and June 2000. The New Zealand market indicator averaged NZ374 cents for the season. The South African market indicator followed a similar pattern as the other major wool producers averaging SA1,859 cents per kilogram for the season, 4 percent higher than the 1998 marketing year. Manmade Fiber The U.S. manmade fiber industry during the first three-quarters of 2000 increased moderately from a year earlier. Total shipments were 7.9 billion pounds, up 2.2 percent from a year earlier, with noncellulosic shipments, at 7.6 billion pounds, up 1.9 percent. Total manmade fiber production, at 7.9 billion pounds, was 4.7 percent above a year earlier (appendix table 42). Noncellulosic fiber production, at 7.7 billion pounds, was 4.2 percent above a year ago. Manmade fiber stocks in fiber producers plants at the end of the third quarter were 0.76 billion pounds, up 18 percent from last year. Domestic shipments of noncellulosic fibers during January- September 2000 were 7.08 billion pounds, 1.6 percent more than a year earlier. Noncellulosic filament fiber domestic shipments were 4.18 billion pounds, 1.9 percent above a year ago. Filament fiber shipments totaled 1.76 billion pounds of olefin, 1.32 billion of nylon, and 1.09 billion of polyester. Noncellulosic staple domestic shipments were 2.9 billion pounds, up 1.2 percent from last year. Staple shipments were 1.6 billion pounds of polyester, 0.54 billion of nylon, 0.57 billion of olefin, and 0.19 billion of acrylic. According to the capacity survey by Fiber Economics, Inc. in May 2000 (the latest data available), total in-place capacity to produce manmade fibers in 2000 is 12.5 billion pounds, down 2 percent from 1999. Of the major manmade fibers, only two showed an increase from 1999 to 2000; olefin filament is up 3.3 percent and polyester filament is up 1.4 percent. Capacity in 2001 is expected to be 12.6 billion, 0.7 percent above 2000. The carpet market continues to consume more fibers in facing and backing uses than in any other fiber market (appendix table 43). During January-June 2000 (the latest data available), the carpet market used 2.09 billion pounds, 3 percent more than a year earlier. Noncellulosic carpet use accounted for more than 43 percent of total noncellulosic fiber domestic shipments. Nylon dominates the carpet market, constituting more than 49 percent of the total use of noncellulosic carpet fibers. Nylon staple carpet fibers were more than 95 percent of nylon staple domestic shipments, while nylon filament carpet fibers were 75 percent of nylon filament domestic shipments. Preliminary data for third- quarter 2000 indicate that about 1.5 billion pounds of nylon were used in carpets during January-September 2000, 1 percent less than a year earlier. The use of olefin fibers in facing and backing during the first half of 2000 was 0.94 billion pounds, 3.6 percent above last year. Olefin fibers constitute 45 percent of the noncellulosic fibers used in carpets. Carpeting is the most important use of olefins at more than 60 percent. Woven textile production remained the second largest outlet for noncellulosic fibers, taking 20 percent of the January-June 2000 domestic shipments. The woven market used 0.98 billion pounds, 1 percent above a year earlier. Two fibers made up more than 86 percent of this market: polyester accounted for 68 percent, while olefin contributed 18 percent. Similarly, the knit market used almost 0.53 billion pounds, 0.8 percent above a year ago. Shipments of manmade fibers to the knit market were 11 percent of total domestic shipments. Three fibers dominated the knit market; polyester, at 0.35 billion pounds, constituted 67 percent; nylon, at 0.09 billion, provided 17 percent, and acrylic, at almost 0.08 billion, totaled 15 percent. Special article The New Agricultural Trade Negotiations: Background and Issues for the U.S. Cotton Sector Stephen MacDonald 1/------ ------ 1/ Agricultural economist, Economic Research Service, United States Department of Agriculture. ------ Abstract: New multilateral trade negotiations under the World Trade Organization (WTO) were initiated for agriculture in 1999. International trade is particularly important for cotton, since 30 percent of the world's consumption of cotton fiber crosses international borders before consumption by textile mills, and, through trade in yarn, fabric, and clothing, much of the world's cotton crosses international borders at least once more before reaching its final consumers. Traditionally, cottons global import barriers have been low, and export subsidies have been largely negligible. Textile trade, however, has long been subject to government intervention across the world, indirectly affecting cotton. Furthermore, export restrictions by cotton producing countries have been common in the past, as governments indirectly subsidize textile output by assuring their domestic textile industries of preferential access to locally produced cotton. Textile policies are an important concern of developing countries, and could receive further scrutiny in any future WTO round. Other WTO issues related to cotton trade include Chinas accession to the WTO, the accession of Central Asian cotton exporters such as Uzbekistan, the role of State Trading Enterprises (STE) in these and other countries, and domestic support for agriculture. Keywords: cotton, trade, policy, WTO, agriculture, textiles, tariffs. Introduction: International trade is particularly important for cotton, since 30 percent of the world's consumption of cotton fiber crosses international borders before consumption by textile mills: a larger role for trade than is the case for wheat, corn, soybeans, or rice. Furthermore, through trade in yarn, fabric, and clothing, much of the world's cotton crosses international borders at least once more before reaching its final consumers. Cotton exports are particularly important for the U.S. cotton industry, with about 40 percent of the U.S. cotton harvest exported during the 1990s. New multilateral trade negotiations under the World Trade Organization (WTO) were initiated in 1999. During these negotiations, officials from WTO member countries will work to continue the process of reforming agricultural trade rules begun in the Uruguay Round, which concluded in 1994. The traditional prevalence of low tariffs and limited non-tariff barriers among major cotton importers limited the impact on cotton of the market access provisions of the Uruguay Round Agreement on Agriculture (URAA). However, the newfound importance of cotton-producing countries as importers means market access issues could grow in importance for cotton. While export subsidies for cotton by WTO signatories have been negligible, government policies governing the role of State Trading Enterprises (STEs) and support of local textile industries have affected cotton trade. While textiles trade rules are not a subject of the current negotiations, they are an important multilateral trade issue affecting cotton, and significant changes in textile import barriers are mandated by 2005 under the Uruguay Rounds Agreement on Textiles and Clothing (ATC). Other WTO issues related to cotton trade include Chinas accession to the WTO, the accession of Central Asian cotton exporters such as Uzbekistan, the role of State Trading Enterprises (STE) in these and other countries, and domestic support for agriculture. World Cotton Production, Consumption, and Trade The world's four largest cotton producing and consuming countries are China, the United States, India, and Pakistan. Together, these four account for around 60 percent of world production and consumption. The next three largest consuming countries are Turkey, Brazil, and Mexico, all of which produce cotton but are often large importers nonetheless. Cotton is mostly a Northern Hemisphere crop, but about 10 percent of the world's output comes from south of the equator--primarily Brazil and Australia--and is harvested during the Northern Hemisphere's spring. The United States is the worlds leading cotton exporter, accounting for 25 percent of world trade during the 1990s. In recent years, six importers have accounted for 40 percent of world trade-- the European Union (EU), Indonesia, China, Brazil, South Korea, and Thailand. The United States exports to all these major markets, but only accounts for a small share of imports by the EU and Brazil. These markets are largely served by the leading U.S. competitors from Central Asia, West Africa, and the Southern Hemisphere. The leading markets for the United States are Mexico, Turkey, Japan, and Korea (accounting for about half of U.S. exports). The United States ranks second in world cotton production, third in world cotton consumption, and third in the size of its ending stocks. Imports by the United States are minimal--less than 1 percent of the worlds total on average in recent years--but since 1994 have expanded from a level of virtually zero maintained during the previous two decades. World cotton trade shrank during the 1990s, as one of the worlds largest textile industries--Russias--collapsed. World consumption stagnated during most of the 1990s as Russias collapse offset increased consumption by India, Turkey, Mexico, Pakistan, and the United States. World cotton consumption rose sharply in 1999/2000, and another record-high is expected in 2000/01. However, world trade remains close to the average level of the last decade since recent cotton consumption increases have largely occurred in countries producing most of their own cotton. The Uruguay Rounds Impact on Agricultural and Textiles Trade Rules The Uruguay Round of Trade Negotiations began in 1986 and culminated with the signing of the Uruguay Round Agreements at Marakesh in 1994. Three of these agreements are of particular importance to cotton: those concerning agriculture, textiles, and dispute settlement. The Uruguay Round marked the first major effort by the General Agreements on Tariffs and Trade (GATT, the predecessor organization to the WTO) to include trade liberalization in agriculture as a central objective, resulting the URAA. The URAA required signatories in many cases to cut average tariff levels on all agricultural products by set percentages, reduce the value and volume of subsidized exports, and lower aggregate spending on some domestic support programs for agriculture. A separate agreement also established new disciplines on the use of sanitary and phytosanitary (SPS) measures that could be used to restrict trade based on health and safety concerns. In textiles, the Uruguay Rounds ATC addressed the longstanding divergence of global textile trade from the GATT principles of reciprocity and nondiscrimination that resulted from the application of bilateral quotas under the Multifiber Arrangement (MFA). The ATC mandates a schedule for the progressive elimination of MFA quota restraints by 2005, and also mandates that non-MFA restrictions not justified under a GATT provision also be phased out by no later than 2005. The Uruguay Round Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) was also a significant outcome of the Uruguay Round negotiations. The DSU extended greater automaticity to the adoption of dispute panel findings and the Appellate Bodys findings. Previously, the consent of the parties to a dispute was necessary for the adoption of a panels findings, limiting the usefulness of the dispute settlement mechanism for contentious issues. Uruguay Round Agreement on Agriculture Because the main provisions of the URAA are detailed elsewhere (see USDA, 1998), only a general overview of the main accomplishments are given section below for market access, export subsidies and domestic support. Trade issues related specifically to the cotton sector are then discussed in more detail. Market Access--The URAA required participating countries to reduce base period (those in effect in 1986 or 1986-88) tariffs on agricultural products by an average of 36 percent for developed countries and 24 percent for developing nations, and to cap tariffs at a final bound level by the end of the implementation period. The minimum tariff cut on each product is 15 percent (10 percent for developing countries). The agreement also required signatories to convert all non-tariff agricultural trade barriers to tariffs. Countries doing so established a two- tiered tariff system (a tariff-rate quota, or TRQ) in which a lower tariff applies to a quota of imports and higher tariffs to imports beyond the quota level (USDA, 1998). Export subsidies--Twenty-five WTO member countries agreed to reduce the volume and value of their subsidized agricultural exports from base period levels. Four countries made specific commitments to reduce subsidized cotton exports. However, none of these countries are significant exporters, the total volume of subsidized cotton permitted each year by the URAA is negligible, and the countries committed to reducing subsidized cotton exports have subsidized exports of virtually no cotton since the signing of the URAA. China subsidized a substantial volume of cotton exports recently, but China is not currently a WTO member and agreed to refrain from further subsidies in the U.S.-China bilateral agreement for Chinas accession to the WTO. Domestic support--Policies such as price supports and other types of subsidized production have the potential to distort trade flows by reducing imports below levels that would normally occur, or by encouraging the use of export subsidies to dispose of excess domestic production. The URAA required countries to reduce and cap total outlays, as measured by the Aggregate Measurement of Support (AMS), on certain domestic policies that provide producers with direct incentives to increase production. For developed countries, the AMS is to be reduced from base period (1986-88) amounts by 20 percent over a 6-year (implementation) period. The European Union (EU), the United States, and Japan, have the most substantial domestic support programs of the 29 WTO members that agreed to these limits. Of the $285 billion spent on agricultural support programs by the 29 countries in 1995, the EU ($113 billion), Japan ($70 billion), and the United States ($61 billion) accounted for about 85 percent. For the EU and Japan, the majority of that spending (50- 55 percent) was on amber box policies that counted towards their AMS limits, in contrast to only 10 percent for the United States. The URAA divided support on domestic programs into three categories indicating the relative trade-distorting effects of the policies: 1) amber box policies, such as price supports, marketing loans and loan deficiency payments, which are subject to reduction and final spending limits; 2) blue box policies, which are exempt from limits because payments are tied to production limitations by basing payments on fixed area or yield, or on a maximum of 85 percent of base production; and 3) green box policies, such as domestic food aid (e.g. food stamps) and de-coupled income support (e.g. U.S. production flexibility contract payments) which are also exempt from limits. Only amber box policies count towards the AMS limits each country can provide. In addition, support from policies that would otherwise be considered amber box are not counted towards the AMS if support for a specific commodity is equal to or less than 5 percent of the value of that commodity's production in any given year. This is known as the de minimis exemption. The de minimis exemption also applies to non-commodity specific programs, such as crop insurance, as long as support for all such programs remains below 5 percent of the value of all agricultural production. Domestic Support in the European Union and the United States The worlds largest cotton importer is the EU, which maintains no tariffs or significant non-tariff barriers on cotton imports. However, generous domestic support has driven cotton production in Greece and Spain steadily higher since their accession to the EU in the first half of the 1980s. From a 1975-79 average of 795,000 bales, EU cotton production soared 227 percent, to reach 2.6 million bales in 1999/2000. Generous support has ensured that cotton has become the major field crop in Greece in terms of planted area and income, and Greece has become one of the worlds largest exporters (mostly to other EU countries and Turkey). While the EU has instituted co-responsibility levies triggered by production ceilings to moderate the impact of its generous guide price, the EU notified the WTO of payments totaling 809 million ECU in 1997/98--an amount comparable with the entire value of the crop. In the United States, beginning in 1996, deficiency payments to cotton were replaced by de-coupled income support payments (production flexibility contracts, PFC), and both of these payments are exempt from reduction. Amber box support to cotton includes the U.S. User Marketing Certificate Program (Step 2 of the Marketing Loan Program for Upland Cotton--for details on Step 2, see MacDonald and Meyer, 1999), nonrecourse marketing loans, and loan deficiency payments. Until 1997/98, support to cotton was below the de minimis threshhold and not included in the total AMS. Step 2 payments totaled $416 million during 1997/98, accounting for most of cottons product-specific contribution to the $6.24 billion U.S. AMS during 1997. In 1998 and 1999, payments under the nonrecourse loan program and loan deficiency payments have increased, surpassing 5 percent of the value of U.S. production, as did Step 2 payments. In addition, due to falling farm incomes and weather-related disasters, the U.S. Congress provided supplemental emergency assistance (AMTA) payments to recipients of PFC payments in both 1998 and 1999, but no decision has been made on how the supplemental payments will be notified to the WTO (Dohlman and Hoffman, 2000). However, the United States is still in compliance with its commitments on domestic support. Domestic support programs affecting cotton are also in place in China, Turkey, Egypt, Brazil, and Mexico (Valderrama, 1999). However, according to the International Cotton Advisory Committee, excepting China, the level of assistance these countries provide to cotton producers is low. The level of domestic support to agriculture provided by developed countries is a concern of many developing countries. For example, during the 59th Plenary Meeting of the International Cotton Advisory Committee in November 2000, delegates from several countries raised this issue. Market Access and Cotton Importers Traditionally, much of the worlds cotton imports have been by countries lacking the natural resource endowments necessary to grow cotton. Accordingly, the most commonly applied tariff level is 0 percent. A global import-weighted average of applied tariffs reported by UNCTAD is only 2.2 percent. Similarly, with little in the way of non-tariff barriers to cotton by major importers before the URAA, there have been few instances of tariff-rate quota creation since the signing of the URAA. The U.S. quantitative restrictions on imports were converted to a TRQ now totaling 351,000 bales, and South Africa and Colombia also implemented TRQs. However, with respect to bound tariffs, an UNCTAD/WTO study indicated the highest and most frequent bound tariff peaks occur in sugar, tobacco, cotton, and prepared fruits and vegetables. Generally, cotton-producing countries have higher than average tariffs, and account for most of the high-bound tariffs. For example, Brazils MFN average applied tariff is 8 percent, with a bound rate of 55 percent. Pakistans applied rate is 15 percent and its bound rate is 100 percent. An export-weighted average of applied tariffs outside the United States is 7.7 percent. As cotton-producing countries account for a larger share of world consumption, their role as importers has also increased, and the predisposition of cotton-producing countries to develop trade policies that favor domestic cotton producers becomes more important. For example, Brazil was among the worlds top 10 exporters as recently as 1990, but has been one of the worlds largest importers since 1992. Similarly, Turkey was the worlds second largest importer in 1999/2000, and its sixth largest producer. Brazils tariff applied to U.S. cotton went from 0 percent to its current level of 8 percent following Brazils MEROSUR accession, and Turkey briefly imposed a 25-percent import tariff during 1999 in an effort to support its domestic cotton industry. Thus, while the market access provisions of the URAA had little immediate effect on world cotton trade, the assurance of openness and transparency in agricultural trade is likely to be increasingly beneficial to cotton exporters like the United States. Chinas Reforms and WTO Accession China was the worlds largest importer during the mid-1990s, and in addition to market access, its accession to the WTO would involve every major trade issue of importance to cotton. China is the worlds largest producer and consumer of cotton, and is believed to hold 30 percent of world ending stocks. It was the only significant exporter of subsidized cotton in recent years, would have the largest cotton TRQ upon accession to the WTO, and is the worlds largest exporter of textiles and clothing. The terms and timing of its accession to the WTO could have a significant impact on world cotton trade, as indeed its unilateral policy shifts already have. Chinas cotton production fluctuated substantially during the 1990s, as the adjustment of government-set purchasing prices failed to keep pace with changes in agriculture and the economy. Chinas imports, ending stocks, and exports ebbed and flowed as Chinas policymakers lowered and raised procurement prices, opened and closed import quotas, and offered and withdrew export subsidies. At times, China was the worlds largest importer (1994/95-96/97), but in 1998/99 it was the worlds fourth largest exporter. During 1999/2000, China finally extended to its cotton producers the right to sell cotton to state-approved buyers other than its domestic procurement agency--the Cotton and Jute Bureau- -and withdrew from attempting to fix domestic cotton prices. These changes came more than a decade after similar reforms for grains and oilseeds, and the impact of these changes on Chinas cotton sector remains unclear. Chinas trade policy evolved during the 1990s from a complete reliance on an STE--Chinatex--to an extension of import and export rights to some local cotton bureaus, state farms, and state-owned and joint-venture textile enterprises. However, Chinatex remains an important player in Chinas cotton trade, most of the other entities permitted to trade are state-owned, and trade remains strictly regulated by quotas. During 1998 and 1999, exports from Chinas main producing region--Xinjiang-Uighur Autonomous Region--were subsidized, and only a small import quota was permitted during 2000. The draft protocol package that would be the basis for WTO members decision on whether to admit China to the WTO remains under negotiation. Under terms of the U.S.-China bilateral agreement, which will be incorporated into the final WTO accession protocol, China has committed to eliminate nontariff barriers on agricultural imports upon its accession to the WTO and it has agreed to implement a series of tariff cuts between 2000 and 2004. In addition, China committed to establish tariff- rate-quotas (TRQ) for wheat, rice, corn, cotton, and soybean oil with gradually increasing quota levels, mostly over the same period. China committed to a tariff-rate quota of 743,000 tons for cotton in 2000, increasing to 894,000 in 2004. The within-quota import duty would be 1 percent, and the over-quota duty would decline from 69 percent in 2000 to 40 percent by 2004. Nonstate trade companies with the right to trade would be allocated 67 percent of each years quota. Use of export subsidies for farm products will end and trade-distorting domestic subsidies will be capped and reduced (Colby,et al, 2000). Developing Countries Textile Trade Policies and The ATC Chinas accession to the WTO will have a significant impact on world textile trade. While the specifics of this impact are beyond the scope of this report (see USITC, 1999), WTO accession will require China to reduce import barriers to textiles and apparel as well as help ensure its access to export markets. While the use of quotas under the MFA by developed countries has been a concern of developing countries, many developing countries have also maintained significant non-tariff barriers against these imports. In some cases they have also supported their local industries by regulating exports of locally-produced cotton. Although export prohibitions on products other than foodstuffs are not addressed by the URAA, they are form of assistance to developing country textile industries, and could be an issue in a future trade round. India and Pakistan (which are among the worlds top four cotton producers and consumers) traditionally regulated raw cotton exports to ensure preferential prices for their domestic textile industries. During the 1990s both countries largely dismantled their STEs, and following completion of the Uruguay Round negotiations, Pakistan agreed to end its minimum export price system and adhere to free trade in the export of raw cotton. However, Pakistan has periodically announced policies inconsistent with free trade, and reintroduced an STE during 1999/2000. India continues to impose raw cotton export quotas-- although these quotas are not believed to be constraining--and imposed phytosanitary barriers to cotton imports from Pakistan during 1999/2000. While the Cotton Corporation of India Ltd. (CCI) has lost its monopoly role, it remains a significant cotton trading organization (Guitchounts, 1998). The ATC requires reciprocity in market access for textiles, and achieving that reciprocity is considered vital by the textile industries of countries like the United States, which are reducing their textile and apparel protection under the ATC. Indias long-standing reliance on the GATT balance-of-payments provision to justify virtually prohibitive non-tariff barriers to textile imports is expected to end by 2001. India committed to remove many yarn, fabric, and apparel imports from its restricted licensing list as a result of a U.S.-India Market Access Agreement for Textiles and Clothing in 1995. A 1999 U.S.-India agreement to lift quantitative restrictions on imports of over 1,429 products--including textiles--came after India lost its appeal of a dispute panel ruling against its use of the balance- of-payments provision to justify import restrictions, reflecting the importance of the WTOs new dispute settlement mechanisms. Multi-Fiber Arrangement Quotas End in 2004 International trade in textiles and apparel has been governed by quantitative restrictions under the Multi-Fiber Arrangement (MFA) and earlier agreements for more than 30 years. One of the major results of the Uruguay Round was the conclusion of the Agreement on Textiles and Clothing (ATC), which provides for the dismantling of these restrictions. Under the ATC, the MFA restrictions are to be phased out over a 10-year period ending in 2004. The ATC provides the legal framework leading to a complete integration of this sector into the GATT at the end of the transition period. The MFA phaseout is comprised of two parts: a four-stage process eliminating import restraints contained in bilateral agreements previously negotiated on products covered under the MFA, and an increase in quota growth rates for products still under restriction during the transition period. The ATC also deals with other non-MFA restraint measures relating to textiles and clothing. With the elimination of the MFA quotas and other restrictions, tariffs will become the primary mechanism for border protection, as the same rules will apply to trade in textiles and clothing as in other goods. In the long run, the restraint reductions will effectively improve market access for developing countries textile and clothing products in developed countries. And at the same time, developed countries are already achieving the reciprocal access to developing countries textile and apparel markets that was lacking before the ATC. Estimates of the impact of the ATC have varied widely. It is generally accepted that more clothing will be produced in developing countries and less in developed countries like the United States once the MFA quotas are terminated. However, the magnitude of the change and the distribution of the gains among developing countries varies between studies (Whalley, 1999). During the 1990s, the United States and Western Europe increasingly sourced their clothing imports from nearby regions rather than traditional Asian sources--from Mexico and the Caribbean Basin for the United States, and Eastern Europe and the Mediterranean for Western Europe. While this development in part represents preferential access granted to these regional clothing exporters under regional trade agreements such as NAFTA, it also represents the impact of structural change in apparel marketing and distribution. Timeliness is of greater importance in the apparel industry than ever before due to improvements in computing, communication, and transportation. Tighter inventory management and electronic collection and analysis of sales data by retailers have reduced order lag-times and increased the frequency of adjustment in styles and colors necessary to satisfy retailers. This places regional clothing producers at an advantage relative to distant Asian exporters, and the end of quota protection will not eliminate this advantage. Indias WTO dispute about import restraints illustrates one aspect of likely concerns about evolving textile trade rules in coming years--the assurance that developing countries will reduce the widespread trade barriers protecting their industries as the developed countries end the MFA quotas protecting theirs (ATMI, 2000). On the other hand, developing countries have expressed concern with how developed countries have chosen to meet their commitments under the ATC, and how developed countries will respond to the new trade environment after 2004. Furthermore, even after textile and clothing trade is integrated into the WTO framework, tariff protection for the sector around the world remains well above the average for manufactured products. Exporter Policies and State-Trading India and Pakistan have significantly reduced their government role in cotton trading, and have become frequent net importers rather than exporters in recent years. However, several other traditional exporters maintain policies that may be relevant to future WTO negotiations. Virtually no country currently subsidizes cotton exports, and only a handful of countries have export subsidy reduction obligations under the URAA (Brazil, Colombia, Israel, and South Africa). None of these countries have notified the WTO of any use of cotton export subsidies since 1995. However, the domestic policies of several major exporters--particularly with respect to STEs--may be relevant to WTO negotiations in future years. STEs can affect trade by influencing domestic and international prices in ways similar to the use of import tariffs and export subsidies (Ackerman and Dixit, 1999). Negotiations in this area could be important for the U.S. cotton industry since STEs play prominent roles in the cotton industries of the United States leading export competitors, particularly in Central Asia and West Africa. (With the exception of Chinatex, STEs play little role in importing cotton.) The worlds largest exporter of cotton after the United States is Uzbekistan, which supplies about 16 percent of the cotton traded internationally. Uzbekistans cotton output peaked a few years before it achieved independence in 1991. Since then, the impact of decades of environmental damage, a desire to increase self- sufficiency in grains, and the economic collapse of Russia--once Uzbekistans leading customer--have helped bring about a 40- percent decline in Uzbekistans production and exports of cotton (Isengildina, et al, 1998). Uzagroimpex, Uzbekistans STE for cotton, is the fourth largest cotton-trading organization in the world, according to estimates by the International Cotton Advisory Committee. It ranks just ahead of the Plains Cotton Cooperative Association in the United States, but behind the three largest U.S.-based private cotton merchants (Guitchounts, 1998). Economic reforms in Uzbekistan have not reached the point where cotton farmers have a viable alternative to selling their output to enterprises largely controlled by the state. Most cotton farms are also state-owned, and, although production is subsidized through nearly free irrigation water, subsidized lending, and inputs imported at preferential exchange rates, other policies such as state marketing orders more than offset these subsidies. The net impact of government policies in Uzbekistan is a taxation of agriculture that the World Bank estimated equaled 4.5 percent of GDP in 1998. According to the International Monetary Fund, the government is using an overvalued exchange rate, government-set prices, and delayed payments to farmers to transfer resources from cotton producers to the textile industry (IMF, 1999). Turkmenistan, the second largest cotton producer in Central Asia, also retains significant vestiges of centralized planning for cotton and the rest of its economy, with virtually all cotton sold under state order. Neither country is a WTO member, with Uzbekistans accession talks at a preliminary stage and Turkmenistan yet to apply for membership. Collectively, exports by the West African Francophone cotton producers nearly equal those of Uzbekistan. Before their independence, these countries cotton was marketed through Frances parastatal Compagnie Francaise pour le Development des Fibres Textiles (CFDT). After independence, CFDTs role was replaced by local African parastatals, with CFDT maintaining an equity interest in these companies, and much of the cotton continues to be marketed through COPACO (Compagnie Cotonniere, a private firm affiliated with CFDT). Until recently, each local parastatal supplied local farmer associations with inputs, and purchased, transported, ginned, and marketed the entire crop. Since these parastatals had a legal monopoly on cotton purchasing within their respective countries, and marketed their cotton internationally, they appear to meet the definition of a STE in the WTO Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994. However, none of the major West African cotton-exporting WTO members have notified the WTO regarding whether or not they maintain any STEs. Financial difficulties by several parastatals during the early 1990s and recent efforts by the World Bank to increase private sector participation in cotton marketing have resulted in some changes in the last few years. The establishment of private ginning companies has been permitted in some countries, and Cote dIvoires la Compagnie Ivoirienne pour la Development des Textiles (CIDT) was split into three companies in 1998. However, Cote dIvoires Government retains control of one company, and privatization is still at the planning stage in Mali, the regions largest producer (Levin, 2000). While the role of West African parastatals is prominent within their respective countries, none of them ranks among the worlds largest cotton-trading organizations. The fourth largest government cotton-trading organization--after Uzagroimpex, Chinatex and Indias CCI--is Syrias Cotton Marketing Organization (CMO). These four were the only STEs ranking among the worlds 20 largest cotton trading organizations. According to the ICAC, CCI ranked 15th, and the CMO ranked 16th among world cotton-trading organizations in 1998. Conclusion The future of U.S. cotton exports will depend on, 1) consumption gains in markets relying largely on imported cotton, like Mexico and Southeast Asia, and 2) the degree that cotton producers like China, Turkey, and Brazil rely on imports rather than domestic production to meet the growing needs of their textile industries. The impending reform of world textile trade by the WTOs 2005 deadline will put pressure on textile industries in developed countries, but will improve the outlook for consumption by developing countries. The application of current textile trade rules and the development of future policies is of interest to both developed and developing countries, and could affect the location of textile production and cotton demand. The growing import role of cotton producers suggests that cotton trade will increasingly benefit from the discipline that multilateral negotiations bring to global market access. Chinas accession would be bring the market access policies of an important frequent importer under WTO discipline, and would affect the role of one the worlds largest STEs trading cotton. While the role of STEs in global cotton trade has declined in recent years, they remain important for the largest U.S. export competitors. References Ackerman, Karen, and Dixit, Praveen, An Introduction to State Trading In Agriculture, Economic Research Service, USDA. AER No. 783. 1999. 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USITC, Assessment of the Economic Effects on the United States of Chinas Accession to the WTO, Publication 3229. 1999. Valderrama, Carlos, Direct Assistance to Production on the Rise Again, Review of the World Cotton Situation, 53(2): 16-19. 1999. Whalley, John, Notes on Textiles and Apparel in the Next Trade Round, Developing Countries in the Next WTO Trade Round, Cambridge, MA, November 5-6, 1999. World Trade Organization, Export Subsidies: Background Paper by the Secretariat, G/AG/NG/S/5, May 2000 . END_OF_FILE