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GTAP Resource #1580

"China’s Role in World Cotton and Textile Markets"
by MacDonald, Stephen, Agapi Somwaru, Suwen Pan and Francis Tuan

Since China’s accession to the World Trade Organization (WTO) in December 2001, the growth of China’s textile industry has been the dominant factor shaping world cotton and textile markets. China’s textile and apparel (T&A) exports have grown by 50 percent and China has doubled its share of world T&A exports in less than a decade, to about 25 percent. Until 2005, T&A exports from China and other developing countries are constrained by quotas originally implemented by developed countries under the Multifibre Arrangement (MFA). Under the Uruguay Round’s Agreement on Textiles and Clothing (ATC), these quotas will be completely removed at the end of 2004. Given China’s export expansion with the quotas in place, many countries are concerned that China’s textiles will dominate the post-MFA world. This study examines the impact of the ATC’s implementation on China’s textile industry, and its impact in turn on China’s cotton sector. We find that freer trade under the ATC is expected to increase China’s net apparel exports, textile production, cotton consumption, cotton production, and cotton imports.

China’s manufacturing prowess has been repeatedly demonstrated since the 1980’s as China has come to dominate trade in one consumer product after another. Luggage, toys, and a number of other consumer goods at one time were sourced from a number of countries, but are now dominated by China. MFA restrictions meant T&A trade rules differed from other products, suggesting that the alignment of T&A rules with those governing other products will also permit production to once again shift to China. This would also have important implications for world cotton markets. Fluctuations in China’s import demand for cotton has been a key factor in cotton’s world price fluctuations for the last 20 years. Since 1999, China’s share of world cotton use for textile production has soared from the 22-25 percent share it held since 1980, up to 30 percent. China’s imports are expected to reach record levels in 2004, but as the world’s largest cotton producer, China has the potential to substantially reduce its imports, and possibly even export. The interaction between China’s growing demand for cotton and its ability to increase its production will determine the prospects of cotton exporters like the United States.

This study uses two modeling frameworks to examine the interaction between multilateral trade regime changes, global industrial restructuring for textiles and apparel, and China’s cotton consumption, production and trade. A dynamic computable general equilibrium (CGE) model was used to determine how the global restructuring of T&A apparel production and consumption would be realized as the end of the MFA brings T&A trade into the GATT rules governing the rest of world manufacturing trade. World trade change would be expected to change production by China’s textile industry, which in turn changes demand for textile fibers in China. An econometric partial equilibrium model of China’s agricultural sector was then used to examine the impacts of changing demand by the textile industry on China’s cotton consumption, regional cotton production, and cotton trade. The interaction between China’s demand for cotton and man-made fibers is also examined.

This study focuses solely on the impact of implementation of the ATC on world T&A trade. Historical trends suggest that world T&A trade can be expected to grow, and hence change in the world market structure may continue regardless of trade policy changes. The method used in our study does not allow us to predict future trends, or the pace of future structural change. The method we use is sometimes called a ‘counter-factual’ or scenario analysis, i.e., we ask questions such as given the trend in the growth and the change in the market structure, how will the implementation of the ATC add additional growth to world trade or cause further changes in world market structure? We use this counter-factual approach with both the CGE and the partial equilibrium models.

The intertemporal CGE model used in this study is documented in Diao and Somwaru 2000, 2001. The econometric model of China’s agriculture used in this study is documented in Fang and Babcock 2003, and recently has been redeveloped by the department of Agricultural and Applied Economics, Texas Tech University (Pan, Mohanty and Ethridge, 2003). The study brings together these two models, relying on the CGE model’s global economy-wide coverage to capture the changes in the world economy that guide the development of China’s textile industry in the post-ATC world, and relying on the econometric model to analyze the response of China’s agricultural sector to the growth in its textile industry.

The data for the intertemporal CGE model used in this study are from the GTAP database version 6.1, (GTAP, 2003), including data about trade flows in the world and production and consumption in each country/region in 2002. The original data set includes 66 countries/regions and 57 aggregate sectors. For the purpose of this study, we aggregate the data into 14 countries/regions (see below) and 7 sectors, including cotton, other crops, livestock, processed food, textiles, apparel, and an aggregated manufacturing and services sector.

Preliminary results suggest while China’s T&A exports grow, world trade grows, and China’s textile imports also grow. Removal of MFA restrictions does not result in China dominating world trade and production even after 10 years of growth and investment under liberalized trade rules. Other Asian exporters also increase their apparel exports, some even more than China. China’s textile production does not grow as fast its apparel exports, and demand for cotton grows even more slowly. With production of cotton increasing as well, China’s cotton imports are not as strongly affected as some earlier studies have found.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Somwaru, A. (5/13/2004)
Updated: Walmsley, T. (5/21/2004)
Visits: 5,525
No keywords have been specified.

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