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Volume 16, No. 4 April 9, 2018

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More Tariff Talk

A tariff is a fee assessed on imports. The tariff is a per-unit charge

that has to be paid to the government by whomever brings the
good across the border and into the country. Assuming this fee is
passed on by the importer, the impact of a tariff is to increase the
price of the commodity to the user and ultimately the consumer.
Alternatively, if such a tariff makes the imported good less price
competitive, the impact of the tariff is to reduce the quantity
demanded of the imported good.

A potential “trade war” between the US and China has been

brewing for almost a year. Only recently has this escalated and
China is important to US agriculture and to cotton. There is little
gotten increased political, industry, and media attention.
argument about that. After 3 years of decline (2013-15) in total
US exports due to sharply lower exports to China, US exports were
On March 1, President Trump announced non country specific
almost 15 million bales for the 2016 crop year and will likely do
tariffs on steel and aluminum imports. Later, by the end of March,
the same or more for the ’17 crop year. The rebound the last 2
several countries but excluding China, had successfully argued and
years has been due to higher sales to China but also—the
been granted exemption from the tariff. But China is 11th in steel
emergence of sales to mills in Vietnam; and increased sales to
and 4th in aluminum exports to the US.
mills in Indonesia, Bangladesh, and Pakistan. It is also important
and worth noting that a good share of the growth from ’15 to ’16
On March 22, President Trump announced tariffs on about $60
came about for an unusual reason—due to much higher than
billion of Chinese imports. China responded by announcing new
normal sales to mills in India. This was due to back-to-back low
tariffs on US imports including meat, fruit, nuts, and ethanol.
India production in ’15 and ’16 and low stocks.
On Tuesday last week, the US threatened to levy tariffs on more
than 1,300 Chinese products worth $50 billion. On Wednesday
April 4, China vowed tariffs targeting 106 products from the US
including cotton. On Thursday, President Trump called for
imposing an additional $100 billion in new tariffs.

It is important to point out that, for the most part, this is nothing
more than verbal sparring thus far. Still, this has increased
tensions and uncertainty in stocks and commodities markets.

Last Wednesday (April 4th), prices (Dec futures) dropped almost

200 points on the news of China imposing tariffs of 25% on a long
list of commodities including cotton. By the end of the day, prices
had recovered a good portion of the decline and have since moved
back above 78 cents.

Support at 76 cents held. For now, the market seems to be

returning to economic fundamentals and taking a wait and see
attitude on the tariffs issue. The initial drop in prices certainly Thus far for the 2017 crop marketing year, 17% of sales are for
sends us the signal that prices could move lower on any eventual Vietnam, 16% for China, 11% for Turkey, and 10% for Indonesia.
reality of tariffs but it’s early yet. Thus far, US sales to China are 49% of their projected total for the
2017 crop year compared to 44% last year.
World use/demand for cotton is growing/improving. Much of that
growth is mill business in China. China’s textile mill industry is
growing. They are currently in a third year of government reserve
sales. Their stocks are declining but still modest. Their production
is far less than their mill use. Their mill industry is heavily
dependent, or has been, on the US as a major import supplier. A
tariff will increase the cost of US cotton to their mills. It’s hard to
believe this is the desired impact unless they have cheaper,
alternative sources. The issue of fiber quality also comes into
play—what will be the quality of alternative sources?

This tariff talk comes at a particularly inopportune time. The

southern hemisphere crop (Brazil and Australia in particular) will
be coming available for export soon. Of course, this is always the
case this time of the year but any tariff could create opportunity
for increased market share for them.

The jury is still out on (1) whether or not all the “verbal war” will
actually result in tariffs and (2) what the impact on cotton will be.

If US sales of cotton into China decline as the result of a tariff, it is

possible that sales to mills in other countries could increase to
offset the decline in China. If other exporting countries were to
pick up the lost US market share to China, then unless those
countries production and available supply is above average, that
would only leave the door open for the US to export to the
countries being displaced by increased sales to China.

Could US export sales to China be hurt by a tariff? Yes. Could US

exports in total be hurt? That’s the bigger question and the bigger
unknown. As long as the global demand for cotton remains strong
and on the rebound, it is possible that US exports will continue to
find a home……….

But this brings up a much broader issue. China is important to the

US cotton grower. Absolutely. Shipments to China represent our
#1 use. But we have also benefited from growth in mill use in
other countries. Let’s hope this situation with China can be
resolved to the mutual benefit of both the US and China. But
longer term, let’s also work to develop and expand market
opportunities in other countries so we are not as dependent on
one country.

Professor Emeritus of Cotton Economics
229-386-3512 or 229-386-7275