Changing Pattern in U.S. Apparel Trade Post-2008: Implications for U.S. Cotton

In 1995, the Agreement on Textiles and Clothing (ATC) provided for the calculated liberalization of the textiles and apparel sectors over a 10-year period ending in 2005, except for some safeguard measures ending on December 31, 2008. These safeguard measures allowed for import restrictions by the U.S. on certain categories of cotton apparel from China. Using a 57-equation, annual econometric, price equilibrium simulation model of the U.S. cotton and cotton apparel markets, results point to lower cotton apparel prices in the U.S. by as much as $ 0.25 per kilogram while cotton prices decline by less than $ 0.01 per kilogram once these safeguards expire. In the baseline scenario, quotas are removed in 2009-2015 except for the safeguards. In the simulation, the safeguards are taken out beginning 2009. A number of empirical studies have been done to quantify and depict post-2008 trade patterns in the clothing sector but the implications for upstream sectors, particularly to the cotton industry, are still unclear. An overall increase in cotton apparel production post–2008 will increase demand for cotton. But with the shift of cotton clothing production from protected developed countries to previously constrained, developing countries, together with policies that favor domestic fiber producers with significant cotton production, the net effect of the safeguard measure removal becomes an empirical question. This study addresses this question in the context of the U.S. cotton industry. It provides a quantitative net impact of trade liberalization of cotton apparel on U.S. cotton production, consumption trade and prices. Couched in a partial equilibrium (PE) framework that (a) vertically links the downstream cotton apparel sector to the upstream cotton sector; and (b) horizontally links the U.S. with its representative trading partners in both the cotton and cotton apparel sectors, a four-region, two-market structural econometric model is developed. The regions include (1) China, (2) other quota-constrained exporters of cotton apparel to the U.S., (3) preferred partners of the U.S., and (4) the U.S. Each region is composed of two markets – cotton apparel and cotton. Markets are linked through cross-market price linkages. That is, resultant domestic prices for one market in a particular region determine the quantity supplied and demanded in the other market through cross-market prices. Each market across regions is linked through bilateral trade flows in the sense that a region’s exports in a particular market are equivalent to another region’s imports in the same market. For example, U.S. imports of apparel from China are equivalent to China’s exports of the same commodity to the U.S. In the baseline scenario, quotas are removed in 2005-2015 except for the safeguards. In the simulation, the safeguards are taken out beginning 2009. With the expiration of the safeguards in 2008, an influx of cheap apparel from China into the U.S. import market will lower domestic apparel prices by an annual average of $ 0.25 through 2015. Faced with cheaper imports, domestic apparel production is projected to contract by 2.28 million kilograms. With this cutback, domestic cotton mill use is likely to be reduced by 3.8 million kilograms. Meanwhile, 6.4 million kilograms of preferred countries’ exports to the U.S. is projected to be displaced which is likely to dampen these apparel suppliers’ demand for U.S. cotton by 310,000 kilograms. On average, however, this decline in U.S. mill use and export demand for U.S. cotton by preferred countries are estimated to be significantly offset by a net increase in the export demand for U.S. cotton traced to China and to other previously constrained countries. On the net, export demand for U.S. cotton will rise by about 3.27 million kilograms – 84 percent offset to the decline in domestic mill use. This is likely to lead to lower cotton prices by less than $0.01 per kilogram.