The US Customs and Border Protection agency (CBP) - a federal authority - is preparing to impose a "Withhold Release Order" (WRO) on imports of cotton, cotton yarn, textiles, finished cotton clothing, and tomato products from western China’s Xinjiang region. The WRO, which requires goods found to have been made using forced labour to be re-exported or destroyed, is expected to take effect later this week.
The justification for the WRO is the allegation of human rights’ abuses of the minority Muslim Uighur population in Xinjiang - the United Nations says that some 1m Uighurs held in camps are being used as forced labour, an asertion denied by Beijing.
Xinjiang is the epicentre of China’s cotton production - about 85% of the country’s annual almost 6m tonnes of cotton comes out of Xinjiang. Total Chinese textile and apparel exports in the first seven months of this volatile year were worth, according to the USDA, $56.5bn, 5.6% higher year-on-year. Forecast consumption for 2020-21 is 8m tonnes, against 7.3m tonnes in 2019-20, but still well below 2018-19’s 8.6m tonnes.
Companies using cotton in China have seen a significiant drop in total profits in the first, Covid-19-affected half of 2020, down by 19% for large-scale enterprises (those with annual sales of more than Renminbi 20m). Exports of clothing in the first half of 2020 dropped by more than 19% and were valued at $51.1bn. Its estimated that about 20% of all the garments sold in the world contain cotton or yarn from Xinjiang.
Deteriorating US/China relations
In March this year US legislators proposed that all goods imported from the Xinjiang region would require a statement that they had not been produced by forced labour. This was followed in July by instructions from Washington D.C. advising companies with Xinjiang connections that they faced "reputational, economic and legal risks". In July the US department of Treasury’s Office of Foreign Assets Control (OFAC) sanctioned two Chinese individuals and the Xinjiang Production and Construction Corps (XPCC) for alleged human rights’ abuses in Xinjiang province. The XPCC dominates Xinjiang’s cotton industry.
This deterioration of US/China trade relations - President Donald Trump has threatened to "decouple" the US from China - might placate some but risks causing further damage to a key part of the US consumer economy, which acounts for 70% of the US’s gross domestic product (GDP). Moreover, it’s an easy threat to make, given how reliant on US soybeans China is.
The American Apparel & Footwear Association (AAFA) said at the start of August that the industry is on track for a 50% decline this year to around $200bn. Key apparel brands are nervous that President Trump could re-impose tariffs on Chinese cotton which were halved to 7.5% under the Phase 1 trade agreement signed in January, making their goods more expensive to produce.
At the same time US brands remain annoyed at Chinese intellectual property theft and point to a failure of China’s to step up purchases of US cotton and textiles to $1bn a year, part of the Phase 1 trade deal, from the approximately $500m a year prior to the signing of that deal.
Policing the supply chain
Policing the cotton supply chain, which the CBP is proposing to do, would be a vast and expensive undertaking. Is it even possible?
Mutually damaging retaliation by China - the world’s biggest cotton importer - is sure to follow. The US is the world’s biggest cotton exporter and annually exports around three times what is consumed locally. The US last year accounted for 30% of China’s cotton imports. A Chinese ban on US cotton imports - which might follow the WRO order - would be a severe jolt to US cotton producers. Clogging up the global cotton trade in this way would push stock levels higher and will not help cotton prices, languishing around 63 cents per pound today, to move up. They are up about 30% from their low at the start of April, but a cotton trade war between China and the US would cap any further move higher.