President Donald Trump has made clear he is not in favor of multinational trade agreements such as NAFTA and the Trans-Pacific Partnership. Last month, he signed an executive order withdrawing the U.S from the negotiations of the TPP, a free-trade agreement between the U.S. and 11 other Pacific Rim nations.
The TPP would have eliminated foreign taxes in the form of tariffs on the vast majority of U.S. exports of food and agricultural products. Agricultural tariff rates average 19 percent in Japan and 16 percent in Vietnam, though some products have peak tariffs of more than 300 percent, according to the U.S. trade representative.
There is also the 2010 ASEAN-China Free Trade Agreement, which pulls together 10 nations in Southeast Asia. Although the U.S. is not a member, the pact indirectly benefits American cotton farmers and is the catalyst behind the plant's recent surge in price.
The commodity is having its best rally in six months and much of that can be attributed to Vietnam’s demand for raw cotton, which has grown steadily for the past six years, according to Vietnam’s customs statistics, with August-to-January imports at record levels. Much of this demand has to do with trade agreements.
The U.S. is the world’s largest cotton exporter, supplying approximately 40 percent of Vietnam’s cotton imports in the last three years, and 50 percent for the year to date, which suggests that the U.S. market share is growing. In fact, according to the U.S. Department of Agriculture, American growers are expected to ship the most cotton this season (ending July 31) since 2013. U.S. exporters have already sold 38 percent of expected shipments, topping the five-year average of 32 percent to date.
Much of Vietnam’s growth in demand for U.S. cotton stems from China’s declines in cotton spinning after the government hobbled the country's industry. China’s price support program, now defunct, required the state reserve to purchase large quantities of Chinese cotton and hoard global cotton, intentionally driving up the price, but making its own output less competitive globally. Such action spurred foreign direct investment into Vietnam’s spinning sector.
The 2010 ASEAN-China Free Trade Agreement allowed duty-free access of produced cotton from Vietnam and other ASEAN nations into China. Raw cotton unfortunately didn’t make the cut, facing a 40 percent above-quota tax.
Thus, it made sense that many Chinese-owned mills relocated to Vietnam, imported raw cotton and shipped the yarn back to China. As a result approximate 50 percent to 65 percent of Vietnam’s cotton imports are spun in foreign-owned mills, with the bulk exported to China.
Earlier this year, China sold its mounting cotton reserves at auction, forcing its price closer to global levels. The move reawakened China’s domestic spinning industry and encouraged more governmental support for yarn spinning in the west of the country. Thus, China became a viable competitor to Vietnam, and added to the already rising demand for U.S. cotton.
China’s three major yarn suppliers are India, Pakistan, and Vietnam. The latter's growth has been the most impressive, particularly in 2016. Meanwhile growth in Pakistan and India declined, having faced crop shortfalls and tighter stocks. Additionally, yarn exports from major non-ASEAN countries such as Uzbekistan and South Korea experienced declines.
Even as yarn spinning shifted from India, Pakistan, Uzbekistan, and to some extent China, into duty-preferred importer countries such as Vietnam, the U.S. has derived an indirect benefit from China’s duty-free ASEAN access.
This rising demand has fueled two straight years of rallies, albeit, futures on the NYMEX are trading about 65 percent below their 2011 record, leaving more room on the upside. There will be further clarity with the release of the USDA’s first estimate during its annual Agricultural Outlook Forum Feb. 23-24.
The history of China and Vietnam is shaped by war and suspicion. There still are sources of tension that cannot be easily reconciled, including maritime conflict. Trump's actions have given the two nations an incentive to cozy up, particularly on trade issues.
The TPP would have helped level the playing field for American workers and businesses, leading to more Made-in-America exports and more higher-paying jobs. By cutting more than 18,000 taxes various countries put on Made-in-America products, TPP would have allowed U.S. farmers, ranchers, manufacturers and small businesses to compete in some of the fastest growing global markets.
Trump’s refusal to negotiate the treaty should be worrisome not only for cotton farmers but for all exporters to Asia.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shelley Goldberg is an investment adviser and environmental sustainability consultant. She has spent more than 20 years in the capital markets, with expertise in global resources and commodities. She has worked as a commodities strategist for Brevan Howard Asset Management and Roubini Global Economics. She founded and managed the energy fund G3 Capital Partners LLC, and ran the largest fund of funds devoted to natural resources with Union Bancaire Priveé.
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