Helping U.S. Farmers Overcome Trade War and COVID-19 Economics
American farmers have been among the hardest hit due to the double whammy of the ongoing China-U.S. trade war and the effects of COVID-19. The ongoing trade war with China has wreaked havoc for American farmers, with agricultural exports – primarily cotton and soy – plummeting as China left the market. U.S. agricultural exports to China have almost seen a two-thirds decrease in that time.
The Federal aid packages aimed to help farmers in 2019 acted as a small band-aid to cover the losses of farmers and mull over the loss of demand. Yet, with the spread of COVID-19, international trade took further hits as major markets both in the east and west saw long extended lockdowns and shutdowns that completely dried up purchase orders – further sending American farmers reeling.
So, what’s to do as we gear up for a possible recession with the trade war with China still on-going and the post-COVID-19 world still much of a mystery? How can we help American farmers recover and rebuild?
It’s a question that plagues administrators, lawmakers and merchants like us that sell American agricultural goods. There may be some hope of some sort of progress on a new trade deal between China and the U.S. But going by the results of the last rounds of negotiations, it does not seem promising. There may another round of stimulus style government bailouts or aid offered as our country tries to dig ourselves out of the pandemic induced recession. These would provide some relief, but still would be more or less a band aid.
Merchants have been actively marketing in every market outside of China to grow new business. But, we believe this will take some creative work from the U.S. government to get us back to a winning trajectory. We must look at reestablishing demand for U.S. agricultural goods and actively look for new markets to develop and garner.
Focus on Building New Markets
One of the simplest ways to help establish demand and develop markets is to look at where can we induce new buyers to buy more American agricultural goods. A look at the cotton market may provide a possible solution.
The U.S. produces some of the best cotton in the world with the premier long and extra-long staple cotton. Nonetheless, cotton trade has suffered mightily due to the trade war and COVID-19. China has significantly dropped its purchase of U.S. cotton, with buyers there preferring to buy cotton from other nations like Brazil where China has better trade relations. What can we do to better position American cotton? An interesting idea is to identify where to develop a stronger demand for U.S. cotton.
For instance, Bangladesh is one of the world’s largest cotton importers, as well as the world’s second largest textiles exporter. According to the Office of Textiles and Apparel with the U.S. Department of Commerce, Bangladesh also exported over $30.1 billion in textiles and apparel last year, of which $5.93 billion came to the U.S. Given that Bangladesh does not grow much cotton, it relies heavily on imports to cover over 98% of its cotton consumption. Bangladesh imported close to $5.5 billion of cotton last year according to the CIA commodities export listings – the second most in the world.
Per USDA, Bangladesh was one of the few countries that saw an increase in cotton imports in the last few months during the pandemic. However, U.S. cotton only has an 11-13% market share for that consumption right now, worth only about $400 million. How could we increase our market share in a country looking to import more cotton?
Part of the issue for building demand for American cotton in Bangladesh comes from costs of the finished textiles, as American importers must pay significant tariffs on those exports since Bangladesh was removed from the Generalized System of Preferences (GSP) list. The GSP list is supposed to help developing nations trade with the U.S. by providing huge tariff reductions, allowing for countries like Pakistan to export more goods to the U.S. However, this does not always help our farmers, as it is not necessarily tied to buying American goods or agriculture.
Pakistan is the fifth largest producer of cotton in the world according to the UN Food & Agriculture Organization, and their domestic cotton is markedly cheap. This gives manufacturers the impetus to use the maximum amount of domestic cotton they can. In 2019, Pakistan exported $3.15 billion in textiles to the U.S., while only purchasing $618 million in raw U.S. cotton.
Most of the time, U.S. importers are just looking for a bottom line and don’t specify or care what cotton is being used to manufacture their product. So, the manufacturers will buy the cheapest cotton to make ends meet. Hence in Pakistan, even with the benefit of the GSP, they will use whatever domestic cotton they can to keep prices down. In Bangladesh, where they do not have a strong domestic crop, they will still need to import cotton, and we need to create a climate where they want to buy more U.S. cotton.
Time for Creative Thinking
What if we threw a wrench into this scenario if the U.S. simply offered tariff breaks or relief on goods made with American agricultural commodities?
In this case, now the U.S. importers and brands now have an impetus to ask their manufacturers to make their goods with U.S. cotton. Those manufacturers, like the ones in Bangladesh, depend on these large U.S. clients and would start looking at how to shift that cotton consumption to include more U.S. cotton. They will cause spinners to ramp up their purchase of U.S. cotton. The tariff breaks would be worth more than the difference in prices between using U.S. cotton instead of cheaper grades from India and West Africa.
We can generate a larger market share in one the largest cotton buying markets in the world for U.S. cotton by giving them a small incentive that changes how they value buying U.S. cotton as opposed to cheaper alternatives. With eased tariff rates lowering the costs, we can expect a significant uptick in the purchase of U.S. cotton, especially for a country like Bangladesh that is dependent on cotton imports.
In the case of Bangladesh, let’s look at what happens with the biggest tariff break possible. Let us say that they are treated as if they were a GSP nation. That is going to look like something along a 7% tariff break, meaning a savings of approximately $416 million in extra costs of their $5.93 billion exports to the U.S. – a sizable savings for the U.S. importer. Now, to counteract that, manufacturers must use U.S. cotton to make these goods.
In the textile world, the cost of cotton accounts for about 20% of the final price. If we can persuade Bangladesh to buy about $1.2 billion of U.S. cotton that it was previously buying from other nations – almost a 3x increase from what it bought last year from the U.S. – it would fill a huge amount of the hole left by China, wouldn’t it?
Since the incentive is tied directly to the use of U.S. cotton, this helps set up U.S. farmers to win, as they will see the bulk of that money come to them. In the long run, we create more solid markets for U.S. goods where we can reap the benefits regardless of where the U.S.-China trade war settles.
This sort of incentive structure could be implemented several ways. We could simply have tariff and tax breaks for the end importer of the textiles here in the U.S., a scaling tariff rate for a country based on the dollar amount of agricultural exports that it buys, or even a combination of the two. It could help foster greater demand for U.S. agricultural products in that country, while also strengthening better relationships between the different players involved.
Imagine if we identified 5-10 markets like Bangladesh, India, Turkey and others that could make sense for the various agricultural products that have taken the biggest hit. Which countries would say no as they work to dig themselves out of the recession and ramifications of COVID-19 in a clear win-win for both parties?
We must actively begin looking for solutions to this changing global trade market. China has invested heavily in competing markets like Brazil and West Africa to set up U.S. alternatives. Entire supply chains have been uprooted and redesigned during this time, and new markets are looking to gain a foothold in global trade.
We must set a winning course for American farmers in this climate. We need to look for small, smart investments that are incentivized in a way to help American farmers make more money. It is time for us to invest and grow alternative markets beyond China that can lead to huge windfalls in terms of the amount of American agriculture sold. It is imperative that we develop these alternative markets and ensure that we put in incentive structures tied directly to buying U.S. agriculture goods to set up long term profits.
The greater the demand we build and the more markets we develop, the better the chance of ramping up exports – which ultimately means more money for our farmers.
Now that is a good investment for America’s future.
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