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India has China’s cotton spinners in a twist

March 9, 2012

The India-China cotton trade has got messy. Just a year after India mulled over expanding the export quota for cotton to China owning to over production this year its taken a complete role reversal. India’s decision to ban cotton exports to protect the domestic industry has Chinese cotton associations up in arms. A previous Indian attempt in 2010 to ban cotton exports had resulted in “heavy losses” for Chinese textile producers and had also hurt local Indian producers as demand was artificially curtailed and prices shot through the roof.

“As a member of the international trading family, we hope the Indian government will rectify this market-disrupting and mistaken policy in a timely fashion and comply with global trade rules,” a statement said. More than 70 percent of India’s cotton exports go to China, where Indian exports amount to 1/3rd of China’s cotton imports, the Chinese textile industry is still a big employer. China uses a majority of Indian cotton to spin into fabrics retailed internationally by the worlds leading brands.

India has already exported about 9.5 million bales in the current cotton year beginning on October 1, higher than the projected export surplus quota of 8.4 million bales set in January, due to strong demand from China.

Indian farmers meanwhile concede that the ban is futile and exports should be reversed. China is still the worlds largest producer of cotton, and India being the second largest producer. Analysts agree that while the ban may serve to increase the price of Indian cotton to a certain extent for the time being, China is capable of finding new avenues of cotton imports. While India is the world’s second largest cotton exporter, it controls only about 15 percent of global production. This doesn’t give it much weight when it comes to bargaining power with China which is ready and able to pay more to access cotton from other markets including America even if it is more expensive.

As a result, the decision taken to ban Indian cotton to demand a higher price seems to have back-fired on the Indian government which is most likely to announce its reversal after a meeting today.

Nonetheless, while cotton can be sourced from various markets, its a lesson in foreign policy that both China and India have to learn about each other. India needs to realize she can’t ban raw materials to threaten a price rise in today’s free trade economy (India has played this card often against China with textiles, yarn, iron ore etc) and China needs to realise that this is a tactic often played by New Delhi and to whether the storm for it can’t last too long.

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