Australia’s US$750 million cotton trade with China targeted, with mills ‘discouraged’ from purchases

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One of Australia’s most China-dependent exports, cotton, has become the latest product to be targeted, Australian industry groups said on Friday, joining a growing list that already includes coal, barley, wine and beef.

Cotton Australia and the Australian Cotton Shippers Association confirmed reports that China’s National Development Reform Commission (NDRC) has been “discouraging” Chinese spinning mills from using Australian cotton.

There has been no official confirmation from the Chinese management agency that sits under the State Council, and both industry groups are investigating.

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The value of Australia‘s exports of cotton to China in 2019 was roughly US$750 million.

To now learn of these changes for Australian cotton exports to China is disappointing

Cotton Australia & the Australian Cotton Shippers Association

“Our industry is working with the Australian government, including the trade and agriculture ministers’ offices, to investigate the situation and fully understand what is going on,” the two groups said in a joint statement.

“Our industry’s relationship with China is of importance to us and is a relationship we have long valued and respected. To now learn of these changes for Australian cotton exports to China is disappointing, particularly after we have enjoyed such a mutually beneficial relationship with the country over many years.

“The Australian cotton industry will continue having meaningful conversations with stakeholders to fully understand this situation, and we will continue working with the Australian government to respectfully and meaningfully engage with China to find a resolution.”

Almost all of Australia’s cotton is exported, according to the Australian Cotton Shippers Association, but if China proceeds with an official ban, it would represent a significant blow to the industry, as China accounts for more than 65 per cent of the sector’s exports.

In a submission to an Australian inquiry about trade diversification in July, the association said the industry was aware of its dependence on the Chinese market and often sought to diversify its trade, but China remained the consistent main source of demand and has proved to be a fair buyer by offering acceptable trade terms and honouring purchases despite market movements.

China went from buying just over 1 per cent of Australian cotton 20 years ago to becoming a major buyer in 2019, and despite being a big producer of cotton itself, China has even become a net importer over the years, accounting for 35 per cent of the world cotton trade.

“For the past 10 years, China has been the single largest buyer of Australian cotton. This demand has been welcomed by the Australian cotton industry. It has resulted in higher prices for raw cotton, improved net farm incomes, improved the wealth of local farming communities, and played a part in increasing land and water values,” the association said in its submission earlier this year.

“Our continued reliance on China is a clear testament to the general inability for [Australian] suppliers of bulk agricultural products to generate demand.”

Why has the China-Australia relationship deteriorated into ‘trade war 2.0’?

The political friction between the two countries escalated again this week after news emerged last weekend that the Chinese government had – much as it has done with cotton – verbally old steel mills and power stations to stop buying Australian coking and thermal coal.

Steel mills and power stations have since been turning down deliveries of orders already placed and redirecting shipments.

Australian trade minister Simon Birmingham and agriculture minister David Littleproud said they were aware of the latest development, and were also seeking clarification.

Impeding the ability of producers to compete on a level-playing field could constitute a potential breach of China’s international undertakings

Simon Birmingham & David Littleproud

“Our cotton exporters have worked hard to win contracts and establish themselves as reliable suppliers of high-quality cotton in the Chinese market, which is an important input for many Chinese businesses,” they said in a statement.

“China should rule out any use of discriminatory actions against Australian cotton producers. Impeding the ability of producers to compete on a level playing field could constitute a potential breach of China’s international undertakings, which would be taken very seriously by Australia.”

A formal written order to stop buying from Australia would violate the China-Australia free trade agreement, and possibly World Trade Organization rules, analysts have said.

Two-way trade between the countries was worth about A$240 billion (US$172 billion) from July 2019 to June 2020, according to the Australian Bureau of Statistics.

In the year to September, China’s imports from Australia were down by 6.3 per cent compared with a year earlier, but China’s overall imports were down by 14.8 per cent, according to James Laurenceson, director of the Australia-China Relations Institute.

The China-Australia relationship has been on the decline since Canberra announced in April that it would coordinate an investigation into the origins of the coronavirus, and aside from trade sanctions, journalists from both countries have also been targeted.

In another escalation on Tuesday, Australian Senator Eric Abetz drew a backlash after he demanded that three prominent Chinese Australians pledge their loyalty by denouncing the Chinese Communist Party in a public inquiry.

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