COVID-19 and Cotton Demand in China

China is a major cotton importer as well as a major exporter of manufactured cotton products. The recent COVID-19 outbreak has resulted in decreased global demand for products like clothing and apparel, directly affecting China’s demand for imported cotton. The primary objective of this paper is to examine how the COVID-19 outbreak is affecting cotton demand in China, with a particular focus on U.S. cotton exports. We estimate a source- (e.g., U.S., Australia, Brazil, and India) and product- (cotton and yarn) differentiated import demand model for China. Using a Vector Autoregressive (VAR) procedure, we also estimate the dynamic price relationships across countries. The import demand and VAR analyses are used to derive an import demand-forecasting model of the Chinese cotton market, which is then used to simulate the effects of COVID-19 on China’s import demand. For the simulation, we first determine the initial COVID-19 price shock given current and historical prices. Using this initial price shock, we estimate the price changes across all countries using the estimates from the VAR procedure. We then apply the estimated price changes to the demand model to derive import projections. We compare the import projections to actual trade in 2019 and 2020 and assess the price and non-price impacts of COVID-19 on the U.S. and competing countries.

Projections based on recent price declines showed a reduction in China’s cotton and yarn imports of 177 thousand MT ($327 million). However, this decline did not account for additional losses of 258 thousand MT ($548 million) unexplained by prices. Although U.S. cotton exports to China were higher in 2020 when compared to 2019, COVID-19 is clearly having a negative impact given the expected increase in trade under the U.S. China Phase One Trade Agreement.