In this issue:
Trade with Cuba: Past and Future
Forbidden Fruit
Islands in the Export Stream
From the Comptroller: Cutting Government Down to Size
Texas Cotton Travels the World
Trade with Cuba: Past and Future
A mere 90 miles from Florida, Cuba enjoyed a long history of trade with the U.S. before Fidel Castro rose to power in 1959. In that bygone era, U.S. trade with Cuba exceeded $1 billion a year. If the U.S. eventually lifts its longstanding trade embargo against Cuba, the island nation could once again become a significant trading partner with Texas and other states.
Since 1992, the end of Soviet subsidies to Cuba and the resulting collapse of the island economy have forced Cuba to initiate economic reforms designed to attract foreign investment. Investors from many countries have formed joint ventures with the Cuban government in tourism, telecommunications and mining. Many American businesses are pursuing plans to reenter the Cuban market.
Cuba's 11 million people need all types of consumer and durable goods. If the U.S. lifts its embargo, U.S.-Cuba trade could amount to between $2 billion and $3 billion in the first year and $6.5 billion a few years later, according to a study by Johns Hopkins University economists. Texas could share in these new trade opportunities with potential exports to Cuba worth at least $200 million in the first year.
Under the terms of the Cuban Democracy Act (CDA) of 1992, the U.S. will not relax its embargo unless Cuba takes steps to adopt free markets, hold free elections and improve human rights. Meanwhile, business people and economists speculate on what normalized trade would mean. The consensus is that Cuba is an attractive emerging market. Even as Cuba opens its doors, however, Castro insists on economic development without capitalism.
Embargo history: U.S. relations with Cuba soured soon after Castro came to power. In 1959, Cuba expropriated large tracts of land from Cuban nationals and U.S. citizens. The following year, Cuba confiscated American and British refineries when they refused to process Soviet oil. The U.S. retaliated by cutting off imports of Cuban sugar. In October 1960, Cuba confiscated most U.S. businesses on the island. The U.S. severed relations with Cuba in January 1961 and imposed a trade embargo in February 1962.
The embargo has been modified over the years. Beginning in 1975, the U.S. allowed foreign subsidiaries of American companies to trade certain goods with Cuba if licensed by the U.S. Treasury Department. These companies' trade with Cuba reached a high of $718 million in 1991.
In 1992, however, Congress passed the CDA, barring foreign subsidiaries of U.S. firms from continuing trade with Cuba. The law prohibits any ship docking in Cuban ports from docking in American ports within 180 days.
While tightening the embargo, the CDA also authorized U.S. firms to enhance communication with Cuba. Now, for the first time in more than 30 years, anyone in the U.S. may make a direct telephone call to Cuba. AT&T, Sprint, MCI and other companies began offering direct-dial telephone service to Cuba at the end of 1994.
In late 1995, Congress debated a bill that would tighten the embargo to increase pressure on the 69-year-old Castro. A controversial provision of this legislation would authorize Americans to file lawsuits in U.S. courts against foreign companies that buy or use expropriated properties in Cuba. The bill would also deny U.S. visas to foreigners who own or benefit from properties expropriated after 1959.
Island economy sinks: Cuba's economy began to unravel in the early 1990s after the former Soviet Union-facing its own economic crisis-sharply reduced its support for the island nation. Cuba had relied on Soviet economic aid to the tune of an estimated $5 billion to $6 billion per year.
By 1992, Soviet aid to Cuba had ended, and Cuba had lost its Soviet bloc trading partners, the source of 84 percent of the island's trade. Between 1989 and 1993, Cuba's trade with Russia plunged by 92 percent.
Cuba stopped publishing official economic statistics in 1989. Since then, by most estimates, Cuba's total economic output has shrunk by more than 50 percent. According to Carmelo Mesa-Lago, professor of economics and Latin American studies at the University of Pittsburgh, the total value of Cuban exports and imports declined by 75 percent between 1989 and 1993. Imports shrank by nearly 80 percent as Cuba sharply reduced its purchases of raw materials, machinery, transportation equipment, consumer goods and food.
The resulting shortages have harmed all sectors. An estimated 80 percent of Cuban factories sit idle for lack of spare parts, fuel and other inputs. Reliable transportation is practically nonexistent. Pesticides, fertilizers and fungicides are scarce; farmers use oxen instead of tractors. Between 18 percent and 25 percent of the Cuban labor force is unemployed, affecting 2.1 million to 2.8 million families.
The government has rationed basic foodstuffs and household goods since the early 1960s, selling them at subsidized low prices. Now, monthly rations cover only about one to two weeks of consumption. Most food and consumer items are available only on the black market, where prices are much higher; at the new farmer's markets, where items are sold at market prices; or at government-owned Odollar stores.O Cuban wages buy little at market prices. In October 1995, with the Cuban peso trading at 25 pesos to the U.S. dollar on the black market, Cuba's median monthly salary of 180 pesos equated to $7. Salaries range from only 40 to 480 pesos per month.
Cubans live with frequent power blackouts and interruptions in their natural gas and water supplies. Cuba produces less than 20 percent of the oil it consumes and must import the remainder, primarily from Russia. With hard currency in short supply, Cuba is forced to swap sugar for oil.
Cuba's exports, primarily to the former Soviet bloc countries, shrank by more than 70 percent between 1989 and 1993. Production of sugar, Cuba's main export and source of hard currency, plunged from 7 million tons in 1992 to 4.2 million tons in 1993, a drop of 40 percent; the 1994-1995 crop of 3.3 million tons was the lowest in well over 40 years. Similarly, nickel production fell by 35 percent between 1989 and 1993. Caught in a vicious circle, Cuba cannot earn the hard currency it needs to shore up these industries until the island increases its exports.
Despite these problems, Cuba will have some advantages in rebuilding if the expected economic reforms become a reality. Cuba's literacy rates and proportion of university-trained professionals are among the highest in Latin America. The large Cuban-American community will act as a source of capital and business know-how, and a post-embargo Cuba would be eligible for International Monetary Fund and World Bank loans.
Road to reform: Economic necessity has forced Cuba to undertake economic reforms to attract foreign investment, while Castro maintains tight political control.
Beginning in the 1980s, the Cuban government allowed foreign private investors to hold a 49 percent interest in joint ventures with the state. Since September 1995, foreign investors may fully own businesses in Cuba and may invest in real estate (though not necessarily land) and all other economic sectors except defense, education and public health. They may create duty-free trade zones and export manufacturing zones similar to those along the Texas-Mexico border. Foreign investors are exempt from most taxes and enjoy benefits such as free repatriation of profits, low salaries for highly skilled laborers and a ban on worker strikes.
Foreign businesses still may not hire their own workers. The Cuban government collects workers' wages in foreign currency, skims a percentage off the top and pays the workers in less valuable pesos. Cuban workers end up receiving only a fraction of the wages that foreign investors pay for their services.
In 1993, the government decriminalized the possession and use of foreign currencies by Cubans on the island, resulting in the OdollarizationO of the economy. Many goods now can be bought only with dollars. Decriminalization was also intended to encourage Cubans living abroad to remit dollars to their families on the island. These remittances are estimated to range from $300 million to $400 million annually.
Also in 1993, the government authorized self-employment in 135 trades, crafts and services, seeking to legitimize the black market for personal services that already existed and to help employ workers idled by government layoffs. Professionals such as doctors and teachers, however, may not be self-employed.
The government also has taken steps to decentralize farming by establishing cooperatives in place of the large state farms. The idea is to give these co-ops more say over management and use of the land, while still requiring them to sell their produce to the state at fixed prices. Most analysts believe that this will not improve productivity significantly because not enough incentives exist for the farmer.
Since September 1994, all farmers may sell their surplus produce-the amount remaining after they meet their sales obligations to the state procurement system-to the public at market prices. To do so, farmers must obtain a license and pay fees and taxes. The farmer's markets have improved the quantity and selection of agricultural products available to the public, but at higher prices.
In October 1994, the government established industrial-artisan markets in an attempt to undercut the black market and stimulate production. Individuals and state enterprises may sell their surplus goods at market prices but must pay the government a transaction tax, similar to a sales tax.
Foreign investment grows: Since 1990, according to Cuban officials, foreign private investors and the Cuban government have agreed to 225 joint ventures in which the government has sold portions of state-run companies to investors.
The government claims that direct foreign investment in Cuba in September 1995 exceeded $2 billion, though no firm statistics exist. U.S. analysts say some of this money has been committed but not disbursed, and some is in the form of debt-for-equity swaps in which foreigners receive a stake in a Cuban industry.
Tourism attracts the largest amount of foreign investment due to Cuba's huge potential for travel and gaming industries. In 1994, more than 600,000 tourists visited Cuba. European hotel chains-led by Spanish and German firms-have been the most prominent investors, primarily in Havana and the nearby beach resort of Varadero. U.S. hotel chains also would like to invest in a post-embargo Cuba, and cruise lines likely would rush into that market.
Canada is one of Cuba's major trading partners and the leading source of tourists to the island. Canadian companies are buying and upgrading Cuban nickel mines. Canadian and Australian companies have signed deals to explore for copper, nickel, lead, gold and silver. Canada's Labatt Brewery has signed a joint venture agreement to brew Hatuey and Cristal beer and export it to Cuba for sale to tourists.
In 1994, Mexico's Grupos Domus bought half of the Cuban telephone company for $1.5 billion. Mexicans also have invested in Cuban cement and textiles.
As of 1994, an estimated 170 companies from three dozen countries had done business in Cuba. The Dutch ING Bank, Cuba's first foreign financial institution, has opened its doors for business. Other European firms produce light bulbs, detergents and toiletries for the Cuban market. Five Italian Benetton retail stores have opened on the island. Nissan and Mitsubishi sell automobiles in Havana. The Israelis have invested in textiles. British firms have expressed interest in oil exploration.
U.S. law allows American businesses to execute letters of intent to invest in Cuba if the embargo is lifted. As of April 1995, according to Cuban officials, 30 U.S. firms had signed letters of intent. Most were in tourism or biotechnology, but some were in oil, mining, food processing and manufacture of construction materials.
Texas-Cuba trade potential: According to the Johns Hopkins study, U.S. firms could export between $1.3 billion and $2 billion worth of goods to Cuba in the first year after normalization. That range is based on official Cuban estimates that the U.S. would capture between one-third and one-half of Cuba's trade, if not more.
Ernest Preeg of the Washington-based Center for Strategic and International Studies notes that Cuba is likely to shift to U.S. suppliers in preference to imports from Europe and elsewhere. Cuba could get lower prices from U.S. suppliers and save on transportation costs. According to Preeg, if Cuba fundamentally restructures its economy, the island's foreign exchange earnings could double to $5.5 billion within two years of normalization.
The Florida Department of Commerce estimates that Florida would capture as much as 60 percent of all U.S.-Cuba trade because of its geographic proximity and cultural ties to Cuba. Florida is home to about 675,000 Cuban- Americans, by far the highest concentration in any state. (Texas ranks sixth with 18,200 Cuban-Americans.) The agency estimates that Florida's exports to Cuba would grow from $990 million in the first year after the embargo is lifted to $1.9 billion by the fifth year.
Texas is in a good position to capture a large amount of trade with Cuba because of its proximity to and trading experience with other Latin American nations. The Port of Houston, which leads all other U.S. ports in foreign tonnage, handles cargo bound for Mexico and farther south. Texas also produces consumer and agricultural products of the type that Cuba once imported from the U.S.
Texas' exports to Cuba in the first year could range from roughly $300 million to $800 million, according to a 1994 study by Luis Rene Fernandez and Jorge Mario Sanchez, University of Havana scholars visiting the University of Texas at Austin. The low-end estimate of $320 million assumed that Texas' exports to Cuba would equate to its combined exports to Costa Rica, Jamaica and the Dominican Republic, which together resemble Cuba in population, arable land, literacy rates and size of the labor force. The most optimistic estimate was based on matching the items and quantities that Cuba has imported from U.S. foreign subsidiaries and Canada to the items that Texas exports to other countries.
Estimates by the Comptroller's Office are more conservative. Assuming that U.S. exports to Cuba range from $1.3 billion to $2 billion in the first year and that Texas captures 15 percent of this trade, the state's share of exports would range from $200 million to $300 million. A 15 percent share would be in line with Texas' current trade patterns with other Latin American nations (excluding Mexico), and could rise in later years. As total U.S.-Cuba trade grew, so would Texas-Cuba trade.
Studies by the Institute of Food and Agricultural Sciences at the University of Florida underline the potential for U.S. agricultural exports to Cuba. Before 1959, Cuba bought 25 percent of all U.S. rice exports and was Louisiana's largest export market for rice. The island still imports between 30 percent and 40 percent of the rice it consumes. Texas, the fourth largest U.S. rice producer, is well placed to compete for a share of that market.
Cuba imported only small amounts of cotton from the U.S. before 1959. Over the past three decades, however, Cuba's cotton imports have grown significantly. As the largest U.S. cotton producer, Texas could compete in that market as well. And with its lead in cattle production, Texas could export breeding animals, equipment and the expertise needed to rebuild Cuba's once thriving cattle industry.
Texas produces many of the agricultural inputs that Cuba needs to improve its output. In 1989, Cuba imported about 1 million metric tons of fertilizer and 20,000 metric tons of herbicides and pesticides. Texas' Gulf Coast petrochemical plants manufacture these products and could export them to a post-embargo Cuba. The island also is a potential customer for Texas' primary exports to other Caribbean nations, such as industrial machinery, computer equipment, petroleum products and transportation equipment.
Texas' location makes it a natural for maritime transportation to Cuba, as well as for travel and related services. Texas airports, airlines, travel agencies and other providers could capitalize on better U.S.-Cuba relations. United Airlines already has acquired the Miami-to-Havana route from the former Pan-American World Airways. Direct flights to Havana from Houston and Dallas are a real possibility some day.
Cuba needs to buy everything from food, shoes and medicines to materials and services needed to rebuild the island's roads, water and sewer systems, electric utilities, telecommunications and housing. A post-embargo Cuba could open many opportunities for Texas exporters.
Contributing to this article:
Maria Mendez-Lewis
From the Comptroller:
Cutting Government Down to SizeOn November 7, Texans acted to lower the ratio of state bureaucrat to taxpayer. In approving Proposition 10, they voted to do away with the State Treasury by September 1996 and merge its most important functions into the Comptroller's Office.
Abolishing the Treasury will create no harm and lots of savings. By 2000, when the transition to the Comptroller's Office is complete, the state will need about 160 fewer employees and will save more than $20 million.
The Treasury performs three basic jobs. It serves as the state's bank, investing and managing public funds. It collects the tobacco tax, the single largest source of tax revenue that the Legislature hasnOt already transferred to the Comptroller. And it runs the unclaimed property program, which collects cash, securities and other valuables abandoned in private accounts and, after attempting to return them to their owners, turns the rest over to the state.
The Comptroller's Office-or in some cases, a private firm under contract with the state-can handle these important tasks at least as efficiently, and for far less money.
Opponents of Proposition 10 claimed that abolishing the Treasury would undercut an important Ocheck and balanceO over the state's money. That argument just doesnOt hold water. Internal and independent outside auditors keep a constant eye on state funds, and taxpayers already foot the bill for the State Auditor to make sure those funds are handled honestly and effectively.
Large private companies use up-to-date accounting practices and strict internal controls to safeguard their money. So does Texas. Our internal auditing procedures are nationally recognized as efficient and effective. The state's money is safe and sound-and will remain that way.
-John Sharp
Mention Cuba in the context of world trade and many people think immediately of cigars. Cuban cigars, hand-rolled from the island's aromatic tobacco, hold a special mystique in the romance of cigar smoking.
Should the U.S. lift its embargo, a big Cohiba or Montecristo cigar would probably be many American consumers' first direct exposure to legal trade with Cuba. Attempts to import Cuban cigars into the U.S. illegally are increasing, according to the Office of Foreign Assets Control of the U.S. Department of the Treasury.
At present, only persons returning directly from Cuba after a licensed visit there may bring Cuban cigars into the U.S., and then only for personal use. The value of the cigars may not exceed $100. Travelers may not bring Cuban cigars into the U.S. from a third country such as Mexico or Canada. It is illegal for anyone in the U.S. to buy, sell, trade or give away illegally imported Cuban cigars. Violators may face fines of up to $50,000 and, in some cases, criminal prosecution and imprisonment.
Nevertheless, a large black market exists in the U.S. for Cuban cigars. Norman Sharp, president of the Cigar Association of America, estimates this trade at 2 million cigars per year, worth about $32 million.
Once these cigars become legally available, Sharp said, as many as 10 million Americans might line up to sample them during the first year. After the initial explosion of demand, though, sales would likely subside because the Cuban product will remain scarce and much more expensive than other high-quality brands.
The quality of today's Cuban cigars is a topic of smoldering debate among aficionados. While some insist that the Cuban smokes deserve their reputation as the finest in the world, others say the modern product is poorly rolled and the quality of the tobacco has declined.
According to Richard C. Hacker, author of The Ultimate Cigar Book, Cuban cigars owe much of their allure in the U.S. to their status as Oforbidden fruit.O Interviewed in The Double Corona, the journal of the International Association of Cigar Clubs, Hacker said that when the U.S. lifts its embargo, Othe Cubans will have to rethink their marketing strategy and quality control procedures in order to regain their foothold in the American market, where we have access to some of the finest non-Cuban cigars in the world, at a fraction of the price.
U.S.-based cigar makers are eager to import Cuban tobacco leaves to blend into their own cigars. These imports, rather than cigars rolled on the island, are likely to account for the main volume of U.S.-Cuba tobacco trade. Norman Sharp said, however, that Cuba will require three to five years of investment to reverse the decline in the quality of its tobacco.
From 1989 through 1993, the value of Cuba's tobacco exports averaged $91 million per year, according to U.S. Central Intelligence Agency estimates based on official data from Cuba's trade partners. The largest customers were in Europe, with Spain taking more than half of all exports.
After 1492, when Spanish explorers seeking new trade routes landed on Hispaniola (modern-day Dominican Republic and Haiti), the islands in the Caribbean Sea served as base camps for further explorations of the New World that eventually led to the discovery and settlement of Texas.
Now, as the 20th century draws to a close, Texas is pursuing its own trade and investment opportunities in the Caribbean. Meanwhile, the Caribbean and West Indies countries are laying the economic and political foundation for membership in the North American Free Trade Agreement (NAFTA) and the Free Trade Area of the Americas, a proposed Pan-American trade bloc scheduled to form by 2005.
Since 1991, Texas' annual exports to the Caribbean and West Indies have risen from $616.8 million to $746.8 million, an average annual increase of almost 7 percent. Between 1991 and 1994, the Caribbean became the destination of a larger share of Texas' exports to Latin America (excluding Mexico) and the Caribbean, increasing from 8 percent to 11 percent of exports to this region.
Texas' top five exports to the Caribbean in 1994 were industrial machinery and computer equipment, petroleum refining and related products, chemicals and allied products, transportation equipment and fabricated metal products. These five industries accounted for $616 million or 82 percent of Texas' total shipments to the region.
Trade currents: Texas exports merchandise to 22 Caribbean countries, of which 10 receive the bulk of Texas' shipments. Texas' top three Caribbean trading partners, in order of export value, are Trinidad and Tobago, the Dominican Republic and Jamaica. In 1994, exports to these three countries accounted for more than $471 million or 63 percent of Texas' exports to the Caribbean and West Indies.
Trinidad and Tobago: Located off the Venezuelan coast, these are the southernmost of the Caribbean islands. The U.S. is the major supplier of goods to this island republic, providing almost half of the country's imports in 1993. Texas' exports to Trinidad and Tobago have dipped and surged considerably since 1991. In 1994, exports reached $181.5 million, a 52 percent increase over 1991, although down from 1993. Throughout this period, Texas' main export has been industrial machinery. By 1994, Texas' shipments of industrial machinery had increased to more than $129 million, roughly double the 1991 level.
Dominican Republic: In 1994, Texas exported $171 million worth of goods to the Dominican Republic, more than double the 1993 value, led by transportation equipment worth $68.5 million. Over the past four years, chemicals and allied products have been Texas' primary export to this island, with shipments averaging $38.6 million per year.
Jamaica: Jamaica's economy is based on sugar, bauxite and tourism. In 1993, the U.S. was Jamaica's largest trading partner, supplying 50 percent of the island's imports and receiving 40 percent of its exports. Texas' 1994 exports to Jamaica reversed the declines experienced in 1992 and 1993, increasing by 46 percent to $118.5 million. The main Texas exports were petroleum refining and related products, which increased by more than $40 million or 50 percent over 1993.
Other islands: In 1994, the Netherlands Antilles and the Bahamas imported $141.8 million worth of goods from Texas-19 percent of the state's exports to the Caribbean-even though these countries' imports of petroleum refining and related products have declined by 50 percent over the past four years. Since 1991, when the U.S. imposed an economic embargo on Haiti, Texas has exported $50 million worth of food and kindred products to that country, accounting for two-thirds of Texas' exports to Haiti. Rounding out Texas' top 10 export customers in the Caribbean are Aruba, the Cayman Islands, Barbados and Dominica.
Sun blocs: NAFTA has motivated Caribbean countries to form new trade alliances and to revive moribund pacts with other countries to increase regional trade, investment and cooperation. Two major alliances are the new Association of Caribbean States (ACS) and the reinvigorated Caribbean Community and Common Market (CARICOM).
The ACS, formally established in August 1995, seeks to create a trading bloc with a population of more than 200 million and an estimated trading volume of $500 million per year. ACS membership comprises 31 Caribbean and Latin American nations, including Mexico, Costa Rica, Venezuela, Colombia, Cuba, the Dominican Republic, Jamaica, Haiti and Trinidad and Tobago.
The 13-country CARICOM has existed since 1973. Although it has been only marginally successful in opening up interregional trade in the Caribbean, CARICOM countries recently began discussions to create a single common market in the Caribbean by 1997.
According to trade analysts, these new alliances must overcome historical rivalries and economic disparities to create new trade and economic opportunities for their countries-and to compete in world trade.
Contributing to this article:
Augustin Redwine
Texas Cotton Travels the WorldCotton has been Texas' main cash crop since before Texas became a state. The nation's leading cotton producer for more than 120 years, Texas supplied as much as 30 percent of the world's production during the 1920s.
Today, Texas produces more cotton each year than the Old South produced at the time of the Civil War, and Texas growers depend almost as much on exporting raw cotton as did the antebellum South. Texas exports about 40 percent of its annual cotton crop, shipping raw product to Indonesia, Thailand, Taiwan, the Philippines, Pakistan, China, Japan, South Korea, Spain and Mexico.
Thanks to the consistent quality of Texas cotton and the growth of the world market, the U.S. maintains a favorable balance of trade in cotton with many of these nations. Texas processes very little of its cotton, however, and some countries ship more manufactured goods back to the state than they receive in raw product.
Texas could increase the economic impact of cotton if the state continues to develop its cotton processing industry, adding high-wage manufacturing jobs to the state's economy.
King Cotton: Before the Civil War, cotton was the most important industry in the U.S. The South, from Texas to Virginia, produced 80 percent of the world's annual cotton supply. About 25 percent of the 1861 U.S. crop, nearly 1 million bales, was shipped to the Northeast for processing in some 800 mills; the rest was exported, primarily to England.
Texas cotton production records go back only as far as 1866, when the state produced 359,000 bales. Texas became the leading cotton state after the Civil War, producing 592,000 bales in 1873. The state's production peaked in 1949 at more than 6 million bales, a huge crop made possible by increasing mechanization in the years following World War II.
Today, the U.S. remains the world's largest producer and exporter of cotton. Texas leads all other states in annual production, averaging 27 percent of the U.S. total during the 1990s. Only four foreign countries produce more cotton than Texas: China, India, Pakistan and Uzbekistan.
From 1990 to 1994, Texas cotton output averaged nearly 4.7 million bales a year. The 1995 crop should exceed that level slightly with about 4.8 million bales produced-despite a combination of unfavorable weather conditions and a worm infestation that devastated crops in parts of South and West Texas. U.S. raw cotton exports reached 9.4 million bales in the 1994-1995 marketing year, setting a new annual record. A standard bale of cotton weighs 480 pounds.
Texas' share of the world export market was about 1.8 million bales per year or 6 percent from 1990 through 1994. The value of exported Texas cotton more than doubled from 1993 to 1994. Foreign sales reached $737 million in 1994, compared to $314 million in 1993, and averaged $630 million annually over the past five years.
Expanding markets: Worldwide per-capita demand for cotton fiber averages 16.1 pounds annually. If per-capita demand remains constant, population growth alone will increase world demand for cotton from 176 million bales in 1994 to nearly 192 million bales by 1999.
Per-capita demand for cotton goods is likely to grow, however, as incomes rise in developing countries. U.S. consumption of cotton rose by 3 percent in 1994, and per-capita consumption was 30.2 pounds, the highest since 1946.
Countries with expanding economies are increasing their cotton consumption through capital investments in processing and manufacturing. Some Asian countries have abandoned cotton production altogether in favor of value-added manufacturing, thereby providing more jobs for growing populations.
The top customers for U.S. cotton are experiencing high growth rates in their respective economies. In South Korea, for example, economic growth is expected to average 7 percent per year through the end of the century.
Trade balance: Some importing countries consume most of the cotton they buy, while others process and export large amounts of their cotton purchases. Some countries make yarn, thread or cloth from Texas cotton, while others specialize in cutting or sewing operations.
A favorable balance of trade in cotton and cotton goods is essential to maintain a strong domestic industry. The U.S. has a favorable trade balance with Canada, Mexico, Brazil, Germany, Italy, Indonesia, Japan and South Korea. Patriotic American consumers may prefer to choose goods made in those countries if they canOt find the OMade-in-the-USAO label. Conversely, the ratio of U.S. cotton exports to imported cotton goods is unbalanced in favor of India, Pakistan, Singapore, Sri Lanka and Costa Rica.
Half of the 30 countries buying the most U.S. cotton are in Asia; those countries all buy Texas cotton. Indonesia imports more Texas cotton than any other country.
South Korea, Japan and Indonesia are the destinations for more than half of the U.S. cotton shipped to foreign ports. These three countries buy more than 2.3 million bales of U.S. cotton annually, and return only one-half million bale equivalents per year as sales of manufactured cotton goods.
South Korea is by far the most important purchaser of U.S. cotton, having bought more than 1 million bales in 1993, about 23 percent of U.S. exports. In the past three years, two-thirds of the U.S. merchants handling Texas cotton for export shipped it to South Korea. Of the cotton exported to South Korea, the U.S. buys back only 19 percent in the form of manufactured goods.
The U.S.-South America export-import trade balance is nearly even. The main South American importers of Texas cotton are Brazil and Colombia. Almost all of the cotton these two countries import returns to the U.S. in manufactured goods.
Four European countries buy Texas cotton: Italy, Germany, Spain and Turkey. Collectively, the balance of trade with these countries favors the U.S. They purchase 8 percent of U.S. cotton exports, with the equivalent of only 82 percent flowing back to U.S. ports as finished product.
Cotton future: Texas farmers like cotton because it has a higher profit margin than any other crop grown in the state. As long as cotton remains profitable, it will have a future in Texas.
Because of poor harvests in Pakistan, China and India in 1994, cotton prices surged past $1 per pound in the spring of 1995-figures never before seen in this century. The Memphis cash price topped $1.10 per pound in May, compared to previous New York spot-market highs of $1.90 per pound in 1864 and $1.20 per pound in 1865, during the Civil War.
Federal budget trimming may greatly reduce or eventually phase out U.S. Department of Agriculture programs for cotton growers and exporters. Federal price support programs have helped the U.S. compete with other major cotton-producing countries that subsidize their cotton industries. The price support mechanisms help when the market price is below the cost of production, or when natural disasters strike, making crop insurance insufficient to offset growers' losses.
If price supports disappear, export incentives and government-negotiated trade agreements will still be crucial to ensure a level playing field in world trade. World markets will remain important in selling U.S. cotton, whether as raw product or manufactured goods. Worldwide consumption of cotton textiles and apparel should continue to increase along with rising incomes and population growth. The largest gains should be in moderate- income developing countries with a propensity to spend additional income on clothing.
Texas could benefit greatly from economic development strategies that focus on the state's most important crop. Developing a cotton processing industry aiming for high-value- added jobs can be cost-effective, as capital- and technology-intensive manufacturers pay higher wages than do service industries.
Broad-woven fabric mills, knitting mills, cotton finishing plants and carpet and rug mills all pay relatively high wages, have high capital investment per employee and generate a high ratio of finished product value per employee. The U.S. already exports more value-added agricultural products than raw commodities, and this trend should continue, creating jobs for Texans and increasing their per-capita income.
Contributing to this article:
Terry Turner
Fiscal Notes
December 1995
December 1995