Impact of "Uyghur Forced Labor Prevention Act" on textile industry

Zhengzhou cotton futures market declined sharply last week. During the week from Jun 20 to Jun 24, Zhengzhou cotton futures market declined more significantly, with the largest fall on Friday, down by over 1,000yuan/mt only in the morning and by over 8% in one day. In addition to fundamental reasons, the sharp decline of cotton futures also had macro-factors. The US began to implement "Uyghur Forced Labor Prevention Act" on Jun 21, requiring companies importing goods from China’s Xinjiang province to provide “clear and credible evidence” that no components are produced using slave labor.

From the orders in upstream and downstream market, we can see that mills gradually avoided the risks brought by the act. Indeed, the formal implementation of this act has a certain impact on the market, and this impact is long term. If the ban exists for a long time, then China's cotton products exports will be greatly affected. How to digest cotton products in Xinjiang has become a market concern.

In 2022, most enterprises said that in export orders, non-Xinjiang cotton evidence was more stringent. China has an annual output of more than 5 million tons of Xinjiang cotton, and more downstream cotton products are involved. The act not only affected US orders, but also some Japanese and European clothing brands required non-Xinjiang cotton. Therefore, the scope of influence was greater. The United States imported about 8.4 billion USD worth of cotton products from China in 2021 and around 11 billion USD in 2019. In terms of import volume, it was about 5.1 billion square meters in 2021 and 5.5 billion square meters in 2019, showing decline in recent years. If the cotton fiber consumption is about 1 million tons according to the conversion of US imports of cotton products from China, even if there is a ban, China's cotton textile and apparel are not all exported to the United States, and the amount of cotton fiber consumption is actually less than 1 million tons. However, it is important to see that this influence has been expanded to some clothing brands in Japan, the European Union and other regions. Judging from the US cotton products import origins, India has seen the most obvious growth in recent years.

At the beginning of the Sino-US trade war, the proportion of US‘s cotton textile and apparel imported from China dropped rapidly. Last year, the proportion dropped to 24.1%, down 12.1 percentage points from the 2010 high. During this period, ASEAN occupied the second largest origin for a long time. However, India has developed rapidly after the trade war. Last year, it overtook ASEAN to become the second largest import origin of US cotton products, accounting for 18.4%. From January to April this year, ASEAN again surpassed India and its share reached 19.5%, 1 percentage point higher than India, which was related to the fact that Indian cotton prices have continued to rise to become the most expensive cotton in the world since the second half of last year, and orders were also shifting. It is expected that the share of US‘s cotton products imported from China will continue to decline this year, while ASEAN and India ones will continue to rise. In addition, Bangladesh has also risen in recent years, gradually increasing its share, while Pakistan one was fluctuating, growing in the past two years.

China's cotton products exports are mainly apparel and finished products, and the proportion of semi-finished products is relatively small; the main markets for apparel exports are the United States and Japan; and the main export markets for textile products such as home textiles are Bangladesh, Vietnam and the United States. According to CCFGroup, the proportion of China's cotton textile and apparel exports to the United States accounted for about 11% of the total cotton products exports. Although the proportion of direct exports is small, indirect exports or the exports to Japan, the European Union and others should not be underestimated. Trade between China and members of RCEP can alleviate the impact of the Sino-US trade war and US’s ban on Xinjiang cotton to a certain extent, but the support is relatively limited.