US Cotton Exports and Bilateral Exchange Rates

Abstract

AbstractThis paper compares the sensitivity of US cotton exports to the bilateral exchange rate for three Asian textile producers with a long series of yearly data from 1978 to 2010. The model of the cotton market includes an alternate supply, US production cost, and local mill use. Effects of each bilateral exchange rate vary considerably across these countries. Aggregation and the related trade weighted exchange rate lead to misleading results. Changes in the rate of depreciation have more robust effects than depreciation, suggesting a wealth effect on cash balances.Keywords: Cotton imports, exchange ratesJEL codes: Q17, F14, F31(ProQuest: ... denotes formulae omitted.)This paper examines the effects of the bilateral dollar exchange rate on US cotton exports to three Asian textile producers, Bangladesh, Indonesia, and Thailand, in a market model covering 1978 to 2010. US cotton exports to these three developing countries grew considerably even though their currencies generally depreciated relative to the dollar. Other significant importers had fixed exchange rates during the sample period. China has become the largest importer with 30% of US exports in 2008 but exports were inconsistent before liberalization in 2000 and the exchange rate remains fixed. Turkey accounted for 17% of US cotton exports in 2007 but the lira remains fixed relative to the dollar.The present model of the cotton import market includes an alternate supply insensitive to the dollar exchange rate. Exogenous variables in the market model are US production cost that fell during the sample period, and textile mill use that grew considerably for each of these developing textile producers. Estimates include effects of the Asian financial crisis.The main conclusion is that exchange rate effects vary considerably across the three importers. Aggregation proves misleading due to an insignificant effect of the relevant trade weighted exchange rate. A novel property is that the rate of depreciation has more robust effects than depreciation itself. An increase in the rate of depreciation lowers the purchasing power of importer cash balances, suggesting a wealth effect not noted in the literature.I. A Summary of US Cotton ExportsAbout half of the cotton produced in the US was exported betweenl970 and 2000. Between 2000 and 2010 there was an upward trend of about 70%. The US remains the largest cotton exporter in the world accounting for about a fifth of the world total as described by Jolly, Jefferson-Moore, and Traxler (2005). Trends of the dollar exchange rate and the US share of the world cotton market are described by Shane (2001). Similarly, a report by the Cotton Research and Development Corporation (2003) stresses the role of the exchange rate for Australian cotton exports.Schuh (1974) examines the effects of exchange rates on cotton trade during the Bretton Woods era of fixed exchange rates. Raines (2002) finds only minimal exchange rate impact on US textile trade during the 1990s. Shane, Roe, and Somwaru (2008) find no exchange rate effects on US cotton exports although they do uncover effects for other commodities.Regarding other commodities, Awokuse and Yuan (2006) find an effect of exchange rate volatility on US poultry exports. Xie, Kinnucan, and Myrland (2009) find exchange rate effects on domestic prices and exports of farmed Salmon from Norway. Almarwani, Jolly, and Thompson (2007) find dollar appreciation between 1961 and 2000 lowers some agricultural exports but with uneven impacts across countries and commodities. Examples of time series analysis of market models similar to the present include Byard, Chen, and Thompson (2007) for NAFTA tomato imports into the US. Copeland and Thompson (2008) examine the link between US wages and falling tariffs. Upadhyaya and Thompson (1998) examine exchange rates effects on Alabama manufacturing.II. The Import Market ModelThe present model of the import market focuses on the effect of the bilateral exchange rate on US cotton exports. …