Recently, the Wall Street Journal published a story, which highlighted how a Chinese consortium has been making inroads into South Carolina’s cotton industry. In as much as this investment presents good tidings to cotton farmers in the state, it has emerged that key figures behind the investment are in China instead of the US.
It is common knowledge that cotton production mainly requires energy and raw materials. These two inputs are more expensive in China than in the US. Therefore, Chinese entry into the American cotton industry raises eyebrows. Besides this, the existence of market quotas, which restrict the importation of raw cotton has given Chinese textile firms an invidious choice. The government has similarly been stockpiling domestically produced cotton, an action that has raised the price of cotton.
China’s Overseas Agricultural Investments
For more than a decade, agricultural production in China has been solid. Nevertheless, it has failed to satisfy domestic demand. The country has thus been forced to import, so that the growing demand can be satisfied. Its main trading partner has been the United States. Chinese businessmen have been making strategic overseas investments, more so in agriculture.
The availability of favorable climate and arable land in South Carolina was the reason why Chinese investors decided to invest in the state. China intends to encourage more overseas investments in cash crops so that more local farmers can take part in the production of cash crops. Such crops will also be processed in overseas countries due to the low cost of production. Many analysts predict that once this aggressive program is fully implemented, China will stop importing raw cotton altogether by 2018.
Why South Carolina was Chosen
Apart from arable land and good weather, Chinese investors chose South Carolina due to the availability of cheap weather, energy and low labor costs. Access to cheap raw materials was also a motivating factor. The state similarly has scale economies and transport subsidies for cotton farmers. While parts of China are still holding onto protectionist measures, forward-looking businessmen are seeking lucrative overseas production areas, which guarantee larger profit margins. Making an entry South Carolina has paved way for other investors in the cotton industry to shift their attention to the lucrative overseas markets. In its case, South Carolina stands to benefit greatly from this move. The article was originally published on Forbes.