Demand Elasticity for China’s Major Imported Agriculture Textile Material Based on Restricted Version of Source Differentiated Almost Ideal Demand System Model

TIAN Congying()， XIAO Haifeng()

College of Economics and Management， China Agricultural University， Beijing 100083， China

Abstract： By comparing China’s import of major imported agriculture textile material (cotton and wool)， the characteristics of import are concluded. On this basis， a restricted version of source differentiated almost ideal demand system (RSDAIDS) is used to estimate the income and price elasticity of major imported agriculture textile material from the major sources based on the data from 1992 to 2015. The results are shown as follows. (1)Although the dependency on imported cotton is lower than wool， the fluctuation of cotton import is much more drastic; China’s demand for cotton is relatively price elastic with higher expenditure elasticity compared with wool; besides， the existence of complementarity is proved between imported cotton and wool. (2)According to the import elasticity of cotton， demand for cotton imported from India shows priority over cotton from other sources; demand for cotton imported from America is the most price-sensitive one; substitution among cotton from different sources is weak. (3)According to the import elasticity of wool， wool imported from Uruguay has bright market prospects. In addition， wool imported from Australia has irreplaceable advantage than that from New Zealand.

Key words： agriculture textile material; retricted version of source differentiated almost ideal demand system (RSDAIDS)model; import demand estimation

Introduction

As textile processing industry transferring from developed countries to developing countries， China has gradually become the world’s largest textile producer and exporter. So far， the total industrial output value of textile enterprises above designated size in China has exceeded 6 trillion yuan and fiber processing accounts for more than 50% of the total amount of the world. The flourishing development of textile industry is inseparable from sufficient supply of textile raw materials. Although our country is a major producing country of agricultural textile raw materials (cotton， linen， wool and silk class)， the production is limited by resources， environment， production capacity and other objective conditions. Agricultural textile raw materials， especially high-quality raw materials， have always been in short supply situation. Among them， cotton and wool are the main kinds of import agricultural textile raw materials. China’s imports of cotton and wool were 1 million 473 thousand tons and 350 thousand tons， respectively， accounting for 20.8% and 45% of the total domestic consumption in 2015.

Since the proposition of “the 13th Five-Year Plan”， the supply-side structural reform has been put forward. Domestic textile enterprises face the opportunity to upgrade with the product structure transition from low-end to high-end. Given the above situation， the contradiction between supply and demand of domestic raw materials will be further aggravated as the demand of high-quality agricultural textile raw materials is increasing. Therefore， it is particularly important to make use of the two markets and two kinds of resources both at home and abroad. Then， how should we make full use of the international market resources to serve the domestic textile industry? In order to construct the stable import pattern of agricultural textile raw materials， how should we optimize the tradepartners in the future? What are the implications for the domestic textile raw materials industry due to the strong growth of import of agricultural textile raw materials? These problems are not only related to the vital interests of the vast number of growers in our country， but also to the development of circulation and processing and other fields. Therefore， the purpose of this study is to analyze China’s agricultural textile raw materials import pattern， and explore China’s demand preferences for different sources of textile raw materials， thus providing policy basis for the building of a stable and multi-source agricultural textile raw materials imports.

Relevant empirical studies are mostly about individual agricultural textile raw materials. Especially in the past few years， cotton imports have become a hot topic with the rapid increase of cotton imports in China. The existing studies mainly focus on two aspects: firstly， the present situation of cotton import and the causes of fluctuation. For example， Zhu and Liu[1-2]calculated China’s cotton import price elasticity from different sources; Wangetal.[3]analyzed the causes of cotton import trade fluctuation using the modified constant market share analysis(CMSA) model; Liu and Zhu[4]analyzed the potential of cotton import between China and the top 40 partners based on an improved gravity model. The safety situation of China’s cotton industry was further evaluated[5-7]. Secondly， the impact of large cotton import on domestic industry. Some scholars believe that a large import of cotton will impact domestic cotton production and should therefore be restricted[8]; other scholars believe that cotton import is a necessary situation for the development of China’s textile industry and a normal development in the environment of economic globalization[9].

In addition to cotton， wool trade， especially bilateral trade， is also an area of focus. For example， Zhou and Xiao used the global trade analysis project(GTAP) model to simulate the effects of the establishment of the Sino Australian free trade area on Chinese wool and related industries[10]. Linetal.[11]put forward suggestions to solve the contradiction between the wool production and import trade through comparing domestic wool and import wool. However， although an alternative or complementary relationship may exist between the main imported textile materials， there is less literature regarding agricultural textile raw materials as a whole.

Therefore， the main kinds of imported agricultural textile raw materials (cotton and wool) are selected as the research object. We analyze structural changes of import market， evaluate dependence on imports， and put demand for different materials into a common demand system， and estimate the import demand elasticity with the restricted Version of source differentiated almost ideal demand system (RSDAIDS) model. The paper is structured as follows. Section 1 introduces the main characteristics of the agricultural textile raw materials import. Section 2 is the construction of RSDAIDS model. Section 3 introduces the data processing and descriptive statistics. Section 4 is the research results and section 5 is the conclusion and policy suggestions.

1 Import Pattern of Major Agricultural Textile Raw Materials in China

1.1 Changes in import volume of major agricultural textile materials in China

As shown in Fig.1， before 2002， China’s cotton imports remained at a low level below 100 thousand tons. However， since joining the World Trade Organization， China’s cotton imports had showed explosive growth. In 2003， imports of cotton exceeded 1 billion yuan for the first time. Since then， China had become the world’s largest cotton importer. Subsequently， the import volume showed M-type oscillation growth. The import surged from 870 million 100 thousand kilograms in 2003 to three million 641 thousand and 400 tons in 2006， with an average annual growth rate of 43.03%. At the same time， the rapid growth of imports led to rapid growth of cotton import dependence， and the proportion of cotton imports in total consumption increased from 12.09% in 2003 to 32.59% in 2006.

In order to adapt to the new situation after accession to WTO and protect domestic cotton industry， China began to levy cotton sliding tax outside quota in May 2005. Coupled with the impact of world financial crisis， the cotton imports fell to six-year low of only 1 billion 526 million kilograms in 2009. Then， as textile exports picked up， cotton demand gradually stabilized and imports increased， reaching a peak of 5 billion 134 million 900 thousand kilograms in 2012， when the proportion of cotton imports in total consumption increased to 43.00%. After 2013， affected by numerous factors such as the adjustment of import quotas， price cut of state-reserve cottons and sluggish demand， the price of domestic cotton dropped. The price gap between domestic cotton and import cotton narrowed. As a result， cotton imports fell sharply to 1 billion 472 million 700 thousand kilograms in 2015， falling 71.32% compared with the peak in 2012.

*Source: China National Bureau of statistics and customs information network， similarly hereinafterFig.1 Cotton production and import in China(1992-2015)

China had imposed import quota management on wool since 1994. In 2001， China joined the WTO and promised to impose tariff quota system on wool. Subsequently， China reached free trade agreement with New Zealand and Australia in 2008 and 2015 respectively， promising to provide duty-free country tariff quotas for wool originating in the two countries. Trade liberalization provides a huge space for China’s wool import trade. As shown in Fig. 2， compared with cotton， the change trend of China’s wool imports is relatively stable but the degree of dependence on import wool is much higher. In 1992， China imported 154 million 200 thousand kilograms of wool. Since then， there have been two rounds of minor changes. Wool imports kept growing since 2003， increasing from 164 million 900 thousand kilograms to 349 million 700 thousand kilograms in 2015. The average annual growth rate was 5.95% between 2003 and 2015. Accordingly， the proportion of wool imports in total consumption had increased from 32.79% in 2003 to 45.02% in 2015.

1.2 Structural changes of importing sources of main textile raw materials in China

The sources of cotton imports in China have long been concentrated in the United States， India， Australia and Uzbekistan (seen Table 1). Among them， the proportion of cotton imports from the United States fell from 63.30% in 1992 to 38.30% in 2015， but it has consistently topped the list. In addition， Australia and Uzbekistan had undergone a slight fluctuation， but basically stable in the top 5. The two countries’ market shares were 18.37% and 14.21% respectively in 2015. By contrast， India’s ranking in the sources of cotton import had changed considerably. On the one hand， it was due to the India foreign trade policy. On the other hand， the cotton yield was significantly improved in India since 2002 when commercial production of transgenic cotton was approved. As a result， exports of cotton doubled. India became China’s second largest source of imports in 2010， occupying a market share of 30.70%. The cotton import from India declined slightly in 2015 and India sits in third place with 14.21% of market share.

Fig. 2 Wool production and import in China(1992—2015)

Ranking19922000200520102015CountryRatio/%CountryRatio/%CountryRatio/%CountryRatio/%CountryRatio/%1USA63.30USA55.05UAS45.95USA35.33USA38.302Mali8.12Australia21.89Uzbekistan11.88India30.70Australia18.373Paraguay5.79Egypt10.78Australia8.61Uzbekistan12.26India14.214Pakistan5.22Pakistan2.74Burkina Faso5.12Australia7.35Uzbekistan11.215Columbia3.82Uzbekistan1.97India4.73Brazil3.13Brazil2.78Total86.2592.4376.2988.7784.87

As shown in Table 2， China’s main import sources of wool were relatively stable in the same period， mainly including Australia， New Zealand， South Africa and Uruguay. Among them， Australia had always been the largest source of wool import. The proportion of imports from Australia maintained at more than 60%， far higher than other countries. In recent years， however， it has shown a trend of slow decline from 83.09% in 2000 to 63.62% in 2015. New Zealand ranked second， however imports from New Zealand accounted for only 10%， much lower than Australia. Although the proportions of imports from South Africa and Uruguay were not large， they had grown rapidly from 1.77% and 1.75% in 1992 to 7.35% and 3.68% in 2015 respectively. The reasons for the above-mentioned changes were that， firstly， affected by the continuous drought and wool price downturn， wool production continued to decline in Australia in recent years. Secondly， with the enhancement of environmental regulation requirement in China， the domestic wool washing capacity shrank to a certain extent. Therefore， demand for Australian greasy wool declined. At the same time， demand for scoured wool from New Zealand， Uruguay and other countries increased rapidly.

Table 2 Main sources of imported wool and proportion of imports for 1992—2015

2 Source Differentiated Almost Ideal Demand System

Since Deaton and Muellbauer[12]proposed almost ideal demand system (AIDS)， the model was widely used in the import demand analysis due to its advantages of flexibility， simple structure and easy to estimate. Previous research usually regards products from different import sources as the same commodity， but there was a lot of controversy about the hypothesis[13]. According to the composite commodity theorem of Hicks[14], if the prices of a group of commodities change in parallel, they can be regarded as a commodity. However, such assumptions are too severe for agricultural trade. For example, different transaction costs can lead to differences in price changes[15]. In addition, importers may regard Australian wool and New Zealand wool as different commodities due to quality differences. Therefore, in the analysis of the import demand of agricultural products, it is particularly important to distinguish origin. Hayesetal.[16]extended AIDS model to source differentiated almost ideal demand system (SDAIDS) model， which has been widely used[17]. The improvement was that it can contain a wide range of products from different sources.

The derivation of the SDAIDS model starts with an expenditure function， representing the price independent generalized logarithmic (PIGLOG) preference. The expenditure function given utilityuis

ln[E(p，u)]=(1-u)ln[a(p)]+uln[b(p)]，

(1)

where

(2)

and

(3)

whereα，βandγare parameters. The subscriptsiandjdenote goods(i，j=1，2, …，N)， andhandkdenote products. Goodimay havemdifferent sources， while goodjmay be imported frommdifferent sources(h=1， 2, …，m， andk=1， …，n). By substituting Eqs. (2) and (3) into (1)， the expenditure function can be rewritten as

(4)

By Shephard’s lemma， the function of budget share (wih) can be obtained by differentiating ln[E(p，u)]with respect to ln(pih)is shown in Eq.(5).

(5)

Solving Eq. (4) with respect touand substituting this into Eq. (5) results in the SDAIDS in expenditure share form

(6)

where

(7)

SinceP*is nonlinear， Deaton and Muellbauer[12]point out that in most cases， especially when prices do not change dramatically， Stone’s index can be used as a liner approximation ofP*in order to simplify the equation and avoid the multicollinearity. On this basis， the lagging Stone’s index is adopted to revise the possible endogeneity problem referring to Eales and Unnevehr[18]， as shown in Eq.(8).

lnpL=∑i∑hwih， t-1ln(pih).

(8)

Although the SDAIDS model is more flexible， it may suffer from a degrees-of-freedom problem in empirical application. To reduce the number of parameters， we can introduce the following block substitutability assumption.

γihjk=γihj， ?kandj≠i.

(9)

The block substitutability assumption enables the SDAIDS model to be rewritten as restricted version:

(10)

The general demand conditions for import behavior also can be imposed as for AIDS model. The conditions are adding-up，homogeneity and symmetry， respectively.

∑i∑hαih=1,∑hγihk=0,∑i∑hβih=0.

(11)

Measures of price elasticities computed from the estimated parameters are: Expenditure elasticity [Eq. (12)]， Marshallian price elasticity [Eq.(13) and (14)]， and Hicksian price elasticity Eqs. (15) and (16).

(12)

(13)

(14)

(15)

(16)

where Kronecker deltaδijis equal to unity ifh=kandi=j， and zero otherwise.

3 Data Processing

Annual data in 1992—2015 are used to estimate the parameters of the RSDAIDS. The data come from the UNCOMTRADE database. China import cotton and wool from various sources. A country is identified as a supply source if imports from that source constituted over 10% of the imports of selected commodity. Otherwise， importations are included in the rest-of-the-world (ROW) category. Using this criterion， the source differentiated are: cotton from the United States， India， Australia and cotton from ROW; wool from Australia， New Zealand， South Africa and wool from ROW. Import prices for individual goods by origin are not publicly available. Thus， as a proxy for import price， the unit value is obtained through dividing the value by the quantity.

Table 3 reports the proportion and price of China’s major agricultural textile raw materials (cotton and wool) from 1992 to 2015. In the cotton import market， imports from the United States account for the largest share of cotton. The main reason lies in the good consistency and stable quality of American cotton. Especially， the mechanized production of cotton in America can avoid the adulteration of foreign fibers， which is very popular in domestic textile enterprises. Judging from the price side， cotton from the United States and India has a lower weighted price than Australia. This is because the United States cotton obtains a variety of subsidies from planting to export， and thus can maintain a strong price advantage. And cotton production in India has increased substantially in recent years， coupled with low labor costs and other factors， giving India cotton a strong price advantage. In the wool import market， South Africa has the highest wool price， followed by Australia and New Zealand wool. The main reason is that the quality of wool from South Africa and Australia is superior to that in New Zealand. The fineness of wool from South Africa and Australia is generally less than 25 μm. It is suitable for spinning and is excellent raw material for clothing industry. While the New Zealand wool is mainly coarse wool with a fiber diameter of 30 μm or more， mainly used for carpet industry raw materials.

Table 3 Summary statistics for expenditure shares and prices of cotton and wool imports

Note: Std. Dev. means standard deviation

4 Results and Discussion

Under the constrain condition of adding-up and homogeneity， seemingly unrelated regression (SUR) proposed

by Zellner[19]is applied to estimate the model. This model has four equations for cotton and four for wool. The equation for cotton from ROW is dropped to avoid singularity due to the adding-up condition. The estimated results are shown in Tables 4-6, and*,**,and *** denote significance at 10%， 5% and 1% levels， respectively.

Table 4 Expenditure and self-price elasticity of Chinese cotton and wool import demand using RSDAIDS model

Table 5 Cross-price elasticity of Chinese cotton import demand using RSDAIDS model

Table 6 Cross-price elasticity of Chinese wool import demand using RSDAIDS model

(1) Expenditure elasticity. The expenditure elasticities of demand for all the goods from each source are positive. Except for South African wool， all expenditure estimates are significant at the 1% level. This shows that the import volume changes in the same direction as the total import expenditure. Overall， the expenditure elasticities of demand for cotton are all more than 1，i.e. fully elastic. However， the expenditure elasticities of demand for wool are all less than 1，i.e. inelastic. It shows that when the import demand of agricultural textile raw materials increases， the import of cotton will increase more than wool. In the cotton import market， India’s expenditure elasticity is the largest， at 1.898， and the United States is the lowest， at 1.090. For wool， the expenditure elasticity of ROW is the largest， at 0.648， slightly higher than New Zealand (0.621) and Australia (0.414). Expenditure elasticity can reflect the comprehensive evaluation of the price performance of imported goods， implying that China has the strongest preference towards wool from India， Uruguay and other countries.

(2) Self-price elasticity. Self-price elasticities of cotton and wool from each source are all negative， indicating that they are normal goods. Exports will fall as prices rise， and vice versa. On the whole， the price elasticities of cotton are generally higher than that of wool， showing that China’s import demand for cotton is more sensitive to price fluctuation. In cotton goods， the absolute value of self-price elasticity of American cotton is the biggest， which is 2.162， and is significant at the 1% level. In wool import market， the absolute value of self-price elasticity of South African wool and Australian wool are greater than 1， respectively 1.782 and 1.310， which are significant at the 1% level. The results suggest that China’s import demand for American cotton， South Africa and Australian wool is most sensitive to price changes.

(3) Cross price elasticity.Hicksian price elasticity eliminates the income effects of price changes through compensation. Therefore， it is more accurate to reveal alternative relationships or complementary relationships between different goods. Therefore， this study will pay more attention to Hicksian cross price elasticity. From the view of cross-price elasticity between the two major categories of cotton and wool， the price fluctuation of wool has more significant influence on cotton import. And the estimated elasticity is negative， which shows a certain complementary relationship between them.

In the cotton import market， cross price elasticity between Australian cotton and American cotton is significantly positive， showing that Australia and the United States， which are the biggest exporters of cotton in the world， have some substitution relation in the cotton import market. The cross price elasticity between Australia cotton and Indian cotton is significantly negative， showing that there is a complementary relationship between the two. This is mainly because the cotton harvest seasons of the two countries are different， so there are seasonalcomplementary.

In the wool import market， there is no substitute relationship between Australian wool and New Zealand wool， and the substitution of South African wool for Australian wool is stronger. This is in line with the present situation of wool import market in China. As mentioned above， as raw material of worsted garments， wool from Australia and South Africa are of high quality. Their product positioning is similar， so there is a strong competitive relationship between them. Wool from New Zealand， however， which is mainly used as carpet material， is mainly complementary to wool from Australia and South Africa.

5 Conclusions

The characteristics of main agricultural textile raw materials import in China are summarized using the data of annual imports of cotton and wool from 1992 to 2015. It was found that the fluctuation of cotton imports is more severe and sensitive to the government policy. While wool imports is more stable， but the degree of dependence on foreign is much higher. Subsequently， the RSDAIDS model is applied to estimate the elasticity of import demand， and the following conclusions are drawn.

Firstly， through the comparison of cotton and wool， we can find that: (1) the import demand for cotton is elastic to total expenditure， while wool is inelastic. This means that if the expenditure of agricultural textile raw materials import kept growing in the future， the growth of imports of cotton would exceed wool. This is consistent with reality， because the cotton industry in China is much bigger than the wool industry; demand for raw materials is much stronger accordingly. (2) China’s import demand for cotton is more sensitive to price than wool. It means that when the price of import cotton rise， the demand for import cotton of domestic cotton textile enterprises will show a significant decline. Instead， they will buy domestic cotton as raw material. It can be inferred that we can effectively prevent China’s cotton imports from surging by increasing the price advantage of domestic cotton. (3) It is usually considered that cotton and wool are substitutes. However， the estimated results showed that there is a complementary relationship between wool and cotton imports. This may be due to the popularity of blended textiles which own the advantages of both textile materials.

Secondly， it can be drawn from the demand elasticity of import cotton. (1) China’s preference towards India cotton is stronger than cotton from other sources. In other words， if China’s cotton import keep growing in the future， India would benefit the most. (2) As China’s largest import source， import demand for American cotton is most price-sensitive. It means that price reduction will lead to a surge in imports. And that is what happens; the United States has occupied the China’s cotton import market at a low price relying on the huge subsidies. (3) There is little substitution relation between the import sources. It shows that China has relatively strong demand for cottons of varying quality and from different sources.

Thirdly， it can be drawn from the demand elasticity of import wool. (1)The expenditure elasticity of wool from Uruguay， Argentina and other countries is highest， showing that these countries have good prospects in China market. (2) As excellent clothing materials， wool from South Africa and Australia belong to the high-grade wool， so the imports are more sensitive to the price change. (3) As the two largest exporter of high quality wool， there is certain alternative between Australia and South Africa; and there are mainly complementary among New Zealand, Australia and South Africa.

Driven by the rapid development of the textile industry in China， the demand of textile raw materials， especially agricultural textile raw materials will continue to expand， while there is limited space for increasing domestic production in the short term. As a result， growing imports of agricultural textile will still be the reality we must face for some time to come. Therefore， the growth of import of agricultural textile raw materials should be correctly considered. We should support domestic raw material industry by reasonable means of market measures. At the same time， import textile raw materials should be provided as a useful supplement to the domestic market. The conclusions provide some ideas for this purpose.

First， we should broaden the sources of imports of agricultural textile raw materials and establish a diversified import channel. Although higher import market concentration is conducive to the establishment of good trade relations with major trading partners， it will also aggravate the market risk of China’s agricultural textile raw materials import at the same time. Once there were production cuts in the major import countries， a hugesupply gap would appear， resulting shortage of raw materials， soaring prices and other adverse consequences in the downstream textile industry. Go a step further， previous studies have shown that a country is regarded as having strong export potential in an import market if demand for the product is insensitive to price changes but increases with import expenditure[20]. Based on the elasticity estimates， cotton from India and wool from Uruguay， Argentina and other countries are in this position. The implication is that we should develop these raw materials markets in the future.

Second， we should further improve the domestic support policy of cotton industry， and improve the price advantage of domestic cotton. Compared with the developed countries in the United States and the European Union， subsidies are obviously insufficient in China. Therefore， the standard of seed subsidy for cotton should be raised. Besides， agriculture production resource input subsidy should be set up in major cotton producing areas to reduce production cost. At the same time， the target price of cotton subsidies should be further improved and promoted.The price of cotton should be determined by the market， which is in favor of shrinking price gap between at home and abroad.

Third， Australian wool occupies a leading position in the market of China’s wool imports， and possesses irreplaceable quality compared with the second import source. This reflects that Australian wool has well catered to the domestic textile enterprises’ demand. This conclusion is of great significance to the promotion of wool industry in China. On one hand， some ideas should be proposed for the constitution of domestic wool industry policy referring to the development experience of Australian wool industry. On the other hand， we should strengthen market cooperation between Australia and China， carry out more joint ventures and improve the quality of wool through education and training projects and information sharing.