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Improvement of cotton trading practices: Prospects and problems

Dr Rajaram Jaipuria

In the textile and clothing industry, there is a growing trend of shifting production to developing countries, especially to those in Asia. With abolition of bilateral quota by the end of this year, this trend is expected to further accelerate. China’s production and exports have been growing very fast in recent years and are expected to grow even faster in the coming years. India, Pakistan, Bangladesh, Sri Lanka, Indonesia, Thailand, Vietnam and Cambodia are among the other Asian countries with substantial exports of textile products and will continue their presence in the international markets at least in the immediate future, with varying success rates. Countries in North America and West Europe also have significant exports in textile products at present, but most experts believe that their production and exports have so far been sustained through protection and are likely to decline significantly after abolition of quotas.

The production trends in raw materials, especially in cotton, are not expected to follow those in finished products. Currently, the largest producers of cotton are China, USA, India, Pakistan, the erstwhile CIS countries, Egypt, Turkey, Brazil and Australia. Among them, USA is expected to see a significant decline in its textile sector and Australia already has very little textile production. China and Pakistan, in spite of being major producers, are already net importers of cotton. This was the case with India also for several years until India’s imports and exports of cotton reached the same level last year. During the current year, India is expecting a bumper crop and is likely to become a net exporter of cotton.

The highly subsidised US cotton producers, by all accounts, will continue to produce increasing quantities, while their domestic consumption is expected to steadily decline. This would mean that USA, which already is the largest exporter of cotton in the world, is likely to see further increase in its exports in the coming years. In spite of some expansion in spinning activities, most of the erstwhile CIS countries are also likely to continue export of cotton for many years. Among the producers and exporters of textile products in Asia, only China, India and Pakistan have significant cotton production at present and all the others are almost completely dependent on imports. Thus the emerging scenario is one of significant increase in international trade in cotton. This makes it extremely important to ensure that cotton trade is regulated properly.

There are serious issues in cotton trade already and sweeping these under the carpet is not going to help. Exporters and arbitration bodies have been complaining that arbitration awards are rarely being complied with and the sanctity of contracts is not being respected by many importers. Importers, on the other hand, feel that exporters refuse to include detailed specifications and stipulations in contracts and later take refuge under these infirmities to escape liability, in the event of any default or claims. It is significant that disputes are negligible in domestic cotton transactions, in all cotton producing countries.

International trade is increasingly being driven by consumers, both in the case of commodities and products. But in cotton, it is often the seller who decides the conditions of contracts and in most transactions his writ ultimately runs. The fact that cotton exporters are few in number and huge in size, whereas importers are often thousands of small spinners only further compounds this position.

After years of futile efforts to convince major cotton suppliers and arbitration bodies that the trading conditions should take into account the genuine concerns of buyers, the mills in India have requested the government that imports of cotton into the country may be permitted only on condition that any arbitration arising from the transaction will be handled by the Indian Council of Arbitration (ICA), which is an internationally reputed professional arbitration body with no affiliation with either cotton or textile sectors. ICA has cooperation agreements with 40 international arbitration bodies all over the world and handles arbitration for several commodities and products.

The international cotton trade needs to appreciate that other major cotton importing countries are also getting frustrated with the present trading conditions and it will be in the interest of suppliers to remove such frustration. I would like to present before you a few measures that are easy to implement and equitable to both suppliers and buyers:

• The arbitration body should prescribe a Standard Cotton Contract Form (SCCF) which should include all elements on which disputes normally arise.
• It should be binding on both suppliers and buyers to ensure that every column in the SCCF is filled up in full.
• There should be no differentiation in arbitration/administration fees between members and non-members of the arbitration body. (This is already the case with several arbitration bodies including ICA).
• Arbitrators should include professionals from all major exporting and importing countries and there should be no stipulation that an arbitrator should necessarily be a member of the arbitration body (Panels of WTO’s Dispute Settlement Body always consist of professionals from outside WTO, who do not represent any WTO members).
• There should be testing laboratories designated by the arbitration bodies in major exporting and importing countries, whose findings should be binding on arbitrators, in disputes on quality.
• Arbitration awards should be ‘speaking orders’ and should record and analyse all evidences and arguments presented before arbitrators. The reasons for accepting or rejecting them should be part of the recommendation of the arbitrators.

I am confident that these measures would go a long way in smoothening the increasing international trade in cotton.

(The statement was released during the 63rd Plenary Meeting of the International Cotton Advisory Committee)