How Cotton Trading has evolved

Where is the future of global trading, with geopolitical tensions mounting across different continents and yet technology revolutions accelerating? It’s too big a question to get a simple answer, so I took a historical perspective and deep dive into reading with Sven Beckert’s book, Empire of Cotton: A Global History, to find valuable reference in thinking. By writing this blog, hope my take-away and reflection could help broaden your perspectives toward global trading, in the turbulent era.

History repeats itself, just in different format

Anyone in the world would have some cotton cloth, rich or poor, man or women, Muslim or Christian, Asian or American. Cotton trading probably is the first globalized value chain started 200 years ago: raw cotton planted in US and textile manufactured in British and sold to consumers world-wide. With a bloody history full of greed and hatred, cotton production and trading went hand-in-hand with the rising state power, the growing global capital out-reaching, the technology innovation and the waves in human rights movements.

Asia, especially Indian weavers and traders dominated cotton production and trading for centuries; their high-quality yet low-cost cotton textile had far-reaching into Africa and Europe. Before mid of 18th centuries, majority of European wear linen and wool; the textile industries in Europe was less well developed, as most served only regional and national markets. Eventually, European especially British merchants reshaped global cotton trading network and dominance throughout 17th to 18th centuries by first controlling trade network backed by war capitalism and then overtaking world production centers from Asian countries.

Over the course of the 18th century, cotton exports from Britain increased 200 times – yet 94% of that increase took place in the two decades after 1780. By 1830, one in six workers in Britain labored in cotton. However, no cotton was grown in Europe.

Yes, no man ever steps in the same river twice; but history repeats itself, just in different format. The same story actually was repeated in modern times: Nike first acted as distributor for Onitsuka Tiger shoes in US markets and then gradually moved up into design-to-production, earned huge market share and became a global corporation; the most recent case, Alibaba first acted as a “digital” trading middleman and then moved to end-to-end supply chain including downstream logistics and upstream production.

Rethink about IP and Trade Barriers

Here is what we commonly heard: Intellectual property is good because it motives innovations and only innovation drives productivity; trade barrier is bad because it contradicts with free-market concept and the free-market is the smartest guy to allocate resource for long-term growth. 

If you read cotton trading history, you may read another version: protectionism played a key role in domestic industrialization and to “observe and copy” is a very common leverage to starters.

When imported cotton from India hurting local textile industries, in 1680, England imposed a 10% duty on “all calicoes and other India linen and all wrought silks which are manufactures of India”; in 1774, Parliament decreed that cotton cloth for sale in England had to be made exclusively of cotton spun and woven in England; other European governments followed suite.

On the other hand, India textiles were so popular among European and African consumers because of their superior design and brilliance colors backed by better techniques. So European manufactures, throughout 17th and 18th centuries, went to India to observe and investigate how India artisan produced cotton and even “copied” India cotton design using Indian printing expertise.

Many years later, the same strategic moves were imposed on Britain. Napoleon’s wartime blockade of British exports and the subsequent high-tariff imposed on British cotton textile allowed protected regions to build capacity in mechanized cotton manufacturing and eventually to export to their colonized territories. So the key to grow even under trade barriers is market access.

It’s all about productivity.

Before 1800, by appropriating Indian technology, the British cotton manufacturer raised the bar of product quality to compete with their India cohort. However, the second challenge was to sell it at a competitive pricing point. Pricing is eventually is a cost topic with labor cost as the primary item. Wages in Britain were significantly higher than India – perhaps as much as 6 times those in India. Around 1770, productivity per cotton worker in Britain was already 2-3 times higher than in India; however, it was not enough to level the playing field.

Well, we all know how the story involved with Industry Revolution.

“In eighteenth-century India, spinner required 50,000 hours to spin a 100 pounds of raw cotton; their cohorts in 1790 Britain, using a 100-spindle mule, could spin the same amount in just 1,000 hours; by 1795, they needed just 300 hours; after 1825, only 135 hours. In just three decades, productivity had increased 370 times.” With such productivity gains, British cottons rapidly replaced Indian cottons on world markets.

Such “productivity” is just about new “Spinning Jenny”. Like Empire of Cotton writes, the truly heroic invention was the “economic, social and political institutions in which these machines were embedded”: 1) the state’s ability to regulate industries; 2) the social innovation to motivate workforce without enslaving them; 3) the technological revolution and a mature capital market.

Supply Chain Security: where there is a will, there is way

By the late 1850, cotton grown in the United States accounted for 77% of cotton consumed in Britain’s, 90% of cotton consumed in France, and 92% of cotton consumed in Russia. As The Economist put it in 1861, the United States had become so successful in the world’s cotton markets because the planters “soil is marvelously fertile and costs him nothing; his labor has hitherto been abundant, unremitting and on the increase” – the 2nd success factory refers to Slavery.

Eventually, the greatest advantage turns out to be the weakest spot with outbreak of Civil War. Exports from the United States to Britain fell from 3.8 million bales in 1860 to virtual nothing in 1862. Such “cotton famine” led to mill shutdown and rising unemployment which eventually re-shaped the cotton industry.

European cotton consuming countries together with the United States and Japan moved decisively to control and exploit territories where cotton could be grown. British merchants developed India & Egypt as alternative source for cotton; Russian in central Asia; European merchants in Africa; Japanese in Korea and China. For those efforts to born real fruits, it took decades to cultivating new lands, persuading or forcing farmers to switch to cotton, conducting experiences to improve yields, providing state supervision to sell crops and even launching war for occupations. However, in those efforts, slavery become free labor and local sovereign ties gave away to nation-sates and empires.

Impact of the territorial expansion of cotton cultivation is complicated: on one hand, it brought in infrastructure upgrading and new capitalism model; on the other hand, former craft worker was drawn into cotton cultivation and de-industrialization downgraded people’s life. The shift of cotton plantation generated greatest advantage to merchants for quite some time but eventually led to social movements in the global south, which in turns would re-shape the global cotton industry again. 

The summary I draw from the book looks like common sense:

There is always a market to play; however, market penetration is always backed up by military and political power.

To win consumers, the rule is simple: even better product with even cheaper price.

If one has the market, one accumulates profit to re-invest in productivity and quality to get products cheaper yet better; which in turns expands the market and create more jobs which get more profits.

To navigate the choppy water of geopolitical conflicts, sourcing and production must be consistently adjusted to sustain the advantage in cost structure and supply base.

The self-reinforcing cycles seems to go on and on, however, there are always hidden risks staying in the business model, eventually, the greatest advantages may become the weakest link.

So, one must keep sharping the edge – or change to new one.

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