Market and Welfare Impact Assessment of the Target Price-Based Subsidy Program in the Chinese Cotton Market

The Chinese pilot target-price-based subsidy program (TSP) on the cotton market in Xinjiang region started in 2014 and is regarded as an effective policy, motivating cotton farmers and reducing cotton imports. This paper develops and applies a partial equilibrium model of the cotton market with regional details and linkages to the rest of the world to quantify the market and welfare impacts of a nationwide TSP. The results show a significant increase in domestic output and decrease in imports without significantly reducing current national welfare as long as the target price does not go below 120 percent of market price. In addition, measures that restrict the release of cotton stock to the domestic market would help the government in reaching its objective of supporting cotton farmers and reducing import.