This evaluation and economic assessment is of a project funded by the Australian Centre for International Agricultural Research (ACIAR) aimed at improving economic knowledge of the Chinese wool industry. The project was carried out jointly by Australian agricultural economists at the Universities of Queensland and Sydney and their Chinese colleagues attached to the Institute of Agricultural Economics within the Chinese Academy of the Agricultural Sciences and the Institute of Rural Development within the Chinese Academy of the Social Sciences. The research has concentrated on understanding the supply side of the Chinese wool industry and links between wool production and the marketing system within China. However, the research has consequences for Chinese and Australian understanding of the demand for local and imported wool within China and for Australian wool on the world market. The research also has implications for farm management within China and economic policy decisions within both countries. In particular, the research is relevant to the future course of the trade in raw wool and wool semi-manufactures between Australia and China. In some recent years, China has been the most important buyer of Australian wool. In broad terms, exports of greasy wool and semi-manufactures (scoured wool and wool tops) from Australia to China now account for around one-fifth of Australian production (detailed information on Australian wool exports and world production and trade in wool is presented in section F of the Australian Wool Compendium published by Wool International). Within China, the wool industry is specially important because of its economic and political significance to ethnic minorities living in the pastoral region. This region is vulnerable to overgrazing and land degradation. Wool is the major source of cash income in some districts. Sheepmeat is an important part of the food supply for ethnic minorities. The balance between wool and sheepmeat in the sheep industry affects the total quantity of wool produced and, even more so, the type of wool produced. The quality composition of the wool clip determines the types of products into which wool can be processed and thus the extent of competition between domestic wool and imported wool. Developments in Chinese wool production are important to Australia because China is both a major wool consumer and a processor of domestic and imported wool for the Chinese market and export. The clothing and textile industries are already an important component of the Chinese economy and significant in its overall development strategy. China is now the world’s largest exporter of clothing and second largest exporter of textiles, despite severe handicaps incurred from widespread restrictions on trade in clothing and textiles reflected in the Multi-fibre Arrangement that regulates world trade in clothing and textiles (Drysdale 1997). Zhong Chuanshi and Yang Yongsheng (1997) have recently reviewed economic issues surrounding Chinese exports of clothing and textiles. These products have been a driving force behind the surge in China’s exports that have accompanied the opening of the Chinese economy over the last two decades. From 1980 to 1994, textile and clothing exports rose from US$4.4 billion to US$35.5 billion, an increase more than eight-fold (Zhong and Yang 1997). Furthermore, these industries have created the basis upon which imports of technology, machinery and equipment essential for the development of other sectors of the economy can be financed. While it is obvious that wool in aggregate competes with synthetic fibres, artificial fibres and cotton in markets for clothing and textiles, it is less clear how wool of different origins competes in determining the shares of Australian wool and other wool in Chinese output of clothing and textiles. This is because wool processing uses specialised assets. Firms in the wool processing business in China and elsewhere are interested in maintaining the throughput of their operations. Blending wool from different countries may also have positive effects on processing performance. In economic terms, the issue is whether Chinese wool and imported wool are substitutes or complements. Formulation of other Australian policies for the wool industry depends upon knowledge of the economic interaction of domestic Chinese wool production and wool imported from other countries, principally Australia. Australia has an ongoing interest in maintaining access to the Chinese market, the emerging role of China in the world textile industry, and Chinese participation in world trade generally. Chinese demand for Australian wool has been most unstable over recent years—both cause and effect of the profound difficulties for the Australian wool industry associated with the demise of the reserve price scheme and the protracted recovery following that Australian-induced debacle. Knowledge of the supply side of the Chinese wool industry is obviously critical to Australian understanding of the short-term and long-term outlook for wool upon which many private investments and government decisions are based. Moreover, understanding (if not resolution) of perennial Australian disputes in the wool industry concerning exports of Australian Merino sheep largely depends on economic information on wool supply in major wool producing countries. On closer inspection, the long-running conflict over the export of Merino sheep to China and elsewhere is a variant of a far wider debate concerning the effects on Australian farmers of assistance by Australia to agricultural development in Third World countries. In the case of wool, the argument hinges on the economics of wool supply versus sheepmeat in the wool industry in the Chinese pastoral region as well as the competitiveness (or complementary position) of Australian wool and Chinese wool in processing and final demand. Of far greater financial significance to Australian woolgrowers than the controversial controls over exports of Merino sheep is their compulsory participation in generic promotion of wool that does not (and could not) distinguish wool by country of origin. The component of domestic Chinese wool in Chinese exports of semi-processed wool and wool endproducts is one ingredient in the complex economics of wool promotion. The emerging Chinese wool processing industry is a major beneficiary of the current Australian approach to promotion because Chinese wool endproducts, whatever the origin of wool, attract Woolmark certification and promotion, increasing their competitiveness with wool end-products produced by established processing firms in other countries. Wool promotion is an important public policy and commercial issue for the Australian wool industry (Haszler 1997). Over 1995–96 and 1996–97 Australian woolgrowers contributed a total of over $230m towards the world-wide promotion effort managed by the International Wool Secretariat, largely through their current 3.5 per cent promotion tax. Arguably, the Woolmark ‘brand’ that is the basis of generic promotion of wool has substituted for firm-specific brands and made it easier for new firms and emerging countries in the wool trade such as China to become established in the markets of developed countries (Watson 1997). There are practical and theoretical differences between economic assessment of scientific versus economic research into agricultural production. Economic research is generally less costly than scientific research because it have expensive requirements such as capital equipment and land for research stations. Like other agricultural research, the adoption of economic analysis leading to improvements in farm management depends upon decisions by farmers. The benefits of research can then be observed directly in higher (net) farm incomes. The rate of adoption is an important determinant of the research profitability. According to the nature of the research, on-farm research may require capital investment by farmers. The connection between economic research and economic benefit is less where that research leads to decisions by Governments on agricultural policy. Often, policy decisions are re-inforced by economic research but also based on other evidence or a priori economic reasoning. Therefore, while changes in economic policy bring about a range of actions by economic agents, not all of the associated costs and benefits can be directly linked to the underlying research. Moreover, adoption of policies by Government is generally discrete rather than continuous. Judging the specific contribution of this project to the changes in economic policy that have taken place in the Chinese wool industry is perhaps the most difficult and problematic component of this assessment. In the present case, the gains from research on Chinese wool production mainly relate to increased gains from trade that are occurring because the research has reduced impediments to the import of Australian wool. In addition, liberalisation of the wool trade is part of the process by which Chinese aspirations to join the World Trade Organisation are responded to by Australia.