China’s cotton production has been under serious threat from rising labor costs. Its domestic cotton supply and use relationship has also been mismanaged by recent government policy choices, which resulted in large domestic storage, expensive domestic subsidies, and also high amount of imports. This has prompted a recent policy change in favor of the so-called targeted price system. Using a CGE modeling approach, this paper aims at estimating the domestic production and trade effects of China’s recent cotton policy, especially the impacts of the newly installed target-price based subsidy under the circumstance of rising labor costs. We also model the impacts of domestic and trade policy coordination on cotton imports and world cotton price, as well as how a potential WTO cotton agreement may interact with and complicate China’s cotton policy choices.