Title: China's rapidly growing exports fuel deflation in U.S. Author: Jeffrey Rubin Source: The Globe and Mail Date: March 3, 2003
>From computers to sporting goods, pricing power in the North American marketplace is increasingly determined by China's mammoth exports. Growing access to foreign markets has been the single most important dynamic behind China's explosive export growth and attendant industrialization. While exports account for less than one-quarter of the country's gross domestic product, they drive about three-quarters of the economy's growth. No foreign market is more important to China than the American one, which has now surpassed Japan as the No. 1 destination for Chinese exports. Unfortunately for the United States, the same cannot be said for American goods flowing the other way. The relatively small presence of American firms in the Chinese economy has meant a disproportionately small flow of U.S. exports to China. That tandem has been lethal to the U.S. trade deficit with China, which has recently mushroomed to more than $104-billion (U.S.) -- far and away the largest bilateral trade deficit that the United States is incurring. By comparison, bilateral trade deficits with Canada and Mexico are running at little more than half the level of the deficit with China. The single most important consequence of the Chinese import invasion into the American market has been growing evidence of deflation in goods prices. The past seven years have seen sustained deflation in U.S. imports, with prices having fallen by 10 per cent. During this period, China's share of total U.S. imports more than doubled, to 11 per cent from 5 per cent. In virtually every sector where Chinese imports have made significant inroads into the American market, industrial selling prices are either flat or falling. Those range from traditional low value-added goods such as toys, sporting goods, footwear, apparel and textiles -- the traditional staples of Chinese exports -- to more sophisticated manufactured goods such as computers and telecommunication equipment. Recent trade patterns suggest that the fallout from Chinese deflation is becoming broader every day. Like the Japanese import invasion of the 1970s that began with the export of cheaply assembled transistor radios and quickly evolved into sophisticated manufactured goods such as automobiles, Chinese exports are moving upscale at breathtaking speed. While most of us would associate China's exports with footwear or toys, that's very much a rear-view mirror of Chinese trade. The fastest-growing Chinese export to the U.S. market is computers. In fact, in 2002 China became the single largest exporter of computers and parts to the United States and computer exports, after tripling the past five years, are now the most important product the country exports. Telecommunication equipment and televisions aren't far behind. While China is rapidly leaping up the value-added ladder, it has drawn on the same overwhelming labour cost advantage at every rung. Manufacturing wage rates range from $50 to $150 a month, or roughly one-thirtieth of comparable U.S. rates. More importantly, they are significantly lower than labour costs in most other Southeast Asia economies. Compared with the so-called Asian tigers, Chinese labour costs are anywhere from 40 per cent to 70 per cent lower than countries that for the past several decades used their own relatively cheap labour costs to wrestle production from North America and Europe. Over time, wage rates have risen in other countries in Southeast Asia, as labour was drawn from subsistence farming to burgeoning industrial sectors. But the sheer size of China's potential labour force, and the absolute level of today's wage advantage, suggests that it may be decades before even China's torrid pace of industrialization bids up wage rates. About 50 per cent of China's 1.3 billion population is still on the land. Every year, more than 20 million workers flood into urban centres looking for what to them are high-paying factory jobs. With wage disparities between agriculture and industry in the 200- to 300-per-cent range, there is virtually an inexhaustible supply of labour to draw upon from the rural hinterland. That process not only puts downward pressure on wages in the export sector, but also exerts an iron grip on wage rates throughout the economy. Indeed, the Chinese economy is not only an exporter of deflation, but it is itself a victim of the same disease. Consumer prices have declined in China for the past two years. Whether it's footwear or computers, the impact of Chinese imports on industry prices and margins are basically the same. What we really import from China is price deflation by any other name. Jeffrey Rubin is chief economist and chief strategist of CIBC World Markets _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework
