Truth in reporting on China

The global media consistently paint a rosy picture of globalization that is at odds with the facts. When U.S. trade deficits are rising, the press emphasizes any gain in exports it can find. When the deficits plateau or dip a bit, there is a rash of stories arguing that export led economies (China, South Korea, Germany, Japan e.g.) are finally doing what they “should” do — shifting to domestic consumption led growth.

A great recent example was a story in the Washington Post with the headline “U.S. Exports to China Boom Despite Trade Tensions.” It emphasized that U.S. exports to China are up 50 percent since 2008 and attributed this to a “richer China showing a growing appetite for U.S. products” such as soybeans, cars, airplanes, and medicine. This, of course, is just what the conventional wisdom has been saying China should and would be doing as its economy matures, and the increase in U.S. exports is apparently just the tonic orthodox economists have long been predicting for the U.S. economy.

Except that none of it holds up to even casual examination. The use in the story of 2008 as the base year from which to measure the 50 percent increase in U.S. exports to China was actually a giveaway. Yes, U.S. exports rose substantially over the past four years and increased by $11.2 billion in 2011. But, as the Economic Policy Institutes Rob Scott points out, China’s exports to the United States far outstripped that and rose last year by $34.4 billion. Thus, despite all the sales of soybeans, airplanes, and so forth to China, the U.S. trade deficit with China actually increased last year by $23.2 billion. That translates into a loss of 200,000 – 300,000 American jobs.   

Scott further points out that the fastest growing U.S. exports to China were not soybeans, cars, airplanes, or medicine. Rather they were waste and scrap. Moreover, of the ten fastest growing categories of U.S. exports to China, seven were classified as raw materials, minerals, and commodities used for the manufacture of Chinese exports. So the picture of increasingly prosperous Chinese consumers voraciously buying American exports for their domestic use and consumption is the opposite of what is actually going on.

That this is true has been confirmed by Fung Global Institute Director and former World Bank economist Louis Kuijs in a recently released analysis and forecast of China’s import and export balances. He begins by noting that: “Many a headline has recently highlighted how rising costs in China are putting pressure on profit margins and reducing the competitiveness of the country’s huge labour-intensive, export-oriented manufacturing industry — prompting  multinational companies to start shifting production to other countries in Asia.”

He then emphasizes that a closer look reveals that China’s exports are still gaining global market share. Last year, he points out, China’s exports rose 20 percent in dollar terms and 10 percent in real terms while real global imports rose only 7 percent. So the old export led strategy is still solidly in place.

Kuijs notes that a few high profile examples such as Nike have moved some of their low end textile production to Vietnam and elsewhere. But he says, the publicity accorded these few moves has given a very wrong impression of the overall trends which are actually in the opposite direction.

Kuijs then emphasizes a point that has been stubbornly avoided and ignored in the main stream media. Says he, ” The main reason why the amount of manufacturing production that has left China has been very small is because the wage cost pressures have largely been offset. Gains in efficiency and labour productivity have been rapid. This has meant that, after their impressive fall between 1995 and 2004, increases in unit labour costs (wage costs per unit of product) have been modest and gradual in recent years.

Figure below shows profit margins in industry holding up as unit labour costs remain contained.

Meanwhile, what is sometimes forgotten is that wages have also risen quite a bit in countries mentioned as alternatives to China, such as Vietnam and Bangladesh. This is even more so with the higher raw material prices, which are by nature a global phenomenon. Moreover, China’s advantages in infrastructure, clusters of suppliers, and deep labour markets are hard to overlook.

Taking into account all these data, what would be a more accurate description of what is going on than the headlines suggest?

Wage and raw material costs have risen in China. At the same time, continued rapid productivity gains have largely offset the impact on wage costs per unit of product, while raw material prices have risen everywhere. Factoring in the appreciation of the RMB, China’s export prices have risen in U.S. dollar terms in recent years. Data on U.S. import prices are considered to be good because they are adjusted for quality adjustments. And they show that in January 2012, prices of U.S. imports from China were 5 per cent higher than two years ago.

But wage and raw material costs have risen in competitor countries as well, raising their export prices, especially in other emerging markets. In January, prices of US imports of manufactured goods from developed countries and emerging markets were up 3.7 per cent and 7 per cent, respectively. Thus, China’s export-oriented manufacturers have basically maintained price competitiveness in foreign markets, especially compared to other emerging markets.

What is more, despite the cries of pain of export firms and industry organisations, China’s manufacturers have, overall, maintained their profit margins. Thus, it is not that surprising that China’s exports are holding up very well in global markets.”

Exactly. Now why couldn’t the Washington Post figure this out? Kuijs is easy enough to reach. Or did the truth not fit the storyline for the day?