Every now and again, I run a across a chart that is so good that I really, really wish I had thought to do it myself.
James Pressler of Northern Trust's chart comparing Chinese goods exports v. US goods exports is one such chart. Check it out. It is on page 3, and is nicely paired with a graph showing China's reserve growth. I cannot think of any simple chart that captures so many key trends in the global economy quite as well –
What does this chart tell us?
1. Exports – trade really — have been a big source of China's recent economic dynamism the Chinese economy. True, China both import and exports a lot, so if you disaggregate China's growth, net exports matters less than the surge in domestic investment. But that doesn't change the fact that the investment required to expand China's exports (and imports) at this pace has been a big driver of overall growth.
2. Dollar depreciation has been really, really good for China. There are lots of reasons why Chinese exports took off in 2002. The WTO. The shift in electronics manufacturing to China. And the weak RMB. If look at disaggregated export growth data since 2002 the impact of the weak RMB shows up very cleanly. Chinese exports to Europe have grown faster than Chinese exports to the US (in dollar terms). Wanna guess why?
3. Don't look to the past to predict the future. China has changed. One example: Jonathan Anderson of UBS found that the electronics slump of 2001 had a far bigger impact on the rest of Asia than on China (Goldstein summarizes Anderson here). True. But that was before electronics production shifted to China. A similar slump now will likely have a different impact. China exports three times as much stuff as it did as recently as 2001. China's exposure to the global economic cycle must be growing.
4. China will soon top the US (and then Germany) as the largest goods exporter in the world.
5. Chinese export growth almost certainly will slow significantly as some point in the relatively near future. Don't know when. Don't know why. But the law of large numbers says it will happen. If you export as much as the US, your exports just don't triple every five years!
6. Dani Rodrik is right. OK, the last statement is more debatable that the first five. But Dr. Rodrik does have an interesting paper showing that China's exports a basket of goods that are atypical for a poor, labor rich economy. China's export basket (using 2002) was typical of a country with a fair higher per capita income. Rodrik:
"a major argument of this paper is that China is an outlier in terms of the overall sophistication of its exports: its export bundle is that of a country with an income-per-capita three times higher than China's."
Emphasis in original; hat tip: the eagle-eyed New Economist.
The sophistication of China's export basket has increased since 2002. And, as Rodrik notes, China's export success is not simply a product of its ability to import more sophisticated components. That is part of the story, but not the full story:
"China has steadily moved away from being simply an assembler of components. Increasingly, production is integrated backwards and the supply chain is moving to where the assembly is undertaken."
In other words, don't count on China importing high-value added components forever.
Rodrik argues that China's export mix has been atypical for some time, but I think Rodrik's argment is still consistent with Dr. Frankel's argument that China's market exchange rate is out of line with its purchasing power parity exchange (PPP) exchange rate. Poor countries market exchange rate is usually well below their PPP exchange rate. But even adjusting for the fact, there is an unusually large gap between China's current market exchange rate and its PPP exchange rate.
It is also consistent – in some broad sense – with David Dollar's finding that China is unusual in another way. Most relatively poor countries are not (small) net creditors to the rest of the world.
Put differently, Rodrik finds that China exports a product mix of a far richer country. Frankel finds that if China had a more typical gap between its market exchange rate and its PPP exchange rate it would be a far richer country. And Dollar finds that as a result, China is a (small) net creditor when most comparably poor countries are not.
In other words, the RMB is undervalued.
I think Rodrik's conclusion supports another argument that I have made, namely that China's huge reserve growth is challenging one key embedded norm of the post world war II international economic system consensus. Major players in the global trading system – and China is now one – historically have not spent 10% of their GDP a year intervening in the foreign exchange market to keep their exchange rate from appreciating. Yet that is what China has done since 2003. Either the norms of the system have to evolve to accommodate China, or China's behavior has to change to match the existing rules of the game.
One note: if any one has an excel chart with China's monthly export data going back to 1995, I will happily reproduce Pressler's graph.