The reverse processing trade …
A standard argument is that China’s export success is overstated. Sure, a lot of goods, especially electronics, are assembled in China. But those goods are composed of imported parts. Chinese labor just puts the imported components together. China is the master of processing, not exporting.
The IMF has argued (see box 1.2) – and I agree — that things are changing. More and more electronic components are now made in China. Until about 2004 the growth in China’s surplus with the US and Europe was accompanied by a rise China’s deficit with Asia. In 2005 and 2006 though, China’s surplus with Europe and the US kept on rising but its deficit with Asia fell. The obvious explanation: fewer imported components and more Chinese value-added.
China’s role in the global automobile trade though isn’t going to resemble its initial role in the global electronics trade. Rather than being a location for the final assembly of imported parts, China is becoming a major supplier of parts to the global automobile industry.
I really liked Keith Bradsher’s article in the New York Times today. He got – in my view – almost everything right. Not the least the impact of the shift of automobile parts production toward China on small town Ohio.
He notes that Chinese domestic parts producers who raised their standards to supply GM’s Chinese operations (which primarily are geared toward producing for the Chinese market) found themselves in a position where they could also supply GM’s global operations.
"Multinational automakers set virtually the same quality standards for their operations all over the world. They are working closely with Chinese parts companies to help them meet these standards; once they do, they are allowed to submit bids for supplying factories elsewhere. “They get put on the global list and then can quote for anything worldwide,” said Nick Reilly, the president of Asian and Pacific operations for General Motors.
There is a reason why GM and the US auto makers complain about the yen but not the yuan.
When US and European auto makers first set up shop in China, it presumably led to more US exports. GM's part suppliers sold US made components to GM China for cars intended for the Chinese market. Now, the supply chain GM developed in China for its Chinese operations are being “imported” back to the US.
Consider it a bit more evidence that China is increasingly competing in sectors that still produce goods in high-wage places. Nothing wrong with that. But usually booming exports – and more technologically sophisticated exports – are accompanied by a real appreciation.
China though is converging technologically faster than in its domestic prices are converging with world prices. The result: booming exports. We should have the May data soon. But the basic trend is clear. Look at this graph.
And yes, one conclusion that I draw from it is that the real exchange rate does matter. The huge surge in Chinese exports (and reserves) certainly seemed to start with the RMB shifted from a trend real appreciation (95 to 202) to a trend real depreciation (2002 on … ).
How Labor Could Fix Detroit http://businessweek.com/autos/content/jun2007/bw20070607_841730.htm - “GM, Ford, and Chrysler could create a workers’ health-care fund in a cost-saving move—and the UAW may well go along”
they’ve got something in common
workers of the world, unite!
…and also, if i may add, i thought checki’s speech on EMs’ effect worldwide was note perfect (if a bit belabored in places
esp in describing “the micro side,” which i believe is often overlooked from a ‘global macro perspective’… still his conclusion stands:
“reserve stockpiles in a number of countries now have moved well beyond plausible self-insurance needs, and reserves continue to be purchased to resist local currency appreciation. For these countries, further reserve purchases may be less a sign of strength than of the need for more progress in building domestic demand as a source of growth and in completing the transition to a modern monetary regime. Such progress, in turn, would help ensure that global current account adjustment takes place in gradual and orderly manner”
Assembling is a value adding process anyway. So it was a worthy trade surplus even before.
Anyway all this is very good news. 2000 Chinese leave extreme poverty behind every hour, and their increades productivity benefits all the world with cheaper products and increased division of labour and specialisation. The only problem is faster capital and labour reallocation everywhere: welfare programs are under strain everywhere.
china certainly is a case in point when it comes to “beyond plausible needs for self-insurance” (tho business weeek still isn’t convinced …)
i too really liked the checki speech. my only real quibble is that on the micro side, it isn’t obvious (at least to me) that the kind of institutional structural reforms that I think checki has in mind when he talks about barriers to faster growth necessarily will lead to less inequality not more. a more flexible us labor market for example arguable has led to increased inequality, as labor losts it bargaining power/ got less of a growing pie (see Krugman). I also wouldn’t argue that a country like China has weak domestic demand growth and thus finds itself compelled to rely on external demand — it seems to me that China has opted to use its macro policy to restrain domestic demand to avoid overheating in a context where its exchange rate policy is highly stimulative (for reasons i do not fully understand). those quibbles aside, though, it is a really, really nice summary of a lot of recent developments.
re: “a workers’ health-care fund”
cf. http://www.ft.com/cms/s/e76a290a-c758-11db-8078-000b5df10621.html - “Mr Wyden’s bill is 166 pages against Hillary Clinton’s 1,364. Instead of trying to flatten the opposition as the Clintons did, Mr Wyden is courting Republicans. He recently got five of the most conservative men in the Senate to co-sign a letter to Mr Bush endorsing the principles of universal coverage and cost containment.
“Under Mr Wyden’s plan, American employers would no longer provide health coverage, as they have since the second world war. Instead, they would convert the current cost of coverage into additional salary. Individuals would use this money to meet the requirement that they be insured. Buying coverage directly would encourage consumers to use healthcare more efficiently. Getting rid of the employer tax deduction, which costs $200bn a year, would free funds to cover those who are not poor enough to qualify for Medicaid but not wealthy enough to afford insurance. The Lewin Group, an independent consulting firm, recently estimated that Mr Wyden’s plan would reduce national spending on healthcare by $1,500bn over the next 10 years and save the government money through greater administrative efficiency and competition.”
and http://news.google.com/news/url?sa=t&ct=us/1-0&fp=466813d7f182d64f&ei=o9ZoRrrJEJawpQK0meCOCw&url=http%3A//online.wsj.com/article/SB118117722127727221.html - “Mr. Giuliani, currently leading opinion polls for the 2008 Republican nomination, wants to move tens of millions of people from employer-based health insurance to the individual market as a way of giving people more coverage choices…
“He envisions a system where neither state regulations nor federal tax law push people into expensive plans rich in benefits. Rather, health insurance should be more like car insurance… But Mr. Giuliani rejects a government mandate that all individuals purchase coverage. To do that, he said, the government would have to subsidize the bill for those who can’t afford coverage, which would drive up the overall cost.”
Alot of fuss has been made about the changing composition of CHinese exports (note a recent IMF conference on the subject). But it does seems that the evidence is far more ambiguous -while of the papers at the aforementioned conference pointed to the changes Brad describes, others take a more reserved position -if anything it seems that things are going the other way. thus see, amongst others, AN ANATOMY OF CHINA’S EXPORT GROWTH by Mary Amiti and Caroline Freund; Measuring the Vertical Specialization in Chinese Trade by Judith M. Dean, K.C. Fung and Zhi Wang. Different data sets apart, any attempt to reconcile or distinguish these findings would be interesting.
Brad,
Won’t RMB appreciation drive China up the value ladder like the other more developed Asian economies, and therefore come into more direct competition with the U.S.?
“…current conditions are becoming favourable to hedge fund investing in China…” http://www.hedgeweek.com/articles/detail.jsp?content_id=112279
“Candidates vying for the Democratic Party nomination for next year’s US presidential election have taken around three-quarters of the campaign contributions made by hedge fund managers…”
http://www.hedgeweek.com/articles/detail.jsp?content_id=111006
One common source of different conclusions re: Chinese trade comes from a very common tendency to use data sets that end in 2003 or 2004 or even 2005. A lot has changed since then (my take). The shift in the pattern of the processing trade really only happened in 05 and 06. I wouldn’t expect it to show up in even recent studies that are based on older data series.
re: moving up the value chain — China is moving-up the value chain already. But it is doing so with a pricing structure that is very different from other higher-value producers. I don’t appreciation would accelerate china’s move upmarket, but it would accelerate the convergence of Chinese wages/ prices with other producers of comparable goods.
It also no doubt would put pressure on some lower-end sectors in some parts of China. Fair enough. As China enters new industries, it needs to exit some others (tho its size means this process will happen much differently than with smaller Asian exporters). That is part of the process through which Chinese export growth will slow.
Today comment by Peter Schiff:
What do stocks have to do with the price of pork in China?
By tripling the tax on brokerage transactions, the Chinese government succeeded, at least temporarily, in restraining the surging Chinese stock market. But my expectation is that the correction will be short-lived. It’s not that the Chinese stock market is not a bubble, as it clearly is, only that more air will likely inflate it further before it finally bursts.
While Chinese concerns over a potentially bursting bubble are legitimate, their attempts to discourage further speculation can be compared to the captain of a sinking ship who dispenses teaspoons to his crew instead of fixing the gaping hole in the hull. The giant hole in the Chinese economy is the currency peg to the dollar. In order to maintain it, China must pursue a highly inflationary monetary policy which fuels the stock bubble. As long as they continue this policy, dispensing teaspoons will have little effect.
The effects of inflation are not limited to stock prices. Pork prices in China, the primary meat in the Chinese diet, rose over 30% in May alone (live hog prices actually rose over 70%)! In order to hedge against such persistent price increases, Chinese savers are being forced into the stock market. The alternative is to watch the value of their savings erode as the government debases the yuan to prevent the U.S. dollar from collapsing.
Initially, a dollar peg brought stability to China. When the dollar was sound, discipline was required to keep a pegged currency from falling. Now that the dollar is weak, inflation is required to keep it from rising. It’s analogous to tethering your monetary ship to the Titanic. Failure to cast off the line will inevitably sink the pegged currency along with the dollar.
Recently two Arab nations have done just that. Within the last three weeks, both Syria and Kuwait de-linked their currencies to the dollar. Other Gulf States will likely follow suit, with The United Arab Emirates looking like the next domino. The most logical progression would be for these nations to no longer price crude oil in dollars.
Perhaps these actions will cause the Chinese to begin abandoning their defense of the dollar in much the same way the U.S. did with the British pound in 1929. When that happens China’s stock market bubble will burst, but its economy will be on much firmer ground as a result. Though nominal stock prices will decline, the value of the yuan will soar, mitigating the real extent of the losses. Despite some short-term pain, China will not experience anything like our Great Depression (as long as they do not make the same mistakes that Hoover and Roosevelt made).
America however will not be so lucky. Our stock market and economy will fare much worse, as a collapsing dollar will exacerbate the real value of the declines.
Are mortgages in China priced in RMB and/or USD or…?
“China Central Properties Ltd., an investor in distressed real estate assets, said it raised 151.2 million pounds ($299 million) in a London share sale, as it seeks funds to buy incomplete developments in the country…” http://www.bloomberg.com/apps/news?pid=20601080&sid=aIUStJp.PWVg&refer=asia
re: “Our (the ‘U.S.’) stock market and economy will fare much worse”
are you sure about that, as so far the declining USD seems to have been good for the U.S. stock market.
Brad,
What about a pot of FDI against this chart, have there been any effects.
It appears to me that China’s reserves track accum. trade surplus and FDI pretty closely.
On the increasing 2005-6 surpluses can’t one pick out the goods sectors and or regions or
countries that contributed to give a better idea if it is the effect of a move up the chain or
product mix or pricing, from FFEs or SOEs?
reserves were ahead of the current account surplus (close to trade surplus) + FDI from 02-05, but below it in 2006 …. presumably b/c the swaps/ big portfolio outflows ($100b plus) from the public sector in 06.
for a breakdown by sectors/ countries I recommend either the imf’s regional outlook or the charts jon anderson of ubs produces regularly!
Hi brad,
I had one question. If emerging countries’ central banks bought precious metals instead of US treasuries, how will that affect the country’s exchange rate w.r.t USD, Euro, etc.
prakesh — i haven’t really thought a lot about your question. I guess if a cnetral bank bought gold from a us investor, it would still finance the US deficit. it just shifts ownership of the existing gold supply around. if say china bought more oil that means the oil exporters would have more $ — and they would have to decide what to do with them. but it isn’t really a question that i have thought deeply about.
brad