Yet more evidence relative prices matter
The rising cost of transportation makes goods produced closer to their final market cheaper relative to the goods produced a long ways away. Today’s Wall Street Journal reports that rising transportation costs are having an impact: DESA LLC has decided it makes more sense to produce heaters in Kentucky than in China; Breman Castings Ince is getting “work back from China” and Craftsman Furniture (now Chinese owned) is scaling back plans to shift its furniture production to China.
Adjustment in action. Good news too, even if consumers have to pay a bit more. Adjustment doesn’t always work to the benefit of consumers at the expense of domestic producers.
The Journal reports that Jeff Rubin of CIBC in Toronto estimates that the rise in transportation costs has raised the effective “cost of shipping” tariff on imported US goods from 3% to 9%. DESA reports that the 15% increase in the cost of shipping goods from China contributed to its decision to produce more in Kentucky.
Makes sense.
I rather suspect that the close to 20% rise in the Chinese renminbi against the dollar (together with higher inflation in China than in the US) has also played a role in these decisions. A rise in the renminbi has the same effect as a rise in the cost of shipping. Production in the US starts to look more attractive if the cots of producing goods in China goes up.
Indeed, I was a little surprised that Timothy Aeppel’s story focused so much more on rising transportation costs than on the exchange rate: exchange rate changes were mentioned, but only in passing after the beak. The focus was on rising transportation costs
There is one more bit of evidence that exchange rate moves matter. According to the Chinese data (which undercounts Chinese exports to both the US and Europe because of Hong Kong through trade), China’s exports to Europe are growing by 27% (y/y). China’s exports to the US are only up 9% (y/y). And guess what, the renminbi has appreciated against the euro. Indeed, relative to say 2000, the renminbi has depreciated quite significantly against the euro. That has helped to offset the rise in the cost of transporting goods from China to Europe.
Appologies for off topic post…
The new BP annual report is out. Loads of interesting stuff! “Proved reserves” will last for 40 odd years at present consumption, is one chilling fact. Chinese consumption has increased by 88% over the last 10 years, is another.
http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/downloads/spreadsheets/statistical_review_full_report_workbook_2008.xls#‘Oil – proved reserves history’!A1
pallj — i’ll take a look at the bp data
[...] shipping more expensive. The result is renewed interest in localized production of some goods. Combining shipping costs with some minor exchange rate adjustments and inflation and wage growth in emerging [...]
Import substitution for simple heavy commodity items is relatively simple. The Chinese-made manhole covers in New York City that the New York Times economics editor complains about can easily be replaced by domestic US production or imports from Mexico. The Chinese government policy is de-emphasizing “low value added” exports including steel manhole covers.
But Advanced technology products which the US runs trade deficit in are not so easily replaced or duplicated. Wasn’t a Clinton Administration economic advisor to then Treasury Secretary Robert Rubin once quoted stating, “it doesn’t matter what we produce for export, potato chips or computer chips”? In that case, the Japanese will gladly take the semiconductor manufacturing industry, leaving potato chip production to the Americans.
Advanced semiconductor production requires a literal army of trained specialized engineers, years of accumulated inhouse knowledge, a critical mass of subcontractors, and billions in investment capital. Once the US advanced technology industrial base was downsized by Wall Street, it is permanently gone for good. Several weeks ago, Businessweek magazine for once discussed how Motorola’s former advanced chip manufacturing operations were being starved by capital and downsized by a private equity firm’s asset stripping practice.
Even for low labor cost China, to develop an advanced semiconductor industry, it has been necessary for the Chinese government to pour tens of billions of state investment capital into the development in order to scale the comparative advantage of Korean, Taiwanese, and Japanese firms. Moreover, even with assistance from overseas ethnic Chinese engineers, state-owned SMIC still probably lags major overseas competitors by several years. But that is a huge technology advance compared to a couple of years ago when the Chinese industry lagged a decade or more behind the leading edge. And India has alot of smart engineers, why can’t they develop an advanced semiconductor industry?
Today, there are only 3 remaining US companies capable of producing advanced semiconductor chips: Intel, IBM, and Texas Instruments. The rest of US companies outsource production to Asian contract manufacturers. I might also add that the World’s largest contract chip company is Taiwan Semiconductor Manufacturing Corporation which was established and financed by the Taiwan government.
The Neo-liberal economic myth that the state-driven capitalism is a complete failure is a self-serving propaganda myth by the Washington Consensus elites to prevent the industrial emergence of Asian economic competitors.
i am going to repeat myself, but only because brad and DC do so. fair’s fair.
this china v. america and america v. china stuff is self indulgent fantasy.
i spilled coffee on my keyboard. phphutt. they told me you don’t fix computers, you upgrade. so i went to buy an apple mac keyboard.
point 1 : apple costs €50. macalley costs €30 and does the same job even though the design isn’t as cool. chose macally.
point 2 : hold on, who am i supporting here ? discover in the small print on the box that macally, like apple, is a US company and the product is made in china.
question – who do we macally customers cheer for in the great dollar v. r m b football game ?
What about the Irish Referendum, gillies?
USA corporations with low taxes and lots of thunder noise?
Or we’ll blame China of all this mess?
Free smoking after the poll?
gillies — you now think usa and chinese interests are convergent? I’ll grant that us firms producing/ sourcing in China (tho no doubt with some Irish operations for tax reasons
)have common interest with those in China who benefit from the combination of an undervalued exchange rate and low real interest rates. As do Americans who benefit from low real interest rates (especially if they aren’t exposed to competition from china/ competition from those losing out from production in china). But i fail to see how us and chinese interests are convergent if China defines its interest as avoiding any adjustment and the US believes adjustment is in its interest — and I’ll repeat the argument I had with 2fish on the earlier thread, if you believe America’s external deficit is made exclusively in America, please explain why US interest rates are so low? the usual mechanism through which a spendthrift attracts financing is by paying high rates …
China is intervening to the tune of a trillion dollars a year (a bit less) in the fx market. do you really think that has no impact on the global pattern of trade (including Europe’s growing deficit with China)/ the global flow of funds? if so, please explain!
I think that the red hot Chinese economy is about to cool. As everyone knows, the oil costs, weak US dollar, and maxed out US consumer are likely to have an impact. I suspect that these significant macro-economic events will change the political shape of the world. I’m not sure how exactly, but it seems the current economic resurfacing is creating a more globalized allocation of wealth. Perhaps capitalism is the fairest method of wealth distribution and therefore freedom. When I was younger, I suspected that this massive growth of global wealth would be predominately centered around innovation, but unfortunately it isn’t. It is centered around a scramble for all of our natural resources. The shift to environmental capitalism is clearly going to be very painful. I don’t think the run on commodities is based on fundamentals, but our current scenario is providing a very fitting example of a world with an appetite to consumer, beyond its physical means to produce.
http://econdynamism.blogspot.com
Brad,
The focus on energy costs in lieu of exchange rates is clearly a case of ethnocentric thinking. It plays on other similar psychological anchors including clarifying identity through blame. The US can’t hinge its anger on the depreciation of the dollar, because the causes at hand are complex and self-inflicted. Rising energy cost is a problem we are intimately familiar with, because it is about competition and demand. All psychological and herd behavior issues that would drive any macro-economist completely crazy.
the irish referendum shows that democracy is a great system – with only one flaw : the people.
this is a re-run of an earlier referendum. with the same result -
democrats 1 – bureaucrats 0
i voted ‘yes’ but am happy with the ‘no’ result, being a democrat.
so blame china ? for what ? a triumph of democracy ?
in global terms it marks a general turning point from expansion and globalisation, to contraction and localisation. (see also : cost of transport, above.)
the irish are a politically sophisticated people, and occasionally like to remind their own leaders of that. chef giscard d’estaing and his cooks served up a reheated version of the tired hamburger we sent back to the kitchens last time. he should lose his michelin star for that.
yes, ireland is a tax haven and the average house price falls @ €10,000 / month. same as the rise used to be on the way up. churchill said wars are not won by evacuations – (dunkirk) – and economies, likewise, are not saved from slump because they are tax havens.
oil will be $40 / barrel, and turkish donkeys will become almost priceless – being driven by (renewable) sticks and powered entirely by biofuels which they harvest themselves.
if things get really tough, the turks might have to eat the donkeys, but at least they taste better than computer print outs . . .
.
Since we are reviving arguments from the last thread, I will answer Brad’s rhetorical request “if you believe America’s external deficit is made exclusively in America, please explain why US interest rates are so low” with a rhetorical request of my own, which I discuss in a little more detail at http://reservedplace.blogspot.com/2008/05/enigma-inside-conundrum.html.
If central bank intervention has been driving US interest rates, please explain why government bonds have been cheap relative to spread product. In fact, until the financial crisis, spreads were tight, from which I conclude that US demand to borrow has been as responsible for the US current account deficit as foreign central bank supply of savings.
Since the full stop at the end of my sentence above messes up the link, here is a clean one:
http://reservedplace.blogspot.com/2008/05/enigma-inside-conundrum.html
Oh Brad, it’s really Neo-liberal dogma that currency devaluation improves a nation’s long=term global competitiveness.
China export growth, despite America economy declining and US Dollar devaluation
http://www.moneymorning.com/2008/06/12/chinas-export-machine-shifts-into-high-gear-even-as-u.s.-market-decelerates/
After growing 21.9% in April, Chinese exports climbed 28.1% to $120.5 billion last month, China’s customs bureau reported. Exports to the United States grew 9.1% in the first five months of year. The yuan gained more than 10% on the dollar in the year through May, and still exports surged.
The fact that Chinese exports have more than weathered the global financial storm is a huge blow for critics who had earlier predicted this credit-related mess would cause China to stumble. China’s economy grew by 10.6% in the first quarter of 2008, despite complications stemming from the U.S. credit crunch, the Chinese New Year and the worst ice storm the country had seen in decades.
“We have a lot of evidence to support the decoupling view,” Timothy Bond, Merrill Lynch & Co. Inc.’s (MER) chief Asia economist, said in a research note.
Indeed, the recent surge in exports is proof that China will continue to advance – with all but a complete collapse of the U.S. economy. The growth in sales overseas sales, regardless of what happens in the United States, but they also proved that Chinese trade isn’t dependent on the weakness of the yuan.
DC,
These are dollar term figures.
Chinese exports to US have actually fallen in RMB terms, as the dollar depreciated 1o% against the RMB yoy.
The euro on the other hand has apprecieated against the RMB. No wonder euroland exports in dollar terms are up.
In the meantime there was 8.2 % PPI and 15-2o% wage growth and nearly 1oo% energy cost growth in the past year.
Speculative inflows are on record. Minimum reserve rates were hiked 5 times this year. They will have to revalue sooner or later.
IF exports cannot grow, there is no need for investments. Investments make up 45% of Chinese GDP. There will be a very nasty hard landing soon.
Countries with fixed rates are falling like dominos. Look at Estonia, look at Vietnam.
“If central bank intervention has been driving US interest rates, please explain why government bonds have been cheap relative to spread product.”
PBOC drove treasury yields down.
Private sector drove credit spreads down due to relative scarcity of treasury product.
Meaning that the overall demand for bonds in the face of scarcity of treasury product caused substitution of risky assets for non-risky assets and narrowed pricing for credit risk as a result. Therefore treasury yields declined due to PBOC and credit spreads declined due to residual private demand and the resulting substitution effect.
Anon,
So, despite the fact that PBoC bought treasuries, spread product yields fell MORE than treasury yields (ie spreads narrowed)?
Brad, are there public data or estimates about the PBoC balance sheet and about China open market operations? (the English section of the PBoB web site is up to 2004!)
I’m particularly interested on a measure of how much they actually print and how many of newly printed yuan end up the FX market in exchange of dollars.
TIA
Alessandro — i generally use the data from UBS (which will be updated soon) or from GEne Ma (ISI). Goldman also has a good data series. the yuan issued in exchange for $ remain in yuan tho; the challenge is to convince holders of yuan cash to accept an interest paying yuan assets in the sterilization process.
Rebel. I agree with Anon. Canada’s central bank governor has made a similar argument as well. the invested yield curve of 05-06 in particular generated a lot of demand by private actors for spread products, as you couldn’t make money borrowing short and lending long without taking credit risk. This is when SIVs and the like really took off.
DC — the rmb hasn’t appreciated against most currencies, so it isn’t a surprise that Chinese export growth remains strong. CHinese export growth to europe is exceptionally strong right now. that seems entirely a product of the enormous depreciation of the rmb against the euro over the past five years. China’s may export growth was very very strong. Some of that is a byproduct of more working days this may than last may (See the previous thread). Some though is a reflection of the impact of the RMB’s depreciation against much of the world. as you note, chinese exports to the uS aren’t growing as fast as before — as one would expect if exchange rates (plus slow us growth) are having an impact.
I’m sorry Brad, do you have the links handy? The site search on UBS and ISI sites and even the mighty Google didn’t help me.
The reason I’m asking is to see who benefits from yuan inflation. In the US and Europe the newly printed money goes to the government and to the banks giving them the (unfair) monetary inflation benefit. If the PBoC hands the newly printed money to the US importer who uses it to buy for-export goods, those who benefit from monetary inflation are the foreign customers and the Chinese exporters. Very strange.
“So, despite the fact that PBoC bought treasuries, spread product yields fell MORE than treasury yields (ie spreads narrowed)?”
Both are facts. Not sure how to respond to doubts about facts.
Anon, I do not dispute the facts, but I am pointing out that they do not fit the theory that PBoC buying of treasuries was responsible for narrower spread product. It is hard to see why PBoC activity alone should move the price of what they were buying less than the price of its substitutes.
An alternative theory which seems to fit the facts better, however, is that a US-generated (eg CDO driven) boom in demand for spread product encouraged more borrowing and more imports of consumer goods. Given the PBoC’s currency peg, this led them to intervene.
Perhaps the Governor of the Bank of Canada is wrong!
“They do not fit the theory that PBoC buying of treasuries was responsible for narrower spread product.”
You distort the premise of the argument. Nobody said this. PBOC behaviour alone does not determine all bond market pricing.
Concentrated buying of treasuries and agencies by PBOC caused yields to decline in treasuries and agencies, relative to what they would have been.
Concentrated buying of treasuries and agencies by PBOC caused a scarcity of such product available for private sector investment.
Scarcity of treasury and agency product for private sector buying caused the private sector to seek the closest substitutes where it could find them. This created greater demand for credit risk products than would otherwise be the case, starting with the lowest risk product. Dealers assisted in creating lower risk credit with various forms of financial engineering. This effect rippled through the credit pricing spectrum.
Most importantly, at the same time, the general macroeconomic outlook for credit risk was unusually optimistic.
So the correct conclusion is that, notwithstanding the downward pressure put on the general level of interest rates due to PBOC demand for treasuries and agencies, credit spreads still compressed, due to high private sector demand for near substitutes for treasuries and agencies, a buoyant credit risk outlook, and Wall Street engineering.
There’s nothing inconsistent with both trends happening at once. Both put concentrated demand pressure on two different sectors of the market. There’s nothing to say that the pricing of risky credit can’t improve at the same time as the pricing of risk free credit, or that it can’t improve at a faster absolute basis point pace.
I agree with anon.
There also may have been a second factor at play. A fall in interest rates associated with the rise in central bank purchases of treasuries and agencies would tend to push up the price of all interest sensitive assets, including homes. If new homes can be produced at a lower price that would pull prices back down — but there are lags, and in some places new supply is constrained. the rise in home prices in turn would reduce losses on the generation of risky loans made just before the rise in prices. a borrower that got into financial trouble (say lost a job) could sell the home and pay off the mortgage and perhaps even pocket some cash in a rising market. Lower than expected losses entered into the models used to price/ value potentially risky securities — and contributed to the compression in credit spreads in the mortgage space.
you can argue that markets should be forward looking and recognize that a one off rise in prices increases the risk of subsequent loans barring further price rises, but well, that doesn’t seem to be how the market thought. remember all the talk about how home prices never fall on a nation-wide basis.
[...] of my frequent reads in the econoblogosphere is Brad Sester’s Follow the Money. In a recent post, Sester covered the topic of a June 13 Wall Street Journal article that posits transportation costs [...]