The world is about to suffer another China shock. Report Wsj
China is once again flooding foreign markets with cheap goods. But this time he's not buying much in return… The Wall Street Journal article
In the late 1990s and early 2000s, the United States and the global economy experienced the “China shock,” a boom in imports of cheap Chinese products that helped keep inflation low , but at the cost of local manufacturing jobs. The Wall Street Journal writes.
A sequel may be in the works, as Beijing doubles exports to boost the country's growth. Its factories churn out more cars, machinery and consumer electronics than the domestic economy can absorb. Backed by cheap government loans, Chinese companies are filling foreign markets with products they can't sell at home.
Some economists see this China shock pushing inflation even lower than the first. China's economy is now slowing down, whereas in the previous era it was booming. As a result, the disinflationary effect of cheap Chinese products will not be offset by Chinese demand for iron ore, coal and other raw materials.
China is also a much larger economy than it once was and accounts for a larger share of the world's manufacturing sector. According to World Bank data, in 2022 China accounted for 31% of global manufacturing output and 14% of all goods exports. Two decades earlier, China's share of the manufacturing sector was less than 10% and its share of exports was less than 5%.
Everyone invests in the manufacturing sector
In the early 2000s, overproduction came primarily from China, while factories elsewhere closed. Now, the United States and other countries are investing heavily in their industries and protecting them as geopolitical tensions rise. Chinese companies such as battery maker Contemporary Amperex Technology are building plants abroad to quell opposition to imports, even though they already produce much of the world's needs at home.
The result could be a world swimming in manufactured goods and lacking the spending power to buy them: the classic recipe for falling prices.
“The scale of China's impact on global prices is tipping even more towards a disinflationary direction,” said Thomas Gatley, China strategist at Gavekal Dragonomics.
There are some countervailing forces. The United States, Europe and Japan don't want a repeat of the early 2000s, when cheap Chinese products put many of their factories out of business. For this reason they have extended billions of dollars of support to industries deemed strategic and have imposed or threatened to impose tariffs on Chinese imports. An aging population and persistent labor shortages in the developed world could further offset the disinflationary pressure China exerts this time.
“It won't be the same China shock,” said David Autor, an economics professor at the Massachusetts Institute of Technology and one of the authors of a 2016 paper describing the original China shock.
A different kind of Chinese shock
However, according to Autor, “the concerns are more fundamental” now, because China is competing with advanced economies in automobiles, computer chips and complex machinery – higher-value industries that are considered more central to the technological leadership.
The first China shock came after a series of liberalizing reforms in China in the 1990s and accession to the World Trade Organization in 2001. For US consumers, this brought significant benefits. A 2019 paper found that in the United States, consumer prices of goods fell by 2% for every additional percentage point of market share gained by Chinese imports, and the greatest benefits were felt by low- and middle-income people.
But the Chinese shock has also put domestic producers under pressure. In 2016, Autor and other economists estimated that the United States lost more than two million jobs between 1999 and 2011 due to Chinese imports, as manufacturers of furniture, toys and clothing succumbed to competition and workers from emptied communities struggled to find new roles.
It looks like there's some sort of sequel in the works. China's economy expanded 5.2% last year, a modest rate by its standards, and is expected to slow further as a crippling housing crisis crushes investment and consumers cut back on spending . Consultancy Capital Economics believes annual growth will slow to about 2% by 2030. Beijing is trying to turn the economy around by pouring money into factories, particularly for semiconductors, aerospace, automobiles and renewable energy equipment, and selling the resulting surplus abroad.
Deflation in China
But weak demand and excess production capacity mean Chinese producer prices have been falling for 16 months, led by consumer and durable goods, food, metals and electrical machinery. This disinflationary impulse is playing out across the world. The price of U.S. imports from China fell 2.9% in January from a year earlier, while the price of imports from the European Union, Japan and Mexico rose.
Unlike the early 2000s, however, the Western world now sees China as its main economic rival and geopolitical adversary. The EU is examining whether electric vehicles produced in China are unfairly subsidized and should be subject to tariffs or other import restrictions. Former President Donald Trump, who is seeking the Republican nomination for November's presidential election, has floated the idea of hitting imports from China with tariffs of 60% or higher.
Such protectionism could shift some of the deflationary impact to other parts of the world, as Chinese exporters seek new markets in poorer countries. Those economies could see their infant industries wither under the blows of Chinese competition, just as the United States did in an earlier era. Unlike Japan or South Korea, which abandoned low-cost manufacturing as they moved into higher-value exports, China has maintained a dominant position in low-cost sectors, even as it pushes into products typically dominated from advanced economies. China represents “a unique mercantilist challenge,” said Rory Green, chief China economist at GlobalData-TS Lombard.
(Excerpt from the foreign press review edited by eprcomunicazione )
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/il-mondo-sta-per-subire-un-altro-shock-cinese/ on Sun, 10 Mar 2024 06:42:00 +0000.