Insanity:Threats of Trade War with China

Last week via the miracle of streaming video on the internet I watched the Republican presidential candidates debate.  There were many aspects of the discussion that were comment-worthy , one of which was Romney's belligerent remarks about trade relations with China.  Certainly, the central government of China has managed or 'manipulated' the exchange rate of its currency against the dollar for many years, but the overall impact of the Chinese exchange rate policy on the US economy and standard of living has not been as catastrophic as the candidates portray it.  Incidentally, such exaggeration is not limited to the Republicans, indeed Democrats in their heart-of-hearts are more natural China bashers than the Rs.  They just haven't had the opportunity to mouth off in a series of globally televised candidate debates.

Yes, there have been many US manufacturing jobs lost to China in the last two decades or more.  But one must ask several questions:

1. Hasn't the cost of the lost jobs been less than the benefits to the nation of the lower cost goods imported from China?
2. If China had allowed its exchange rate to float would the exodus of US factory jobs have been less, or would the jobs have been lost to competitors in other nations?
3. Was China's exchange rate policy a major cause of the bursting of the housing/financial bubble in 2007-08 and the agonizing deleveraging that still plagues the US and Euro economies?
4. Was the melt down that began in the housing industry in 2007 and quickly spread to the financial industry caused by a transfer of jobs from the US to China?

Bashing China for its trade and exchange rate policies scores points with US voters and distracts them from the domestic failures that certainly are more responsible for America's current economic woes.  However, such tactics risk further shocks to the already vulnerable global economy with potentially more harm to the US.

The article below from the South China Morning Post, Hong Kong's leading English language newspaper, explains the competitive problems that China's manufacturers are having.  It notes that the Chinese currency has appreciated against the US$ by 7.02% since June last year.  But the effective appreciation was actually much more than that: probably more like 11% (7.02% plus the amount by which Chinese inflation exceeded US inflation over the same period). 

China's manufacturing exodus
Relentless rises in production costs and wages are forcing
mainland manufacturers - and product buyers - to the cheaper
markets of Southeast Asia
Denise Tsang in Guangzhou
Updated on Oct 17, 2011
    As overseas buyers flood China's largest and most established trade show,
the Canton Fair, change is afoot in the world's largest exporter.
    Relentless inflation in production costs and wages had forced many
manufacturers to relocate production from the Pearl River Delta or
Yangtze River Delta to Southeast Asian countries such as Vietnam and
Indonesia, some buyers said at the 110th China Import and Export Fair at
the weekend.
    They said moving offered a solution for manufacturers, who had limited
room to raise costs for buyers at a time of a possible double-dip recession
in the United States and European Union, China's largest trading partners.
It also came at a time when Beijing's policy was to force factories to
upgrade or migrate.
    Despite the economic turmoil abroad, the trade fair, held each spring and
autumn in Guangzhou since 1957, was packed with visitors from across
the globe on Saturday, the first day of a 15-day show.
    A bellwether of trade, the show runs across three weeks. This week, it
centres on home appliances, electronic goods, construction materials and
machinery, switching to gifts and home decoration next week, with
garments, shoes and food the theme for the final week.
    "One in every four of my Chinese suppliers have moved to Vietnam and
another 20 per cent will be moving before the Chinese New Year [in
January]," said a Hong Kong-based Canadian trader of home electrical
appliances named Richard, a fair regular for the past 40 years.
    "Labour cost inflation in China is not going away," he said, adding that
inflation was stable relatively in Vietnam and Indonesia. He expected 60
per cent of his company's products to be sourced from Southeast Asian
countries by 2013, but China was now the group's dominant source,
supplying 80 per cent of products.
    Guangzhou-based Lebanese Farhad Ziad, who sources consumer goods
from the mainland for retailers in Lebanon, said he was planning to move
to lower-cost Vietnam next year. "Commodities are too expensive here,"
he said. "Business is tougher and tougher, particularly [now that] there is
political unrest at home in Lebanon."
    He said political turmoil in eastern Europe and North Africa meant that only
about 20 of his customers showed up at the trade show, compared with
more than 50 at the spring fair in April.
    Inflation is also spreading across the supply chain as costs rise for raw
materials, rent, utility bills and labour, while the yuan keeps hitting new
highs against the US dollar.
    Premier Wen Jiabao, who officiated at the fair on Friday and toured
Guangzhou at the weekend, promised to keep the yuan's value stable to
protect exporters.
    The yuan was at 6.378 per US dollar on Friday. It has gained 3.31 per cent
this year, and 7.02 per cent since it was delinked from the dollar in June
last year. Economists expect it to hit 6.25 or 6.20 per dollar by December
31.
    The persistent inflation and the strong currency effectively means China's
days as a low-cost producer are numbered, particularly in the Pearl River
Delta. Shenzhen, for example, recently raised the minimum wage 16.6 per
cent to 1,320 yuan (HK$1,600) a month, the highest in China, and
surpassing the average 1,310 yuan in Zhejiang province in the Yangtze
River Delta.
    Average wages for one exhibitor, Gusto of Zhejiang, which makes
thermoelectrically controlled cooling and warming containers for food and
beverages, jumped 20 per cent this year but it only raised factory-gate
prices by about 10 per cent, marketing manager Jerry Cheng Bangjie said.
This was still not enough to cover a 15 per cent rise in overall cost, he
said. "Buyers bargain very hard and they don't want to swallow the price
increase," he said. "But we swallowed some already."
    Suzhou-based exhibitor TEK Electrical chose to focus on high-end
products by improving functions of its robotic vacuum cleaner. A
spokeswoman said the company kept factory-gate prices the same, but
expanded distribution channels through selling in Hong Kong and
emerging markets like Brazil.
    Yves Renaud, a vice-president of Planterra in Quebec, Canada, which
puts on Christmas decorations for hotels and office buildings, flew to the
mainland for the second time to look for suppliers instead of through
resellers in the US to cut cost.
    "Corporate clients are more careful in spending, but demand is still good,"
he said. "The Chinese suppliers have not given me good deals so far. The
negotiation will be tough."
    The fair attracted a growing crowd of buyers from Latin America countries
such as Brazil and Chile.
    Brazilian trader Ricardo Santana Alves, a fair regular, led a delegation of
eight entrepreneurs, who had come to China for the first time.
    "Many Brazilian traders are coming to China even though it's getting more
expensive," he said in Putonghua. "I may have to learn other languages as
some factories are moving to Southeast Asia."
denise.tsang@scmp.com
Copyright © 2011 South China Morning Post Publishers Ltd. All right reserved

 (I am aware that I am treading on the SCMP's copyright by reprinting the complete article here. Their website has a high paywall which does not permit purchase of individual articles.)