Sunday, November 28, 2004

BusinessWeek on US-China trade

I picked up the latest issue of BusinessWeek on the flight home, which is largely devoted to US-China trade. The cover story is on the "China Price" that manufacturers are now forced to match.

Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it.

China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game."

An interesting statistic from the article: the US is still the world's largest manufacturer, and 75% of goods consumed in the US (presumably by value) are made here (this is down from 90% as late as the mid-90's). So, very roughly speaking, a 4% trade-weighted decline in the dollar would lead to a 1% increase in inflation, assuming there is no resulting substitution of goods.


Mover Mike said...

So Steve, the USD is down 30% since 2001, have we experienced an extra 7% inflation on top of the "normal" inflation or have we substituted. Seems like your theory doesn't tell us much, unless you know the degree of substitution.
Mover Mike

Steve Hsu said...

I think exporters to the US have been holding the line on prices even though their currencies have been appreciating against the dollar. They can absorb the difference in their margins, at least for a while. But what will happen in the future?

In the current issue of Businessweek there is another article showing a breakdown of US CPI into goods and services components. The goods component has been *negative* in recent years (China exporting deflation to the US?), so inflation has been entirely from services, which are at least for the moment local to the US (white collar outsourcing is still in its infancy).

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