China Takes Over World Trade – Despite the Spats

 

3 November 2009. Assuming you haven’t been living in a cave or underwater hotel for the last year, you will know that as fear gripped the world once the Financial Crisis took hold and US consumers stopped buying things they didn’t really need, world trade collapsed.

 

 

3 November 2009. Assuming you haven’t been living in a cave or underwater hotel for the last year, you will know that as fear gripped the world once the Financial Crisis took hold and US consumers stopped buying things they didn’t really need, world trade collapsed. Orders to exporters just stopped suddenly, and ships were, for a time, effectively transporting goods for free rather than pay fees to stay in ports.[br]

China was ravaged, millions were out of work and all the nonsensical talk of Asia ‘decoupling’ from the West was silenced (although sadly it has staged a modest return). The decoupling myth and equally misguided cries of China’s imminent demise have obscured a more profound truth. China this year has become the world’s biggest exporter – and the crisis has only helped speed up the process.

It is true that China’s exports plunged dramatically this year – but they dropped less than those of other countries. While China’s trade fell 21.7 percent in the first six months of 2009 compared to 2008 – a catastrophic drop in normal times – Germany’s fell 34.1 percent. In other words, Germany had a 57 percent bigger bust – while Japan’s was 72 percent worse. The other major exporting power, the US, had a slightly worse fall of 23.8 percent, or 2 percent more than China.

So now, for the first time, China has overtaken Germany (which itself overtook the US in 2003) to become the largest exporter.

What happened? EconomyWatch.com’s Chief Political Economist, David Caploe PhD, compared the US, Japan and China, and explained it like this:

[quote]China has essentially followed the Japanese model of export-oriented growth, producing first and foremost for the domestic American market.

Now what happened in Japan is that the banking sector sucked up so much of the society’s material and intellectual resources post-1989 that it failed completely to participate in the software / internet based growth of the 1990s and first decade of the 21st century. Instead, it was stuck producing fundamentally for the “upscale” elements of American economy and society, as it was continually losing the price war for the “downscale” sector of the US market to up and coming, low-cost producers like -China!

Put bluntly, Japan may have captured the Lexus set, but China was becoming the key factor for the Wal-Mart gang. And while income inequality in America grew radically during Cheney / Bush, those rewards were going to an increasingly smaller part of the population – hence, constricting US markets for Japan, increasing American markets for China.
[/quote] [br]As if to underscore this point, China has just overtaken Canada as the United States’ largest supplier of imports. The New York Times reports that in the first seven months of 2009, China supplied 19 percent of imports (up from 15 percent), while Canada dropped to a 14.5 percent share, down from 17 percent. They attribute the change to aggressive price cuts to reach what is now being called the ‘China Price‘ – a price that other exporters cannot match.

Germany is a similar story to Japan with one exception. It’s sports cars and luxury electronics are suffering in a similar fashion to the Japanese, but it also has a commanding position in precision engineering, and that is a market where it will continue to see growth for a position of strength.

The structure of the world’s economy has changed. China has taken advantage of that change, at the expense of the US, Japan and Europe. In the next few years, we will see China decisively consolidate its trade leadership position. But what then? David goes on to say

[quote] But therein lies the rub for China. Having copied, then bested, Japan’s export-oriented growth strategy, the Chinese now find themselves with an economy structured more or less along the same lines as Japan – which means they are vulnerable to the same sort of difficulty in which post-1989 Japan found itself.[/quote]

The bigger that China gets, the harder it will be to continue to grow, and not just because of the Law of Diminishing Returns (which makes Frontier Markets such attractive investment options), but also because it too will face Japanese-style structural problems.

However China has advantages over Japan in this regard. It can learn what not to do by studying the mistakes of the Lost Decade, and crucially, the government controls the banking sector and not the other way around.

It can also expect to get increasingly embroiled in trade disputes. In September, the Obama administration increase the tariff on Chinese tyres from 4 percent to 35 percent, in what has been an escalation of duties since 2007. China slammed the ‘protectionism’ of the move and has imposed tariffs on auto parts and chicken meat in retaliation. The Europeans are also looking at extending antidumping duties.

These disputes, and compaints of an undervalued reminbi will continue, but from clothes to furniture to electronics, the Chinese will only consolidate their hold on world trade, using structural advantages to beat the capitalists at their own game.

This is not decoupling, this is recoupling, but the shoe is on the other foot now.

Chen Xiulian

EconomyWatch.com