Sunday, February 03, 2008

China Exports Inflation

Interesting New York Times article about how the combination of rising domestic inflation in China, reduced export subsidies and the rising yuan will contibute to rising prices of Chinese imports and so raise inflation in America. This will be felt particularly much for goods that are dominated by the Chinese, such as toys and apparel. And even setting aside the direct effect of the higher prices of Chinese imports, this will also enable manufacturers in other countries to raise prices as they no longer need to fear Chinese competition as much.

If you look at U.S. import price statistics, you can see that between December 2003 and December 2006, the price of imports from China fell by 2.7%. But in the 12 months between December 2006 and December 2007, they rose 2.4%. And considering that both domestic inflation and the rate of yuan appreciation have accelerated (The combined effect of which is a rising real exchange rate), it seems clear that they will rise a lot more than that in 2008.

The rapid increase in the real exchange rate in China will of course also help provide continued support for the commodity price boom, which will also create upward pressure on inflation in America and elsewhere.


Blogger Allen said...

"And even setting aside the direct effect of the higher prices of Chinese imports, this will also enable manufacturers in other countries to raise prices as they no longer need to fear Chinese competition as much."

I don't like this; it doesn't sit well. It seem would seem to fly in the face of how competition works. It feels like someone saying that just because Bayern Munich decides to cut their player budget in half that other teams are going to do the same; that they're not going to keep trying just as hard to win the Bundesliga. If they've found a way to cope with those lower prices what's to say they won't keep theirs just as low in an effort to gain business at the expense of the Chinese?

3:56 PM  
Blogger stefankarlsson said...

Allen, I don't understand what you mean by flying in the face of how competition works. This is exactly how competition works. A firm's profit-maximizing price is determined by how much any price change will affect its margins compared to how much it will affect sales (The price elasticiy, to use the terminology of economics). And the tougher the competion is, the higher the price elasticity, which will reduce the margin where profit-maximization is reached.

If competition becomes less tough (as is the case here), by contrast, then the price elasticity will fall, implying that profit maximization will be reached at a point where margins are higher. Or in other words, profit-maximization will be reached at a point with higher prices.

4:07 PM  
Anonymous Ryan said...

Hey Stefan, I happened upon your blog via Technorati, and am enjoying your commentary on the coming bust.

Do you think it is a fair assessment to say that in the coming years, wealth will become less concentrated in America due to rising inflation?

7:31 AM  
Blogger stefankarlsson said...

No, I don't think so. In fact, if you look at what I've written in the past about the subject of inequality you can see that I've repeatedly argued for the opposite view, that the Fed's inflationary policies are a root cause of the increase in inequality.

9:42 PM  
Anonymous ryan said...

I am sorry I didn't provide a more detailed question, as I meant to ask whether or not inflationary policy tends to result in an outflow of wealth to other nations.

I beg this question because I have always considered America to be a nation of "haves," while much of the rest of the world lags behind to varying degrees . I am not sure if this assumption is correct, but if it was, would a bust in America be a boom for everyone else, given that there is a finite amount of wealth in the world?

3:08 AM  
Blogger stefankarlsson said...

Well, if your question is whether inflation will make America poorer compared to other countries the answer is clearly yes. While America will gain from reducing the real value of the bonds held by foreigners, this is not enough to compensate for the fact that it will reduce long-term economic growth by reducing savings and creatung malinvestments.

BTW, I do not agree with your characterication of wealth creation as being a zero sum game.
There is no reason to make that assumption.

4:42 PM  
Blogger Allen said...

Maybe this is a better question to ask, what prevents companies in Vietnam, India, Cambodia, Poland, Taiwan, Indonesia, and other such places from picking up production in areas that China cuts back in? For example, the textile industry is very important in Cambodia. Why wouldn't they push to raise production if China's imports are more expensive?

1:11 AM  
Blogger stefankarlsson said...

Well, Allen, first of all, even if they do get active, they will do so only at a higher price than the original Chinese one. So while they might increase production, they will only do do at a higher price than they, and the Chinese, started at.

Secondly, the factors driving up price levels in China is also active in varying degrees and forms in most other countries.

1:33 PM  

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