Tuesday, July 28, 2009

Is China Squeezing Out Other Exporters?

Michael Pettis (via RGE Monitor) has an interesting piece titled 'Squeezing Out the Exporters". Michael makes the case that Europe and the U.S. will likely take a tougher stance on imports from China because of the perception that China is subsidizing their exports. However, the data he lists to support that view seems highly misleading.

Below is a chart of a table of data he references from the Economic Policy Institute (a group he admits is not noted for its commitment to free trade).

This is where I believe the data may be flawed. Michael states (bold mine):

Perhaps as a consequence of a fiscal stimulus aimed at boosting investment and production, China’s share of the US trade deficit has grown significantly. Since the US trade deficit is shrinking quickly, this means that other exporters are getting killed. As I have argued for a while, this is not sustainable and will almost certainly cause trade tensions to erupt.
All exporters are getting killed, but that's because all exports are down, not because China is taking a massive amount of share. One needs to look at TOTAL imports by China vs. TOTAL imports, not TOTAL imports by China vs. TOTAL Net Imports (the ignoring of oil is fine with me).

Why? Lets look at an example. Assume we import goods from four countries, each representing 25% of all imports, and totalling $100 billion, while we export $50 billion per year. In this case (Scenario 1), each country's exports makes up 50% of the trade balance.

Fast forward to scenario 2. Imports from all countries are down an equal amount (in this example 40%), while exports are down only 10%. The result, each country's exports makes up 75% of the trade balance (up from 50%).

Did all counties take market share? Impossible, yet this is the reason why it may appear that China took a ton of market share. The actual figures show that Chinese did take market share in what the U.S. imported, but it was much smaller (from a bit less than 20% to a bit more than 20% excluding oil imports). My thoughts is that was likely due to the decline in cheap goods imported from China being less than the decline for broader goods. It completely ignores the fact that imports from China are down 17%+ year over year.

So... is China squeezing out other exports to the U.S.? Yes, but not any more than they have been doing over the previous 20-30 years. They just import the cheap goods we are less likely to cut out of our lives, thus everyone is taking notice.