With the global recession making consumers and businesses more price-conscious, China is grabbing market share from its export competitors, solidifying a dominance in world trade that many economists say could last long after any economic recovery.
China’s exports this year have already vaulted it past Germany to become the world’s biggest exporter. Now, those market share gains are threatening to increase trade frictions with the US and Europe. The European Commission proposed on Tuesday to extend antidumping duties on Chinese, as well as Vietnamese, shoe imports.
China is winning a larger piece of a shrinking pie. Although world trade declined this year because of the recession, consumers are demanding lower-priced goods and Beijing, determined to keep its export machine humming, is finding a way to deliver.
The country’s factories are aggressively reducing prices — allowing China to gain ground in old markets and make inroads in new ones.
The most striking gains have come in the US, where China has displaced Canada this year as the largest supplier of imports.
In the first seven months of last year, just under 15 percent of US imports came from China. Over the same period this year, 19 percent did. Meanwhile, Canada’s share of US imports fell to 14.5 percent from nearly 17 percent.
Besides increasing its share of many US markets, China is increasing the value of exports in absolute terms in some categories. In knit apparel, for instance, US imports from China jumped 10 percent through July of this year — while US imports from Mexico, Honduras, Guatemala and El Salvador plunged 19 percent to 24 percent in each country, according to Global Trade Information Services.
A similar tale is told around the world, from Japan to Italy.
One reason is the ability of Chinese manufacturers to quickly slash prices by reducing wages and other costs in production zones that often rely on migrant workers.
Factory managers in China say US buyers are demanding they do just that.
“The buyers are getting more and more tough in bargaining for lower prices, especially American buyers,” says Liao Yuan (廖元), the head of international trade at the Changrun Garment Co, which is based in southern China and exports jeans to Europe and the US. “They offer US$2.85 per pair of jeans for a package of a dozen, when the reasonable price is US$7.”
Because China produces a diversified portfolio of low-priced and essential items, analysts say the country’s exports can hold up relatively well in a recession. Few other countries can match what has come to be called the “China Price.”
“China has a huge advantage,” says Nicholas Lardy, an economist at the Peterson Institute for International Economics in Washington. “They can adjust to market changes very rapidly. They have flexibility in their labor markets. And as consumers trade down the quality ladder, China can benefit.”
The expiration of textile quotas in large parts of the world this year has also allowed China to increase its market penetration.
But equally important are government policies that support China’s export sector — from Beijing keeping its currency weak against the dollar to its determination to subsidize exporters through tax credits and billions of dollars in low-interest loans from state-run banks.
The results have been impressive. All told, in the first half of this year, China exported US$521 billion worth of clothes, toys, electronics, grains and other commodities to the rest of the world.
FAVORABLE COMPARISON
Though that represented a 22 percent decrease from the first half of last year, it compares favorably with other major exporters. German exports, for example, have fallen 34 percent over the same period. Japanese exports were down 37 percent and US exports 24 percent, according to Global Trade Information Services.
Trading powerhouses like Germany are suffering from weaker demand for heavy equipment, automobiles and luxury goods. But the value of exports from oil-producing countries, like Russia and Saudi Arabia, has fallen even more.
One reason is that the price of oil has plummeted from last year’s record highs. But since oil is priced in dollars and the value of the dollar has fallen markedly, so have the value of US imports from these countries — more than 45 percent in the case of Russia’s exports to the world.
Meanwhile, US imports from Saudi Arabia have fallen 65 percent.
China’s market share gains are mostly at the expense of countries or regions like Japan, Italy, Canada, Mexico and Central America — in industries that China has long sought to dominate.
China’s share of furniture imports in the US has grown from 50 percent to 54 percent over the last year, while furniture exports to the US from Canada and Italy have plunged 40 percent from a year ago.
In Europe, Chinese textiles and apparel have gained market share in every major country, after the quota expiration in January.
Not long ago, Italy’s shoe imports were dominated by Romania; now China has a commanding share.
Japan once relied on electronics shipments to the US, but every year for the past decade Japan has lost market share to China. This year is no different. In 1999, electronics goods from Japan made up 18 percent of the US’ electronics imports. Today, that figure is down to 7 percent. China’s market share has climbed 10 percent to 20 percent from a year ago.
Together, the gains are helping China increase its immense trade surplus with the rest of the world, reviving worries about global trade imbalances — and once again putting the spotlight on China’s currency, the renminbi.
After letting its currency rise against the dollar, beginning in July 2005, China is once again pegging it closely to the dollar. As the dollar has fallen against other major currencies like the euro — about 15 percent since a year ago — Chinese imports have become more and more competitive.
Now, European officials are clamoring for China to reduce its flood of exports and even pressing for antidumping investigations.
APPRECIATE
The IMF is calling on China to rebalance its economy and allow its currency to appreciate against other major currencies.
The US — which for years complained about China’s weak currency and soaring trade imbalances — has largely been silent in recent months, analysts say, partly because Washington is trying to improve relations with Beijing at a time when it desperately needs China to purchase US debt.
“Obama’s interest is not to push China to appreciate the currency, but to get them to pay the bills,” Tao Dong (陶東), an economist at Credit Suisse says, referring to China’s purchases of US debt.
Beijing worries that raising the value of its currency could be catastrophic, damaging the huge export sector and diluting the effect of the government’s aggressive stimulus package.
But the country’s leaders are well aware of the need to shift the economy away from heavy dependence on exports and toward stronger domestic consumption.
China is eager to move up the value chain, by selling higher-priced goods like computer chips, aircraft and pharmaceuticals — all of which would bring better-paying jobs and healthier economic growth.
Moreover, many economists say that as Chinese consumers become richer, they will buy more of their own goods. And as the dollar falls, it will make US exports more competitive globally, including in China. Those trends together could eventually help rebalance global trade — which became overly reliant on Americans buying cheap Chinese goods and China buying US debt.
Right now, Beijing worries about growing trade frictions with its biggest trading partners, the EU and the US, and the possibility of some countries initiating protectionist measures.
Chinese exporters, meanwhile, fear that even as they gain market share the pressure to produce at low prices will hurt them and the quality of their products in the long run.
Liao at the Changrun factory says many producers are essentially scavenging to source raw material.
“Some even go to old factories to collect abandoned fabrics from old stock, so they can save two-thirds of the cost on raw material,” she says. “These fabrics are in very bad shape. They won’t wash, and easily wear out.”
But the discounting period may be here for a while with many economists forecasting a lengthy period of slow growth in Europe and the US.
“China is going to get stronger,” Tao says. “Its competitors are getting weaker in the downturn. And the Chinese state has helped bail out some industries, like the auto industry; so in the future some new industries may emerge as exporters.”
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