Reports of the Demise of Chinese Exports Are Greatly Exaggerated
Many a headline has highlighted how rising costs in China are putting pressure on profit margins and reducing the competitiveness of the country’s huge labour-intensive, export-oriented manufacturing industry - prompting multinational companies to start shifting production to other countries in Asia.
However, a closer look at trade data shows that China’s overall exports are still gaining market share. In 2011, Chinese exports grew by around 20 per cent in US dollar terms and 10 per cent in real terms, compared to an increase in real global imports of around 7 per cent.
What is going on?
It is hard to get a good aggregate estimate of the transfer of production, but there is concrete evidence that major companies - including Nike, Coach, and Topform (a major supplier to Walmart) - have moved some of their production of garments and sneakers to Vietnam, other Southeast Asian countries or the Indian subcontinent. Indeed, Nike now makes less than half of its sports shoes in China. The key reason cited for these shifts is that, with labour costs in China rising rapidly on top of the strengthening RMB, , hourly wages are now substantially lower in several other Asian countries.
These high-profile cases, however, are not really representative, and it would be a mistake to conclude that they herald the demise of China’s export success. The shift out of China is basically only happening in the production of simple garments and sneakers.
Simple garments and sneakers are among the most low-value added, labour-intensive sectors, with relatively little need for equipment, infrastructure, supply networks and skills. As China is moving up the value chain, these least attractive and quite mobile sectors are the most obvious ones to go. Indeed, the manufacturing powerhouse of Guangdong province has at times actively promoted the transfer away of “low value-added and polluting” industries. An additional motive for companies in these two sectors is the fact that China’s dominance of global textile exports has exposed them to the risk of trade protectionism against products made in China.
However, textile, garments and sneakers make up only about 15 per cent of China’s total exports. In the other export sectors where equipment, infrastructure, supply networks and skills matter more, there has been little or no transfer of production to other countries. This is true also for “brown” shoes (other than sneakers), which require more production machinery. Meanwhile, in sectors such as electronics, there is a shift of production within China from its traditional export-oriented manufacturing hubs along the coast to inland regions.
Even within China’s textile and garments sector, a move up the value chain is taking place. The country’s total textile exports went up more than 20 per cent in US dollar terms in 2011. Even after accounting for reported double-digit price increases, this implies higher volumes of exports.
The main reason why the amount of manufacturing production that has left China has been very small is because the wage cost pressures have largely been offset. Gains in efficiency and labour productivity have been rapid. This has meant that, after their impressive fall between 1995 and 2004, increases in unit labour costs (wage costs per unit of product) have been modest and gradual in recent years.
Figure below shows profit margins in industry holding up as unit labour costs remain contained.
Meanwhile, what is sometimes forgotten is that wages have also risen quite a bit in countries mentioned as alternatives to China, such as Vietnam and Bangladesh. This is even more so with the higher raw material prices, which are by nature a global phenomenon. Moreover, China’s advantages in infrastructure, clusters of suppliers, and deep labour markets are hard to overlook.
Taking into account all these data, what would be a more accurate description of what is going on than the headlines suggest?
Wage and raw material costs have risen in China. At the same time, continued rapid productivity gains have largely offset the impact on wage costs per unit of product, while raw material prices have risen everywhere. Factoring in the appreciation of the RMB, China’s export prices have risen in US dollar terms in recent years. Data on US import prices are considered to be good because they are adjusted for quality adjustments. And they show that in January 2012, prices of US imports from China were 5 per cent higher than two years ago.
But wage and raw material costs have risen in competitor countries as well, raising their export prices, especially in other emerging markets. In January, prices of US imports of manufactured goods from developed countries and emerging markets were up 3.7 per cent and 7 per cent, respectively. Thus, China’s export-oriented manufacturers have basically maintained price competitiveness in foreign markets, especially compared to other emerging markets.
What is more, despite the cries of pain of export firms and industry organisations, China’s manufacturers have, overall, maintained their profit margins. As shown in the figure, on - average, profits as a share of gross output in industry dipped in 2011 after peaking in 2010. But profit margins still compare favourably to the historical experience, suggesting, overall, that exporters have not had to sacrifice margins excessively to maintain price competitiveness. Thus, it is not that surprising that China’s exports are holding up very well in global markets.