The Intricacies of China Unseating Germany As the World’s Biggest Exporter

The Intricacies of China Unseating Germany As the World’s Biggest Exporter

In the first segment of this article, the author deliberated on the episode surrounding the call for revaluation of the currency of China to forestall the growing trade imbalance between China and the rest of the world. In that segment, the author attributed the demand for its export as not only due to its low valued currency but also to other factors such as government subsidies for firms and investors, expansion in its trade horizon internationally and piracy problems. It was deduced that piracy was taking market share from the western world and also reducing the required imports for China. In this segment of the article, the author would like first to consider some pertinent issues surrounding the trade imbalance between China and the rest of the world especially the western world. Second, whether the growing trade imbalance poses a threat in terms of monopoly. Third, whether the world has options to deal with the situation.

From the perspective of exports and imports Germany News  composition, the following are some trade statistics estimates for China;

Exports – $ 1.435 trillion (2008 estimates)
Main Export partners (2008 estimates) – U.S 18.6%, Hong Kong 12.7%, Japan 8.2%, South Korea 5.1% and Germany 4.2%

Imports – $1, 074 trillion (2008 estimates)
Main Import partners (2008 estimates) – Japan 12.2%, South Korea 10%, U.S 6.6%, Hong Kong 4.9% and Germany 4.5%

According to the Center for Trade Intelligence report in 2007, China generally exports low tech goods which include but not limited to computers, printers (storage units generally), cell phones, video recorders, television, electronic integrated circuits, puzzles, toys, telephones, handbags, wallets, non-knit women and girls suits, leather footwear among others. Its topmost exports are computers, printers, storage units, office machine parts, cell phones, video recorders and radio transceivers. The topmost imports includes but not limited to electronic integrated circuits, computer and office machine parts, television radio and accessory parts and crude oil. Also, based on the report, China had much trade surplus with countries like Hong Kong, United States, Netherlands, United Kingdom and Spain in descending order of surplus magnitude whilst it had trade deficits with countries like Angola, Saudi Arabia, Philippines, Japan and South Korea in ascending of deficit magnitude. These statistics do suggest that China tends to have surpluses with the western world and on the hand deficits with developing world. Perhaps, the net is the surplus since the surplus with the western world is huge compared to the deficit with the developing and under-developed world. Ultimately, it is right to say that the trade imbalance with the world is the result of high balance of trade surplus with most countries including United States and United Kingdom. From the structure of its exports, it presupposes that China would need much technological innovation to keep up with its exports. Hence, the country cannot do without high tech machinery and other industrial inputs from the western world.

In fact, resilience and low-tech manufacturing alone cannot support its exports. An economic analysis suggest that in the long term the trade imbalance should not pose a threat only if the country’s surplus in totality is expected to dwindle which is currently becoming evident. This is because recent reports have it that China’s total trade surplus has shrunk to $196.07 billion down 34.2%. As an analyst the decrease is not shocking considering the global slump in demand. Also, it can be inferred that if the global slump continues and domestic demand in China continues to increase, then imports by China would also increase. Increased import is possible because of the country’s large population. Next, the increased imports would factor into the exports bringing down the surplus. In the longer term this would reduce drastically the surplus and pave the way for fair competition between China and the world. It must be emphasized that the dwindling in surplus should come predominantly from an expected increase in its imports as against its exports. Nevertheless, the resilience of the Chinese manufacturer to keep exporting may prove this analysis wrong. Eventually, these developments do not suggest a monopoly of the market by China and so there is no need for paranoid expectations.

Now, there is another salient reason why China is enjoying export superiority and that has got to with price elasticity of products in the current global recession. In the current slump of global demand, two things are imminent: the market has become competitive and goods are likely to be price elastic which makes it difficult to make profit. Under such prevailing conditions, any attempt to raise price could lead to a loss. Contrarily, lowering price can lead to increased sales and possibly profit. Apparently, the ability of China to present low priced products promotes its sales, exports ensuring more revenue and profitability. Again, China seems to be successful in this era because of its ability to take advantage of the price elasticity of goods in the current global slump in demand to make more sales and consequently profit. It also suggest the country’s industrial and manufacturing sector is exhibiting economies of scale in the production of its goods and this is also a plus for its exports.

The whole story of the trade imbalance does not depend solely on the aforementioned factors but it is indirectly enhanced by the country’s growing capital investment predominantly its direct foreign investments and portfolio investments. These two components of capital investment are serving as a backbone for its increasing export as they are consumer confidence boosters for the Chinese economy. The increased direct foreign investments and portfolio investments by China in other economies coupled with the huge accumulation of foreign exchange rate reserves is creating consumer confidence internationally in China’s capability and its products even though there are cases of a down side to the quality of its products and also its investments. Additionally, the country’s huge foreign reserves can be used to intervene in the foreign exchange market to influence its currency the yuan. Such action plan China may not do unless under severe pressure to strengthen or weaken its currency. Until then market forces will determine the yuan rate as it is allowed to float. Interestingly, for those economies with strong currencies as against China, opportunity is however available as well through the attraction of Direct Foreign investment and portfolio investments. On the downside products from such countries are expensive and unattractive but on the upside if their economy offers favorable low tax rates on earnings, have high interest rate and a stable exchange rate, they qualify as feasible candidates for Direct Foreign investment and Portfolio investment.

Now, I would not like to end this article without talking about the impact of inflation on China’s goods pricing in the midst of the country’s stunning GDP growth. China’s inflation rate is comparatively high. Consumer Price Index (CPI) measures inflation and according reports, this value climbed 1.9% in December 2009 year-on-year. However, the low-value of its currency coupled with government subsidies overrides the potency of inflation. On the other hand, this is not sustainable as inflation can be a problem considering the increasing domestic demand in China. The increasing demand due to the large population coupled with a droop in supply of goods (imports) could trigger an increased inflation (demand-pulled). Additionally, increased demand for raw materials by its industrial and manufacturing sectors as against a fall in global supply of raw materials can augment inflation (cost-pushed) in China and globally. This suggests that it is not the CPI statistic alone that will be affected by these developments but also the Producer Price Index (PPI) statistic which should be a bother to producers in China. These developments may also prompt increased interest rate by the Chinese government to curb inflation.

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