Following Up: Biden’s Belief that Cutting China Tariffs Can Cool Inflation is Doofier Than Ever

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Biden, Biden administration, China, consumer price index, core CPI, cost of living, CPI, Following Up, import prices, inflation, tariffs

More than a month has passed since RealityChek last looked at the question of whether the Biden administration is right in claiming that cutting or eliminating some of the current U.S. tariffs on imports from China can help cool torrid inflation Now some new data releases from the federal government it’s running make clear that this belief has never looked more fact-free.

Those releases – both bringing their stories up to May – are the new figures on U.S. inflation, and the latest statistics on the prices of imports. And they continue to show that, throughout the recent period of super-high inflation, the prices of products Americans have been buying from China have risen much more slowly than the inflation rate both for the set of goods most closely approximating the nature of the nation’s purchases from the People’s Republic (the core rate that excludes food and energy prices), and for the overall imports that most closely approximate those Chinese imports (non-fuel imports).

Here are yearly percentage price increase figures by month for all three of these figures between the month when the annual core CPI began speeding up notably and May.

                               core CPI        non-fuel goods imports      imports from China

Oct. 2021                   4.59                        5.5                                    4.38

Nov. 2021                  4.95                        6.3                                    4.48

Dec. 2021                  5.48                        6.4                                    4.76

Jan. 2022                   6.04                        6.9                                    4.84

Feb. 2022                  6.42                        7.2                                    4.83

March 2022              6.44                        7.5                                     5.01

April 2022                6.14                        7.2                                    4.89

May 2022                 6.01                        5.9                                     4.57

For good measure, here’s how much these three inflation rates have increased altogether since October, 2021:

core CPI:                        30.94 percent

non-oil goods imports:    7.27 percent

China imports:                 4.34 percent

In other words, for the last eight data months, the inflation rate for imports from China has risen by less than half the rate of that for comparable imports from the entire world, and more than seven times more slowly than the core CPI.

Truth to tell, as I’ve written (in the above linked and other posts), the idea that the China tariffs have fueled U.S. inflation at all was always nonsensical even by the degraded standards of the last few years. After all, they represented a one-time cost increase – so they can’t possibly explain why American prices have been rising uusually strongly for months. These one-time increases were imposed in phases between 2018 and 2019 – years before U.S. inflation hit multi-decade highs and began speeding up ever faster from there. And many of the Made in China goods that the Biden administration calls “non-strategic” and for which tariffs therefore are supposedly expendable were never were tariffed to begin with.

In addition, the idea that, given China’s recent behavior, any steps should be taken that would help the economy of the People’s Republic, and in exchange for exactly nothing, is just whacko — at best. 

For many months, most Americans have been telling pollsters they have grave doubts about President Biden’s fitness for office. (Here’s the latest example.) Imagine what they’d think of abilities if it was widely reported that he’s keen on a policy move based on ideas about China tariffs and inflation that are utterly detached from reality. 

 

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(What’s Left of) Our Economy: Why Cutting China Tariffs to Fight U.S. Inflation Looks More Bogus Than Ever

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Biden, China, consumer price index, CPI, currency, currency manipulation, Donald Trump, import prices, inflation, non-oil goods, Section 301, tariffs, yuan, {What's Left of) Our Economy

As RealityChek readers may have noted, I haven’t followed the U.S. government data on import prices for a while. That’s been because global trade has been so upended for the last two-plus years by the CCP Virus pandemic and the supply chain turmoil it’s fostered. Three big recent developments warrant returning to import price numbers, though.

First, President Biden has confirmed that he and his administration is seriously considering lowering tariffs on imports from China in order to help fight inflation. Second, since early March, China has dramatically driven down the value of its currency, the yuan. Since the yuan’s value is controlled by the Chinese government, rather than trading freely, Beijing has been giving its exports price advantages over all the competition (and in the U.S. and other foreign markets as well as in its own) for reasons having nothing to do with free trade or free markets. Third, new import price statistics just came out this morning.

And developments number two and three make clearer than ever that blaming the China tariffs for any of the torrid price increases afflicting American consumers or businesses is the worst kind of fakeonomics.

In a previous post, I explained why the scant actual tariffs imposed by former President Donald Trump on Chinese-made consumer goods and remaining on them, and the negligible portion of the Consumer Price Index (CPI) they represented, couldn’t possibly move the inflation needle notably.

Further, there’s the timing issue: The Trump tariffs imposed under Section 301 of U.S. trade law were slapped on in stages between March, 2018 and August, 2019. And by their nature, each of them could only generate a one-time price change. Yet consumer inflation in America didn’t take off until early 2021. Obviously, something(s) else was (were) responsible.

China’s currency moves, moreover, show that any Biden tariff-cutting will only add more artificial price edges to those Beijing is already creating for itself – thereby recreating some of the predatory Chinese pressure that competing U.S. employers and workers had long endured before the relief granted by Trump’s tariffs.

Since early March, the yuan has weakened by fully 7.75 percent versus the dollar. And with China’s leaders facing a substantial economic slowdown that could challenge the Communist Party’s political legitimacy, don’t expect Beijing to abandon quickly any practice that could prop up growth and employment.

Those new U.S. import price data reveal that the yuan’s depreciation hasn’t much affected China’s (government-made) competitiveness yet. But as indicated by the chart below, it soon will. As you can see, for years, the prices of Chinese imports entering the American market and the yuan’s value have risen and fallen pretty much in tandem.  

In addition, according to the new import price statistics, over the past year (April to April), import prices from China have risen much more slowly (4.6 percent) than the prices of the closest global proxy, total American non-fuel imports (7.2 percent). And the Trump tariffs should be singled out as a meaningful inflation engine?

Of course, these price trends could be cited to argue that these tariffs had no notable impact on U.S. competitiveness at all. But U.S. Census data show that, between the first quarter of 2018 (when the first Section 301 Trump tariffs were imposed), and the first quarter of this year, goods imports from China fell from 2.44 percent of the U.S. economy to 2.26 percent. (And this despite a big surge in American purchases of CCP Virus-fighting goods from the People’s Republic due to Washington’s long-time neglect of the nation’s health security and the secure supply chains it requires.) During this same period, total non-oil goods imports (the closest global proxy) increased as a share of the economy from 11.35 percent to 12.41 percent. So the Trump policies must have had some not-negligible effect.

The case for reducing the China tariffs is feeble enough even without these inflation points. After all, the Chinese economy is running into significant trouble due to its over-the-top Zero Covid policy, the deflation of its immense property bubble, and dictator Xi Jinping’s crackdown on the country’s tech sector. So the last thing on Washington’s mind should be throwing Beijing a tariff lifeline. Boosting China’s export revenue also means boosting the amount of resources available to the armed forces of this aggressive, hostile great power. And none of the tariff-cutting proposals is conditioned on any reciprocal concessions from China.

Citing bogus inflation arguments is the icing on this rancid cake, meaning the tariff-cutting proposal can’t be dropped fast enough.

(What’s Left of) Our Economy: The Case for Keeping it Simple with China Trade Just Got Stronger

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China, currency, currency manipulation, exchange rates, Great Recession, import prices, imports, Labor Department, Robert Lighthizer, Trump, U.S. Trade Representative, yuan, {What's Left of) Our Economy

I haven’t been closely following the Labor Department’s import price data lately, and that’s been an oversight. As is clear from this morning’s figures (for August), they keep telling a fascinating and important tale about China’s ongoing manipulation of its currency and how it does and doesn’t impact U.S. trade with the People’s Republic. More specifically, examining the data over time reinforces a strengthens a point I’ve posted on previously – that as important as this currency protectionism is, it’s far from the only predatory Chinese practice that’s been shafting domestic companies and workers exposed either directly or indirectly to Chinese competition.

Just as a refresher, unlike most other trading countries and regions, China prohibits the free buying and selling of its currency. For most of the previous decade, Beijing’s aim has been to keep the value of the yuan artificially low versus most other currencies and especially the U.S. dollar – in order to give its goods and services price advantages over foreign rivals in markets everywhere. As a result, China’s exports got a government-aided boost worldwide, and its domestic industry was able to undersell imports in its home market – all for reasons having nothing to do with free trade or free markets generally.

Since the latter part of that decade, and especially earlier during the current economic recovery, the story has been more complicated. The main reason: China was getting worried about wealthy Chinese concerned about political stability or the economy’s future spiriting too much of their wealth out of the country, for stashing in countries (like the United States) considered a lot safer. These capital outflows began depressing the yuan’s value much faster than Beijing wanted, and even threatened to cause a worldwide crisis of confidence in the currency – and the broader Chinese economy. So for much of this latter period, China has been trying to prop up the yuan’s value to some extent – even as its wary that an overly strong yuan would jeopardize the exports on which its growth still heavily relies.

Trade policy critics have rightly focused much and even most of their anti-China ire on currency manipulation, and that’s been understandable for two main reasons. First, this policy affects the relative prices of everything sold back and forth between the United States and China; and second, currency manipulation is one of the few protectionist practices that even some of the globalization-happy economics and business establishment (and the latter’s political hired guns), can be convinced to combat. (Much of the rest of this group, though, will simply grandstand against this form of protectionism.)

Nonetheless, the import price numbers, coupled with the oscillation in China’s currency priorities, the consequent roller-coaster ride of the yuan’s value versus the dollar, and the actual trade flows, show that the cost of Chinese goods and services aimed for the American market stems from many other causes.

The Labor Department’s import price data for China goes back to 2004, and it shows that, in the 13 years since, on an August-to-August basis, the prices of purchases from China Americans can make has fallen in eight years and risen in five. As for the yuan’s value, it’s strengthened versus the U.S. dollar in nine of those 13 years, and weakened in four.

What happens when the two indicators are paired? The numbers reveal that in five of the 13 years, the prices of imports from China in the American market have fallen while the yuan has strengthened – which isn’t supposed to happen if you believe in currency uber alles. In another year, the prices of those imports rose while the yuan weakened – another counterintuitive result. In seven of the thirteen years, in other words, currency values and import prices seem to have behaved as they should have, but in six (nearly half the time), they didn’t.

Also important : In three of the four years when both import prices and the yuan went up, the yuan’s rise was much greater, most often by a factor of two to one. And in two of the three years when both indicators fell, the change in the yuan again was much greater. So at the very least, even when the relationship is looking like economists tell us it should, it takes a lot of yuan movement to generate significant import price changes. Clearly, therefore, other factors must be at work.

In this vein, the yuan’s value and the changes it undergoes doesn’t seem to have an especially strong relationship with the amount of goods that American imports from China. Of course, they have some effect. After all, all else equal, if U.S. customers buy a certain quantity of items and services from China one year, and the same quantity the next, and the price of those goods and services falls (for whatever reason), the value of those purchases will go down. And naturally, the converse is true as well.

This point matters because purchasing patterns rarely respond to price changes right away, and the lag can mean that the impact of currency changes on import values can take some time to materialize – and often more than a year. But even taking this reality into account produces a fuzzy picture. For example, between August, 2004 and August, 2005, U.S. goods imports from China (which make up the vast majority of American purchases from China) jumped by more than 24 percent even though import prices fell (by 1.10 percent) and the yuan rose versus the dollar (by 2.13 percent). The next year, Americans bought 19.14 percent more products from China, despite their prices falling yet again (by nearly as much – 1.01 percent), and the yuan rising again (also by nearly as much – 1.80 percent).

Between August, 2007 and August, 2008, import prices rose by a very large 4.95 percent and the yuan strengthened by an even greater 9.55 percent. Yet U.S. goods imports from the People’s Republic increased by double digits again (11.96 percent). The following year, however, import prices plummeted (by 3.08 percent), and the yuan weakened by 0.70 percent. And did American imports surge again? Not even close. They nosedived by 18.93 percent.

Sharp-eyed RealityChek readers will realize why: The Great Recession was intensifying in 2008 and lingered well into 2009. So Americans’ consumption of just about everything fell off a cliff for a while. Between the following Augusts, neither the prices of imports from China nor the yuan’s value moved much, and America’s goods imports from China nonetheless soared by more than 37 percent.

Yet you don’t need these kinds of extreme economic events for import prices, import amounts, and yuan movements to confound expectations, lag or not. From August, 2011 to August, 2012, both the prices of Chinese imports and the value of the yuan were up (both by a bit) and American imports from China dipped by 0.25 percent. Even stranger, the American economy grew by a pretty decent 2.39 percent (in inflation-adjusted terms) during that period.

The following year, U.S. growth was down to 1.69 percent, prices of imports from China dropped (by a meaningful 1.24 percent), the yuan rose (by a much greater 3.61 percent), and American purchases from China jumped from a small dip to more than five percent growth.

The point here is not that China’s currency policies don’t matter, but that the prices of Chinese goods and services, and therefore America’s trade performance with the People’s Republic, are influenced by a wide array of factors. Some are legitimate – for instance, if China keeps selling Americans greater amounts of relatively pricey advanced goods (like industrial machinery and high tech products), and less in the way of cheaper, simpler products (like clothing and toys), as has been the case, the price of the average import from China is going to rise. But many reasons are much less legitimate (e.g., changing levels of subsidies like value-added tax rates), and these can be so numerous, so fungible, and therefore so difficult to document that trying to isolate them and attack them piecemeal is a fool’s quest.

Far better is to decouple American tariff policy completely from specific items of evidence of individual predatory trade practices and impose these levies proactively, until they produce the desired effects on bilateral trade flows. In fact, the case for such a sweeping approach was made just yesterday, and is worth quoting at length:

“[T]here is one challenge on the current [trade] scene. It is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer and to distort markets, in China and throughout the world, is a threat to the world trading system that is unprecedented.”

This speaker also argued that “The years of talking about these problems has not worked, and we must use all instruments we have to make it expensive to engage in non-economic behavior.”

His name is Robert Lighthizer, he’s President Trump’s chief trade negotiator, and the devilishly complex relationships between currency values, import prices, and trade flows just add to the case for the administration to start following this advice pronto.

(What’s Left of) Our Economy: China Import Price Puzzles

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China, competitiveness, currency, currency manipulation, dollar, import prices, imports, Little Murders, manufacturing, multinational companies, productivity, subsidies, technology transfer, Trade, value-added taxes, VAT, yuan, {What's Left of) Our Economy

One of my favorite literary passages of all times comes from “Little Murders.” If you’ve never seen the stage or film version, I strongly recommend both, and for me, the high point of this late-1960s Jules Feiffer 1967 black comedy about life in a rapidly deteriorating New York City comes when Detective Miles Practice exasperatedly describes his frustration at solving a massive ongoing wave of violent crime.

The 345 unsolved homicides he and his colleagues are investigating have three characteristics in common, Practice explains. “A – that they have nothing in common; B – that they have no motive; C – that, consequently, they remain unsolved.”

I’ve felt a little like Detective Practice today as I’ve tried to dig deeper than usual into this morning’s new Labor Department data on the prices of imports bought by Americans in April. And it’s not just that the figures seem to undercut an argument I’ve made consistently during the ongoing debate over U.S.-China trade policy. It’s that the differences among various industries defy anything close to easy explanation.

As many of you surely know, since early in the previous decades, Chinese government policies that determine the value of its currency, the yuan, versus that of the U.S. dollar have been major bones of contention between the two countries. Essentially, many Americans have accused Beijing of keeping the yuan artificially weak, which gives Chinese-made goods unwarranted price advantages over their U.S.-made counterparts in markets all over the world. And if Made in China goods are outselling Made in America goods for reasons having nothing to do with market forces, then American production and jobs will be penalized for reasons having nothing to do with free markets, or free trade, either.

Because this issue has loomed so large for so long, I’ve been following the import prices figure closely in order to see how the yuan’s changing value has affected the actual price of Chinese-made products in the American market. And what I’ve found indicates that, although currency values matter a lot, these prices doubtless change for a variety of other reasons, too – including other forms of Chinese government interference with trade, but not limited to such protectionism.

For example, if the Chinese are making growing quantities of relatively advanced manufactured goods and selling them to Americans, and de-emphasizing less advanced goods, then the effects of Beijing’s currency policies could be (at least partly) masked by the higher prices these more sophisticated products presumably command. And in fact, I’ve shown that precisely this shift in Chinese manufacturing and exporting has been taking place, and argued that, as a result, precisely this masking effect is influencing the prices of Chinese imports. To me, it’s strong evidence that China’s yuan is still too cheap – even though for reasons we needn’t delve into now, China is now trying to prop up the yuan’s value.

Now, however, I’m not so sure. Because the detailed, product-by-product figures kept and reported by the Labor Department show that in many cases, prices of advanced manufactured products sold by China to Americans are falling faster than the prices of less advanced goods. Moreover, the prices of many Chinese products in the U.S. market are falling more slowly than those of comparable imports from other countries – which supports the idea that Beijing’s new currency stance is harming Chinese products’ price competitiveness.

Some caveats need to be made at this point. First, the number of manufacturing industries in which direct comparisons can be made between the prices of Chinese and other imports is relatively small – because the Labor Department issues detailed data for many more U.S. imports overall than for U.S imports from China. Second, some of the missing China data concerns industries where Beijing has encouraged massive overcapacity – notably steel – and clearly helped create significant (and worrisome) deflation.

All the same, most of the statistics I’ve found are real head-scratchers. For example, since the business press has been filled in recent years with articles on strongly rising Chinese wages, it’s not entirely surprising to see that the cost of imports of Chinese garments – a labor-intensive industry – have actually increased a bit since 2012 (the earliest China-specific figures available), whereas overall garment import prices are down.

But why have the prices of Chinese-made clothing been so much stronger, and less internationally competitive, than the prices of Chinese made machinery – an admittedly broad category but one in which the output is very capital-intensive, complex, and (I thought) relatively expensive? (Think boxer shorts versus machine tools.) In fact, on the whole, the more technologically advanced a Chinese product is, the faster its price is falling and the more price competitive it is with foreign rivals.

Rapidly rising productivity could easily explain this trend for Chinese information technology products like computers and semiconductors and communications equipment. But if that’s the case, then why do goods that are less advanced but hardly primitive – like fabricated metal products and household appliances – display the opposite characteristics? This is a special puzzle given that fabricated metal products contain so much steel – which has been so rock-bottom cheap in China for so long. And why are China’s chemical products (another broad category) able to cut prices so impressively and gain on their competition in the U.S. market, but not plastics products – which are a major category within chemicals?

Some tentative conclusions and possibilities:

First, these figures are a valuable reminder that even manufacturing industries that seem closely related can have enough differences to produce widely varying results

Second, some of this variation in Chinese manufactures could reflect their positions on the government’s priorities scale. In principle, the products that perform best price-wise could be the beneficiaries of the biggest government subsidies (including value-added tax rates, which are extremely granular) and research budgets. They could also be the sectors where Beijing exerts the greatest pressure on foreign investors to transfer their best technology.

Third, since much foreign tech transfer in China is still voluntary, the price gap illustrated above also could stem at least partly from different tech transfer approaches taken by multinational companies from different countries. For example, it’s widely believed that American companies that operate in China – and which are especially active in information technology – share their know-how with Chinese partners much more freely than do firms from Japan and Germany.

Even so, however, these import price figures raise many more questions than they answer, and they seem to be telling us that all of us need to be paying a lot more attention to them.

(What’s Left of) Our Economy: Why America’s Trade Problems with China are Much Bigger than the Yuan

Tags

broad dollar index, China, currency, currency float, currency manipulation, currency peg, devaluation, dollar, exchange rates, import prices, manufacturing, prices, Trade, yuan, {What's Left of) Our Economy

So much has been written about China’s devaluation of its currency last week that it’s hard to believe that all the major angles haven’t been covered. In fact, they’ve been generally neglected, and none more so than what matters most to the U.S. economy – how the yuan’s government-controlled movement affects the prices, and therefore the competitiveness, of Chinese imports that compete with American counterparts in the American market.

The big takeaway is that although of course China’s policy of artificially manipulating the yuan’s value versus the U.S. dollar has a lot to do with whether American customers buy Chinese- or U.S.-made goods – with big effects on American growth and employment levels – currency movements are far from the only determinant. As a result, U.S. policymakers need to keep in mind all the other measures China uses to gain trade advantages for reasons having nothing to do with free trade or free markets.

Let’s start to show why by looking at where the yuan stood on July, 2005. That month, a dollar bought about 8.28 yuan, an exchange rate that had stayed constant since the fall of 1998, thanks to Beijing’s determination to peg its currency to the dollar even though economic conditions signaled the yuan should have been getting much stronger. But on July 21, China began letting the yuan float versus the dollar to a limited extent – that is, allowing market forces to play a limited role in setting the exchange rate.

This tightly circumscribed “float” continued through July, 2008, when the weakening global economy persuaded China to reestablish the peg. During those three years, the yuan strengthened versus the dollar by more than 16 percent – which should have provided a major competitive boost for American goods and services competing against Chinese imports (as well as against Chinese rivals in China’s own market).

But U.S. Labor Department data on import prices shows that those from China rose by only 5.18 percent during that period. Clearly, something else was influencing Chinese cost levels – notably a wide range of state-provided subsidies. But largely because Washington ignored all these Chinese government props, those three years were a time of huge American manufacturing trade deficits with China, which translated into major production loss and even worse job destruction.

More evidence that Chinese price levels were huge outliers: During this period, the dollar weakened by 14.94 percent versus a statistical basket consisting of most other foreign currencies (the Federal Reserve’s “Broad” index). That’s slightly less than it weakened versus the yuan. Yet the prices of U.S manufacturing imports overall (a good point of comparison since manufactures dominate what America buys from China), rose by 15.90 percent – more than three times faster than the prices of China’s imports.

These divergent relationships have persisted through the various ups and downs experienced by the dollar, the yuan, and other foreign currencies since then. To some extent, that’s not terribly surprising, given all the other factors that affect the prices of traded goods, and given that prices never change in lockstep with exchange rates. But what is surprising – and disturbing – is how consistent China’s outlier behavior has remained over the decade since that first July, 2005 loosening.

During this period, until the Chinese devalued on August 11, the yuan became 25.10 percent stronger versus the dollar, while the dollar became 4.46 percent stronger than that Broad index of foreign currencies. Yet import prices from China rose by less than half the amount that overall U.S. manufacturing import prices (4.26 percent versus 11.50 percent). And not surprisingly, despite widespread claims that China is steadily losing competitiveness versus rivals both from the United States and from other developing countries, China’s merchandise trade surplus with the United States is still rising strongly – though its latest 9.80 percent year-to-date increase through June lags the growth of the world’s manufacturing trade surplus with America (15.85 percent).

Asking Washington to focus on that full range of artificial Chinese competitiveness supports seems pretty unrealistic given the bipartisan, decade-long failure to do anything about currency manipulation. Unfortunately, that’s also largely why a return to full health for the U.S. economy, fueled by investment and production rather than borrowing and spending, seems pretty unrealistic, too.

(What’s Left of) Our Economy: Import Prices Teach a Big Lesson About TPP

Tags

Abenomics, China, currency manipulation, exchange rates, import prices, Japan, Trade, Trans-Pacific Partnership, yen, yuan, {What's Left of) Our Economy

Since currency manipulation looms so large in Congress’ likely upcoming debate on President Obama’s new trade deals, the release earlier this week of government data on import prices for full-year 2014 couldn’t be better timed. They’re especially informative regarding the President’s planned Pacific Rim agreement, the Trans-Pacific Partnership (TPP), because Japan and other prospective members have been major currency manipulators. And if the agreement is completed and ratified, the inclusion of China – a master manipulator – can’t be far off.

The import price data reveal how much goods made abroad are sold for in the U.S. market. Because currency manipulation policies affect the prices of all the manipulator economy’s products, and because the issue has attracted so much attention in Washington, you’d think that there would be a strong relationship between manipulated exchange rates and these import prices. But in recent years, that relationship has sometimes been elusive.

Japan illustrates the problem. From 2011 to 2012, (using the end of the year as the baselines), the yen depreciated by a modest 1.25 percent versus the U.S. dollar. That year, the prices of Made in Japan manufactured goods (virtually Japan’s only exports to the United States) in the American market actually rose by 0.59 percent. By comparison, the overall prices of U.S. manufactures imports dropped by 0.51 percent.

Early the following year, new Japanese Prime Minister, Shinzo Abe, set economic policy on an explicit weak-yen course. Japan’s currency that year fell by 21.48 percent against the dollar, and prices of U.S. imports from Japan in 2013 fell by 3.40 percent. That was a much steeper drop than that experienced by the prices of all U.S. manufactures imports (1.36 percent). The continuation of “Abenomics’” weak-yen policy drove the currency down another 13.87 percent against the dollar in 2014. Yet import prices declined by much less – only 1.41 percent. This decrease was virtually the same as the decline in the prices of all America’s manufactures imports (1.38 percent).

Keep in mind that the explanation here can’t be the so-called J-curve effect. That notion holds – pretty persuasively – that when a currency weakens, an early effect is to increase that country’s trade deficit. The main reason: Consumption patterns don’t change overnight, and the weak-currency economy initially keeps buying foreign goods even though they’ve become more expensive. But we’re not talking about trade flows here – just the prices of imports.

The relationship between import prices and exchange rates is even harder to discern for China. Between 2011 and 2012, the prices of China’s (manufacturing-dominated) imports in the American market fell by 0.57 percent. That was slightly more than the 0.51 percent decline in the price of all foreign manufactures bought by Americans. But the yuan strengthened versus the dollar by 1.01 percent that year.

Between 2012 and 2013, the yuan rose against the dollar by much more: 2.83 percent. Yet the prices of Chinese manufactures sold in America fell faster: by 0.67 percent. At the same time, overall U.S. manufactures import prices, however, did drop by about twice as much as Chinese prices – 1.36 percent.

Last year, the yuan resumed weakening against the dollar: by 2.49 percent. Yet the prices of China’s imports slipped a mere 0.10 percent – much less than the 1.38 percent price drop for all U.S. manufactures imports.

It’s always vital to remember, though, that exchange rates aren’t the only determinants of import prices. The different growth rates – and demand levels – of economies matter crucially as well. So, as a result, do government policies that affect these demand levels – like tax rates and incentives and fiscal and monetary policy that’s not aimed at exchange rates.

Changes in the make up of trade flows mustn’t be overlooked, either; countries can move into more expensive manufacturing sectors from less expensive ones, and are constantly trying to do so. Various types of government industrial subsidies and incentives are major influences on prices, too, whether they’re legal according to trade agreements or not (as I noted in this recent post).

It’s also important to remember, as I’ve noted previously, that the movement of one currency versus another over a certain time frame has little to do per se with whether that moving currency is becoming more or less fairly value. Currencies like the yen and yuan can be undervalued even after periods of strengthening if Japanese and Chinese economic fundamentals are strengthening even faster, and especially if their governments keep actively buying and selling dollars in foreign exchange markets – which significantly affects the prices of those currencies versus the dollar. And it’s even more important to remember that China’s government barely permits any trading in the yuan.

So even though import prices by no means move in lock step with currency values, there can be no doubt that exchange rates and their movements are big parts of the price picture. Moreover, manipulation affects these prices for reasons having nothing to do with free markets of free trade.

As a result, a Trans-Pacific Partnership agreement without strong, enforceable measures against currency manipulation would, as critics warn, be a major blow to U.S. economic interests. But because of all the other ways in which governments can change the prices and competitiveness of traded goods – and rig trade flows to their advantage – it will take much more to make the TPP into a winner for America.

(What’s Left of) Our Economy: A Whiff of Deflation in Import and Export Prices

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deflation, export prices, import prices, Trade, {What's Left of) Our Economy

Just time for a quick one today, but yesterday’s Labor Department release on U.S. export and import prices in October revealed a minor, not-so-encouraging milestone: On a monthly basis, both of these prices declined for the third straight month for the first time since April, May, and June of 2013. For anyone worried about the U.S. and/or world economies falling into deflation, and all the economic harm that persistently decreasing prices can do, this stretch of weak import and export prices spells trouble.  For it indicates that the demand for goods and services all over the world is seriously waning.

Moreover, signs of deflation in U.S. trade flows didn’t just start in August. U.S. import prices have been falling month-to-month since July, and have dropped for five of the last seven months. U.S. export prices have been down month-to-month for five of the last seven months, too.

Measured year-on-year, these price trends are scarcely more encouraging. For example, in October, 2013, import and export prices started a five-month period in which they both fell over the preceding twelve months. But prices began strengthening in both flows in the spring – until August, when import prices began sliding again. Export prices followed suit in September, and now both are down year on year for the past two months, with the October yearly drops exceeding the September yearly drops.

One source of (slight) consolation: The import and export price situations are both looking better than when the financial crisis was peaking, in 2008. That year, both sets of prices saw month-to-month drops for five straight months – and the declines were much bigger, especially on the import side. At the same time, that was a period when the world economy was teetering on the edge of historic meltdown.

Interestingly, as overall U.S. import prices were decreasing in October, prices of Chinese and Japanese goods rose slightly last month over their September levels. Don’t expect that trend to continue for Japan – October 31 was the day when the Bank of Japan announced a massive monetary easing program, which has since driven the yen down to multi-year lows against the dollar.

(What’s Left of) Our Economy: Don’t Play Taps for China Just Yet

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China, competitiveness, import prices, labor costs, manufacturing, Trade, trade deficit, trade surplus, {What's Left of) Our Economy

It’s getting to be a familiar pattern: Western analysts add to the mountain of predictions that China is cruising toward a major economic bruising. And data from China at the least sends a dramatically different message.

The China bear meme of the moment has been generated by two Asia-based Merrill Lynch analysts, who argue that the People’s Republic “may be entering an asset-deflation phase” and therefore is in danger of falling into the deflationary trap from which post-bubble Japan has been struggling to escape for two decades. No less than BusinessWeek and TIME have picked up the study.

These claims come on the heels of years’ worth of proclamations that China is rapidly losing its manufacturing competitiveness, largely because its labor costs are rising so fast.

All of this may be true. Certainly, China has its share of big economic problems – and consequently big political, environmental, and social problems, too. But talk about bad timing! The Merrill Lynch report was written up just before the release of new data from Beijing showing that, in August, China’s monthly trade surplus hit its second new record high in a row.

The $49.8 billion excess of imports over exports brought the PRC’s year-to-date surplus to $199.61 – 28.24 percent higher than last year’s comparable total. And although there’s ample reason to be skeptical of all Chinese economic data, China’s July surplus of $47.3 billion tracks well with Census Bureau statistics showing that China ran a record $30.08 billion trade surplus with the United States that month. (The August U.S. figures will be out Oct. 3.)

The second piece of evidence undercutting “whither China” speculation was released today, in the form of U.S. figures on import prices. These Labor Department statistics showed that between July and August, Chinese goods (overwhelmingly manufactures) bought by Americans got cheaper faster (falling in price by 0.1 percent) than all manufactures imports (down 0.09 percent). And year on year, prices of Chinese imports have been rising at only about half the rate (0.19 percent) than manufacturing import prices overall (0.35 percent).

Years of recent official and policy establishment bullishness about the U.S. economy haven’t prevented the current recovery from remaining historically lousy. Don’t count on similar bearishness about China to have significantly greater effects.

(What’s Left of) Our Economy: Chinese Industry is Still Plenty Price Competitive

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China, competitiveness, import prices, manufacturing, manufacturing renaissance, Obama, {What's Left of) Our Economy

Another month’s worth of import (and export) price data came out from the Labor Department today (Labor oddly produces all the government’s price-related data), and these July figures once again show that claims of China pricing itself out of U.S. and global manufacturing markets are just more fakeonomics.

The relevant comparisons here are between import prices from China, and import prices for manufactures generally. (U.S. imports from China are dominated by industrial goods. Unfortunately, although the Bureau of Labor Statistics publishes import price data for detailed categories of Chinese manufactures, it doesn’t provide an industry-wide figure for the country.)

According to the new report, prices of Chinese goods sold in America in July fell by 0.19 percent from their June levels. The month-to-month change for all manufactures? They rose by 0.09 percent.

China is underselling manufactures in general on a year-on-year basis, too. Since last July, prices of Chinese products sold in America have risen by 0.29 percent. Prices for manufactures imports overall are up 0.52 percent.

You need to look back considerably longer for a period during which Chinese price competitiveness has weakened. July, 2011 is one reasonable baseline month. Prices of Chinese imports have not risen on net since then – and in fact have inched down by 0.09 percent. Prices of all manufactures imports have fallen by 1.19 percent over the last three years.

At the same time, it’s critical to point out that, like other economic data, import prices and what they say about competitiveness can’t validly be seen in a vacuum. Chinese prices, for example, can be and surely have been influenced strongly by China’s steady shift from lower to higher-value manufactures, which tend to cost more. These products have certainly made striking inroads into the U.S. market, as shown by my import penetration studies.

The bottom line: Combine the import price data with U.S. and Chinese data showing continually improving Chinese trade performance, and you have ever more evidence that, contrary to the claims of U.S. manufacturing cheerleaders like President Obama, manufacturers in the PRC (including those owned by or affiliated with U.S. and other foreign multinational companies) keep getting more, not less competitive versus their rivals in America.

(What’s Left of) Our Economy: June Import Price Data Show no Inflation Effect but Lots of Currency Manipulation

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China, currency manipulation, import prices, inflation, Japan, Trade, Trans-Pacific Partnership, {What's Left of) Our Economy

This morning the Labor Department released its data for import prices in June. The two big takeaways: First, if the U.S. economy does face the threat of gathering inflation, don’t blame import prices. Second, currency manipulation by East Asian countries continues distorting U.S trade flows with the region even though President Obama refuses to deal with the problem in a Trans-Pacific Partnership trade deal that currently includes Japan and likely will bring in China.

Here’s a handy-dandy summary. (Much of the data below, BTW, comes not from the release but from Labor Department statistics tables that contain the monthly numbers going back many years.)

According to the Labor Department, overall import prices advanced by 1.90 percent in the first half of this year, which have produced a 1.20 percent increase on a June-on-June basis. The Department also ominously warned that this year-on-year price rise was the fastest since the March, 2011 to March, 2012 period.

But it’s hard to justify inflation worries when you see what that 2011-2012 increase was: 3.50 percent! So if you use that as your baseline, price pressures from imports have been weakening, not strengthening.

The new Labor figures also show that the prices of U.S. imports from Japan, which are dominated by manufactures, were flat over the May figures, and fell 1.59 percent on a year-on-year basis. The comparable numbers for all U.S. manufactures imports were a decrease of 0.17 percent from May to June, and a rise of 0.17 percent over last June’s levels.

Adding to the evidence of currency manipulation’s impact — since Japan’s program of dramatic monetary easing and yen weakening began in January, 2013, the prices of America’s imports from Japan have decreased by 3.70 percent. Prices of all U.S. manufactures imports have dipped by only 0.66 percent during this period.

Prices of America’s manufactures-dominated imports from China in June also showed no change from the May figures – as opposed to the 0.17 percent drop in all manufactures imports. Similarly, prices of imports from China are now up 0.39 percent year-on-year – more than the 0.17 increase for all manufactures imports.

At the same time, import prices from China have not risen on net since August, 2011. During this period, prices of all U.S. manufactures imports are down, but only by a total of 0.41%.

Perhaps more revealing, since July, 2005, China initially announced an end to its policy of pegging its currency’s value to that of the U.S. dollar, the prices of its imports in the U.S. market have risen by 5.69 percent. But the prices of all U.S. manufactures imports are up by 16.40 percent – nearly three times faster.

Further, the more recent China lag unmistakably stems in part from the inclusion of rapidly falling Japanese prices in the overall totals. Trends in the prices of Chinese imports, along the soaring wages and other production costs supposedly fueling them, also partly reflect the ongoing shift in the make-up of China’s exports from lower-priced labor-intensive products to more expensive, more productive, high-value manufactures.

Indeed, the growing sophistication of China’s manufacturing exports even appears to have more than offset the effects on import prices of the yuan weakening seen since the beginning of this year. From January through June, the yuan has fallen by 2.53 percent versus the U.S. dollar. But during this period, prices of Chinese imports have risen by 0.39 percent.

In all, however, the import prices data strongly refute widespread claims by President Obama and others that China is rapidly becoming priced out of U.S. and global manufacturing markets, and are helping to create a renaissance in U.S. domestic manufacturing. China’s continuing manufacturing prowess is also repeatedly confirmed by its continually rising manufacturing trade surpluses with the United States.