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.
