China gains as world trade slows

Exports Oct09.jpgSometimes a picture is worth 1000 words. The chart above, from the New York Times, highlights the massive changes that are taking place in world trade flows. These are of critical importance to the chemical industry, one of the world’s most globalised businesses.

• Firstly, the volume of world trade has fallen to 2006 levels, with the World Bank forecasting 2009 will see “the largest decline in 80 years“.
• Secondly, China (red line) has now become the world’s largest exporter, overtaking Germany during H1 2009.

The rationale for China’s success is its ability to offer low prices. It can supply jeans for just $2.85, thus allowing its textile exports to soar as quotas were removed earlier this year. And the government has pulled out all the stops to support exports, by:

(a) keeping the currency’s value fixed and low
(b) providing $1trn of low-cost loans and
(c) providing export tax rebates (worth $39bn in January-August).

Two conclusions follow from China’s success:

• Contrary to European hopes earlier in the year, it seems that export success in the ‘new normal’ will be based on price, and not necessarily on the ability to produce high quality, more expensive items.
• Trade frictions will increase with the West as a result. Governments are unlikely to sit back and watch jobs disappear. Anti-dumping measures will increase, as will pressure for the currency to appreciate.

And whilst financial markets worry about the return of inflation, China’s success suggests deflation is the more serious near-term concern.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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One Response to China gains as world trade slows

  1. John Richardson 15 October, 2009 at 3:03 pm #

    Hi Paul

    At a presentation today where a China chemical analyst said that while the overall monetary value of exports kept falling, the volume of fibres exports actually rose by 9% for the year up until July.

    He agrees that this is being boosted by reduced raw-material import tariffs, export tax rebates and compared with H1 last year, lower feedstock costs.

    Add to this the social imperative of keeping people in work through soft loans from banks and you start to get the explanation.

    This, as you say, is in effect exporting deflation as this will end up a “bargain basement” stuff at Wal-Mart etc.

    This will surely lead to more antidumping petitions etc.

    Chrs
    John

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