China Competition Helps

 | Jan 16, 2013 | 3:00 PM EST
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China has often been vilified by some Americans who are worried about job losses here due to the competitive forces of lower-cost goods produced in China.

These trade ties have, at times, become political, with some viewing China as competing unfairly due to an artificially weaker currency or perhaps because of a lack of the environmental protections (and their cost) that we have here. As such, this can be a sensitive topic.

It is also an important topic considering the growth of imports from China. In 1995, China accounted for only 6% of total imports, but that increased to 18% in 2011. During this period the number of detailed product types that China exported to the U.S. increased by 2,000.

Is this cause for concern? Maybe not, as recent research from the New York Fed has shown that the entry of Chinese exports into markets tends to reduce the prices other manufacturers charge and/or improve the quality of goods those non-Chinese producers make. This consideration shows there are benefits to Chinese competition that extends beyond what China exports to us to include those products from other producers as well.

After all, competition is what drives capitalism. A level playing field is important, no doubt, and we can't ignore differences in environmental costs or concerns, whether or not currencies are dictated by market forces as they should be. But what research shows is that China's entry into a market benefits consumers.

Specifically, the research shows that when Chinese exports compete with goods produced either here or imported from abroad, the markup of some of those non-Chinese goods can decrease by up to 30%. That means that these non-Chinese competitors are attempting to compete on price, lowering the markup (and consequently the selling price) to consumers across all products in a given category. On average, the level of U.S. import prices was 2.2% lower due to China.

These decreases in markups, which were particularly large for manufactures such as machinery, electronics and transportation products, provide strong evidence of the pro-competitive effects of trade. Of course, with a lower markup this can mean lower profit margins for those companies competing against Chinese goods. On the other hand, it may force greater efficiencies in the use of capital and labor and such productivity enhancements can benefit the economy more generally over the longer term. After all, consumers who save funds from lower prices on one product have more money left over to buy another, helping sales of unrelated companies.

But some businesses don't lower prices. Instead, they compete by raising quality. Here the research shows that marginal costs -- the researchers' measure of the quality of a given good -- can increase by as much as 50% for some goods. That means that these non-Chinese competitors respond to competition from China by differentiating their products to offer consumers a better product than they did before. Perhaps not too surprisingly, this has, in turn, led to an increase in the quality of goods China exports, offering further benefit to quality-conscious consumers.

Research suggests the entry of Chinese exports into a market benefits consumers by both lowering prices, regardless of country of origin, and/or improving the quality of other, competing products. Competition here is likely a good thing. I will leave the more political discussions to policymakers, acknowledging their concerns.

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