[Finally saw a (Canadian) reporter say something fair]--How the Chinese dragon brought prosperity to Canada
MARCUS GEE
From Wednesday's Globe and Mail
theglobeandmail.com
October 3, 2007 at 6:13 AM EDT
If you are of a certain age, you may remember the Age of Inflation. There was a time, not so very long ago, when it was taken as a given that prices always went up. Complaining about how much "they" were charging for stuff was as common as moaning about the weather.
We still complain, but things are different now. For a generation or more, we have lived in an era of more or less stable prices. In fact, for many of the things we need in our everyday lives, prices have been going down. According to the Bank of Canada, prices for "durables excluding autos" fell 13.4 per cent between 1995 and 2006.
Durables, as the name implies, includes just about everything made to last: furniture, appliances, tools, watches, bicycles, musical instruments, computers, reading material, televisions, radios and recreational vehicles. The fall in the prices of semi-durables - bed sheets and towels, toys and games, photographic equipment, fabrics, jewellery and footwear - began later, in 2001. But the drop has been steady since; prices have fallen on average about 0.8 per cent a year.
It has escaped no one's notice that, over the same period in which all of these prices were dropping, Canadian stores - indeed stores the world over - have been flooded with goods from the new workshop of the world, China. Sticker shock used to mean being taken aback at how much something cost. Today what more often takes the breath away is how little things cost. A Chinese-made DVD player for 20-something dollars? A Chinese-made TV set for $100?
There's no doubt that China's rise as a low-cost manufacturer is saving us all money. We can see it every time we walk into a Wal-Mart. The question is, how much? A report by Bank of Canada economist Louis Morel takes a stab at an answer.
Mr. Morel reminds us just how massive that import flood from China has been. In 1992, 18 per cent of Canada's clothing imports came from China. By 2006, that had risen to 50 per cent. In 1992, China supplied 4 per cent of our furniture imports; in 2006, 30 per cent. For appliances and audiovisual equipment, the figure moved from 2 per cent to 17 per cent.
Mr. Morel reckons that, over the period 2001 to 2006, the flow of cheap goods from China has reduced Canada's annual inflation rate by about 0.1 per cent. That may not seem like much, but it means billions of dollars in the pockets of ordinary Canadians, something to remember the next time politicians or union leaders go on about how Chinese competition is threatening our prosperity.
"In the coming years," Mr. Morel concludes, "Canada's increasing imports of inexpensive goods from China will continue to act as a disinflationary source on the Canadian total inflation rate."
China's effect on inflation is a controversial subject among economists, that fractious profession. A working paper for the International Monetary Fund released last year concluded that China had only a modest effect on U.S. inflation. A paper for the Board of Governors of the U.S. Federal Reserve System came to a similar conclusion. There is even a growing argument that as wages in China go up, the supply of cheap labour to Chinese factories slows and the price of things made in China rises, China may be becoming a source of inflationary pressure, pushing prices up instead of keeping them down.
That may happen in time, but it seems more likely that, for some years now, developed economies will benefit from China's restraint on global prices. As Mr. Morel points out, it doesn't matter if the price of Chinese goods trends up "as long as the price of these goods remains lower than what can be produced in Canada, or by other trading partners, and as long as the Chinese share of Canadian imports continues to rise." In other words, China doesn't hold down inflation by producing cheaper and cheaper goods. It holds down inflation because the relatively cheap price of the goods it exports to our shores keeps down the price of competing items here.
There are two other ways that China helps keep our inflation rate low. For one thing, it reduces the inflationary pressure that usually occurs when the economy heats up, spending increases and producers can't keep up with demand. In a globalized economy with free and rapid trade flows, some of that demand can be met by Chinese imports.
For another, China helps our central banks gain face. If inflation stays low in part thanks to cheap Chinese imports, then institutions like the U.S. Federal Reserve and our Bank of Canada accumulate credibility as inflation fighters and inflationary expectations diminish.
We may owe China more than we think. |
