China's still producing, but the world isn't buying, trade data shows
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On Friday, China’s Ministry of Commerce released its December trade figures. What did the numbers reveal?

On balance, China’s aggregate exports declined year over year by 7.7 percent. The 2016 figures mark a continuing pattern of decline that has persisted over the past two years.

What is one to make of such numbers and what does this tell us about China’s growth prospects? To answer this, one must step back and understand the factors driving supply and demand for manufactured goods all over the world.

There are two figures supporting the notion that China’s export growth will continue a downward glide in the years ahead. 

Figure number one, the average rate of productivity growth for manufactured goods around the world, has been averaging 6 to 7 percent per year, maintaining this pace for the past fifteen years or more. Figure number two, the average rate of demand growth for manufactured goods, has, at best, been growing 2 to 3 percent per year.

Compare these two numbers and what does this tell us? There is an imbalance between the supply of manufactured goods and demand for such goods. The world is flooded with manufactured goods and demand growth for such goods has been insufficient to absorb the supply.

What has been the driver of manufacturing productivity globally? Companies engaged in manufacturing have been able to do things better, faster and cheaper as a result of automation.

The application of technology, automation and computerized machine tools have enabled manufacturers to produce goods at ever greater quantities while, at the same time, minimizing costs through the reduction of labor. It takes far fewer people today to manufacture a product than it did even ten years ago.

To get a glimpse of what the future looks like, just reflect on what happened to farming over the past century; manufacturing is going down that same path.

In the late 19th century, more than half of the U.S. population was engaged in farming. As technological advancements and machinery were introduced on the farm, a revolution in farm productivity took place.

It took far fewer people to produce increasing quantities of food due to automation. Today, 1 percent of the U.S. population is engaged in farming, yet the U.S. is producing enough food to not only feed the country, but other parts of the world as well.

Simply put, the rapid productivity gains in farming led to reduced employment in agriculture while, at the same time, leading to agricultural surpluses that simply could not be consumed fast enough despite the expanding waistlines of Americans. Demand has its limits and we cannot eat our way through such surpluses.

How about demand for manufactured products? As people become wealthier, more of their income is spent on services, rather than goods. At the same time, the average consumer reaches a limit of how many manufactured goods they wish to consume.

The average consumer does not need five iPhones, ten pairs of Nike shoes, or four flat screen TVs. This reality is reflected in the 2 to 3 percent global demand growth indicated above.

Given this set of circumstances, we can expect China to continue to feel the headwinds of oversupply and waning demand. While China is well recognized as an export powerhouse and the “made in China” label is ubiquitous on many of the products we own, China is not the only place where manufacturing is found.  

China will not be able to escape the reality that the world is flooded with supply and there is a global deficit in demand.

To deal with this reality, one will see China double-down on its efforts to “fish in other waters” be it through their ambitious Belt and Road initiative, or promoting their companies and products more aggressively in the developed markets of the U.S. and the EU.

How they will be able to do this in a world where sentiment is shifting toward greater protectionism remains to be seen. 

 

Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States. 


 

The views expressed by contributors are their own and not the views of The Hill.