China's Economic Sneeze Is America's Flu

Yangshan harbor of Shanghai GETTY

China’s slowdown is troubling U.S. companies that have enjoyed strong exports to that giant economy. Caterpillar missed earnings estimates partly because of China. 3M warned of a sales slowdown related to weak China business. Apple and NVIDIA warned about consumer sales being weaker than expected in China, and automakers see slower car sales in the country.

But the China slowdown is pretty minor, with GDP still growing at a good pace, albeit slower than in past years. Retail sales in China are still quite strong, up 8.5% over the last 12 months. Why should a mild deceleration in China trigger substantial reductions in U.S. sales to the country? It turns out that exports tend to be more volatile in general, and also we export a great many capital goods, which are less needed by a slow-growing economy.

The volatility of exports surprised me when I first studied it. The first reason is that countries tend to use their own products when they can, then they buy from other countries for their needs in excess of their own production.

(Here I’m using the common metaphor of countries buying and selling goods. Actually, it’s usually businesses or individuals doing the buying and selling. And services are included as well as physical goods.)

Using imported goods to supplement domestic production creates substantial volatility of foreign trade. Let’s say that a country consumer 100 bananas, of which they produce 80 and import the other 20. Then the economy softens, and consumers can only afford 95 bananas. Domestic producers continue to sell 80, but foreigners can only sell 15 bananas. Foreign producers see a sales decline of 5 from a base of 20 or a one-fourth decline. And that was triggered by just a five percent drop in consumption.

The United States sells a great many products that fall into this category, including agricultural products, chemicals and metals.

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