There’s a plus side of the China Shock for Canadians

Over the past 20 years Chinese-made goods have occupied more and more space in the shopping baskets of Canadians. This has had costs and benefits. There is no shortage of research on the costs, which include job losses in manufacturing. In a recent report for Global Affairs Canada, the Centre for the Study of Living Standards has taken a detailed look at the benefits, which include lower prices for some products and lower inflation overall.

China became an exporting powerhouse after it joined the World Trade Organization (WTO) in 2001. Much of this export surge, commonly called the “China Shock,” stemmed from internal factors in China, such as urbanization, the rising competitiveness of Chinese manufacturing and the Chinese government’s decision to, at least nominally, sign on to the rules of global trade. China wanted to sell its goods to the world and consumers around the world were happy to buy them. The expansion of superstores like Walmart, which focused on high-volume, low-margin sales, boosted the spread of Chinese products.

In 2000, consumer goods from China accounted for five per cent of all imported consumer goods in the basket of goods and services that Statistics Canada uses to calculate the consumer price index (CPI). A decade later they accounted for 14 per cent. The increase varied a lot by product category.

Canadians experienced particularly large, trade-induced price declines in consumer products related to textiles, clothing, furniture and electronics. At the same time, technological progress, which may be interrelated with rising Chinese imports, may also have depressed prices. Increasing imports from China may have induced Canadian firms to adopt advanced technologies either to become more competitive or because trade with China made those technologies more available.

We estimate that, on average over the decade following 2001, a 1.0-percentage-point increase in the Chinese share in total imports of a given product led to a 0.221-percentage-point decrease per year in its consumer price — a little over a fifth of a percentage point. We also find, over the same decade, that cumulative inflation for all consumer goods in the consumer price index would have been 2.41 percentage points higher had there been no change in the Chinese share of total imports in Canada. In other words, the cumulative inflation for all consumer goods over this period would have been 20.0 per cent instead of 17.6 per cent.

For the total consumer price index, which includes services as well as goods, cumulative inflation would have been higher by 1.17 percentage points in 2011 had the Chinese share in total Canadian imports remained at the 2001 level. The average annual inflation for the total CPI was 2.1 per cent from 2001 to 2011, so annual inflation would have been about six per cent higher — 2.22 per cent per year rather than 2.1 per cent — without the China Shock.

How do these benefits stack up against the costs associated with the large increase in imported goods from China? An earlier CSLS study estimated that a loss of 113,500 manufacturing jobs between 2001 and 2011 could reasonably be attributed to the rise in imports of Chinese goods. The average annual wage for a manufacturing worker during that period was $58,464 in today’s dollars.

This current study implies that the lower inflation rate over this period translates into a cumulative gain of $745 per Canadian worker or $105,009 (again in today’s dollars) for every job lost. If this amount of money had been given to the workers who lost their jobs, it would have been more than sufficient to compensate for lost earnings and to help with training or other costs associated with finding a new job. Of course, the costs of the China Shock were borne by a small group or workers and firms whereas the benefits were widely spread across Canada. And the workers who were hit generally did not receive compensation, though our findings provide support for compensation, retraining and other policies that redistribute the gains from trade.

Since 2011, the share of consumer goods from China in the CPI has been increasing much more slowly than it did between 2001 and 2011 so the further reduction in prices and increase in real incomes for consumers presumably have been less. If the world moves to reduced trade flows, as it seems to be doing, the China Shock will be reversed and this source of net real income gains for Canadians will disappear. Andrew Sharpe is executive director of the Ottawa-based Centre for the Study of Living Standards. Myeongwan Kim, currently a PhD student in economics at the University of Toronto, was an economist at the CSLS when the study

was written.

CHINA BECAME AN EXPORTING

POWERHOUSE AFTER IT JOINED THE WTO IN 2001.