The China Shock

Sometimes you read newspaper articles, complete with studies and statistics, that seem far from reality. Such a commentary written by Andrew Sharpe and Myeongwan Kim ran yesterday in the Financial Post, (you can read it here) based on a study conducted by the Centre for the Study of Living Standards (CSLS).  The study sought to discover the impact on consumer prices in Canada and on inflation caused by an increase in goods imported from China, an effect known as “China Shock.”

First, the bad news. An earlier study by the CSLS estimated that Canada lost 113,500 manufacturing jobs in the period 2001 and 2011. These were good jobs that disappeared, paying an average of $58,464 in today’s dollars. But this new study claims to have found good news. As imports from China grew during the same period from 5 percent of all the goods in the Consumer Price Index to 14 percent a decade later, these imports dampened the rise of inflation. The average annual inflation for the total CPI was 2.1 percent from 2001 to 2011. Without the China Shock it would have been 2.2 percent. You read that right. The big impact amounted to an annual reduction of 0.1 percent. (You can read the full CSLS study here.)

While the study stuck to the 2001-2011 decade in order to be able to make a comparison to the early findings by CSLS about jobs, this latest study does offer some newer stats. For example, the Chinese share in total imports in Canada rose from 3.2 percent in 2000 to 12.6 percent in 2017. Does this relatively low number jibe with your own shopping experience? Walk into Canadian Tire or Dollarama and all you can smell is the plastic used to make goods in China.

There was a time in the 1950s when the designation “Made in Japan” meant shoddy items that didn’t last long. But within twenty years, Japan’s output in automotive and electronics was best-in-class. The Big Three American automakers had to make serious changes to their own design and manufacturing to stay abreast. I look forward to signs that China’s quality will improve in a similar manner, but I have my doubts. Meanwhile, the so-called positive result on inflation of the China Shock feels more like a shiver.