Feb 17 2008

Triple threat puts the pinch on Asian garment makers

FT.com / Asia-Pacific / China – US downturn hits Asian garment makers

Here’s a good example how a slowdown in consumer spending in the US effects manufacturers in other countries. Asian garment makers are feeling pinched not only due to less demand from American consumers, but also the weak dollar and rising costs.

“Costs are hitting us,” says Henry Tan, chief executive of Luen Thai, a large Hong Kong-based manufacturer with operations in China. “Sales to Europe are not so bad because the euro is strong, but sales to the US are very difficult.”

Chinese manufacturers have been facing double-digit annual wage increases over the past few years. More recently their headache has come from the renminbi’s appreciation, which Beijing has allowed to gather pace this year as it seeks to curb inflation.

Times are hard for manufacturers here in China, but in a macro sense the slowdown in demand from abroad, stronger RMB, and rising wages is probably a good thing. China has its own macro problems, and they’re pretty much the opposite of the US’s right now, where recession looms. China faced the highest inflation in a decade during the last quarter of 2007, likely a combination of cost-push and demand-pull factors.

A stronger RMB should make imported raw material cheaper for producers, having a positive supply-side effect, putting downward pressure on the price level. For consumers, the strong RMB means imports are cheaper, again helping to ease inflation. Furthermore, rising wages for Chinese workers, while harmful to individual producers since they mean higher costs, indicate higher living standards for China’s 300 million strong blue collar workforce. Slowing demand for its exports will soften the demand-pull inflation, since net exports make up for over 10% of China’s GDP.

Times may be hard for the garment manufacturing sector, but overall the trend of higher wages, a stronger RMB, and slowing demand for its exports should soften the inflationary threat in China and put the country on a path towards more sustainable economic growth in 2008 and hopefully beyond.

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

5 responses so far

5 Responses to “Triple threat puts the pinch on Asian garment makers”

  1. yunqimokon 20 Feb 2008 at 10:20 pm

    How can there be appreciation and inflation at the same time? Isn't depreciation coupled with inflation?

    But anyway, even though manufacturers here might have it tough, China is probably better off in the long run. If businesses are finding it harder and harder to achieve the initial profits that they hopped to gain, then wouldn't fewer businesses venture into China? That way, China's growth would be drastically slowed, and economists would no longer have to worry about China's "unsustainable" growth. Additionally, as wages increase, living standards will increase too. While this might cause an even greater burst of consumerism, China might quickly begin to deal with social welfare, or even environmental issues. When nations no longer have to worry about feeding their people, they can begin to focus on issues that affect the global community, and become better global citizens.

  2. A.Eon 31 Oct 2009 at 9:44 pm

    Instead of trying to keep the trade with the United States, China should maybe concentrate on becoming more independent by improving their domestic production and consumption. When their domestic production and consumption increase they would not be dependent on Americas buying of their goods. In addition, the garment makers would also benefit if their domestic consumption would increase. Instead of selling their products to America they could sell it to Chinese people. The working condition, living standards and income would automatically increase if domestic consumption would improve, since the profit stays in the nation itself.

  3. Jonathan Ron 04 Nov 2009 at 2:22 am

    Hopefully, as A.E. remarked, this shift can help lower China's large depedency on the United States for its exports. Instead, with rising domestic wages as well as fewer exports due to the appreciation of the Renminbi, I think we will start to see more and more domestic consumption of Chinese-produced goods. Hopefully, this will result in a higher standard of living for the Chinese population. Furthermore, as Chinese exports become more and more unattractive due to the appreciation of the Renminbi, I think we will start to see a decline in China's massive current account surplus – which allows Chinese to consume more goods and services and thus also an increase in their quality of life.

  4. Virginiaon 07 Nov 2009 at 7:22 pm

    I think that it would be good if China doesn't have to depend so much on the US trade relationship. As mentioned in other articles, it is a good thing if China stands on its own feet, and can increase GDP in the country with their own people, then always depending on foreign trade. The rising domestic wages, is only a good thing in the long run, and as mentioned before if there is less trade then the consumption of Chinese goods in China can increase too. This may cause a higher standing of living, and the inflation might decrease. Therefore, in the long run it is only a good thing that the wages are increasing and trade is decreasing, because it gives a oppurtunity for China to stand on its own feet.

  5. Alexander Eon 20 Apr 2010 at 9:22 pm

    China's economy, especially the clothing market, has been hurt significantly by the lower aggregate demand in the US due to increased unemployment. Also, wages have risen, hurting the aggregate supply in China. The government allowed the RMB to appreciate somewhat, making Chinese imports more expensive for foreign countries, further reducing demand for Chinese goods + services. However, the stronger RMB makes imports cheaper, helping consumers and corporations who import raw materials. The higher wages hurt firms in the short run, but they contribute to a higher standard of living of the population in general. Even the reduced demand isn't entirely bad for China; inflation will decrease as a result due to net exports being a large chunk of China's GDP. China will thus become less reliant on other nations, as its consumer spending domestically will make up a larger percentage of GDP.