Yet more evidence relative prices matter

The rising cost of transportation makes goods produced closer to their final market cheaper relative to the goods produced a long ways away. Today’s Wall Street Journal reports that rising transportation costs are having an impact: DESA LLC has decided it makes more sense to produce heaters in Kentucky than in China; Breman Castings Ince is getting “work back from China” and Craftsman Furniture (now Chinese owned) is scaling back plans to shift its furniture production to China.

Adjustment in action. Good news too, even if consumers have to pay a bit more. Adjustment doesn’t always work to the benefit of consumers at the expense of domestic producers.

The Journal reports that Jeff Rubin of CIBC in Toronto estimates that the rise in transportation costs has raised the effective “cost of shipping” tariff on imported US goods from 3% to 9%. DESA reports that the 15% increase in the cost of shipping goods from China contributed to its decision to produce more in Kentucky.

Makes sense.

I rather suspect that the close to 20% rise in the Chinese renminbi against the dollar (together with higher inflation in China than in the US) has also played a role in these decisions. A rise in the renminbi has the same effect as a rise in the cost of shipping. Production in the US starts to look more attractive if the cots of producing goods in China goes up.

Indeed, I was a little surprised that Timothy Aeppel’s story focused so much more on rising transportation costs than on the exchange rate: exchange rate changes were mentioned, but only in passing after the beak. The focus was on rising transportation costs

There is one more bit of evidence that exchange rate moves matter. According to the Chinese data (which undercounts Chinese exports to both the US and Europe because of Hong Kong through trade), China’s exports to Europe are growing by 27% (y/y). China’s exports to the US are only up 9% (y/y). And guess what, the renminbi has appreciated against the euro. Indeed, relative to say 2000, the renminbi has depreciated quite significantly against the euro. That has helped to offset the rise in the cost of transporting goods from China to Europe.

Originally published at CFR and reproduced here with the author’s permission.