The Federal Reserve Bank of New York today released What’s Behind Volatile Import Prices from China?—the latest article in its series Current Issues in Economics and Finance.
Authors Mary Amiti and Donald R. Davis investigate the 6 percent rise in the price of U.S. imports from China over the 2006-08 period. The authors attribute this development—a marked reversal of earlier trends—largely to the global surge in oil and other commodity prices through mid-2008.
Amiti and Davis arrive at this finding by constructing a new import price index that uses highly disaggregated data to track price movements for individual product types from 1997 to 2008. The authors note that their index represents an advance over the Bureau of Labor Statistics’ monthly import price index, which covers just the past five years and provides only aggregate figures for Chinese imports as a whole.
The data set used by the authors, comprising roughly 8,000 different products, permits a division of U.S. imports from China into three broad end-use categories: consumer goods, capital goods and industrial supplies. With this breakdown, Amiti and Davis are able to show that the largest import price increases were concentrated in industrial supplies, while the prices of consumer and capital goods rose only moderately. Since industrial supplies are made from commodities such as rubber, wool, chemicals, fuel, steel and iron, the authors infer that the run-up in oil and commodity prices drove the higher import prices from China.
In support of their conclusion, the authors show that the price movements
of industrial supply imports from China have been broadly in sync with the
movements of commodity and crude oil prices: all three series turned upward
between 2002 and 2003. Moreover, the authors demonstrate that the prices paid
by U.S. importers for industrial supplies from the rest of the world also climbed
sharply after 2002. Since the surge in oil and commodity prices was a global
phenomenon, one would expect it to boost prices of industrial supplies worldwide
if it were indeed driving the rise of Chinese import prices.
In considering other sources of the rise in import prices from China, Amiti and Davis observe that the appreciation of the Chinese currency against the U.S. dollar played a role, particularly in price increases for capital and consumer goods. The authors discount the notion—put forward in a number of press reports—that rising Chinese wages were the key factor in the rise in import prices: “Although wage growth is a reality in China, for a large range of firms the labor component of costs is just too small to explain the change in price trends.”
Mary Amiti is an officer in the International Research Function of the Bank’s Research and Statistics Group; Donald R. Davis is the Kathryn and Shelby Cullom Davis Professor of Economics and International Affairs at Columbia University.