The impact of low-cost economies on UK import prices

Transcription

1 58 Quarerly Bullein 28 Q1 The imac of low-cos economies on UK imor rices By Conall Mac Coille of he Bank s Srucural Economic Analysis Division. The share of UK imors from develoing counries has increased sharly in recen years. Using measures of bilaeral rade rices, his aricle suggess ha increased sourcing from low-cos economies has u significan downward ressure on he relaive rice of UK goods imors. However, his effec may have dissiaed over ime as he rices of UK imors from low-cos economies have risen more raidly han in he as and develoing economies increasing demand for raw maerials has conribued o higher oil and commodiies rices. Inroducion The shar exansion of exors from China and oher develoing economies in recen years (Char 1) has been aribued o: reducions in legal barriers o rade; ransiions owards marke-orienaed olicies; and relaively low coss of roducion. The increasing imorance of develoing economies wihin world rade has been idenified as one facor ha may have ushed down on global and UK rade rices. This aricle examines how imoran hese effecs may have been for he Unied Kingdom. Char 1 Share of world rade (a) G7 China Develoing Asia Source: IMF Direcion of Trade Saisics. Develoing Euroe Res of he world 6 (a) The shares are calculaed from nominal US dollar values. Develoing Asia excludes China. A key oin in considering hese channels is ha aggregae UK consumer rice inflaion is deermined by UK moneary olicy in he medium o long run. And even in he shor run here is a wide range of oher, oenially offseing, effecs on aggregae inflaion. Hence, increased sourcing of imors from develoing economies has robably been associaed wih movemens in he relaive rices of some raded goods raher han any susained effec on aggregae inflaion. Neverheless, i is imoran for cenral banks o undersand movemens in relaive rices o assess heir oenial influence on aggregae inflaion in he shor run. (1) In he as, analysis of UK rade rices has been hamered by he lack of available daa. Price measures for goods imored ino he Unied Kingdom from secific rading arners are no ublished. So i has no been ossible o decomose aggregae imor rices, in an accouning sense, ino conribuions from differen rading arners. This aricle describes new measures of bilaeral rade rices which allow such an accouning decomosiion. The second secion discusses he many channels hrough which globalisaion may have affeced he UK economy and rade rices. The hird secion describes how a rising roorion of imors from low-cos economies may have reduced UK imor rices. The fourh secion measures he imac using bilaeral rade rice measures. The fifh secion considers disaggregaed daa o analyse which caegories of goods imors may have exerienced he larges relaive rice falls. The sixh secion concludes. Channels hrough which globalisaion may have affeced he Unied Kingdom One exlanaion for he shar exansion of develoing economy exors is he reducion in legal barriers o rade. Over he as wo decades he rocess of global rade liberalisaion has been faciliaed by ransiions owards (1) For examle, see Kamin, S, Marazzi, M and Schindler, J W (24), Is China exoring deflaion?.

2 Research and analysis The imac of low-cos economies on UK imor rices 59 marke-orienaed olicies in many develoing economies. Oher key develomens in inernaional rade relaions include he Euroean Single Marke rogramme, he accession of new EU member saes, China s enry o he World Trade Organisaion in 21 and he comleion of he Agreemen on Texiles and Clohing (ATC) in 25. Char 2 Conribuions o average annual oil consumion growh (a) Oher Asian counries China Former Sovie Union OECD Res of he world World 3. The inegraion of develoing economies ino inernaional rade has been characerised as an increase in he effecive global labour force and an imrovemen in labour roduciviy in develoing economies following from he new roducion ooruniies. Many macroeconomic models sugges ha such changes should u downward ressure on he rices of radable goods and services. However, here are several channels hrough which hese changes in he global economy could affec rices in he Unied Kingdom. Increased comeiion in global markes from develoing economies may have led UK firms, and exorers in oher advanced economies, o lower heir mark-us over coss. Globalisaion ressures may also work hrough he domesic labour marke. As global rade becomes more inegraed, emloyees and comanies may ake more accoun of lower labour coss in oher counries when bargaining for wages. For examle, he oenial for UK firms o relocae roducion abroad may resrain wage demands and hence coss. Globalisaion may also affec domesic rices by raising roduciviy and hence lowering uni labour coss: increased rade allows counries o concenrae heir resources in he secors in which hey are relaively more efficien, for examle by relocaing inefficien rocesses abroad, so ha overall labour roduciviy growh increases. And increased comeiion may raise firms incenives o innovae. A full discussion of hese channels is beyond he scoe of his aricle. (1) Bu a key channel hrough which globalisaion may have affeced he UK economy is hrough lower imored goods rices as comanies have increasingly been able o access he cheaes goods on world markes. Tha said, he inegraion of develoing economies ino he global economy is likely o have u uward ressure on oher domesic rices. Increased demand for raw maerials from develoing economies as hey exand roducion has u uward ressure on he rices of oil and commodiies imored ino he Unied Kingdom. Indeed, Char 2 illusraes he increasingly imoran conribuion of develoing economies o world oil demand over he recen as. (2) Anoher oenial offse o cheaer imor rices comes from he boos o real incomes ha consumers of cheaer imors enjoy. As he rices of some imors fall, consumers have more income o send on domesically roduced goods and services. And he rices of hese goods and services are likely o rise in resonse o increased demand, offseing he imac Source: US Energy Informaion Adminisraion. of lower imor rices on aggregae inflaion. The imac of any movemen in imor rices on oher rices will also deend on households execaions abou he fuure. For examle, if eole exec he fall in imor rices o be ermanen, or ha imor rices will coninue falling, hey may bring forward consumion as hey exec heir real incomes o be ersisenly higher in he fuure. Again, his exra demand would offse any downward ressure on aggregae rices. In he medium erm, inflaion is deermined by moneary olicy. And UK moneary olicy would reac o any shock o imor rices, and he relaed execed changes in oher relaive rices, o ensure UK CPI inflaion remained close o arge in he medium erm. The imac on UK imor rices How much cheaer are goods imored from develoing economies likely o be? Char 3 illusraes ha overall rice levels are low in India, China and easern Euroean counries relaive o he rices of similar goods in develoed economies afer accouning for exchange rae differences. Differences in he rices of raded goods may be less marked: in he long run, comeiion should ensure ha he rices of similar raded goods sourced from differen counries converge, in common currency erms. Bu a shorer horizons, rice differenials beween differen counries can ersis, even for raded goods. Such rice differences are more likely where rade barriers reven firms and consumers from aking (1) See for examle IMF (26), How has globalizaion affeced inflaion? and IMF (27), The globalizaion of labor. (2) See Develomens in rimary commodiy rices, November 27 Inflaion Reor, age (a) Consumion is measured in volumes. The oher Asian counries grou excludes Jaan and Souh Korea which are members of he OECD, and China. The grou includes India, Taiwan and Hong Kong in addiion o oher Asian counries..5 1.

3 6 Quarerly Bullein 28 Q1 Char 3 Relaive rice levels in 25 (a) Index: Unied Saes = 1 12 π ( ( ) ( )) = f π, S, P P, P P MP HC LC HC LC HC LC (1) India China Slovak Re. Poland Czech Re. Unied Saes Source: World Bank Inernaional Comarison Program. advanage of lower roducion coss in develoing economies. Bu Char 4 illusraes ha over he as en years he Unied Kingdom has seen subsanial subsiuion owards goods sourced from lower-cos economies such as China and he new EU member saes. Equaion (1) describes, in an accouning sense, he oenial imac of he increasing share of low-cos imors on UK imor rices. Aggregae imor rice inflaion (π MP ) is a funcion of he inflaion rae of goods imored from high-cos counries (π HC ) he change in he share of low-cos counries in oal imors ( S LC ) he exen of he rice-level differences (P HC P LC ), and relaive rice movemens ( P HC P LC ), beween goods imored from high and low-cos counries, where P indicaes he rice level. Here, all inflaion and rice levels are in serling raher han foreign currency erms. EU3 Jaan Unied Kingdom (a) The comarisons are made using nominal exchange raes. The EU3 figure is an average of France, Germany and Ialy. The goods comared include a broad range of consumer goods and also caial and governmen exendiures. Char 4 UK goods imor shares (a) Source: ONS Pink Book (27). Res of he world (righ-hand scale) High cos (lef-hand scale) China (righ-hand scale) New EU member saes (righ-hand scale) (a) The high-cos counry grouing is defined as: Ausralia, Canada, he EU15 counries, Jaan, New Zealand, Norway, Swizerland and he Unied Saes. The new member saes include Cyrus, Czech Reublic, Esonia, Hungary, Lavia, Lihuania, Mala, Poland, Slovakia and Slovenia. The res of he world is defined as a residual relaive o oal UK imors. These same counry grous are illusraed in Chars 5 and 6 and Table A. The shares are calculaed in nominal erms The imor rice inflaion rae is deressed over ime as imors wih a low rice level relace similar goods wih a high rice level. The magniude of his share effec wihin roduc caegories deends uon he exen of rice-level differenials beween he high and low-cos counries and how quickly low-cos counries increase heir share of UK imors. The final erm in equaion (1) caures relaive rice movemens beween goods imored from low and high-cos counries. For examle, if he rices of goods imored from low-cos counries are rising faser han hose from he high-cos counries, his rice effec will ush u on UK imor rices. (1) The magniude and sign of hese effecs may change over ime and oenially offse each oher. For examle, if he rising share of goods from develoing economies in UK imors has acceleraed over ime he share effec may become more ronounced. Tha is, here migh be greaer downward ressure on UK imor rices over ime from subsiuion owards cheaer goods wihin roduc caegories. In conras, if inflaionary ressure in develoing economies has icked u in recen years he rice effec may have increasingly ushed u on UK imor rice inflaion. Of course, movemens in serling exchange raes have he oenial o offse such ressures. Hence, his aricle analyses he serling rices of manufacured goods imored from differen counries. Assessing he magniude of hese effecs has been he focus of several recen sudies. Nickell (25) calculaed ha he share effec accouned on average for a.5 ercenage oin reducion in a UK-weighed measure of annual world rade rice inflaion over he eriod 2 5. Pain e al (26) argued ha develoing economy imors reduced US inflaion (measured by he domesic demand deflaor) by.1 ercenage oins on average over 21 5 and by.3 ercenage oins for he euro area over he same eriod. Using a similar mehod o his aricle, a recen Euroean Cenral Bank sudy found ha he increase in imor eneraion from low-cos counries may have damened annual euro-area imor rice inflaion for manufacured goods by 2 ercenage oins each year over he eriod (2) In he nex secion he evidence on share and rice effecs from low-cos counries on UK imor rices is discussed. (1) A more formal descriion of hese effecs is rovided in he aendix o his aricle. (2) Globalisaion, rade and he euro area macroeconomy, ECB Monhly Bullein, January 28.

4 Research and analysis The imac of low-cos economies on UK imor rices 61 Measuring he imac of low-cos economies on UK imor rices Char 5 A measure of rice levels for UK manufacured goods imors (a) Previous analysis of UK rade rices has been hamered by he lack of available daa. The Office for Naional Saisics (ONS) measures aggregae rade rices bu does no ublish measures disaggregaed by individual rading arners. (1) Furhermore, due o measuremen limiaions, he ONS daa may no fully caure he imac of subsiuion owards cheaer goods and services, ie he share effec, on imor rice inflaion. (2) In his case, rue UK imor rice inflaion may have been weaker han indicaed by he official daa. Res of world Weighed uni value, 2 High cos New EU member saes 8 6 China 4 In he absence of direc survey daa on bilaeral rade rices, roxies for he rice of imored goods can be consruced from uni values daa colleced by Her Majesy s Revenue and Cusoms (HMRC). (3) Uni values are derived by dividing he serling value of imored goods by heir quaniy or weigh. There are several caveas o using uni values as a roxy for rade rices. Firs, unlike he consumer rices index, uni values are no derived from direc surveys of rices and are herefore less reliable. Second, uni values should only be comared for narrowly defined roduc caegories as comaring uni values a an aggregaed level risks confusing rice changes wih changes in he comosiion of imored goods. This is a drawback o his mehod, as arguably many erhas mos caegories of goods do no have idenical comosiions beween counries. Clearly, he more deailed he level of disaggregaion, he less of a roblem his is; alhough even he lowes caegories may well differ beween counries. A relaed, hird, oin is ha no adjusmen for qualiy imrovemens is made. The roxy measure for he UK imor rice of manufacured goods discussed in his aricle is derived from nearly 2,2 disinc roduc caegories in 35 caegories for each of 32 of he Unied Kingdom s rading arners. (4) Char 5 illusraes he rice levels (uni values) of UK manufacured goods imors sourced from differen counries. The high-cos counries accoun for around hree quarers of UK manufacured goods imors. The roxy measure of manufacured goods imors from he new EU member saes and China were 42% and 3% resecively of he high-cos rice in 26. This suggess ha, in an accouning sense, he increasing imor share of low-cos economies may have deressed UK imor rice inflaion. Tha is, he share effec may have been negaive in recen years. Char 6 illusraes he inflaion raes of UK imor rices for high and low-cos counries using he same daa as Char 5. Imor rice inflaion from all economies icked u beween 24 and 26. The imor rice inflaion rae for manufacured goods from China rose o close o 5% in 26. Noiceably, imor rice inflaion from low-cos counries was Sources: HMRC and Bank calculaions. (a) The counry grouings are he same as hose used in Char 4. Char 6 Manufacured goods imor rice inflaion (a) New EU member saes China Percenage changes on a year earlier Sources: HMRC and Bank calculaions. High cos Res of world below ha of high-cos economies during 2 3, bu was higher in This suggess ha he rice effec has ushed u on UK imor rices in recen years. One ossibiliy is ha hese aaren differences across counries may o some exen reflec he comosiion of rade. Tha is, if he Unied Kingdom ends o imor more exensive iems (eg moor cars) wih a common rice on world markes from high-cos counries and cheaer goods (eg clohing and foowear) from develoing economies. Hence, he nex secion of he aricle discusses evidence ha even for similar caegories of secific manufacured goods, imors from China end o be cheaer. (1) The ONS do rovide a decomosiion of aggregae goods imors ino hose goods from EU and non-eu counries. (2) This is because i is difficul o measure he imac on aggregae imor rices when goods imored from one counry are relaced by similar cheaer goods from anoher counry. See Box 3, An examle of measuremen challenges exacerbaed by globalisaion: he case of hanom GDP, ONS Economic and Labour Marke Review, Seember 27. (3) The daa are available from he HMRC websie a (4) See he aendix for deails of he consrucion of hese aggregae measures

5 62 Quarerly Bullein 28 Q1 Table A rovides an accouning decomosiion of UK manufacured goods imor rice inflaion. The figures here are he average accouning conribuions across 35 manufacured goods secors, weighed according o heir aggregae nominal shares of UK manufacured goods imors. Togeher he share and rice effecs from he new EU member saes, China and res of he world are esimaed using his echnique, o have ushed down on imor rice inflaion for manufacured goods by.7 ercenage oins on average across secors and over 2 6 (row (1)). The increasing share of imors from China conribued -.5 ercenage oins on average, and ha of he new EU member saes -.2 ercenage oins on average (row (2)). Char 7 Average conribuion o UK manufacured goods imor rice inflaion China (rice effec) China (share effec) Percenage oins Table A Average conribuion across secors o UK manufacured goods annual imor rice inflaion Average Sources: HMRC and Bank calculaions (1) Aggregae low-cos effec (= 2 + 3) -.7 of which: New EU member saes -.2 China -.5 Res of he world -.1 (2) Low-cos share effec -.6 of which: New EU member saes -.2 China -.5 Res of he world.1 (3) Low-cos rice effec -.2 of which: New EU member saes. China. Res of he world -.2 Sources: HMRC and Bank calculaions. I is imoran o remember ha hese conribuions may have varied over ime. Char 7 illusraes he average conribuion of China o UK imor rice inflaion for manufacured goods over ime. The share effec has remained negaive as he share of China in UK imors has increased. In conras, he rice effec urned from negaive o osiive in 24 and hereafer. In summary, he evidence from uni values daa suggess ha increases in he share of imors from low-cos economies have ushed down on he relaive rice of UK imors, in an accouning sense, hough his has been offse a imes by more raid inflaion in imor rices from hese economies. Evidence a he disaggregaed level The revious secion described he ossible downward imac of a rising share of UK imors from low-cos economies on he aggregae rice of UK imors of manufacured goods. However, he increasing share of China has been concenraed in secific caegories of manufacured goods. And he share of China in UK services imors remains very low. (1) Hence, any downward imac on aggregae imor rices from low-cos economies is likely o have refleced declines in he relaive rice of secific yes of imored manufacured goods and increases in he relaive rice of oher goods and services. Table B shows ha China has increased is share of UK manufacured goods imors mos sharly in hose secors wih a relaively low echnological conen and high labour inensiy of roducion, such as clohing, foowear and furniure. Wih China now accouning for large shares of UK imors in hese secors, here may be less oenial for China o coninue increasing is share of UK imors in he low echnology secors raidly. However, here is evidence ha China has increased he echnological inensiy of is exors over ime. (2) As a resul, China has also increased is share in some of he secors wih a higher echnological conen such as office and daa rocessing equimen, elecommunicaions and sound recording equimen and elecrical machinery. These secors accouned for around a quarer of UK manufacured good imors in value erms in 26. Table B also shows ha in he roduc caegories where China has increased is share of UK imors mos sharly, Chinese rices end o be lower han similar caegories of goods imored from he G7 economies. This is consisen wih evidence from he World Bank and oher sources ha wages and coss are lower in common currency erms in develoing economies. Tha said, hese aaren rice differences could arially reflec differences in qualiy no caured by uni values daa. (1) In 26, he share of China in UK services imors was.8%. (2) See Globalisaion, rade and he euro area macroeconomy, ECB Monhly Bullein, January 28.

6 Research and analysis The imac of low-cos economies on UK imor rices 63 Table B Changes in China s imor share and relaive rices Change in China s Relaive rice of share of UK imors imors from China for each secor agains G7 average in 1999 Percenage oins Furniure Foowear Meal manufacures Cork and wood manufacures Texiles Office and daa rocessing equimen Clohing Prefabricaed buildings and heir manufacures Travel goods Miscellaneous manufacured aricles Elecrical machinery Leaher manufacures Rubber manufacures Telecommunicaions and sound recording equimen Sources: HMRC Trade Daabase and Bank calculaions. Alhough he imac of increases in he rade share of China has mos robably lead o changes in he relaive imor rices for secific goods caegories, here may no have necessarily been corresonding changes in relaive rices wihin he CPI baske. For examle, UK imorers could in he shor run have absorbed some or all of he lower imor rices in higher mark-us leaving heir reail rices unchanged. If UK firms have reduced heir reail rices for hose caegories of goods where China has increased is share of UK imors mos sharly, his effec may no have ushed down on he aggregae CPI inflaion rae. As noed earlier, if he rice of clohing and foowear has fallen in resonse o increased imor sourcing from China, his will have increased he roorion of income UK consumers can send on oher goods and services in he CPI baske. And hese rices may have increased in resonse o higher demand. In summary, increased sourcing of imors from low-cos economies is likely o have led o movemens in relaive rices raher han susained effecs on aggregae inflaion, which is deermined by UK moneary olicy in he medium o long run. Conclusion This aricle has discussed wheher greaer sourcing of imors from low-cos economies has reduced UK imor rices over he recen as. Deailed bilaeral measures of rade rices sugges ha goods imored from China and new EU member saes cos less han similar goods imored from radiional rading arners. So, in an accouning sense, increases in he imor share of China, oher Asian economies and new EU member saes may have reduced annual manufacured goods imor rice inflaion by.7 ercenage oins on average over he eriod 2 6. However, his effec may have dissiaed over ime as he rice inflaion rae of Chinese imors has icked u. Increased sourcing of imors from China has been concenraed in secific caegories of manufacured goods. These caegories include labour-inensive goods, such as clohing and foowear, bu also more echnology-inensive goods. This is consisen wih evidence ha China has increasingly concenraed in labour-inensive assembly rocesses for goods wih a high echnological conen. The overall UK inflaion rae is deermined by UK moneary olicy in he medium o long run. Falling imor rices may have ushed down on aggregae inflaion in he shor run bu he overall imac will have crucially deended on he moneary olicy resonse in addiion o a lehora of oher channels hrough which rade liberalisaion and globalisaion may have affeced he UK and global economy. (1) Furhermore, he exansion of exors from develoing economies has been associaed wih a range of effecs on he global economy such as increased demand for oil and commodiies. Hence, increased imor sourcing from China and oher develoing economies is likely o have led o movemens in relaive rices raher han any susained imac on aggregae inflaion. (1) For examle, see Bernanke, B (25), The global saving glu and he US curren accoun defici.

7 64 Quarerly Bullein 28 Q1 Aendix To consruc rice measures of UK manufacured goods imors on a bilaeral basis, daa were obained from he Her Majesy s Revenue and Cusoms (HMRC) Trade Daabase. (1) Bilaeral daa for serling values and volumes of UK imors for manufacured goods roduc grous were acquired over he eriod from each counry. The roduc grous are defined according o he Sandard Inernaional Trade Classificaion (SITC) definiions. In aricular, daa were acquired for each five-digi secor corresonding o he SITC grous five o eigh. Tha is, hose grous ha reresen semi-manufacured and finished manufacured roducs. In calculaing bilaeral rade rices in Chars 5 and 6, for each counry grou j he aggregae UK imor rice in he iniial year = is defined as a geomeric average = α ik, j, ik, i k for each counry i and five-digi secor k. Tha is, he weighed average of he uni values of each five-digi SITC classificaion in each counry included in he counry grou. Here α is he value share of imors in each secor from each counry in oal UK imors from he counry grou j = {China, new EU member saes, res of he world}. For subsequen years ( > ) he UK imor rice from counry grou j is defined as (1) ha secor: and HC, is he uni value of he high-cos counries. (2) For each secor he imac of low-cos economies is sli ino wo effecs. The UK imor rice inflaion rae (for each secor) is given by: = j, HC, 1 j 1 α j, + j 1 (4) The firs erm on he righ-hand side of equaion (4) is he share effec. Tha is, he downward imac on he UK imor rice from low-cos counries as hey increase heir imor share. The second erm reresens he rice effec. If he UK imor rice of counry grou j rises by less han he reference high-cos counries his has a negaive imac on he UK imor rice. The hird erm reresens he remaining ar of UK imor rice inflaion due o changes in imor rices from high-cos counries. The aggregae figures for share, rice and high-cos effecs reored in Table A are weighed arihmeic averages across he secors for each counry grou. Here, he weighs for each secor are he nominal share in he receding year of ha secor in oal UK manufacured goods imors. α j HC +,, HC, 1 1 = 1 π j, j, j, (2) where π = i i k k α ik, ik, 1 α ik, 1 ik, 1 The decomosiion illusraed in Table A of he imac of low-cos counries on UK manufacured goods imor rice inflaion is carried ou on a secoral basis for each of he 35 manufacured goods secors defined according o he wo-digi SITC classificaions. The UK imor rice for each secor is derived as a weighed average of he rices of goods imored from each counry grou. = α j j+ 1 j j α j,,, HC, (3) where α j, is he value share of counry grou j in oal UK imors and j, is he uni value for each counry grou j in (1) The underlying daa are available from he HMRC websie (2) The high-cos counry grouing is defined as: Ausralia, Canada, he EU15 counries, Jaan, New Zealand, Norway, Swizerland and he Unied Saes. The new member saes include Cyrus, Czech Reublic, Esonia, Hungary, Lavia, Lihuania, Mala, Poland, Slovakia and Slovenia. The res of he world is defined as a residual relaive o oal UK imors.

8 Research and analysis The imac of low-cos economies on UK imor rices 65 References Bank of England (27), Inflaion Reor, November. Bernanke, B (25), The global saving glu and he US curren accoun defici, Aril, remarks a he Homer Jones Lecure, S Louis, Missouri. ECB (28), Globalisaion, rade and he euro area macroeconomy, Monhly Bullein, January. IMF (26), How has globalizaion affeced inflaion?, Chaer III, IMF World Economic Oulook, Aril. IMF (27), The globalizaion of labor, Chaer 5, IMF World Economic Oulook, Aril. Nickell, S (25), Why has inflaion been so low since 1999?, df. Office for Naional Saisics (27), Economic and Labour Marke Review, Seember. Office for Naional Saisics (27), Unied Kingdom, Balance of Paymens, The Pink Book. Pain, N, Koske, I and Sollie, M (26), Globalisaion and inflaion in OECD economies, OECD Economics Dearmen Working Paers No Kamin, S, Marazzi, M and Schindler, J W (24), Is China exoring deflaion?, Board of Governors of he Federal Reserve Sysem Inernaional Finance Discussion Paer No. 791.