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Did China suppress world inflation?

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posted on 2023-06-08, 17:05 authored by Wei Loon Pang
China is simply bigger and growing faster than any other country. The rapid growth of China during the past few decades has led to suggestions that China is exporting deflation, but many of studies of this idea have found no significant effect of China on trading countries’ price levels, mainly due to the small share of China in world GDP. This study will look at China’s impact not through trade shares, but by analysing the price effect directly. For actual competition, we use a model loosely related to the Bertrand model to find the Chinese price effect on Mexico’s export prices in the US market. China’s productivity has increased faster than any other country’s and we assume that the increased productivity as the main exogenous driver of China’s market expansion in the world market. The Chinese price effect is indeed statistically significant; after experimenting with various robustness tests, our regression results show that a 10% drop in Chinese price will cause Mexico to drop its price by around 4% to 8%. We also found that China can influence Mexico’s price even if it has no direct exports to the USA; the mere threat of entry into the market is enough to constrain Mexico’s exporters’ pricing ambitions. We term this effect potential competition. The Chinese price effect for the set of potential products is present and is positive and statistically significant at around at 0.20 to 0.50. To compare the Chinese price effect in a relatively small market, we repeat the analysis on Singapore. We found that China influences Malaysia’s prices in the Singapore market and the results are comparable to those in the USA. One of the necessary conditions for China exporting deflation is its competitive price effect on other manufacturing producers’ prices; we tested for this and have found support for this condition.


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