Summary of Key Points
The appreciation of the RMB should have made Chinese export goods more expensive in the international market, thereby weakening their competitiveness. However, the opposite has occurred: exports have continued to grow stronger, and the trade surplus has reached a new high. The real challenge for foreign trade companies is not foreign competitors but rather the vicious price competition among domestic peers (known as “involvement”). Companies are competing by cutting prices to secure orders, resulting in meager profits and allowing foreign buyers to take advantage of the situation.
Detailed Analysis
1. Why do exports increase despite the RMB appreciation?
Logically, an appreciating RMB means that foreigners have to spend more of their own currency to buy Chinese goods (for example, what used to cost $10 might now cost $11), which should reduce demand. However, there are several reasons for the growth in exports:
- Strong global demand: Many of China’s exported products are essential components of the global supply chain, such as new energy products (electric vehicles, photovoltaic components), machinery and equipment, and chemicals. China either has a high production capacity in these areas (e.g., over 80% of global photovoltaic component production) or possesses significant technological advantages, making it necessary for foreigners to pay more even if it means higher costs.
- Companies lock in exchange rates in advance: Many foreign trade companies negotiate “forward exchange contracts” with banks to fix the exchange rate for future transactions. This ensures that they avoid profit losses due to currency appreciation and are willing to accept orders.
- Upgrading of the export structure: China no longer mainly exports low-cost goods like socks and toys; high-value-added products now account for a larger proportion of exports (e.g., China is the world’s largest car exporter). These products are valued more for quality and technology, making them less sensitive to price changes.
2. What does the record-high trade surplus indicate?
A trade surplus is the difference between export and import values. A high surplus suggests that exports exceed imports significantly. This is driven by two factors:
- Fast growth in exports: The surge in exports of new energy products and cars has boosted demand.
- Slow growth in imports: Some domestic industries (e.g., steel, chemicals) have sufficient capacity, reducing the need for large imports. Additionally, the prices of international commodities (such as oil and iron ore) have dropped, lowering import costs. For example, the cost of oil has decreased from $100 per barrel last year to around $70 per barrel, saving 30% on imports.
While a high trade surplus indicates significant earnings, it also poses risks: persistent surpluses could lead to trade tensions (e.g., accusations of dumping) or overcapacity, resulting in lower prices for domestic products.
3. Foreign trade involvement and price competition:
The problem lies in the vicious price competition among domestic companies. For instance, if a foreign customer wants 1,000 cups, Company A offers $10 per cup, Company B says $9, and Company C offers $8. In this scenario, Company C might win the order but with only a small profit or no profit at all. This is because many small and medium-sized foreign trade companies produce homogeneous products without distinct brands or technologies, forcing them to compete on price. As a result, those that cut prices first suffer losses, while those that don’t risk losing orders entirely.
4. Where do Chinese companies’ profits go?
The consequence of this price competition is that foreign buyers benefit. If a Chinese company used to earn $3 per garment exported, they now only earn $1 after price cuts, allowing foreign purchasers to save money or pass on the savings to consumers. For example, a Chinese-made toy sold for $10 in an American supermarket might now be sold for $4 after price competition, with the additional profit going to the retailer instead of the Chinese manufacturer.
5. How can foreign trade companies escape this cycle?
To break free from price wars, the key is to differentiate their products and make them unique. Companies can:
- Invest in innovation: Develop smart, energy-efficient lighting fixtures that command higher prices.
- Build their own brands: Move from being contract manufacturers (producing for foreign brands) to creating their own brands with higher resale values (e.g., Chinese brands like Haier and Midea).
- Target niche markets: Focus on specific, less competitive segments (e.g., pet products or outdoor equipment).
- Collaborate within industries: Industry associations can set minimum price guidelines to prevent excessive price cuts.
In summary, the appreciation of the RMB is not the main obstacle to exports; the real challenge is the chaotic competition among domestic companies. By focusing on differentiation and innovation, foreign trade companies can increase product value and earn fair profits rather than allowing foreigners to take advantage of the situation.