Consumers of last resort will be (also) in China
Two years ago, a Wall Street Journal article asked: Is the U.S. yet again destined to do the global economy’s heavy lifting?
For a long time, a typical narrative went like this:
When the U.S. grew at a healthy pace, its citizens were buyers, fueling demand for the goods China and other nations produced. They kept the world economy humming.
Or like this:
As Europe cuts spending and China ramps up exports, the U.S. is being looked to by trade partners to once again consume.
But as the chart from Hong Liang's presentation at the Peterson Institute shows, 10% of all internationally traded goods are bought by Chinese people and firms:
A few comments about the chart:
Look at Japan: according to my calculations, its real GDP was 96% larger in 2015 compared to 1980, but Liang's chart shows the share of worldwide imports bought by Japan has declined form about 7% to just 4%.
Measured in constant dollars, the U.S. economy grew from $6450.4 billion to $16397.2 billion, so it expanded by 154% between 1980 and 2015; the U.S. is still a dominant buyer, though its relative dominance may again fluctuate in the future, as it did in the past
Chinese consumers buy a lot more from abroad than is generally recognized.
Most observers expect that China and other emerging markets will consume dramatically more (of both domestically and foreign-made) goods and services in the next decade.
McKinsey Global Institute expects that consumer spending in EMs will rise by $18 trillion between 2010 and 2025 (from $12 to $30 trillion in just fifteen years), and PIIE research suggests that total consumption in China will rise by at least 150 percent in the next twenty years:
A more recent MGI report calculates that China's working-age consumers will double their consumption by 2030, and they "will be spending 12 cents of every $1 spent in cities worldwide". That is great news, but it is not clear what this will mean for China's imports. A natural guess would be that Chinese consumers will be choosier as their incomes increase, and the demand for imports should increase. But a counter-argument would be that imports have grown less than GDP in recent years:
Source: IMF WEO, Oct. 2016
You can read the last chart as saying that "imports have stabilized at 10%" but I would read it as suggesting that imports can growth a lot further and get closer to China's share of global GDP.
One might object that despite the glitter of major Chinese cities, average income of Chinese citizens is still low and, as long as the basic needs such as housing, education and healthcare are not adequately satisfied, consumption will be suppressed. But spending on education and health services clearly counts as "consumption", and demand in these sectors will surely rise as people's incomes will grow (between 2013 and 2015, average wages in China have grown by 18%). Some of the spending on education will not take place in China, but spending on health care will partially pay for imported medical devices and drugs. The composition of imports will gradually change, but I do not see any convincing argument why China's imports of foreign goods would not continue to increase in the future.
Tomas Hellebrandt & Paolo Mauro, 2015. "World on the Move: The Changing Global Income Distribution and Its Implications for Consumption Patterns and Public Policies," Policy Briefs PB15-21, Peterson Institute for International Economics. ↩︎
Richard Dobbs, James Manyika, Jonathan Woetzel, Jaana Remes, Jesko Perry, Greg Kelly, Kanaka Pattabirama & Hemant Sharma, 2016. Urban world: The global consumers to watch, McKinsey Global Institute Report. ↩︎
The CLB says: "Wages in China have increased steadily over the last decade to the point where the country is no longer considered by international business to be an abundant source of cheap labour. However hundreds of millions of Chinese workers are still struggling to make a living wage." ↩︎