Rising Producer Prices

China’s role in driving global prices has always been complex. Its emergence in recent decades as the world’s factory floor brought millions of low-cost workers into the labor pool and helped make consumer products like jeans and fine jewelry cheaper for everyone.¹ As China’s economy matures, its ability to keep tapping cheap workers is diminishing. Labor costs have increased steadily, and China is now contending with a shrinking pool of young workers willing to toil long hours in factories.

One of the ways in which the pandemic has upended global supply chains is through labor and inventory shortages that have resulted from ocean freight bottlenecks and delays for shipping from China.² China’s factory-gate prices have soared this year, creating new sources of inflation for Western buyers who source their material from the region. Just last month, China’s Producer Price Index (PPI) grew at its fastest pace in nearly 13 years, jumping 9% from a year ago in May³, escalating global concerns about rising commodity costs and squeezed profit margins for businesses.

The PPI measures the average change in price that domestic producers receive for the sale of their products.

How Chinese Producer Prices Affect Western Buyers

Chinese factories face a difficult challenge of passing on manufacturing price increases to Western buyers or absorbing higher costs for raw materials like copper and iron ore themselves. Similar to the early 2000s when Chinese energy demand sent oil prices higher or after the 2008 global financial crisis when stimulus was deployed to build infrastructure, which boosted metals prices⁴, China is entering a period of exporting inflation to other countries through higher product wholesale prices. 

Sources of Producer Price Inflation

The combination of rising raw-materials costs and unrelenting supply chain constraints in China is a cause for concern especially as Western demand for products recovers from the pandemic.

• Supply Shortages & Shipping Bottlenecks

As Western economies recover from pent-up demand for goods and services, a fresh wave of Covid-19 clusters in Asia, where vaccination campaigns remain in their early stages⁵, is creating new bottlenecks in the global supply chain, pushing up prices and weighing on the post-pandemic recovery.

Outbreaks at some of the world’s busiest ports in southern China have led to global shipping delays, while infections at key points in the semiconductor supply chain in Taiwan and Malaysia are worsening a global chip shortage that has hindered production in the auto and technology industries.⁶

While vaccination rates have risen in the West with restrictions being rolled back, immunization efforts in Asia have lagged behind, thereby disrupting manufacturing and suppressing consumer spending. Earlier in the year, the European and Asian shipping industry was brought to a near standstill by a weeklong blockage in the Suez Canal, which resulted in a persistent shortage of empty containers. Western and Latin American supply chains and shipping routes remained resilient during this time, ferrying ocean freight and supplying key raw materials and inventories for global consumers.⁷

Some ships had to wait up to two weeks to take on cargo at Yantian, with roughly 160,000 containers waiting to be loaded, according to brokers. The price of shipping a 40-foot container to the West Coast of the U.S. has jumped to $6,341, according to the Freightos Baltic Index—up 63% since the start of the year and more than three times the price a year earlier. ⁸

• Trade War

Ongoing tensions between the U.S. and China are likely to persist. The uncertainty tied to trade negotiations between the two largest economies has very real consequences for U.S. buyers in the form of tariffs. A tariff is a tax that the government places on goods imported from another country.⁹ Both the U.S. and China have imposed tariffs on a range of goods imported from each other, which has pushed up the prices that those buyers have to pay for foreign manufactured goods. As these two economic behemoths go back and forth with new rounds of tariffs, these tensions have escalated into a trade war. 

For example, when the U.S. government announced plans to raise tariffs on $300 billion of Chinese products, the Chinese government responded with tariff hikes on $75 billion on U.S. products including cars and car parts made in the U.S.¹⁰

While tariffs are explicitly excluded from the PPI because they are considered a tax, they can indirectly affect the prices measured by the program. Domestic producers will often adjust pricing decisions in reaction to price changes of imported goods, which are affected by new or revised tariff rates.¹¹

• Greenhouse Gas Emissions

China is currently the world’s largest carbon emitter.¹² Under pressure from environmentalists in the European Union and the U.S., China unveiled sweeping plans last month to limit greenhouse-gas emissions that will increase costs for the manufacturing industry and for consumers.¹³ As China’s trading partners push companies to scrutinize emissions through the global supply chain, the cost of transitioning to cleaner technologies such as wind turbines, solar power and electric vehicles will extract a cost to Chinese suppliers making its manufacturing sector less price competitive relative to the rest of the world.¹⁴

Some economists note that over time China’s latest campaign to cut greenhouse gas emissions will reduce its domestic output of metals including steel and aluminum, potentially adding to upward pressure on global prices.¹⁵

Other factors may be contributing to higher costs in China. Authorities are trying to limit fossil-fuel consumption to help China achieve its goal of reducing carbon emissions, which may be making it harder for steel and other sectors to increase production.

Conclusion

As China continues to feel the pressure from supply chain disruptions and commodity costs, the country’s manufacturers are increasing prices, adding to inflation fears in the West. These cost increases span the entire supply chain lifecycle: from transportation and commodities to packaging and fulfillment. Inventories remain tight because of production and shipping bottlenecks at the same time that U.S. demand for manufactured and wholesale goods is growing from its recovery from the pandemic.

The practice of U.S. “near shoring” -- or moving supply chains out of China to ones that are nearby the U.S. -- could lead to less inflation if the work goes to places that are more cost-efficient. While other low-cost sources of manufactured goods like Vietnam and India are still struggling to contain the pandemic and maintain full production capacity, Latin America remains an excellent alternative for U.S. buyers to diversify its supply chain. Increasing capital formation and robust labor markets combined with a growing footprint in many different types of exports markets positions Latin American suppliers well to be a go-to source for U.S. buyers’ wholesale product manufacturing needs.

About Exporta Technologies

Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States. 

Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.

References

1. https://www.wsj.com/articles/how-china-is-helping-to-damp-global-inflation-11626616802
2. https://www.wsj.com/articles/china-long-a-source-of-deflation-starts-raising-prices-for-the-world-11617015600?mod=article_inline
3. https://fred.stlouisfed.org/tags/series?t=china%3Bppi

4. https://www.wsj.com/articles/how-china-is-helping-to-damp-global-inflation-11626616802

5. https://ourworldindata.org/covid-vaccinations?
6. https://www.wsj.com/articles/the-global-logistics-logjam-shifts-to-shenzhen-from-suez-11623403801
7. https://www.miamiherald.com/news/local/news-columns-blogs/andres-oppenheimer/article250350161.html
8. ibid
9. https://www.ramseysolutions.com/retirement/what-are-tariffs
10. https://taxfoundation.org/tariffs-trump-trade-war/
11. https://www.bls.gov/opub/btn/volume-9/the-effects-of-tarifff-rates-on-the-u-s-economy-what-the-producer-price-index-tells-us.htm
12. https://www.wri.org/insights/interactive-chart-shows-changes-worlds-top-10-emitters
13. https://www.wsj.com/articles/eu-to-propose-sweeping-economic-plan-to-combat-climate-change-11626251377
14. https://chinapower.csis.org/china-greenhouse-gas-emissions/
15. https://www.wsj.com/articles/how-china-is-helping-to-damp-global-inflation-11626616802