Remember the CD player? When it first came out in 1982 to buy one cost around one thousand dollars. Adjusted for inflation, today that would be roughly three thousand of your hard earned dollars. Of course the price of the CD player would drop precipitously in the early 2000’s and that wasn’t because CD players had gone out of vogue. They were still a big thing. It was simply that the price of all electronics dropped along with seemingly every other household item. What happened?

 

In 2001, China joined the World Trade Organization. Soon after, markets were flooded with low cost goods and North American’s couldn’t get enough. They steadily filled their shopping carts in the years that followed. Cheap coal energy to fuel manufacturing, massive amounts of excessive production capacity, and the benefits of state owned enterprise were all factors that drove costs down. That said, no greater factor played into this than the relative value of China’s currency, the “Yuan.” It was a huge advantage for their exports and a contentious issue as the US implied they were constantly devaluing the Yuan to maintain a large trade surplus.

 

What’s interesting to note is that as manufacturing shifted to China so did coal use. It went up by more than ten times in the years that followed their inclusion into the WTO. China now finds itself in the midst of a pollution and health crisis as a result. They’re obviously very aware that they need to seek more expensive alternatives, and that coal is not a sustainable way to fuel their economy.

 

This is probably one of the factors that’s driving a shift in China’s view on trade and their currency. China’s strategic imperative when it comes to the Yuan has changed. One of the stated goals of their current government is to grow less dependent on exports. Furthermore, a higher Yuan provides deflationary benefits to the working class Chinese population who have been struggling with increasing inequality, something their government is now targeting as it tries to get back to more communist ideals. Even in the midst of a domestic real estate crisis and one of the first major economic challenges the country has seen in decades, the Yuan is rising.

 

As well, for the first time since engaging with the West, China is exporting inflation and it appears as though this may not be entirely transitory. If so, it will take some time for the world to adjust. Supply chain issues are definitely at the heart of the inflation concerns we keep hearing about however, we may also be in the midst of a policy and paradigm shift in the world’s 2nd largest economy.

 

We're certainly not going to see a reversion to the prices we paid for electronics in the early 80's, but we may not enjoy steadily decreasing prices either, even after our supply chain issues are resolved.