$200 Oil + Inflation Threaten China's Economy, Too--And Should Help American Manufacturing

Common wisdom is that China and other Asian giants will inevitably supplant their Western rivals as the world’s economic superpowers. But with oil shooting towards the $200 mark and inflation hovering above dangerous levels, the Chinese economic model is about to undergo a severe “stress test.”

China’s miraculous boom has been fuelled by the outsourcing of manufacturing. Low labour costs and a lax regulatory environnment have made the country an attractive place to outsource the manufacture and assembly of cheap consumer goods. But as fuel costs rise, it begins to make less sense to have a factory in Tianjin manufacture products for markets in Dallas or Munich.

Ambrose Evans-Pritchard in the Telegraph:

The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded. “The monumental energy price increases will be a ‘game-changer’ for Asia,” said Stephen Jen, currency chief at Morgan Stanley. The region’s trade model is about to be “stress-tested”.

The consequences? This is actually positive for the US’s dying manufacturing sector: goods will now become cheaper to produce here. (One US manufacturer recently told us that his auto-related company has “become China for Europe”). It also probably benefits poorer countries in Central America and Eastern Europe that are closer to the big U.S. and European markets.

On the negative side, it also threatens an economy that has become critical to world growth, along with a stock market–Shanghai–that has already dropped more than 50% from its peak.

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