Diego Daruich

How much are we investing in our industries? Most Argentinians nowadays complain that the government's policies are affecting their investments as they cannot import these goods. This idea can be exploited to evaluate the capital investments of most countries. Even though direct measures of equipment installed in a country by type are not available, Eaton and Kortum have shown that most of the world’s capital is produced in a small number of R&D intensive countries. The rest of the world generally imports its equipment. Two other economists, Caselli and Wilson, then have concluded that, for most countries, imports of capital of a certain type are an adequate proxy for overall investment in that type of equipment. Before leaving Argentina, I thought it was a good time to test how capital imports (and hence investments) compare over a selection of Latin American countries.

The United Nations has a dataset COMTRADE which holds information on all trade for each country, in a quite disaggregated way. (Notice that for some countries one big benefit of this source is that the information collection is independent of their governments). For example, we can check the number, price and weight of male suits made of linen that are exported from Egypt to Germany each year. And this happens for almost any good, year and set of countries you can imagine. Then, by identifying which of these imports are capital, we can identify the value of capital imports every Latin American country has done over the last 20 years. Figure 1 shows this as a share of GDP. It is clear that Bolivia (really Evo?), Chile and Paraguay are some of the highest capital investors/importers. On the other hand, the rest of Latin America seems to be pretty similar, importing/investing below 10% of GDP (I was surprised by Brazil's low numbers as well). Just to get an idea Asia has had a stable average ratio of capital imports to GDP of close to 16% over the same period.

But not all capital is the same when looking at investments. Aircraft or computers are not the same as cars or even more basic electrical equipment. Hence, we can even use COMTRADE data and evaluate the uses of capital investments of each of these countries. For the sake of clarity, in Figures 2, High R&D refers mainly to aircraft, computers and communication equipment; Medium R&D refers to other electrical and non-electrical equipment (includes professional goods like photographic ones); and Low R&D refers to motor vehicles and fabricated metal products. And now we can see how each Latin American country has invested in the last two decades.

Figure 1: Capital Imports as a share of GDP.

Figures 2: Capital Imports Composition, by country.

Let me start with my own country. Argentina has seen a big switch in the early 2000s from High R&D towards Low R&D. Imports of motor vehicles and fabricated metals seem to have taken place over equipment with more advanced uses like computers and other office goods. (This seems to go against what the Argentinean government keeps saying about building our own motor industry.) A similar pattern can be seen in Chile, though in much milder terms. Paraguay is on the opposite end, switching away from Low R&D towards more Medium and High R&D goods. Interestingly, some of the countries with the best recent reputation (like Brazil, Peru or Uruguay) have had a much more stable path. Figures 2 have many stories to tell and probably depend a lot on each country's policies, which I am most likely unaware of. Nevertheless, they do let us test whether the comments our politicians make on industrial and other forms of investment hold in the data. So pick your favorite country and check it out!

With the recent constant appearance of Alibaba on the news, the increasing relevance of Chinese exports to the world is extremely clear. Low-income countries accounted for just 9% of US manufacturing imports in 1990. But by 2007, they had more than tripled its share. And who do you think was behind this? China accounted for as much as 89% of this increase. 

In this period, China's transition to an open economy included a massive 150 million people migrating from rural to urban areas. Imagine reallocating around half of the United States population geographically, with a particular focus on manufacturing production. Add to this formula novel access to foreign technologies as well as capital and Chinese exports growth to seem reasonable. However, did this come to the expense of anyone? This is the main objective of this post. One group being threatened by Chinese takeover of manufactures is obviously the manufacturing workers in the rest of the world. As these goods are easily tradable, we could expect job losses in these sectors. The figure below shows that as Chinese increased its relevance in US imports, the share of the population working in the manufacturing sector in the US decreased by one third.

However, many things could explain this decline. For example, it could be that Americans themselves were getting more educated and moving to other sectors. Alternatively, the service sector could be becoming more productive in the US, offering higher wages and hence draining employees from the manufacturing industries. These (and many other alternatives) do not involve China's exports growth. Moreover, they could be causing the increase in Chinese exports themselves. (Imagine US decides to get out of the production of manufactures, leaving a lot of unsatisfied demand which leads the Chinese to produce more). Hence, in order to make sure we are capturing the correct effect, modern econometric techniques come to the rescue! Autor and Dorn (AER, 2013) basically exploit the differences in the exposure to import competition across cities in the US. For example, it would be expected that - if the leading cause comes from the Chinese side - an area where manufacturing employed 25% of the people to be more affected by Chinese exports than an area that only employs 10% in manufacturing. Particularly, they will differentiate areas by how specialized they are in each division within manufacturing, and how imports from each of these changed over time. And these differences will give us the information we are after. 

Looking at wages, the effect found of imports from China is negative. An increase in the imports per worker of around three thousand dollars (which was the average change from 1990 to 2007), would explain a decline of around 2.25% (0.76 times 3). More interestingly, this effect is stronger among men and people without college education. It is important to remark that this can only be calculated for the employed. Hence, if we expected workers with lower ability and earnings to be more likely to lose their jobs after the Chinese expansion, the effect on wages above would be understated. And so wages would have fallen even more for the whole sector, it's just that the effect could be hidden by the increasing number of people losing their jobs.
And what if we divide the effect between sectors? I would have expected the wage effect to be stronger in the manufacturing sector itself. But well, the data seems to suggest the opposite: wages seems to have been unaffected in this sector. However, the manufacturing sector was particularly affected by a major reduction in employment (predicting a decline of 12% due to China's increase in exports). 

So most of the effect on wages mentioned for the whole economy seems to come from the non-manufacturing sectors. How can this be possible? Well, (adaptive) story telling is a prerequisite for any upstanding economist. And here is the one that seems most appropriate given the results: the increase in imports from China led to firing of the lower skilled workers in the manufacturing sector but had no effect on their average wages (note this could still involve a decrease in the wages of the ones that remained employed). Having no new paychecks, these newly unemployed decided to reduce spending and so decreased their purchases of services that have to be provided locally (like a haircut or a dentist). This reduced this local sector's revenue. Moreover, the newly unemployed also fled to other sectors looking for jobs. Having lower revenues and seeing lots of people of willing to work for less, other sectors reduced their wages.
The End.

If you have ever shopped on eBay or Alibaba (a Chinese alternative that sells bulks of anything you can possibly imagine), you may have noticed that many Chinese sellers offer free worldwide shipping. This made me wonder how they could possibly afford this service...

Of course they could be covering the shipping costs with the price charged for their products. However, when you can buy a wireless mouse (this was how I noticed this) for 4 dollars including shipping this seems impossible. If it costs more than a dollar and is not very heavy or bulky, there are high chances some Chinese person on eBay is offering free shipping. Just mailing a letter within the US costs around 50 cents. And if you have to mail a 4oz (around 110g if you don't believe in this ridiculous imperial system) package it is more than $2.5 (or above $6 to China). Then you need to add the cost of production, the postage within China, the overseas postage, the two customs offices. And assuming that the Chinese seller needs to eat something to survive, we'd better have some profit left. "Do packages even arrive?" you might wonder. Yes, this is not Argentina's mail service my friends. 

What is behind this low cost that worldwide buyers and Chinese sellers enjoy (but non-Chinese sellers hate!)? A few things came up after some research. First, lower living costs can account for lower prices. Secondly, the Chinese government subsidizes the shipping cost (although apparently it somehow still does break even). Finally, particularly for shipping to the US, the most important reason behind seems to be an agreement between eBay, USPS and China Post called ePacket. This gives the Chinese sellers bulk shipping rates (to individual packages as well) at a rate far below imaginable. According to an EcommerceBytes article, in 2011 almost 40% of them used this service with over 80% of items delivered in 5 to 10 days. Here is a list of the shipping prices the sellers pay.

Well, taking into account that the mouse I bought was around $4. The package was at least 4oz, so mailing costs were above $1.7. This leaves at most $2.3 to distribute between all the ones involved in the production and the seller (take into account a wireless mouse on Amazon is around $10 without shipping). Well, (as so often among economists) maybe my first assumption that Chinese people need to eat to survive is wrong...