Chinese Beggar Thy Neighbor Policy Starts to Upset Neighborhood

Interesting angle on the effect of Chinese currency devaluation on its neighbors. There has been a lot of talk about the impact of the artificially low currency on the US and the debt bubble, but what about Chinese neighbors? Without the US absorbing huge amounts of cheap excess goods, marginal producers in Indonesia and Vietnam are wiped out. Interesting dilemma. It's a mercantilism policy and it's interesting to examine how mercantilism typically resolves. Via NY Times:

Until 2008, Mr. Pettis said, “most of these countries ran trade surpluses, and the U.S. was the countervailing trade deficit.”

“The entire model depended on the ability of an external agent — the United States — to absorb trade deficits,” he added.

Indonesia is especially vulnerable to the shift. It is the most populous and arguably the least economically advanced nation among the onetime Asian Tigers, and perhaps the least able to accommodate itself to a new regional order dominated by China.

Didik J. Rachbini, a professor and the founder of an economic research institute here, said that in the past four years, Indonesia had swung from more or less parity in bilateral trade to a deficit equal to one-third of its annual exports to China — and rising.

The lowly nail is one focus of tension. Making nails is not complicated: start with a bale of steel wire, shave it down to the proper diameter, then feed it into a punch that shapes the nail, cuts it and spits it into a bin. Labor and machinery account for 10 or 15 percent of the cost of a nail. The rest is the cost of the wire.

And that is Indonesia’s problem.

“Many Chinese steel factories have overcapacity, so they sell their wire very cheap,” said Ario N. Setiantoro, who leads the Indonesia Nail and Wire Factory Association. “Chinese nails enter the market here at about the same price as our wire.”

He is right. Most analysts say China has too many steel mills. Its excess steelmaking capacity equals the entire annual production of the world’s No. 2 steelmaker, Japan. Every Chinese province wants a steel industry, because it conveys prestige, creates jobs and attracts other business.

Beyond supply, Chinese state-run banks support industry with construction loans so cheap that credit can be almost free, holding down operating costs. China’s vast purchases of iron ore lock in volume discounts that Indonesia’s small steelmakers cannot match.

Export markets have dried up.