Seven Reasons Why We Should Not Depend on Imported Goods from China

It seems to me that the situation in China is far different from what most people think it is. Even if we would like to depend on China, we really cannot.

Reason 1. When we depend on goods from China, an amazingly large share of the world’s industrial activity gets concentrated in China.

The five largest users of energy in the world are China, the United States, India, Russia, and Japan. The International Energy Agency shows total energy consumption as follows for the year 2016:

Figure 1. IEA’s estimate of energy consumption (total fuel consumed, or TFC) by sector in 2016 for the top five energy consuming nations. Mtoe is million tons oil equivalent. Source: IEA. Non-energy use is the use of fossil fuels as a material to create end products that are not burned. Examples include medicines, plastics, fertilizers, asphalt, and fabrics.

When these countries are compared, restricting our analysis to the portion of energy used by industry, we find the rather disconcerting result shown in Figure 2:

Figure 2. Chart by the International Energy Agency showing total fuel consumed (TFC) by industry, for the top five fuel consuming nations of the world.

China consumes more fuel for industrial production than the next four countries listed (United States, India, Russia, and Japan) combined. Of course, we don’t know exactly the corresponding amounts for other countries of the world, but we can observe that if a country is concerned about its CO2 emissions, the easiest way to reduce these emissions is to send heavy industry elsewhere, such as to China or India. There are likely many countries that are primarily service economies, thanks to the option of outsourcing most industry to other countries.

Much of the discussion I have read regarding sending industry elsewhere has been in the direction of, “As advanced as our economy is, we don’t need heavy industry; service jobs will substitute. Industry can be developed at lower cost elsewhere. Everyone will be better off with this arrangement. The invisible hand will provide jobs and goods and services for everyone.” In addition, corporations saw the possibility of adding customers from around the world. Not too many thought about the real-world problems that might result.

Clearly there is a problem with the jobs being lost to China and other Emerging Markets. When new service jobs are added, they often do not pay as well the industrial jobs they replaced. In fact, there might not be enough jobs in total, if automation plays an important role as well.

Another issue is that the level of industrial concentration can be a problem. We are now depending on China and perhaps a few other countries to provide for a large share of the “stuff” we use. Even if China is not the only provider, it is often an important part of the supply chain. If something should go wrong (for example, widespread riots in China), we don’t have a Plan B.

Reason 2. China needs energy products to make the goods it uses for itself and for the goods it exports. China’s own energy supply is faltering. Because of China’s huge size, it is becoming increasingly difficult to keep China’s energy consumption rising sufficiently rapidly using imported energy.

China’s own energy production is shown in Figure 3. (Note: Hot off the press! New BP report released this week.)

Figure 3. China energy production by fuel, based on 2019 BP Statistical Review of World Energy data. “Other Ren” stands for “Renewables other than hydroelectric.” This category includes wind, solar, and other miscellaneous types, such as sawdust burned for electricity.

It is easy to see that China’s coal production hit its highest point in 2013 and has stayed at a lower level since that date. Also, China’s highest oil production occurred in 2015, with lower production since that date. China’s total energy production has been rising recently, but only with great effort. Total energy production is only 8.9% higher in 2018 than it was in 2012, implying an increase of less than 1.5% per year, relative to 2012 amounts.

A standard workaround for inadequate energy production growth is imported energy products. Even with these imports, it has been impossible to keep total energy consumption rising as rapidly as it rose in the 2002 to 2007 period. The cost with imports is greater, also.

Figure 4. China energy production by fuel, plus line showing its total energy consumption (including imports), based on BP 2019 Statistical Review of World Energy data.

In 2018, China imported 71% of its petroleum (either as crude or as products), and 43% of its natural gas. It was the largest importer in the world with respect to both of these fuels.

In 2018, China’s coal imports shrank as its own coal production surged. This was almost certainly a change planned by China. China would much prefer producing its own coal (and keeping the jobs within the country) to importing coal from elsewhere. China imported 4% of its coal from elsewhere in 2018.

Reason 3. The commodity demand from China is so huge that, to a significant extent, it determines world commodity price levels. Where regional energy prices exist, China’s choice regarding whether or not to import from a country can influence local price levels.

Chile is the largest copper producer in the world. A recent article regarding problems associated with lower copper prices notes that the demand for Chilean copper has been driven “almost entirely by the expanding Chinese economy over the last three decades.” For many commodities, China consumes over half of the world’s commodity supply. If China’s industrial demand is growing, prices will tend to rise, allowing more of the mineral to be extracted. Higher commodity prices tend to be needed over time because the ores of highest concentration (and otherwise easiest to extract ores) tend to be extracted first. Ores extracted later tend to be more expensive to extract, so higher prices are required for extraction to be profitable.

This situation of China playing an extremely large role in commodity prices holds for a very large number of commodities. If China is building widgets or any other product, using a particular commodity, China’s need to buy this commodity in the world market will tend to hold up world prices for the commodity. This situation holds even for fossil fuel prices.

Reason 4. Over the next few years, China’s coal supply is likely to fall significantly because of depletion. This lower fuel supply is likely to lead to a shrinkage of China’s industrial capability, and, indirectly, falling world commodity prices of all kinds.

The problem that China is encountering in Figure 3 is “peak coal.” This is a similar problem to that encountered by the United Kingdom immediately before World War I, and to that Germany encountered just before World War II.

Figure 5. The timing of the peaks is peculiar, relative to wars.

Coal tends to be the industrial fuel of choice because it is cheap. Goods made with coal tend to be inexpensive, especially if wages paid to workers are low and if the company making the goods does not spend much money on pollution prevention. Hydroelectric can be an adequate substitute for coal, if the water flow can be depended upon. Wind and solar are too intermittent and not sufficiently inexpensive to be adequate substitutes for coal. Wind and solar (included in “Other Ren” on Figure 3) are also far smaller in quantity than coal.

Outsourcing a large share of the world’s manufacturing to China seemed like a great idea back when it was started, often in the early 2000s. If, at some point, China cannot really handle the responsibility it has taken on, outsourcing gets to be a huge problem.

The reason why coal prices cannot rise very high is because if they do, the prices of finished goods will need to rise as well. Wages of workers around the world will not rise at the same time because the higher cost of production takes place due to something that is equivalent to “growing inefficiency.” The coal mined is of lower quality, or in thinner seams, or needs to be transported further. This means that more workers and more fuel is needed for each ton of coal extracted. This leaves fewer workers and less fuel for other industrial tasks, so that, in total, the economy can manufacture fewer goods and services. Because of these issues, countries experiencing peak coal are pushed toward contraction of their economies.

Unfortunately, rather than leading to high prices (to compensate for the higher extraction costs), running short of inexpensive-to-extract fuel tends to lead to war, or to tariff fights. Countries whose coal is depleting will try to maintain their own supply as long as possible. They will invent excuses to stop importing coal. Back in September 2018, the Financial Review reported, “China has introduced unofficial restrictions on coal imports in a bid to prop up domestic prices by slowing down customs approvals at key ports.” China needed higher internal prices to make it profitable to extract coal from its depleting coal mines.

Figure 6. Chart showing prices of Brent Oil, China Qinhuangdao Spot Coal price, and Asian Marker Coal, all in US$ of the day. Amounts from BP 2019 Statistical Review of World Energy. Note also that the units of coal (ton) are much larger than the units of oil (barrel) used on this chart. Thus, the same number of dollars of buys a much larger quantity of coal than of oil; coal is cheaper.

If higher coal prices really were possible over the long term, it would make it possible to open new mines in more distant locations. The location of coal mines is important because transport costs by rail or truck tend to be high. China built the large ghost city of Ordos, Inner Mongolia, on the expectation that coal prices would rise, making development of coal in the area profitable. Unfortunately, coal prices fell, making the project not economic. I visited the area in 2015, after teaching a short course on Energy Economics in Beijing. There was a large almost empty airport, and few vehicles were using nearby multi-lane roads.

Reason 5. All of the concern about future tariffs artificially raised China’s 2018 industrial production and commodity prices. Because production was brought forward into 2018, China’s production and world commodity prices can be expected to be lower in 2019 and in future years.

Manufacturers wanted to front-run tariffs, so they tended to ramp up production in advance of the tariff implementation date. This higher production in turn tended to raise commodity production and prices around the world. Note on Figure 6, above, that coal and oil prices are both higher in 2018 than in 2017. Prices in 2019, not shown, are tending to trend downward again.

China badly needed higher coal prices in order to help its coal extraction. Thus, part of the reason that China was able to continue to function as well as it did in 2018 was because of all of the discussion about future tariffs. If this discussion had not taken place, employment in China would likely have been lower. With this lower employment, sales of automobiles and smartphones would have been lower as well.

Note, too, that even with the demand brought forward into 2018, China’s economy was not functioning very well in 2018. Private passenger automobile sales for the year fell by 4%. Smartphone sales fell by a worrisome 15.5%. Clearly, workers were having difficulty buying the kinds of goods a person would expect a growing economy to be selling. I would attribute these problems to the peak coal problem mentioned earlier, making it increasingly difficult to increase the amount of industrial operations provided by China’s economy.

Reason 6. The Chinese economy has been gradually changing and adapting to hide its energy problems. Even more changes will be needed in the future, potentially affecting the world economy, with or without tariffs.

The Chinese economy reports carefully massaged GDP numbers, which many analysts consider to be inflated in recent years. Its debt level keeps rising to try to keep all of its operations going.

We know that China discontinued one major industry at the beginning of 2018: recycling plastic and other types of low-valued recycling. With low oil and natural gas prices, this type of recycling cannot be profitable. Of course, discontinuing a major industry can be expected to lead to a loss of jobs within China. But, on the positive side, it frees up coal and other energy resources in China for other industries that can (perhaps) make more profitable use of them.

On a world basis, the loss of the plastic recycling industry becomes a problem. If rich countries are willing to subsidize the cost of sending plastic recycling to China, this subsidy allows containers that bring goods to rich countries to be sent back to China with a paid load inside. Thus, operating the plastic recycling industry helps keep the cost of shipment of goods from China to the US or Europe down because the shipping costs only need to cover the one-way cost of transit, rather than also covering the cost of shipping the empty container back. Without the subsidy to pay the freight of the plastic recycling, costs for the shipping industry rise, making international trade more expensive. Eliminating the subsidy that rich countries are paying to ship otherwise-empty containers back full of mixed trash is part of what pushes the world economy to contraction.

Other countries are not taking over very much of China’s role in recycling plastic, either. The net effect is that the loss of recycling is one of the things pushing the world toward contraction.

China has no doubt been cutting back in other ways as well. It is likely that it is not building as many uninhabited cities and roads that are really not needed. Ugo Bardi recently posted this chart showing global cement production.

Figure 7. World Cement Production by Ugo Bardi from a blog post on January 19, 2019.

China produces over half of the world’s cement; part of the reduction we are seeing relates to China’s falling use of concrete in new buildings and roads.

In some cases, China is moving in the direction of being a service economy. A recent video states that of the $237.45 cost of producing an iPhone in China, Chinese workers only provide assembly services, worth $8.46. The US contributes $68.69 of the cost, mostly in the design and distribution phases. The parts are generally outsourced from other parts of the world.

One way of looking at what is happening in China’s economy is to analyze the country’s oil consumption in terms of the relative amounts of diesel (used primarily by industry) and gasoline (often used by private passenger vehicles).

Figure 8. Gasoline and diesel consumption for China, based on data from 2019 BP Statistical Review of World Energy.

Based on Figure 8, it appears that China’s industrial growth suddenly leveled off about 2012. This, not by coincidence, is about the time that China’s coal problems were becoming apparent in China. China’s gasoline consumption has continued to rise, however. It appears that once it became apparent that its coal supplies were starting to seriously deplete, China began to “grow” China’s economy more as a service economy. After 2012, most growth seems to have come in the non-industrial sectors of China.

Reason 7. A major concern should be a financial collapse, far worse than 2008, both in China and for the world as a whole.

The world needs growing energy supply to support the world economy. China is increasingly having difficulty with its energy supply. When China has trouble with its energy supplies, the world as a whole has a problem with its growth in energy supplies.

A few months ago, I showed the role China has played in the world economy is this chart:

Figure 9. Ten year growth in world energy consumption, divided between the blue portion associated with rising population, and the red portion associated with higher energy consumption per capita, which I have called “Living Std.”, meaning “Higher Living Standards.”

China added a little bump in GDP growth at the end of the nearly 200-year time period shown, after it joined the World Trade Association in December 2001. The energy added by China (mostly in the form of coal) allowed the world economy to continue to grow, when it otherwise would have been up against limits.

Now we are reaching a situation where China’s energy production is likely to flatten or fall because of the depleted state of its coal mines, and the fact that coal prices can’t rise high enough, for long enough, to open new mines. The world economy, over the period shown, has always had rising energy consumption. In most cases, energy consumption rose faster than population growth, allowing some growth in the standard of living over time.

Changing to a situation of shrinking energy consumption per capita would likely be extraordinarily traumatic. Population would likely fall. Commodity prices would drop to low levels. Debt would tend to default; prices of shares of stock would fall. Many governments would fail. If shrinking energy consumption per capita starts in one country (whether China or elsewhere), it could easily spread to other countries around the world.

We don’t know what is ahead, but we know that the low points on Figure 9 were very bad times, even though energy consumption in total was not contracting. The decade of 1860 to 1870 was the decade of the US Civil War. The decade of the 1930s was the decade of the Great Depression. The decade of the 1990s was the decade of the collapse of the central government of the Soviet Union.

We also know that world energy consumption and GDP growth tend to be highly correlated.

Figure 10. World GDP Growth versus Energy Consumption Growth, based on data of 2018 BP Statistical Review of World Energy and GDP data in 2010$ amounts, from the World Bank.

This is as we would expect, because energy consumption is required for the many aspects of GDP growth. Transportation, heating and/or cooling, and electricity all require energy consumption, for example.

The recent divergence between GDP and energy consumption on Figure 10 may be the result of overstated GDP amounts by China, India, and other countries. If a country wants to appear inviting for new investment, there is a temptation to overstate GDP since other countries seem to be doing so, without penalty.

Back during the Great Recession of 2008-2009, our problem was with homeowners who took out loans that were far higher than they could really afford. Today, we have whole economies taking on more debt than properly stated GDP reports would suggest they are able to handle. We go from one version of optimism regarding debt levels to another.

Conclusion. If a person doesn’t understand how badly the energy situation is working out for China, or how important energy consumption is, it is easy to think that the problems China is facing are primarily tariff-related. In fact, China’s situation is a very worrisome one, with or without tariffs being added.

To fix the situation, China would need a very cheap, non-intermittent, locally produced, non-polluting additional energy source. This energy source would also need to be rapidly scalable. Such an energy resource doesn’t appear to be available.







About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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890 Responses to Seven Reasons Why We Should Not Depend on Imported Goods from China

  1. SUPERTRAMP says:

    Gail was right, AGAIN!
    Clean, potable water will be as more valuable than your precious metals.
    I’ll drink to that….
    CDC warns of fecal pool parasite — how you can stay safe
    In a decidedly unpleasant turn for pool-goers, the Centers for Disease Control and Prevention (CDC) issued a warning Friday about a fecal parasite that can cause symptoms such as “watery diarrhea, stomach cramps, fever, and vomiting.” Known as cryptosporidium or “crypto,” the microscopic parasite is commonly found in swimming pools — where it can reportedly survive in the water for days.
    In a CDC study released last week, researchers found more than 7,465 cases of “cryptosporidiosis” from 2009-2017, 35 percent of them from pools.
    According to the CDC, all swimmers should avoid the pool if they are ill with diarrhea. Parents should take kids on regular bathroom breaks, and check their infants’ diapers at least every hour. Those who are diagnosed with crypto should avoid the pool entirely for a minimum of two weeks.
    Although a large number of cryptosporidiosis cases originate with pools, lakes and rivers can also be vessels for the disease. Of the more than 7,000 cases identified in the CDC’s study, roughly 3,335 cases came from freshwater. As a result, the CDC warns not to “drink untreated water from lakes, rivers, springs, ponds, streams, or shallow wells.”

    Montezuma’s Revenge is waiting to get you!

  2. SUPERTRAMP says:

    Working smarter…not harder…
    And the doomers said it couldn’t be DONE….WEAREDOING IT!!!!

    In June 2014, the U.S. pumped 8.4 million barrels of crude using 1,545 drilling rigs. Last month, it produced about 12.2 million barrels, 45% more, with just 788 rigs.
    “I have an industry that’s built for way more work than we are currently doing, or that we think will be done in the foreseeable future – or at least the next three or four years,” said Richard Spears, an industry consultant who’s also worked in and around the oil patch for decades
    “A major value transfer is underway between oilfield service companies and E&P entities,” James West, an analyst at Evercore ISI, wrote in a report earlier this year. “Rather than seek to preserve value, companies sought greater market positioning despite the structural predicament. Intense competitive conditions exist in almost every major oilfield service product line

    During the same period, the biggest oilfield service and equipment companies have spent $88 billion while earnings have dropped by $5.8 billion, and net debt has climbed by $24 billion, according to Evercore
    Servicers need to focus more on digital technology, switching from diesel-powered frack equipment to electric and generally improving the quality of their gear, said Jud Bailey, an analyst at Wells Fargo. Doing so could lower costs by 25-35% over the next five years, he estimates
    Some analysts and investors, meanwhile, are seeking more widespread consolidation.

    “The oilfield services industry has fundamentally changed,” Carin Dehne-Kiley, an analyst at S&P, wrote in a report to investors. “Companies will no longer be able to generate the high operating margins they did in 2014.”
    BAU Capitalism, ain’t it a beautiful thing?, Whatever it takes to keep the wheels stopping.
    Sorry Doomers, its not gonna happen just yet.
    Fast Eddy was right, to bail out and go mainstream….


    • I imagine this has to do with completing wells that had been drilled earlier, but not been fracked. Also, paying fracking companies less for their services than they need to stay in business.

  3. Harry McGibbs says:

    “As governments across the globe struggle to restore their growth rates, a new spectre has come to haunt many of them: Unsustainable debt…

    “…the specific way in which the global financial crisis was sought to be addressed keeping in mind the interests of finance, has delivered a debt spiral, without imparting much dynamism to the world economy. There is a real possibility of another debt meltdown.”

    • interesting, reading that article.

      it keeps blathering on about debt, no mention of the necessary energy that has to underpin it, as if money is a self supporting entity, requiring no external support system at all.

      Debt expands when available energy contracts. The debt expansion is the denial of that contraction, ie—we borrow more and more to pretend that debt can somehow be repaid at some vague time in the future. (a common human failing)

      But of course, if energy doesn’t rise to meet debt commitments, then the whole house of cards must collapse.
      That law is as inflexible on the domestic level as the national level:

      skim a stone across a pond
      with muscle power imparted
      watch as each bounce gets less
      and how world energy departed

      • Xabier says:

        In the 19th century and the first half of the 20th,, debt was a wining bet, as the energy available globally expanded: now we are like the gambler making ever higher wagers which far exceed the value of all his pledges – estates, houses, etc – and who must lose.

        When the game is over ,and the cold light of dawn breaks……

        • that’s the point i find impossible to put over

          from 1750 we had ever expanding energy supplies, which funded ever expanding debt

          the energy extracted from one coalmine funded the digging of the next one (via steam power)

          those debt economics transferred to oilwells, and thus into every other industrial enterprise

          it is this single fundamental concept the people at every intellectual level refuse to accept—there is a fixation that prosperity comes from cashpassing not energy increase

          we have now reached the stage where everyone must run faster and faster just to stand still
          which in economic language means borrowing more and more money to pretend that the energy factor is just a side issue

          it also explains why average wages have remained static in real terms for 40 years

      • Tim Groves says:

        Time for a song!

        Income Town
        You’ve got no work and you’ve got no money
        You’re just a little pouty, life’s no so funny in
        Income Town, living down in Income Town
        Your eyes are so wide, your head’s still spinning
        Can’t you see there is no winning in
        Income Town, no winning in Income Town.

        Your hands are still sore from wild end fighting
        I don’t see, there is no right and no wrong you done
        No right and no wrong you done
        Your smile looks right, your intentions are right
        Your attitude’s cool, your futures bright, you’re in
        Income Town, welcome down in Income Town.

        Income Town is the place to be
        Income Town was built for you and me
        Income Town makes you sleek and fat
        Income Town leaves you straight and flat.

        The cold comes creeping, the darkness falls
        Nothing to talk to, four brick walls in
        Income Town, living down in Income Town
        You’ve got no life, you’ve got no money
        You’re starting to sigh, future isn’t sunny
        It’s an Income Town, living down in Income Town.

        Your eyes are still wide, your head’s still spinning
        You’re starting to sigh, there is no winning in
        Income Town, there’s no winning in Income Town
        So kick up the heels with the rising sun
        Pick up your feet, come on, let’s run away from
        Income Town, run away from Income Town.

        Lay down your sorrow, pick up your joy
        Come on home, be a country boy
        Just a little while
        Baby just a little while
        Baby just a little country boy
        Country boy
        Take you for a country boy.

        • Harry McGibbs says:

          Nice! That article I posted above about the worsening disparity of wealth in the US since the last financial crisis made me think of this Tracy Chapman track:

          “People say it doesn’t exist
          ‘Cause no one would like to admit
          That there is a city underground
          Where people live everyday
          Off the waste and decay
          Off the discards of their fellow man

          “Here in subcity life is hard
          We can’t receive any government relief
          Won’t you please, please give the President my honest regards
          For disregarding me…

      • If the energy doesn’t rise.. the system can cannibalize (or triage priorities) itself for a while more.. Don Stewart hinted about it in great writing clarity at Surplus comments. these days.

        Yes, so despite the ~40yrs of stagnation inside the IC hubs, and the past insane decade of negative interest rates, there could come yet another postponement of the predicament via sacrificing some segments of the economy. So far and for example ‘the Greta’s faction’ pushes fake-specific way of austerity (essentially for BAU extension of certain elites) in the form of curbed emissions and its implication on consumption. In other words and as example, there could be few more decades in the tweaked system, where big box stores and personal automobiles are to be cut in certain fashion, etc.

        • Of perhaps a few areas of the world economy could be sacrificed. Cuba is not adding much, for example. Neither is North Korea. Parts of China are not adding much–inland areas in particular, where China has been spending a lot of infrastructure, but the cost of production and transport is too high. The coastal area (excluding the industrial Northeast) might be OK for a while longer.

          There are also a lot of problem areas in Europe, including the UK. Also, Japan has major problems, especially since Fukushima.

          The areas whose production is going negative

          • DJ says:

            I’m waiting for lowered standards, especially in resident building, but also health care and guaranteed pensions.

            So far system holds together.

        • DJ says:

          Having built out infrastructure 50, 100, 200 years ago and now not even maintaining it is a form of triage that could/have go/ne on for long before hurting.

  4. Harry McGibbs says:

    “India’s $42 billion shadow-banking system has been creaking since one of the country’s biggest infrastructure lenders unexpectedly halted debt repayments in 2018. Investor nerves were rattled again in June when a major mortgage lender delayed bond interest payments, indicating credit markets remain under enormous strain…

    “Can investor confidence be restored or is a full-blown financial crisis brewing?”

  5. Harry McGibbs says:

    “The U.S. broke its record for time without an economic recession Monday as it began the 121st consecutive month of gross domestic product (GDP) growth since the 2008 recession. The recovery, which began in July 2009, turned 10 years old Monday, marking the longest stretch of economic expansion in modern U.S. history.”

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