Trade Woes in Asia Bring Inflation Relief to U.S. Consumers

SINGAPORE—Sinking global trade is pummelling Asian exports, bringing some relief on inflation to U.S. and other Western consumers.

But easing prices for home furnishings, electronics and other manufactured goods don’t signal high inflation will soon be defeated. Wage growth and services price gains are still elevated. And central banks in the U.S. and Europe are warning they aren’t finished raising interest rates in their fight to cool inflation.

Cheap Asian goods helped keep a lid on price growth for decades before the pandemic. Economists say that phenomenon is unlikely to return with the same intensity now that the high-water mark of globalisation has passed.

Asia’s powerhouse exporters enjoyed a boom in overseas sales during the pandemic as locked-down consumers splurged on new computers, workout gear and home improvements.

On a rolling 12-month basis, the U.S. dollar value of exports from China, Japan, South Korea, Taiwan and Singapore peaked last year in September at $6.1 trillion. That was 40% higher than recorded over the 12 months through March 2020, when the pandemic began, according to a Wall Street Journal analysis of official figures compiled by data provider CEIC.

Asian exports started sliding late last year as rising interest rates took some heat out of economic growth. Western consumers have slowed spending on goods in favour of eating out, traveling and other services they missed during the pandemic. Hopes that China’s reopening would spur a rebound in trade have fizzled along with the country’s consumer-led recovery.

Exports from South Korea over the 12 months through May were 11% lower than they were in the year through September. Taiwan exports were down 14% over the same period. Singapore’s were down 6%, Japan’s 4% and China’s by 3%.

The weakness in trade is showing up in the prices charged for goods when they leave Asia’s factories. Chinese producer prices fell 4.6% in May compared with a year earlier, the eighth straight month of declining supplier prices in the world’s largest factory floor. Similar gauges of inflation in other Asian exporter economies are weakening, too, as lower commodity prices reduce costs and collapsing demand for goods saps companies’ pricing power.

The effects of cooling Asia trade are starting to be felt in the U.S., where the Federal Reserve signalled it expects to further increase interest rates after holding them steady this month.

U.S. import prices for goods from Hong Kong, Singapore, Taiwan and South Korea were down 6.3% in May compared with a year earlier, according to the Labor Department. Import prices were down 2% from China and 3.7% from the Association of Southeast Asian Nations, a 10-member group that includes Indonesia, Malaysia and Thailand.

The prices paid by importers don’t quite line up with the prices faced by consumers, as companies need to cover labor, shipping and other costs to get products into stores.

Nonetheless, prices declined in May from a year earlier for a variety of goods in the U.S. that are often sourced from Asia, including furniture, home appliances, televisions, sports equipment, computers and smartphones.

Overall U.S. inflation is proving resilient, though. The consumer-price index, which measures what Americans pay for goods and services, rose 4% in May from a year earlier—twice the Fed’s 2% goal. Core consumer prices, which exclude food and energy, climbed 5.3%.

If surging prices for goods during the pandemic delivered the first burst of inflation, and rocketing energy prices after Russia invaded Ukraine propelled the second, then the current stickiness of inflation is being fuelled by increases in wages and the price of services. So while easing goods-price inflation is welcome, it doesn’t mean central banks have won the battle, economists say.

“The disinflation impulse coming from Asia is not going to be the magic bullet for the West’s inflation problem,” said Frederic Neumann, chief Asia economist at HSBC in Hong Kong, referring to the slowing pace of price increases.

In the decades before the pandemic, the integration of China into the global economy contributed to a long spell of low and stable inflation enjoyed by many Western economies. The broader integration of markets for goods, services, labor and capital under the banner of globalisation meant cheaper goods for consumers and fewer inflation worries for central banks, though economists debate just how big the effects were.

Now, governments and corporations are tiptoeing away from unfettered globalisation in the interests of security and economic resilience. Manufacturers are adding factories in Vietnam or India while reducing their reliance on China, reflecting concern over icy relations between the U.S.-led West and Beijing. Governments are dangling subsidies in strategic industries such as semiconductors and green-technology products to bring investment and jobs home.

Such trade fractures can increase costs for manufacturers, which, alongside healthier global demand, suggests that inflation in the future won’t be as subdued as it was in the recent past, economists say.

That doesn’t mean globalisation is over or that Asia won’t remain a competitive place to manufacture. But it does mean Asia is unlikely to be as potent a force in tempering price gains as it once was.

“The golden era of globalisation—and the disinflationary pressure associated with that—I think that has gone,” said Neil Shearing, group chief economist at Capital Economics in London.

Note: Usual Northern Sea Route shown for illustrative purposes Source: Sea Legend Daniel Kiss/WSJ

Shipping cargo through an Arctic shortcut never made economic sense—until now.

Climate change and war in the Middle East are flipping the math that previously kept ships plying longer routes from Asia to Europe. A Chinese company on Saturday is starting the first regular cargo service to Europe through Arctic waters, seeking to reap the benefits of quicker travel time and less fuel use.

The shipper Sea Legend will dispatch the Dubai Tower from Ningbo, China, to Felixstowe in the U.K. on what it calls the Arctic Express, following a route along Russia’s north coast. The voyage by the vessel, which is capable of carrying 1,740 20-foot containers, is the biggest commercial step in the Arctic since a Maersk containership first completed the route in 2018.

Global warming is a big factor behind the new route, but it is not the only one. Nearly half the Arctic region’s summer ice—an area four times the size of Texas—has melted over five decades, clearing a fairly reliable path in the summer months. Meanwhile, high oil prices and attacks by Houthi rebels in the Red Sea have made the traditional routes costlier and more dangerous.

Members of China's 16th Arctic Ocean scientific expedition team take selfies on the ice surface. — Members of a Chinese scientific expedition team on surface ice in the Arctic Ocean this week. Wen Jinghua/Xinhua/ZUMA Press

Beyond that, Beijing has ambitions to play a role in the Arctic’s future, lending a geopolitical dimension to the Chinese company’s shipping route.

Last year Sea Legend completed a trial run from Asia to Europe in a record 20 days. That is roughly half the time of a voyage via Africa’s Cape of Good Hope that many carriers now take because of the Red Sea uncertainty.

Fuel accounts for 70% or more of the costs while at sea, said Alan Murphy, a former Maersk analyst who runs research firm Sea-Intelligence.

Saving fuel by shortening the journey doesn’t automatically make a route profitable. Insurance premiums for the Arctic are 40% higher than the Cape of Good Hope route, said Jonathan Steenberg, an economist at credit insurer Coface. Sea Legend’s Arctic vessels are relatively small. And even after warming, an icebreaker is still sometimes needed to help the cargo ship.

But if the ship can go without an icebreaker, Coface said the Arctic route is now cheaper than a Cape of Good Hope voyage in some circumstances. It estimated that at current oil prices of around $90, the cost of shipping liquid bulk such as liquefied natural gas could drop roughly 33% compared with the Cape of Good Hope route, while dry bulk goods such as cereals would cost about 8% less.

The container ship Istanbul Bridge being unloaded by large blue and red cranes at the port of Gdansk. — A containership operated by Sea Legend in the port of Gdansk, Poland. jackowski/epa/Shutterstock

The route is only passable in the summer and fall. Sea Legend plans eight voyages between August and late October, before conditions get too icy.

“It’s not the Suez Canal but it’s a significant number for the Arctic. It shows there is potential,” said Malte Humpert, founder of the U.S.-based Arctic Institute and author of a book on Chinese shipping in the Arctic.

Even in summer, ships have to navigate around dangerous ice floes and deal with rapidly changing weather. By the end of the shipping season in October, the sky is dark most of the time.

A Russian tanker suffered serious damage to its hull while sailing along the Arctic route despite being assisted by an icebreaker, its insurer, AlfaStrakhovanie, said Thursday, adding that it paid out roughly $650,000.

Coface estimates 3.5% of trade among East Asia, Europe and North America will be able to use Arctic routes within the next five years, representing $64 billion in goods.

Last summer, a record 23 cargo ships transited the Northern Sea Route, which hugs Russia’s north coast. That is tiny compared with the Suez Canal, where more than 30 ships transited daily.

Western companies that want to follow in Sea Legend’s path have to navigate treacherous politics. Russia claims sovereignty over the entire Northern Sea Route and permits for ship traffic are issued by its state-controlled nuclear operator, Rosatom.

Aerial view of a port with many cargo ships, red cranes, and rows of stacked shipping containers. — The Dubai Tower’s route will begin in the Chinese port of Ningbo. Huang Zongzhi/ZUMA Press

“Western companies are in a tricky position,” said Humpert of the Arctic Institute. “At what point do they jump back in the water? When does it become economically necessary, and how do you weigh that against environmental risks and the political dimension?”

An alternative Arctic route, the Northwest Passage that connects the Atlantic and Pacific oceans via the Canadian Arctic, is less passable because it is dominated by narrow waterways where ice gets bunched up. The highest number of cargo ships completing the passage in a year was 13, in 2023.

China has declared itself a near-Arctic state despite not having access to Arctic waters. It depends on Russia’s goodwill to use the Northern Sea Route.

“Beijing is concerned that if they don’t establish a significant strategic presence in the Arctic now, it’s going to be more difficult in the future,” said Marc Lanteigne, expert in polar geopolitics at the Arctic University of Norway in Tromsø. However, he said, “China needs to be careful not to give the impression that they are trying to challenge the strategic order in the Arctic.”

Sea Legend didn’t respond to requests for comment.

Any polar venture contributes to China’s quest to master Arctic travel. The country also has three icebreakers and a support vessel currently on a monthslong scientific expedition north of Greenland. Scientific and commercial voyages can yield data about natural resources awaiting below melting ice caps and information for positioning nuclear-armed submarines.

Trade Woes in Asia Bring Inflation Relief to U.S. Consumers

But slowing exports to Western nations won’t alone stem rapidly rising prices

China is launching the first regular Arctic cargo route to Europe, offering faster journeys and lower fuel costs as melting ice and Red Sea risks reshape global shipping.