By Kevin Yee | August 4, 2009
Nearly all Americans are familiar with the name brand Wal-Mart and their mantra of “Everyday Low Prices”. For those who do not know, Wal-Mart is a grocery store, discount center, and hypermarket, bringing value to the US suburban and rural market. Strategically, they are masters of their supply chain and an expert in logistics and information systems. Any idea where a large portion of their goods come from? You guessed it. China.
The Wal-Mart Effect Shielding China
For the last decade, exports have sustained China’s development by growing eight-fold. Enter the financial crisis. By the end of 2009, China’s exports are projected to fall by 20%. Historically, regional countries such as Japan, South Korea, and Taiwan have experienced even larger declines. This is grim news for any country, especially those heavily reliant on manufacturing. However, China has not expressed much concern, partially due to its primary role as the supplier in the “Wal-Mart effect”.
In general, the Wal-Mart effect describes economic ripples attributed to the low-cost retail giant, such as driving down prices and forcing local competitors out of business in the US. As the world’s largest retailer, Wal-Mart accounted for 11% of the growth of US trade deficit with China between 2001 and 2006, importing $27 billion in 2006 alone.
In the US, Wal-Mart’s superstores display an enormous selection of products and are a testament to China’s manufacturing prowess across a diverse composition of goods. In addition to stereotypical goods such as apparel and electronics, China manufactures many basic necessities and low-cost goods characterized by relatively inelastic demands. During the US recession, these inferior goods may actually experience an increase in demand by retailers such as Wal-Mart. Aforementioned countries such as Japan, South Korea, and Taiwan that primarily produce sophisticated and expensive goods have witnessed a more significant drop in export levels in comparison to China. The initial reaction of the US consumer to weather the storm is to be thriftier, but the demand for inelastic products will nevertheless remain.