Professor Keith Head Shows Western Retailers in China Having Adverse Effect on Trade Deficit

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In a new working paper, Strategy and Business Economics professor Keith Head finds that the expansion of Western retailers in China has had a counter intuitive effect on the trade deficit between China and Western economies.

In his study, “From Beijing to Bentonville: Do Multinational Retailers Link Markets?” the researcher and his co-authors discovered that a Chinese city’s capacity for exports increased by 2.55 per cent when the number of foreign retail outlets in that city increased by 10 per cent.

"On the surface, it may seem that the growth of large U.S. and European retail operations in China should help increase exports from the West into the Chinese market and help reduce the large trade-deficits between these nations," says Professor Head who teaches in UBC MBAand BCom programs. "However, our research shows that this isn't the case. It appears that as more Western retailers moved in, the more Chinese exports shipped out."

The researchers found that Chinese officials in the 1990s and early 2000s were pushing Western retail companies such as Walmart, Carrefour, Tesco and Metro to export Chinese goods specifically from areas where they wanted to open stores in order to gain the necessary allowances to expand.

In turn, the retailers pushed hard on local Chinese suppliers, many of which may not have had experience exporting to the West, to boost productivity and improve efficiencies. The retailers also put products they were considering for export to the test in their Chinese outlets before shipping them abroad to ensure they were market ready.

By forcing Chinese exporters to raise the standards of their enterprises and test marketing their products, Head and his co-authors found that Western retailers played a role in bringing new Chinese suppliers online and making them lean, mean exporting machines.