Wal-Mart Slowdown May Signal End to China Dividend
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

It was reported last week that for the first time in 10 years — 10 years! — Wal-Mart (WMT $47) suffered a drop in same-store sales in America. Today the company is set to release more information about the unusual decline. Naturally, there are numerous theories out there about the (possibly temporary) turnaround in the giant company’s stupendous growth history. The sheer size of the retailer makes the event notable, as does its position on the front lines of big box merchandising.
Here’s our theory. Just as the American economy profited from a “peace dividend” in the 1990s, in the past decade we have enjoyed a “China dividend.” Imports of cheap products have lowered the cost of living in America, and plumped up real incomes. Today, that shift to lower-cost manufacturing areas is nearing completion. The booster rocket of cheap imports, which was so important to fueling Wal-Mart’s growth, may be about to fizzle.
The peace dividend was the benefit to American taxpayers of declining defense outlays as the Cold War wound down. Though health officials might conclude that fewer guns and more butter ultimately resulted in an obesity epidemic, the reality is that the nation’s resources were redirected, to the benefit of the consumer. In theory, lower defense spending leads to lower taxes, which in turn results in more money pouring into investment and consumption. This boosts economic activity, employment, and wages. Everyone wins, except perhaps the defense industry.
The China dividend is a similar phenomenon, originating in the flow of manufacturing to lower wage rate nations like China, which has without a doubt reduced the cost of goods on American shelves. This transfer is not without complications, as American workers thus deprived of their jobs have had to relocate and in some cases have been penalized by having to take on lower-wage jobs. For those whose livelihoods are not at risk, which includes many of the lowest-paying as well as highest-paying jobs, the reduction in the prices for apparel, home furnishings, appliances, and many other items constitutes a windfall.
Wal-Mart has commissioned studies that attempt to quantify its contribution to this benefit. One was produced by a firm called Global Insight. Based on data supplied by Wal-Mart concerning its activities in one region, the firm concluded that for the period 1985-2004, Wal-Mart alone had lowered prices of groceries a cumulative 9.1% and commodities prices by 4.2%. Overall, they claim to have reduced the consumer price index by 4.2%. We know of no source that has tried to describe the benefit cumulatively from all low-cost imports, but one would imagine that it has been very significant indeed.
What if it is about to end?
Wal-Mart has been losing momentum for a number of reasons, but surely one is that the great knocking down of prices is simply not as energetic as it has been. Once an item is outsourced to a low-wage area, even mighty Wal-Mart can only effect marginal changes thereafter in costs.
For sure, Wal-Mart is also up against increased competition these days. Other big box retailers like Costco (COST $53) and Target (TGT $58) are competing with increasing effectiveness, and Wal-Mart, according to retail analyst Eric Beder of Brean, Murray, Carret & Company, is running out of room. New stores openings tend to cannibalized existing locations, as has eventually happened for many successful retail chains from McDonalds to Starbucks.
Also, Wal-Mart is behind the eight ball in merchandising. Susan Sansbury of Miller, Tabak says Wal-Mart has struggled to build market share in high margin apparel and home goods. Target has done a much better job, she says, at building traffic in these areas, using inspired advertising and by featuring well-known brands. Also, this far into a recovery, according to Ms. Sansbury, the more successful stores are those targeting upscale buyers. Those buyers are not impressed by Wal-Mart’s apparel offerings, which lack design distinction and are not presented well.
Another truth disclosed by the Wal-Mart announcement, in other words, is that the consumer is increasingly sophisticated, and drawn to name brand merchandise. This is of course what Target has tapped into so successfully, by introducing not just well-known names into its stores, but also high-end designers such as Isaac Mizrahi and Behnaz Sarafpour. This fascination with brands is true, according to Ms. Sansbury, for high-end and low-end shoppers. It is a reality to which Wal-Mart has not responded.
These challenges to Wal-Mart are undoubtedly adding to the gradual decline in the company’s rate of growth. However, they may also be masking the real issue, which is that manufacturing costs may simply be about as low as they are going to go. As more and more of our imports have come from China, labor rates and other costs in that country have begun to rise.
Consequently, the deflating effect of rising imports may be waning. This may account for the troublesome uptick that we’ve seen in inflation. Though still not threatening, the rise in core inflation has the chairman of the Federal Reserve, Ben Bernanke, on full alert.
If we are correct, it would be a disastrous time for Senator Schumer and other like-minded legislators to “get tough” on China. Not only would inflationary pressures result, but with unemployment down to 4.1%, any significant effort to keep jobs in America would simply add to cost increases through pumping up wages. Mr. Schumer’s clout has undoubtedly increased thanks to his successful efforts on behalf on numerous Democratic candidates. Let us hope that he does not focus his newfound authority on attacking the trade relationship most responsible for the cost savings of recent years.