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U.S. manufacturers are leaving China behind

The United States exported more goods and services in March than in any single month in its history: $172.7-billion (U.S.) worth. It was the country's 21st consecutive month of rising exports, pushing the year-over-year increase to 20.9 per cent. In these 12 record-setting months, exports reached within one-tenth of 1 per cent of $2-trillion - more than four times the cost of the country's imports of crude oil.

This is significant. People are starting to take notice. Markets writer Joseph Lazzaro (on the Daily Finance website) anticipates that the U.S. up-trend in exports could last for years and turn its intractable trade deficit into a surplus. More dramatically, Boston Consulting Group (BCG), a global management consulting firm, discerns "a renaissance" in manufacturing that will, within five years, lure major U.S. corporations to return home from China.

In fact, BCG notes, the process has already begun. Caterpillar Inc. decided to build its next manufacturing plant in Texas. NCR Corp. decided to move production of its automated teller machines from China to Georgia. Wham-O Inc., the iconic toy maker, decided to repatriate 50 per cent of its Frisbee and Hula Hoop production from China. BCG said many more such decisions will occur as wage rates for skilled workers rise in China, year after year, at double-digit rates.

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"All over China, wages are climbing at the rate of 15 per cent to 20 per cent a year ...," Harold Sirkin, a BCG senior partner, said in a release. "We expect net labour costs for manufacturing in China and the U.S. to converge by around 2015. As a result ... you're going to see a lot more products 'Made in the USA' in the next five years." At current rates, China's wages could double in as few as five years.

The BCG report (titled Made in the USA, Again) said China's low-cost advantage shrinks to 30 per cent when compared with states such as Mississippi, South Carolina and Alabama. Because wages account for only 15 or 20 per cent of a product's final cost, China's competitive advantage falls to 10 or 15 per cent - without counting shipping costs. In many cases, Mr. Sirkin said, China's competitive advantage will shrink to zero - or, in right-to-work (non-union) states, less than zero.

Average wages in the two countries, of course, remain far apart. BCG notes that cost calculations based on average wage rates are irrelevant: "Averages are historical and based on the country as a whole, not on locations where [a company]would go today."

Average wage rates also don't reflect the productivity difference between the two countries. U.S. manufacturers have achieved such high productivity that real labour costs are less now than they were in 1995 - and, for all practical purposes, operate in a huge zero-inflation zone. The decline in the value of the U.S. dollar, along with the gradual, grudging rise in the value of the Chinese yuan, makes U.S. exports more competitive still.

The BCG report said China will remain a hugely important manufacturing base for the long term - but mostly to serve the high-wage economies of Western Europe - which, it said, will remain uncompetitive. Other low-cost countries (Vietnam, Thailand and Indonesia) will compete with low-cost American states but these countries mostly lack the tangible and the intangible benefits that the U.S. offers. (In selecting Texas, Caterpillar cited efficient ports and "positive business climate.")

In the March-over-March period, U.S. exports increased by huge percentages to countries around the world: Turkey increased its purchase of U.S. goods by 57 per cent; South Africa, 38 per cent; Panama, 36 per cent; Taiwan, 35 per cent; Peru, 34 per cent; Brazil, 33 per cent; Malaysia, 32 per cent; and China, 30 per cent. (Canada imported 22 per cent more goods from the U.S. - increasing its purchases by $40-billion to $220-billion.)

Whatever may handicap the U.S. economy (such as excess government spending), manufacturing isn't it. Since 1947, U.S. manufacturers have precisely tracked the sevenfold increase in U.S. GDP. In 1980, they produced 22 per cent of the world's manufactured goods. In 2011, they still do, while China produces 15 per cent. Through the entire rise of China, in other words, U.S. manufacturers have maintained their original share of global production. This single industry would rank, all on its own, as the eighth-largest economy in the world.

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Editor's note: Caterpillar Inc. points out it is not moving production out of China to the United States and is in fact expanding operations in both countries.



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About the Author
Neil Reynolds

Neil Reynolds is an Ottawa writer whose columns on national economic issues appear in Wednesday's and Friday's Globe and Mail. He is the former editor-in-chief of The Vancouver Sun and the Ottawa Citizen. More

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