Trading places with China?

China is undergoing a labor shortage due to its one child policy with its forced abortions, which means that labor costs are climbing.  It may soon reach a point when American companies will do better to keep their manufacturing jobs here.   From Harold Meyerson:

The best news about the American economy isn’t coming from America. It’s coming from China.

The inexhaustible labor pool that has fueled China’s rise as the world’s dominant low-cost manufacturer is beginning to get exhausted. The nation’s decades-old one-child policy has collided with its decades-old industrial development policy to produce something hitherto unimaginable: a labor shortage. China’s labor force will begin to shrink in the next year or two, the Wall Street Journal reported on Monday.

The result, as the Journal documents, is steeply rising wages — during the past year, up 14 percent in Shanghai; 18 percent in Guandong (China’s industrial belt); and 28 percent in the inland province of Chongqing, a lower-wage region to which manufacturing has only begun to relocate.

The implications for the U.S. economy are potentially major. With labor costs soaring in China and the yuan slowly rising, while in the United States productivity soars and the dollar slowly declines, the economic advantages that American companies reap by offshoring production begin to dwindle. A Boston Consulting Group study released this month on the return of U.S. manufacturing concludes that “re-investment in the U.S. will accelerate” as a result of these trends.

via China’s bad economic news is not necessarily good for the U.S. – The Washington Post.

OK, it’s not quite so simple, as the column goes on to explain.  But still.  Maybe China and other countries will start outsourcing their manufacturing to us.  If China is becoming the new America economically, maybe America will become the new China.  Not that this would be altogether a good thing.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • SKPeterson

    From what I’ve read and can surmise, this is going according to basic economic theory. 1) As labor costs rise and capital becomes more footloose, firms will seek to take advantage of lower labor costs. 2) At the same time, firms may seek to make their investments in capital, and shift away from more labor-intensive means of production, to more capital-intensive means. 3) The long-term affect of increased capital investment into low labor-cost countries which have an large labor to capital ratio, will be to increase returns to labor 4) this will cause firms to seek out other low cost labor locations for investment 5) Where capital intensive investment has occurred labor costs (and employment) in such sectors begins to fall, yet output increases over time, i.e. capital investment yields productivity gains. 6) Over time, productions costs begin to equalize between locations, wither through higher labor costs, or through increased capital investment. This is the idea of convergence and purchasing power parity. 7) production location decisions begin to depend more on transport costs, production volumes, and customer location. Please note – this is all ceteris paribus, but from it you can follow much of what’s happening and the implications.

    1) Chinese labor costs are rising, 2) American firms have slack capital capacity, so production is shifting to capital intensive means – this means American firms can increase production at more competitive costs (this does not mean that employment will increase in those firms) 3) Wages are rising in China, benefits expanding and labor shortages are occurring – in the U.S. there are fewer manufacturing workers, but wages have increased for those still employed in the sector, 4) Firms are responding by seeking out lower labor cost countries – Viet Nam, Malaysia, Indonesia, also the increased interest of China in Africa, 5) U.S. manufacturing output has actually been increasing for years, 6) production costs between the U.S. and China are beginning to equalize in some sectors, especially factoring in 7) shipping costs. There is restricted capacity in ocean shipping right now that won’t be resolved for several years, land transport costs in China are relatively high compared with the U.S., so with these increased costs, including time delays, firms producing in China for export markets may begin shifting production of those goods to those export locations. So, firms producing for U.S. customers will produce in the U.S., while the same firm will continue to produce goods in China for the local market. The mediating factor will be specialty and quality-driven components and bulk commodities, particularly agricultural goods, and then the impact of changes in international shipping costs.

  • SKPeterson

    From what I’ve read and can surmise, this is going according to basic economic theory. 1) As labor costs rise and capital becomes more footloose, firms will seek to take advantage of lower labor costs. 2) At the same time, firms may seek to make their investments in capital, and shift away from more labor-intensive means of production, to more capital-intensive means. 3) The long-term affect of increased capital investment into low labor-cost countries which have an large labor to capital ratio, will be to increase returns to labor 4) this will cause firms to seek out other low cost labor locations for investment 5) Where capital intensive investment has occurred labor costs (and employment) in such sectors begins to fall, yet output increases over time, i.e. capital investment yields productivity gains. 6) Over time, productions costs begin to equalize between locations, wither through higher labor costs, or through increased capital investment. This is the idea of convergence and purchasing power parity. 7) production location decisions begin to depend more on transport costs, production volumes, and customer location. Please note – this is all ceteris paribus, but from it you can follow much of what’s happening and the implications.

    1) Chinese labor costs are rising, 2) American firms have slack capital capacity, so production is shifting to capital intensive means – this means American firms can increase production at more competitive costs (this does not mean that employment will increase in those firms) 3) Wages are rising in China, benefits expanding and labor shortages are occurring – in the U.S. there are fewer manufacturing workers, but wages have increased for those still employed in the sector, 4) Firms are responding by seeking out lower labor cost countries – Viet Nam, Malaysia, Indonesia, also the increased interest of China in Africa, 5) U.S. manufacturing output has actually been increasing for years, 6) production costs between the U.S. and China are beginning to equalize in some sectors, especially factoring in 7) shipping costs. There is restricted capacity in ocean shipping right now that won’t be resolved for several years, land transport costs in China are relatively high compared with the U.S., so with these increased costs, including time delays, firms producing in China for export markets may begin shifting production of those goods to those export locations. So, firms producing for U.S. customers will produce in the U.S., while the same firm will continue to produce goods in China for the local market. The mediating factor will be specialty and quality-driven components and bulk commodities, particularly agricultural goods, and then the impact of changes in international shipping costs.

  • Jonathan

    I suspect there will continue to be a vast difference between the average price of a Chinese manufacturing plant laborer and an American unionized manufacturing laborer for a very long time to come. Call me crazy.

  • Jonathan

    I suspect there will continue to be a vast difference between the average price of a Chinese manufacturing plant laborer and an American unionized manufacturing laborer for a very long time to come. Call me crazy.

  • Joe

    What we are seeing in Milwaukee is Western European manufacturing firms looking at locating plants here. A few have come already. As SK says above, the focus seems to be on entering the US market by building in the US instead of importing finished product. We have a manufacturing base and a ready labor force. I think we will see more of this.

  • Joe

    What we are seeing in Milwaukee is Western European manufacturing firms looking at locating plants here. A few have come already. As SK says above, the focus seems to be on entering the US market by building in the US instead of importing finished product. We have a manufacturing base and a ready labor force. I think we will see more of this.

  • helen

    Interesting that we may have to depend on jobs provided by foreign companies withing the US,
    while our “American” companies take their jobs overseas!

    A particular sore spot this week: I have a computer problem. I “should” call ATT support. HA!
    ATT support is in the Phillipines at last report; it goes through a rote list of questions whether your problem would be answered by them or not and is mostly interested in getting off the line again in 10 minutes, not in addressing your situation. [Last time they "helpfully" changed a password and didn't tell me.] Never again.

    When Gateway was in Sioux Falls, and mid westerners were answering the phones, I got useful help.
    (Three computers ago.) Alas, being a good little computer company wasn’t good enough; the owners thought they should live like Bill Gates.

  • helen

    Interesting that we may have to depend on jobs provided by foreign companies withing the US,
    while our “American” companies take their jobs overseas!

    A particular sore spot this week: I have a computer problem. I “should” call ATT support. HA!
    ATT support is in the Phillipines at last report; it goes through a rote list of questions whether your problem would be answered by them or not and is mostly interested in getting off the line again in 10 minutes, not in addressing your situation. [Last time they "helpfully" changed a password and didn't tell me.] Never again.

    When Gateway was in Sioux Falls, and mid westerners were answering the phones, I got useful help.
    (Three computers ago.) Alas, being a good little computer company wasn’t good enough; the owners thought they should live like Bill Gates.

  • http://carolmsblog.blogspot.com/ Carol-Christian Soldier

    Time for us in the US to stop our 1-2 child policy-
    Church to up-lift women’s roll and mothers instead of Pastors asking-”…what does she do all day?” –
    and to support our LFL!
    C-CS

  • http://carolmsblog.blogspot.com/ Carol-Christian Soldier

    Time for us in the US to stop our 1-2 child policy-
    Church to up-lift women’s roll and mothers instead of Pastors asking-”…what does she do all day?” –
    and to support our LFL!
    C-CS

  • http://carolmsblog.blogspot.com/ Carol-Christian Soldier

    as mothers-
    time to get a new key board or to slow down the speed :-)
    C-CS

  • http://carolmsblog.blogspot.com/ Carol-Christian Soldier

    as mothers-
    time to get a new key board or to slow down the speed :-)
    C-CS

  • DonS

    Economic systems are pendulums. They swing back and forth as market forces do their work to regulate the economy, naturally and beautifully. We saw this happen in Japan. Post-war, in the 1950′s – 70′s, it was a cheap manufacturing mecca. However, as Japanese living standards improved, and the labor force aged, it became less competitive, and manufacturing began shifting to the Asian continent.

    When governments intervene, more often than not, they foul up the workings of the pendulum. In this case, and this is something I have been predicting for a very long time on this blog, the evil one-child policy, by creating shortages in the labor force, is greatly exacerbating the already natural tendency for manufacturing costs to rise in China as living standards improve.

    The major impact of this is still a decade or more away. China’s economy is in its prime right now, with a large work force in its 30′s and 40′s, and fewer children to support. So these early pangs are probably more in the form of warning signs of what lies ahead, and may be partly due just to the natural labor shortages which occur as an economy begins to boom at the tail end of a severe worldwide recession.

    Here’s the question: What our our governments here in the states doing to encourage more and competitive manufacturing in this country? Ensuring that our utilities and manufacturers have access to a secure and inexpensive energy supply? Nope. Instead we are tilting at windmills and solar panels, driving up electricity costs 50% or more in an effort to force renewable energy on the market far before it is cost competitive. Streamlining building permits and making resource and land development more sensible and productive? Nope, again. We remain in thrall to the environmental lobby, which will inevitably say no to every effort to develop anything, and will be permitted by our courts to tie up development proposals for years. Ensuring that we have a competitive labor environment in the U.S., to attract offshore manufacturing? Again, no. We have an NLRB who sues a U.S. airplane manufacturer for choosing to expand in a right-to-work state, even though that manufacturer is fully in compliance with the union collective bargaining agreements it is operating under.

    The only reason European manufacturers desire to site manufacturing here is that their governments are even more antithetical to productivity. But we are moving in their direction, as they move in our’s, so this advantage, at present, will be short-lived.

  • DonS

    Economic systems are pendulums. They swing back and forth as market forces do their work to regulate the economy, naturally and beautifully. We saw this happen in Japan. Post-war, in the 1950′s – 70′s, it was a cheap manufacturing mecca. However, as Japanese living standards improved, and the labor force aged, it became less competitive, and manufacturing began shifting to the Asian continent.

    When governments intervene, more often than not, they foul up the workings of the pendulum. In this case, and this is something I have been predicting for a very long time on this blog, the evil one-child policy, by creating shortages in the labor force, is greatly exacerbating the already natural tendency for manufacturing costs to rise in China as living standards improve.

    The major impact of this is still a decade or more away. China’s economy is in its prime right now, with a large work force in its 30′s and 40′s, and fewer children to support. So these early pangs are probably more in the form of warning signs of what lies ahead, and may be partly due just to the natural labor shortages which occur as an economy begins to boom at the tail end of a severe worldwide recession.

    Here’s the question: What our our governments here in the states doing to encourage more and competitive manufacturing in this country? Ensuring that our utilities and manufacturers have access to a secure and inexpensive energy supply? Nope. Instead we are tilting at windmills and solar panels, driving up electricity costs 50% or more in an effort to force renewable energy on the market far before it is cost competitive. Streamlining building permits and making resource and land development more sensible and productive? Nope, again. We remain in thrall to the environmental lobby, which will inevitably say no to every effort to develop anything, and will be permitted by our courts to tie up development proposals for years. Ensuring that we have a competitive labor environment in the U.S., to attract offshore manufacturing? Again, no. We have an NLRB who sues a U.S. airplane manufacturer for choosing to expand in a right-to-work state, even though that manufacturer is fully in compliance with the union collective bargaining agreements it is operating under.

    The only reason European manufacturers desire to site manufacturing here is that their governments are even more antithetical to productivity. But we are moving in their direction, as they move in our’s, so this advantage, at present, will be short-lived.

  • Louis

    DonS –

    The only reason European manufacturers desire to site manufacturing here is that their governments are even more antithetical to productivity

    Well, as I quoted yesterday, Germany have the second highest exports after China, surpassing Japan and the US. That hardly squares with your comment?

  • Louis

    DonS –

    The only reason European manufacturers desire to site manufacturing here is that their governments are even more antithetical to productivity

    Well, as I quoted yesterday, Germany have the second highest exports after China, surpassing Japan and the US. That hardly squares with your comment?

  • DonS

    Louis @ 8: Well, Germany is somewhat of an exception to the western European market as a whole, mostly because it has a long established reputation in the premium auto market, which is a lot less sensitive to manufacturing costs. But there is no question that its manufacturing is uncompetitive with China and other Asian countries for more common lower margin goods that are not as dependent on reputation. Another huge export for Germany is electricity, but this will diminish now that it is phasing out nuclear power, oil, and lignite generation plants in favor of more and much more expensive renewable generation. Still another is wind turbines and solar systems. As is becoming the case in the U.S., as this technology matures and mainstreams, and government subsidies diminish, its manufacturing will shift to lower cost manufacturing environments. China’s solar industry is growing incredibly, for example.

  • DonS

    Louis @ 8: Well, Germany is somewhat of an exception to the western European market as a whole, mostly because it has a long established reputation in the premium auto market, which is a lot less sensitive to manufacturing costs. But there is no question that its manufacturing is uncompetitive with China and other Asian countries for more common lower margin goods that are not as dependent on reputation. Another huge export for Germany is electricity, but this will diminish now that it is phasing out nuclear power, oil, and lignite generation plants in favor of more and much more expensive renewable generation. Still another is wind turbines and solar systems. As is becoming the case in the U.S., as this technology matures and mainstreams, and government subsidies diminish, its manufacturing will shift to lower cost manufacturing environments. China’s solar industry is growing incredibly, for example.

  • steve

    What do we then say? China’s holocaust is our gain?

  • steve

    What do we then say? China’s holocaust is our gain?

  • Louis

    Really, Don, check the figures:

    Country, Forecast growth 2011, Forecast deficit 2011:

    US 2.3% 10.8%
    UK 1.7% 11.1%
    Canada 2.3% 4.7%
    France 2.0% 6.0%
    Germany 3.0% 2.5%
    Netherlands 2.0% 4.1%
    Sweden 4.8% 2.8%
    Poland 4.0% 5.6%

    Now the news is full of the fact that the UK seems to be taking its medicine, so-to-speak, while the US is not. And the Europeans are evidently not so badly off as you presume… with the obvious exceptions of Greece, Portugal, Ireland and maybe Italy and Spain.

  • Louis

    Really, Don, check the figures:

    Country, Forecast growth 2011, Forecast deficit 2011:

    US 2.3% 10.8%
    UK 1.7% 11.1%
    Canada 2.3% 4.7%
    France 2.0% 6.0%
    Germany 3.0% 2.5%
    Netherlands 2.0% 4.1%
    Sweden 4.8% 2.8%
    Poland 4.0% 5.6%

    Now the news is full of the fact that the UK seems to be taking its medicine, so-to-speak, while the US is not. And the Europeans are evidently not so badly off as you presume… with the obvious exceptions of Greece, Portugal, Ireland and maybe Italy and Spain.

  • SKPeterson

    Germany, and Japan, have one major advantage over the U.S. – low levels of personal debt and high savings rates. Those savings translate into long term capital investment and the use of debt to finance additional capital investment which translates into higher incomes and consumption in the future. That is something we haven’t been doing in the U.S. for at least the last 20 years. Instead, we have been incurring ever larger amounts of debt to finance immediate consumption not investment, thereby diminishing our future economic growth.

  • SKPeterson

    Germany, and Japan, have one major advantage over the U.S. – low levels of personal debt and high savings rates. Those savings translate into long term capital investment and the use of debt to finance additional capital investment which translates into higher incomes and consumption in the future. That is something we haven’t been doing in the U.S. for at least the last 20 years. Instead, we have been incurring ever larger amounts of debt to finance immediate consumption not investment, thereby diminishing our future economic growth.

  • Cincinnatus

    Louis, I don’t know why you’re “all upons” Germany’s economy. Certainly it manifests several good indicators–it is the fifth largest economy, after all–but it also lists several bad indicators. For instance, Germany’s sovereign debt is equal to 83.2% of its G.D.P., compared with 58% for the United States. It’s also a somewhat oppressive environment in which to do business–evidenced by its very low investment ratio (3%), which is leagues below America’s–not to mention the fact that its economic fate is to some extent tied to the disastrous economies of other EU states (Greece, Ireland, Portugal, Spain, Italy, maybe others in Eastern Europe).

    I’m not denying that Germany has a strong economy, but it’s not all butterflies and bunnies over there in Central Europe.

  • Cincinnatus

    Louis, I don’t know why you’re “all upons” Germany’s economy. Certainly it manifests several good indicators–it is the fifth largest economy, after all–but it also lists several bad indicators. For instance, Germany’s sovereign debt is equal to 83.2% of its G.D.P., compared with 58% for the United States. It’s also a somewhat oppressive environment in which to do business–evidenced by its very low investment ratio (3%), which is leagues below America’s–not to mention the fact that its economic fate is to some extent tied to the disastrous economies of other EU states (Greece, Ireland, Portugal, Spain, Italy, maybe others in Eastern Europe).

    I’m not denying that Germany has a strong economy, but it’s not all butterflies and bunnies over there in Central Europe.

  • Cincinnatus

    ^the states I mentioned above, by the way, may militate against some of SKPeterson’s claims @12?

  • Cincinnatus

    ^the states I mentioned above, by the way, may militate against some of SKPeterson’s claims @12?

  • SKPeterson

    How so Cincy? I’m not denying Germany has an oppressive tax regime and excessive regulation, merely pointing out that the German people save relatively more that Americans. That does have implications for real, savings-driven investment. Now, what I don’t know is how much of the savings made by Germans actually goes into financing capital investment in Germany and how much gets funneled into outside investments. Most of my point, though is actually borne out by the other nations you list; Germany has maintained its economic strength <i.despite the interventions of the German government into the economy, largely because of their private savings. The southern countries don’t have such a cushion, while adding to and compounding the regulatory restrictions on their economies that Germany has in place.

  • SKPeterson

    How so Cincy? I’m not denying Germany has an oppressive tax regime and excessive regulation, merely pointing out that the German people save relatively more that Americans. That does have implications for real, savings-driven investment. Now, what I don’t know is how much of the savings made by Germans actually goes into financing capital investment in Germany and how much gets funneled into outside investments. Most of my point, though is actually borne out by the other nations you list; Germany has maintained its economic strength <i.despite the interventions of the German government into the economy, largely because of their private savings. The southern countries don’t have such a cushion, while adding to and compounding the regulatory restrictions on their economies that Germany has in place.

  • DonS

    Louis @ 11: We’re talking about manufacturing, Louis. Not overall economy. Germany is a 70% services economy. Manufacturing in Germany is largely limited to specialty goods where competitive labor rates, cheap energy, and low business taxes are not as critical. In contrast, the U.S., though also a dominant services economy, is still a manufacturing behemoth, producing 21% of the world’s goods, and producing more goods than China, India, and Brazil combined.

    Comparing German manufacturing to American manufacturing is apples and oranges. Which is one reason why most of the German auto manufacturers produce many of their North American autos in the U.S. now.

  • DonS

    Louis @ 11: We’re talking about manufacturing, Louis. Not overall economy. Germany is a 70% services economy. Manufacturing in Germany is largely limited to specialty goods where competitive labor rates, cheap energy, and low business taxes are not as critical. In contrast, the U.S., though also a dominant services economy, is still a manufacturing behemoth, producing 21% of the world’s goods, and producing more goods than China, India, and Brazil combined.

    Comparing German manufacturing to American manufacturing is apples and oranges. Which is one reason why most of the German auto manufacturers produce many of their North American autos in the U.S. now.


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