The Economics of Globalization Are Changing Fast And Are Starting to Favor Moving Back to America
"Labor arbitrage—taking advantage of lower wages abroad, especially in poor countries—has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labor arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by Boston Consulting Group (BCG).
“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says BCG's Hal Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.
“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says BCG's Hal Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.
BCG lists several examples of companies that have already brought plants and jobs back to America.
1. Caterpillar, a maker of vehicles that dig, pull or plough, is shifting some of its excavator production from abroad to Texas.
2. Sauder, an American furniture-maker, is moving production back home from low-wage countries.
3. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia).
4. Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico."
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The end of cheap Chinese labour?
Jul 18th 2010
The Economist
Some surveys show that migrant wages increased by 20% in the first half of 2010...thus conclude that the Lewisian turning point has arrived in China—that is, China has depleted its surplus labour and the period of cheap labour has ended.
...it cannot be made congruent with the fact that the countryside still has 45% of China’s labour force, but agriculture only contributes to 11% of China’s national GDP.
In 2007 there were 80 million rural people who were potential migrant workers. The Chinese economy was at its recent highest point in 2007; during the crisis, about 20 million migrant workers went back home. Therefore, the number of potential migrants can only increase today.
We find that China has never passed the Lewisian turning point. Indeed, we find that China is moving away from the turning point, primarily because agriculture has become more mechanised and squeezed out labour.
Continued:
According to research published in the Monthly Labour Review of the US Bureau of Labour Statistics in April 2009, compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of compensation rates in Europe.
While these figures are now out of date by nearly four years, they underscore the magnitude of the gap between China and the developed world—and how difficult it would be to close that gap even under the most excessive of Chinese wage inflation scenarios.
Boeing to hire 1200 additional workers and build 75,000 building extension to up 737 output from current 31.5 per month to 38 per month by 2013. http://seattletimes.nwsource.com/html/businesstechnology/2015072044_boeingrenton17.html
Considering how Boeing is being treated by the DoL these days, I'd rate regulatory burdens to be as important as labor costs.
"That calculation assumes that wage growth will continue at around 17% a year in China"
this is the flaw in the BGC report.
it's the classic consultant error of taking a straight line and drawing it forever.
Chinese wages will be constrained by their competitiveness.
this trend could also be reversed if china freed up its labor force to move to where the jobs are.
peasants are still tied to the land in many cases and are not free to move to cities.
It is hard to believe that a 69 percent gain in factory worker pay in China would precipitate bringing production back to the US. Wages there could have gone up 10 times and they would still have a cost advantage. I think it more likely that other factors were involved. For example Delta Airlines moved customer service back here from India because they got so many complaints. I have gotten into a habit of looking at were a product is made before I buy. If I seen no domestic product I ask. As I read the comments to any report on trade I come to the conclusion that I am not alone in rejecting the economic wisdom of free trade. Due to this current economic mess, I have much less respect for economist than I once had.
The USA has abright future, but first we have to stop tryuing to emulate Jpaan.
If we can get past this recession (and the Fed needs to loosen up), the star are aligning for a protracted American boom.
A trade-enhancing dollar will bring tons of orders for US goods and services, and foreign capital into our real estate markets (and manufacturing facilities).
Given global growth, this will mean a huge American boom. But we gotta have a dollar that promotes trade, and enough money supply to supply commerce.
We need to cut federal payrolls too.
Japan offers you a picture into tight-money nirvana.
the Fed needs to loosen up
Benjamin, say hello to the Wizard of Oz for me when you get home tonight. Perhaps he can persuade Bernanke to lower interest rates and spend more money to get us out of this depression. Maybe he could also get Congress to toss in an extra trillion or so in stimulus money.
James-
From behind the curtain, let me tell you this: Read David Beckworth's blog. He is (like me) a classic economist, fiscal conservative.
I want to cut the federal budget--and engage in some serious QE.
Scott Sumner also has a great blog, but has stopped blogging until June or so. Another right-winger. Even CATO has called for monetary stimulus, and some at the National Review.
Milton Friedman, John Taylor and Bernanke all recommended QE for Japan--the Nipponese did not take the advice to heart, and look at Japan.
You want to DJIA to remain in stasis for another 20 years? How about an 80 percent retreat in property values?
There is nothing wrong with monetary stimulus when demand is slack, factory capacity is under 80 percent, real estate values are falling, and unit labor costs are sinking.
Even commodities have died.
We have a choice for our future--one in which we seize back our role as a vibrant, growing economy, a manufacturing platform,
or one in which we enter stasis, like Japan.
I chose growth--mild inflation, I can live with.
The Nipponistas are the biggest threat to American security and prosperity today. They make Al Queda look like a bunch of sissies.
Calling what sauder makes, furniture, is extremely generous.
Peak oil will really speed up the move back. Many of the new plants will avoid areas of heavy snowfall and frequent road closures from snow and ice. The cost of snow removal in such areas will skyrocket, which will require higher taxes to pay for the very expensive fuel used.
How wonderful. China's wages will rise much faster than American wages and in no time at all we will have low skilled American workers making toys for rich Chinese kids. Can anyone remind me why this is such wonderful news again?
Why does America count "Made in America" production by the # of people employed, while farming is measured in bushels per acre? A century ago most people lived on farms. Today very few people make a living there. Where are the news stories decrying the loss of American food production?
The truth is that America makes a lot of stuff in two categories: 1) Products taking specialized labor, or 2) Products that are mechanized and take little or no labor.
#1 accounts for all those places where product satisfaction drops low enough after outsourcing that the job comes back to the US.
#2 Takes place once a machine can make your goods. The robot labor rate is the same in New Jersey as it is in China/Vietnam/Haiti etc, the advantage moves to the country with the lowest import/export costs and most stable infrastructure i.e. the US.
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