China’s not as cheap as it used to be…
By Martin Hutchinson
BullionVault.com
BullionVault.com
THE MANUFACTURING renaissance in the United States is not just a fantasy, writes Martin Hutchinson for Money Morning.
It is actually happening. Jobs that had been outsourced to China and elsewhere really are returning to the United States. Believe it or not, this “reshoring” already has reversed the long, steady decline of manufacturing jobs in the US.
In fact, since 2010 America has added roughly 500,000 manufacturing jobs, an increase of 4.3%.
The economic and investment implications of this reversal are considerable to say the least.
With the disadvantages to manufacturing overseas growing each year, it’s no wonder reshoring is beginning to become a major trend.
One of the drivers is cost, especially as it relates to “cheap Chinese labor.” As it turns out it’s not that cheap anymore.
According to an HSBC study quoted in the Financial Times, real wages in China’s coastal areas have risen 350% in the last 11 years. Demographics are only accelerating the trend toward higher wages.
Last year, China’s working age population fell for the first time, by 3.5 million to 937.5 million.
That means the endless supply of young workers from farms in China’s rural areas is drying up, pushing China’s wages up even further. Already, the country’s balance of payments surplus has disappeared, and China’s manufacturing costs, adjusted for productivity, have increased from 20% of US costs to some 50%.
That still gives China an advantage in direct labor costs, but the additional costs of international sourcing must also be considered. When transportation, duties, supply chain risks, and other costs are fully accounted for, the cost savings of manufacturing in China begins to diminish.
In any case, unless there’s a major downturn in China, its overall competitiveness is likely to continue to decrease.
Of course, the more excitable commentators like to claim that China’s cost increases alone will push manufacturing back to the US But the truth is that’s nonsense.
Here’s why.
There are many other low-wage emerging market countries with decent political and economic stability, all of which have had their competitiveness enhanced by the same Internet and mobile telephony that has pushed Chinese outsourcing ahead.
As such it only follows that the return to US manufacturing from rising Chinese costs alone would be modest. But there’s another factor involved here-and this one is home grown.
The second thing bringing manufacturing back to the US is the rise of fracking techniques for the immense US shale gas deposits. That’s different than the oil shale fracking which is unlikely to affect US competitiveness much, because oil can be transported fairly readily (though in the short term excess production from Canadian tar sands has made oil much cheaper there).
However, gas is expensive to transport without an infrastructure of pipelines, which don’t exist in most places. With the arrival of shale gas fracking, the United States now has a substantial energy cost advantage for applications which can efficiently use gas to supply energy for local plants–especially those near these shale gas formations.
Finally, in the long run a third US cost advantage may reappear. It is the cost of capital.
With the world’s most advanced and developed capital markets, the US has traditionally had the lowest cost of capital- combining the lowest cost of debt with the greatest ease of raising equity for medium-sized companies.
Unfortunately, Alan Greenspan and Ben Bernanke have lost this U.S advantage. By making money easy to get at cheap rates, they have driven the banking system and international investors to invest in emerging markets, lowering their cost of capital artificially.
Whereas previously their cheap labor was offset by expensive capital, today their labor is still cheap, while their capital is also a little more expensive than in the US For instance, when the near-bankrupt, impoverished socialist Bolivia can borrow $1 billion for 10 years at less than 5%, the US capital cost advantage has effectively disappeared.
Of course, with some countries it’s not coming back.
China has $3 trillion in foreign reserves and a very high savings rate. Under those circumstances it’s going to get all the capital it needs at a cheap price.
But lesser countries, like Vietnam, India and most of Africa, will find capital expensive again once US monetary policy has stopped creating money artificially. That will increase the cost advantage of US manufacturing, at least in some cases.
Of course, who knows when Bernankeism will finally end. My guess is that a crisis will precipitate a return to sanity, but of course emerging markets will suffer in that crisis, as they did in 2008.
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Martin Hutchinson, 13 Feb ’13
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