China to lose edge over U.S. by 2016


Jun 21, 2011

Based on recent analyses and reports, a leading manufacturing sector economist asserts the Chinese will stand to lose significant market share in the years to come, and will have not a cost advantage over U.S. manufacturing by the year 2016.

"Such a statement would have evoked peals of laughter and derisive remarks only a few years ago, but times change and situations alter," says Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, Intl. (FMA). "There are no guarantees, of course, and these reports make it clear that idiotic policies can still ruin the trend."

"But analysts are starting to string together some of these trends, and they inevitably point to better news for the U.S. than for China. Some feel that it has been a nice run for the Chinese, but all things must come to an end," Kuehl states in the current economic update newsletter Fabrinomics published by FMA.

Kuehl points out that in 1990 the Chinese share of world manufacturing output was a paltry 3%. Today its share is 19.8% and the U.S. is slightly behind at 19.4%.

"The Chinese built quickly on a base of low wage workers and significant government assistance as well as a very low valued currency that has allowed the growth of the export economy," he says. "The future is not looking so positive for the Chinese, however. Wages are growing at 17% annually, while in the U.S. they are growing at 3%.

"That is just for the average worker's wage," he stresses. "If one looks at the managerial levels and among skilled workers, the rate of Chinese wage growth is about 135% per year; in the U.S. that same group is seeing wage growth of 3.7%. The Chinese pay scale is still far less than in the U.S., but that gap is closing very fast."

Kuehl admits China has made great strides in terms of productivity – an improvement of 10 times in the last 20 years. Yet, he claims, this still leaves China at a third of the productivity the U.S. boasts, and the U.S. is seeing productivity gains of almost 8% per year these days.

"The amazing observation from all this is that China is not going to have a cost advantage over the U.S. after 2015," he says. "If, as expected, the Chinese are forced by inflation threats to start pushing the value of their currency higher, the balance could shift pretty quickly. Then there is the potential for much higher transportation costs as the price of oil rises. None of this will cause the U.S. manufacturer to shed a tear."

Kuehl believes that for both nations future emphasis will be on the domestic market and that could well be significant for the U.S. manufacturer in a variety of ways.

Read more of Dr. Chris Kuehl's comments.