Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United States
Euler Hermes
A New era of Manufacturing: “On-shoring”
The Chinese competitive edge in labor costs has been so overwhelming that it often eclipsed all other parameters in the economic and strategic equation. The refreshed set of parameters of “Made in America” (cheap energy, supply chain risk management, etc.), are major advantages to reshoring. Other factors include quality, easier communication, faster time to market and cheaper inventory costs.
▶While real American labor costs have barely chan- ged over the past decade, the dramatic increase in Chinese wages has resulted in a steady erosion of the gap between American and Chinese wages. For the previous two decades this gap had been a crucial incentive for U.S. manufacturers to relocate indus- trial facilities to China. Although there is no doubt that the Chinese competitive edge is likely to remain significant for a while, the recent years have marked a tipping point in the industrial relationship between the two countries wherein the wage gap will shrink enough to become less important.
Figure14below points to a sharp increase in Chinese wages, fueled by buoyant economic growth despite the determination to keep inflation low, resulting in a sharp closing of the wage gap. Combined with the depreciation of the U.S. dollar versus the Chinese yuan, the supremacy of China as the best location to manufacture is likely to be weakened in any case. The current and foreseeable global environment may pave the way toward the reshoring of industrial capa- cities in the U.S. We assume the reshoring of manu-
14. Effective Manufacturing Wage Gap 30 US 25 $7 20 China 15 $17 10
facturing capacities will mainly affect production cur- rently based in China but aimed at the U.S. market. This trend does not imply that the U.S. companies will automatically scale back their operations in China.
The sectors expected to be the most proactive in res- horing in the short and medium term can be cha- racterized by two conditions: > high exposure to labor costs in their cost structure; and > the ability to absorb higher labor costs by having a lower labor cost component of value-added.
Figure 15 and TableDbelow summarize the first and second tier of sectors which would initially participate and contribute to reshoring. The activity potentially affected by reshoring these industries from China to the U.S. would be equal to the current exports to the U.S. from China in these two industries. This amount is estimated to be $282 billion annually.▣
D. The candidates for reshoring
Tier 1: Four sectors representing 56% of the U.S. imports from China
Computer and electronic product manufacturing U.S. import from China (in 2011) Machinery Furniture
Miscellaneous product manufacturing
Tier 2: The Challengers Fabricated metal product manufacturing Electrical equipment and appliance Plastic and rubber products Non-metallic mineral products
Source: Bureau of Economic Analysis, Euler Hermes
115. Part of labor costs in total operating costs and part of the value consumed by the labor costs for each manufacturing sector in 2011, in %
0.1 0.2 0.3 0.4 0.5 0.6 0.7
0 5
assumptions: wages and yuan grow at historical rate 2006-19 US worker 3.4X as productive