Made in China Not as Cheap as You Think

Just 4% less than in the U.S.

Made in China Isn't Much Cheaper Than Made in U.S.

Here's something to think about the next time you hear a U.S. presidential candidate criticize China for unfair trade: labor costs adjusted for productivity in China are only 4 percent cheaper than in the U.S. 

Even with the dollar's rally since 2014, U.S. manufacturing is benefiting from the world's strongest rate of productivity, a flexible labor market, cheap energy and from having a big domestic market. 

That's according to new research by Oxford Economics, which found that the U.S. manufacturing sector remains a world beater.

"Although U.S. manufacturing is currently facing meaningful headwinds from a stronger dollar and the collapse in investment in the shale energy sector, it remains the most competitive worldwide," analysts Gregory Daco and Jeremy Leonard wrote in a note.

The figures are striking. Manufacturing output per employee in the U.S. rose around 40 percent from 2003 to 2016 compared with 25 percent growth in Germany and 30 percent growth in the UK. While productivity has doubled in India and China, the U.S. remains 80 percent to 90 percent more productive.

It's that robust productivity that has helped the U.S. keep down the unit cost of labor--or wages in relation to worker output.    

"Since wage growth in China has largely outpaced productivity growth, and the renminbi has strengthened, China’s unit labor costs are now only 4 percent lower than in the U.S.,"  the analysts wrote.

Two caveats: Productivity growth throughout the U.S. economy as a whole has been meager in recent years, partly dragged down by the burgeoning, albeit inefficient, health-care sector. And the U.S. continues to run a trade deficit with China.

There are other risks ahead. If the U.S. dollar starts to rally again, that would spell danger for exporters.

"Another 20 percent appreciation of the dollar," the analysts wrote, "would certainly dent U.S. competitiveness, and once again make China an attractive production hub, as well as giving Japanese manufacturers a significant advantage."

Criticism of China is a hot topic in U.S. politics right now.  Republican presidential candidates led by Donald Trump have blamed China for the decline of the American middle class through manipulating its currency and one-sided trade policies.

Premier Li Keqiang brushed off the criticism on Wednesday when he said relations with the U.S. will endure no matter who wins the election.

Reports such as this one from Oxford Economics may bolster Li's case the next time China faces criticism from U.S. politicians.  

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