China to lose manufacturing edge over U.S. by 2016: economist

China stands to lose significant manufacturing market share in the years to come, and will have lost its cost advantage over U.S. manufacturing by the year 2016, according to a leading manufacturing sector economist.

“Such a statement would have evoked peals of laughter and derisive remarks only a few years ago, but times change and situations alter,” said Dr. Chris Kuehl, economic analyst for the Rockford, Ill.-based Fabricators & Manufacturers Association, Intl. (FMA). “There are no guarantees, of course…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.”

According to a recent report authored by Kuehl, in 1990 the Chinese share of world manufacturing output was three per cent; today its share is 19.8 per cent and the U.S. is slightly behind at 19.4 per cent. “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 said. “The future is not looking so positive for the Chinese, however. Wages are growing at 17 per cent annually, while in the U.S. they are growing at three per cent. 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. But this still leaves China at a third of the productivity of the U.S. – and the U.S. is seeing productivity gains of almost eight per cent per year in recent years. “China is not going to have a cost advantage over the U.S. after 2015,” he said. “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. There’s also the potential for much higher transportation costs as the price of oil rises.”

Kuehl also noted that, with China’s transportation network directed out of the country and towards service export, its internal transportation system is often inferior, with the result that China will need some infrastructure work to be able to service its domestic markets as effectively as U.S. suppliers are able to service American customers. “This is not to say that China will cease to exist as a global competitor, but it does suggest that the same patterns that affected other fast growing nations have started to impact them,” he noted. “Japan looked unstoppable in the 1970s, and they faded over time. It now appears to be the beginning of China’s return to earth.”