Surprise! Making goods in China isn’t actually that cheap.
These days, China’s labor costs are only 4% cheaper than those in the U.S. when productivity is factored in, according to Oxford Economics.
That’s because wages in China have risen much faster than increases in productivity. Coupled with a strengthening yuan, Chinese labor costs have grown dramatically. Meanwhile, huge productivity improvements in the U.S. have helped keep labor costs down.
The bottom line: Manufacturing in China is no longer a surefire way to save on the cost of labor.
China has long been accused of keeping its currency low to boost exports. The issue is again in the spotlight as U.S. presidential candidates, including Donald Trump, blame China for the decline of America’s manufacturing sector.
Here’s a look at the numbers: Manufacturing output per worker in the U.S. rose about 40% from 2003 to 2016, versus 25% in Germany and 30% in the U.K.
Productivity has doubled in India and China, but the U.S. remains as much as 90% more productive than the two developing countries.
There are some risks for U.S. producers. If the dollar strengthens, for example, it would become more expensive for businesses to manufacture at home.
Right now, though, the U.S. is benefiting from lower energy costs, a stable regulatory environment and a huge domestic market.
“We believe it would take a substantial further appreciation of the U.S. dollar to make it lose its global leader position,” said Oxford analysts Gregory Daco and Jeremy Leonard.