Every two years for the past decade, Richard Hornik, a retired Senior Editor at Time, Tom Hout, a business consultant who specializes in China, and I hold a “China symposium” at Middlebury College where we discuss the future of the Chinese compared to the U.S. economy. We couldn’t hold it this year because they were both teaching in China, but the publication of Jim Fallow’s article, Mr China Comes to America in the December 2012 issue of The Atlantic prompted us to hold an on-line discussion that was, I believe, useful and insightful. The on-line conversation started when Richard asked whether James Fallows’ new book, China Airborne (the gist of which is summarized in The Atlantic article) will be seen as having called the top of Sino euphoria phase just as his Looking at the Sun did for Japan euphoria back in 1993.
I responded with a quick “No way.” I wrote that, in my view, it would be at least another decade before there would be an appreciable movement of manufacturing production back to the United States other than production tied to low cost energy. The reason was the law of one price, which is economic theory’s equivalent to the law of gravity. For most business calculations, net costs of production are still significantly lower in China than in the US for a wide range, and expanding, group of goods. As long as that is the case, the law of one price will pull global production toward China. This process will continue and likely even accelerate as China moves up the value-added ladder. Low technology production will move out of China—not to the US but to other countries in Asia and Africa, and medium technology production will increasingly move to China. This process will be the same as happened with Japan—in that Fallows is correct– but because of China’s size, the time of adjustment will be a lot longer, and a lot more disruptive to the US production.
Tom agreed with me and added some specifics. He noted that while China was still not in the game in complex engineered systems, such as long haul jet aircraft, nuclear power recycling, good automobiles, or original technology creation, it was in the game in a variety of other areas. He argued that “the best of the Chinese private companies were making great progress in expanding production in higher technology areas, after 20-30 years of organization building.” He noted that China’s merchandise exports are still growing fast (8% in 2012), and that the rates of export growth were significantly higher in high value-added categories such as machinery and telecom equipment.
So how then do we explain the movement back of manufacturing that Fallows notes? Some is for PR and political reasons—some is for diversification, and some is because of the low cost energy that the US is now experiencing. But most of this U.S. manufacturing growth is not in production that competes head to head with Chinese and other developing country’s production; it is in those areas that compete with other developed countries where due to the natural gas boom in the US and the current relatively low value of the dollar, the US has cost advantages.
The bottom line: non-energy intensive US manufacturing will be under pressure from Chinese competition for at least the next decade, and if China can hold its political system together, for longer. Even if it can hold it together, China will not take over the world economy. Globalization will spread out production throughout the world as the globalization tides equalize. The US is still facing an ebb tide which will likely continue for another decade. If the business press is telling you anything else, it is misleading you.
First Published : December 9, 2012