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Are Manufacturing Jobs Coming Back from China?

China could actually be America's number one ally when it comes to fighting unemployment...

IF YOU THINK US jobs are destined to drain away to China forever, and that your children will be forced to work selling Big Macs to Chinese billionaires, then the Boston Consulting Group (BCG) got news for you, writes Martin Hutchinson, contributing editor to Money Morning.

The United States' No. 1 strategic consultancy's latest study shows 2 million to 3 million manufacturing jobs and about $100 billion in output can be expected to return to the United States from China by 2020.

That's right. China, so often the scapegoat for US joblessness – and an alleged "currency manipulator" – actually is becoming America's best ally in the fight against high unemployment.

The BCG team says three things will bring millions of Chinese jobs back to America:

  • Soaring Inflation. China's annual inflation pulled back to 6.2% in August after hitting a three-year high in July. It's rumored that the People's Bank of China will allow the yuan to rise further to curb rising prices. A stronger currency will make the country's exports and labor less competitive.
  • Rising Wages. Chinese labor is steadily becoming better educated and more affluent. The central government is targeting an increase in minimum wages of 13% a year through 2015.
  • And A Stronger Yuan. The yuan has risen about 30% against the Dollar since 2005. Again, the great motivator here is not the saber rattling of US politicians, but rather troubling levels of inflation that could spur civil unrest.

Indeed, Chinese manufacturing, which had been much cheaper than US manufacturing for the last decade or so, is suddenly less competitive in certain sectors.

This should come as a huge relief for Americans. 

Modern telecommunications and the Internet revolution made it easier and cheaper than ever before to run a global supply chain. Consequently, US manufacturing was priced out of the market. 

We saw it first in cheap clothing – a highly labor-intensive industry where US factories were already struggling. 

The move to Chinese clothing sourcing, pushed into overdrive by Wal-Mart, brought immense cost benefits to US consumers. In fact, the Bureau of Labor Statistics price index for apparel has declined by 15% in nominal terms since 1993, compared with a 50% increase in consumer prices as a whole. 

US Federal Reserve Chairman Ben Bernanke and his predecessor, Alan Greenspan, helped this process along with their ultra soft money policies. We haven't had much inflation because of the price declines brought by outsourcing, but for many years it has been exceptionally cheap to raise money for investment in emerging markets. China and other emerging markets already had a cost advantage in cheap labor, and the Fed's loose monetary policies further encouraged outsourcing. 

As a result, US workers can now buy cheaper clothes from China through Wal-Mart, but are losing jobs and being forced to accept lower wages. And since Bernanke cannot be persuaded to reverse policy and raise interest rates, it was beginning to look as though US jobs would drain away until American wages were at Chinese, or even African, levels.

However, the BCG report is a very welcome sign that this process could actually be coming to an end. Chinese wages have risen so much that US labor is now competitive when its higher productivity and lower transport costs are taken into account. 

Of course, there are alternatives to China. Mexico, for instance, had been losing out badly to China in the 2000s, but now it is highly competitive once again. That's good news for the employment prospects in our southern neighbor. 

Still, with a population of 1.4 billion, China's supply of cheap labor seemed almost infinite, so it is good to know that we are at least starting to reach the bottom of the country's labor supply.

According to BCG, the process of returning manufacturing to the United States will begin in earnest in roughly 2015, as Chinese wages and other costs continue to rise. 

The seven industry groups most likely to return manufacturing to the US are transportation goods, electrical appliances, furniture, plastics and rubber products, machinery, fabricated metal products and computers/electronics. 

The tipping-point sectors account for about $2 trillion in US consumption per year and about 70% of US imports from China, valued at nearly $200 billion in 2009. 

Other industries, such as apparel, will not quickly return. There, China itself is losing out to cheaper labor centers like Vietnam, and the industry remains labor-intensive enough that the US is unlikely to regain competitiveness.

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Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.

See full archive of Martin Hutchinson.

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