North America's Growing Economic Advantage in Manufacturing

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North America

Along with all of the other benefits of the North American Energy Revolution, which we will explore this month in the trend titled Cheap Energy Ahead, the abundance of low-cost shale gas is helping the U.S. to return to a prominent position among the world's manufacturing leaders.

According to a new study of the 25 largest exporting countries from the Boston Consulting Group, this year only seven have lower manufacturing costs than those of the U.S.1 Those countries are Indonesia, India, Mexico, Thailand, China, Taiwan, and Russia.

Moreover, since 2004, U.S. manufacturers have become more competitive compared with every major export country except three: India, Mexico, and the Netherlands.

This is a dramatic reversal in just one decade. In 2004, it was 14 percent cheaper to manufacture in China than in the U.S. Today, it is only 5 percent cheaper in China, and the gap is continuing to narrow every year.2

Why is this happening?

One factor, as we've already mentioned, is cheaper energy. As energy demand soared, the cost of electricity has risen 66 percent over the past decade in China.3

That's more than twice the 30 percent increase in the U.S. over the past 10 years. The difference is that the U.S. started harnessing shale gas for energy in 2005, which has kept electricity costs from growing in North America as quickly as they have in the rest of the world. As a result, while natural gas prices went up by 138 percent over the past 10 years in China, they have dropped by one-fourth to one-third in North America.

At the same time, China's labor costs are climbing. Since 2004, Chinese labor costs (adjusted to reflect productivity gains) went up 187 percent. Meanwhile, U.S. labor costs over the same period went up just 27 percent. Put another away, in 2004 manufacturing wages (adjusted for productivity) averaged $4.35 per hour in China, less than one-fourth of the cost of $17.54 in the U.S. By 2004, wages measured the same way climbed to $12.47 in China, more than half the cost of $22.32 in the U.S.

The U.S. has also benefitted from shifts in exchange rates, specifically the rise in the value of China's currency. Over the past 10 years, the yuan has gone up more than 30 percent against the U.S. dollar. That increases the prices of products made in China and sold overseas, while products made overseas have become cheaper for Chinese consumers, further hurting demand for Chinese goods...

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