The Essence of Competition Between the US and China

The competition between the U.S. and China is related to political and military power, institutions and values. But it is more about economic competition, of which the essence is the race in the manufacturing sector. In President Obama’s words, the purpose of U.S. re-industrialization is to make future manufacturing jobs not rooted in China and India anymore, and thus create more jobs for Americans and achieve economic sustainability. Obviously the manufacturing industry is the basis of national employment and government taxes. The U.S. is aware of this and has launched a gigantic re-industrialization program. Then, where will China’s manufacturing industry go from here? China faces a tough challenge.

According to a survey, about 40 percent of American enterprises planned to move their plants back to the U.S. Since last November, foreign direct investment has had negative growth, except for in May, when it experienced a brief positive growth rate of 0.05 percent. In June foreign direct investment decreased by 6.87 percent compared with the same period of last year. The U.S. was the world’s largest industry capital exporter. However, as the U.S. re-industrialization program moves ahead, the trend of its capital and technology exportation will gradually reverse. The U.S. will probably turn from being a net exporter of foreign direct investment into an importer of foreign direct investment, which will not only bring back American capital, but also help it attract global capital using its various advantages and huge markets, making China lose its appeal.

In August 2010, the U.S. Congress passed the Manufacturing Enhancement Act to suspend or reduce tariffs on imported raw materials for use in manufacturing. The report by U.S. National Association of Manufacturers indicated that this act would increase output by $4.6 billion and create about 90,000 jobs. The “Creating American Jobs and Ending Offshoring Act” proposed in Sept. 2010 would provide payroll tax relief for companies that bring back outsourced jobs for 24 months and stop providing subsidies for companies that operates overseas, such as tax exemptions and reductions. In his third State of the Union address early this year, Obama outlined themes for his 2012 presidential re-election race and promised to build on four major pillars — American manufacturing, locally generated energy, worker technical training and American values — to bolster U.S. economic development. The Obama administration has even said that it will set up a special trade enforcement agency to investigate trade activities of countries such as China to recapture its lost manufacturing advantages.

For the past 30 years, the demographic and resource dividends have been the greatest driving force behind China’s fast-growing economy. The world’s largest population as well as its demographics have not only supplied sufficient labor for China’s economic growth, but also created favorable conditions for high rates of accumulation and enormous capital investments. Because of its abundant resources and their comparatively low price, China’s marginal return ratio on capital usually has been higher than that of developed countries. Global production capital has favored China. However, as the advantage of its “demographic dividend” is weakening, the gap between production costs in China and the U.S in certain industries is narrowing rapidly. It is predicted that China’s wages in dollars will increase by 15 to 20 percent annually, which will surpass the productivity growth rate. Taking the U.S.’ relatively higher productivity into account, the big gap between labor costs in China’s coastal areas and some U.S. states with low labor costs is likely to decrease to 40 percent or even lower than its current level by 2015. If considering shipping costs, various hidden costs and supply chain costs, China’s overall cost advantage will become pretty small.

China Factor Prices Go Up

Factor prices in China went up in general. Since 2010, the cost of electricity has increased by 15 percent. The increased cost of imported steam coal and the ending of preferential tax policies for high energy-consuming enterprises have raised the operational costs of these enterprises, which account for 74 percent of China’s power consumption. In addition, the industrial lands are not cheap anymore. In fact, the price of commercial land in China has greatly surpassed that of the U.S. In coastal areas such as Ningbo, the price of industrial land is $11.15 per square foot; in Nanjing it is $14.49, Shanghai $17.29, Shenzhen $21. On average China’s industrial land price is $10.22 per square foot. By contrast, in Alabama the price of industrial land is from $1.86 to $10.22 per square foot. In Tennessee and North Carolina the price is from $1.30 to $4.65. China would reduce the cost of land by moving to the west, but logistics costs would increase greatly and the convenience brought by the coastal industry cluster would likely be lost.

Apart from the ever-narrowing gap between the cost of labor in the U.S. and China and the various stimulus measures that Washington has taken, China also faces the challenge of promoting innovation and development in its manufacturing technologies. The U.S. vowed to continue leading high-end manufacturing and prepare technologically for a new industry revolution. In the past two years, although it has been hard for the U.S economy to improve remarkably; the government research and development budget has never been reduced. In 2011 it was $148 billion. And the input for corporate research and development was far more than this figure. Last year Microsoft’s research and development investment hit $9.5 billion, of which 90 percent was invested in the critical “cloud computing.” Intel, being the second largest investor, invested $6.5 billion in technology development last year. Among the biggest 30 global information technology investors, 12 are from the U.S.; second is Japan with 10. China only has Huawei on the list. In 2011 the U.S. research and development investment accounted for 33 percent of its global investments, 2.5 times that of China. High-end manufacturing is the key goal of the U.S.’s re-industrialization program. The U.S has officially released its high-end manufacturing plan and expedited the flow of funds and technological inputs into nanotechnology, high-grade batteries, energy materials, biomanufacturing and a new generation of microelectronics and advanced robots. The U.S. expects these moves to boost the development of high-end technologies and help it become the leader in high-end manufacturing technologies.

The strength and prosperity of a country depends on the degree of its industrialization. The U.S. and Europe faced hardship caused on the one hand by deindustrialization that resulted in the rapid loss of low-end industries, and on the other hand by re-industrialization that was too weak to move ahead. All of these resulted in the stagnation of economic growth, high unemployment and huge financial deficit. By contrast, China was experiencing a historic rapid development of industrialization, which was the basis for the rise of China. But now in global financial crisis, the demand becomes weak and the labor costs go up. If China does not consider industrialization, deindustrialization and re-industrialization in time, it will inevitably face the same hardships as the U.S. and Japan and fall into a recession.

Not long ago, China was discussing the gross domestic product headache, as the purpose of economic growth is not only gross domestic product. But now China’s gross domestic product is already falling to below 8 percent. If the economy continues downward and interferes with the gross domestic product, China will become more worried.