Wake-up call for industry

China has to change its manufacturing strategy to be more innovative in technology and compete with a 'reviving' US

China is expected to face fiercer-than-ever competition from the United States in the manufacturing sector, making it all the more urgent for Beijing to expedite its industrial upgrade.

The US' "re-industrialization" strategy and its accelerated efforts to "return" to manufacturing in the wake of the global financial crisis are re-forging the world's manufacturing landscape.

The "Buy America" movement launched by the Barack Obama administration, the Manufacturing Enhancement Act it has passed, the plan to double US exports within 5 years and the measures to increase employment, all aimed at helping the US revive its declining manufacturing sector, have produced and are producing some positive results.

Statistics show that an additional 237,000 jobs were created in the US' manufacturing sector alone in 2011, and this momentum has gained steam. The US' manufacturing output is estimated to grow by 4 percent this year and 3.5 percent the next, both higher than its expected GDP growth during the same period.

In his third State of the Union Address early this year, Obama set themes for his 2012 presidential re-election race and promised to build four major pillars - manufacturing, home-generated energy, labor technology training and American values - to bolster the US' economic development.

As part of its efforts to rejuvenate the slackened US economy, 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 wrest its lost manufacturing advantages.

The speed with which the US is "returning" to manufacturing poses a major challenge to China's size-focused manufacturing sector, large as it may be. The "factor dividend" has long been the largest driving force behind China's fast-growing economy. The world's largest population and its demography have not only supplied sufficient labor for China's economic growth, but also created favorable conditions for its high accumulation rate and enormous capital inputs.

Because of its abundant resources and their comparatively low prices, China's marginal return ratio on capital has usually been higher than that in developed countries. As a result, global production capital allocation has favored China under the principle of profit maximization and made it the world's "manufacturing workshop".

However, this situation is undergoing some delicate changes with the change in China's factor prices, especially the weakening of its "demographic dividend". Latest data show that the gap between the production costs in China and the US is narrowing because of a decline in the US' manufacturing labor cost, although China's labor cost is far below that of the US average.

In 2010, the US' manufacturing productivity increased by 6.1 percentage points and its labor cost per unit of output fell by 4.2 percentage points, according to official data. In fact, its labor cost per unit of manufacturing output fell by an accumulated 10.8 percent from 2002 to 2010.

In comparison, the growth rate of labor cost in China has been much faster than that of its productivity over the past years. Figures show that workers' pay in China on average grew 19 percent year-on-year from 2005 to 2010, compared to just 4 percent in the US. An ever-growing labor cost will pose a major challenge to China's manufacturing that has long been profiting from cheap labor.

To make its manufacturing sector more attractive to overseas capital, the US has taken measures to reduce tax burdens through some policy adjustments and is trying to make temporary tax cuts a permanent affair.

The Obama administration is also trying to review and revise the North America Free Trade Agreement and its agreements with Colombia and the Republic of Korea for setting up a free trade area with them. With these, the US aims to repeal the preferential policies that American companies were offered to shift their businesses overseas and make them return to the US.

Apart from the ever-narrowing labor cost with the US and various stimulus measures that Washington has taken, China also faces the challenge of promoting innovation in and development of its manufacturing technologies.

The US has vowed to continue leading high-end manufacturing and seems well poised for a new "industrial revolution". This will lay the foundation for the US to achieve more technological breakthroughs in manufacturing, and ensure faster economic growth and increase in competitiveness.

To push forward its "re-industrialization" strategy, the US is aiming to promote industrial upgrade and raise its high-end manufacturing level. As concrete steps toward this goal, the US has released a high-end manufacturing plan and expedited the flow of funds and technological inputs into nanotechnology, high-grade batteries, energy materials, bio-manufacturing, new-generation microelectronics and advanced robots.

The US expects these moves to boost the development of high-end technologies and help it become the leader in high-end manufacturing technologies.

The US' "re-industrialization" strategy, which coincides with changes in and upgrade of China's industrial structure, will result in some direct competition between the two countries in the manufacturing sector.

Given that the US is on the threshold of a new "technological and industrial revolution", China should change its manufacturing strategy in order to overcome its insufficient technological innovation capacity and low competitiveness.

The author is a researcher in economics at the State Information Center.

(China Daily 08/20/2012 page8)