What gave China a competitive advatage vis-à-vis the United States and other developed nations was “the China price.” They could manufacture goods and do finishing work much more cheaply, leading to a large trade imbalance between the U.S. and China.
But what were the factors of this China price?
Currency Manipulation
China made no secret of the fact that it pegged its currency to the U.S. dollar. When pressed by the international community, it began pegging to a “basket” of currencies, but the dollar made up the majority share. The result was that it was cheaper for the U.S. to buy goods and services from China, and more expensive for China to buy from the U.S.
Piracy & Counterfeiting
We think of CD’s, DVD’s or Gucci purses, but China’s penchant for piracy lent to its competitive advantage in manufacturing too. Consider that a given U.S. facility will be equipped with several computer workstations. Each of those PC’s will have a copy of Microsoft Windows, and probably Office as well. Licenses for that software must be purchased, sometimes annually. Specialized software can be very expensive. It is likely that the equivalent Chinese facility is not incurring those same costs—it has been estimated that upwards of 80% of software used in China is pirated.
The U.S. metal finishing industry spends significant time and energy on environmental compliance. As the industry’s representative organization, the NASF uses most of its resources dealing with regulations at the policy-making level. Companies have to meet the ever-growing number of environmental regulations. To meet safety standards, firms of any significant size will often have at least one employee dedicated to safety compliance. These are not necessarily bad things, but they are costs which the equivalent Chinese facility just doesn’t bear. Beijing has passed stricter regulations in the last 5-7 years, but enforcement is almost nonexistent. At the local level, the need for employment generally trumps environmental concerns. In regards to safety, the number of reported industrial accidents that take place in China exceeds that of other industrialized nations (example), and even other emerging economies.
Export Subsidies
The Chinese government gives exporting industries preferential treatment in the form of rebates on its Value Added Tax (VAT), first options on land in newly created Special Economic Zones, discounts on utilities (some of which remain state-owned), and easy credit through the central banks. This adds as much as 10% to the CP advantage.
Low Wages
China has very cheap labor, but its wages are not the lowest in the world. What sets Chinese workers apart is their high productivity. This is what gives Chinese labor such tremendous value on the world market. Meanwhile, U.S. workers see consistent productivity growth, but wages continue to increase too. We would expect China's wage rates to begin climbing as its economy continues to grow, but it is doubtful that will happen any time soon. Because it is still in the midst of a transition from rural-agrarian to urban-industrial, China has a reserve army of laborers numbering as high as 100 million. It could be decades before Chinese wages approach parity with those of the United States.
Foreign Direct Investment
Multinationals and even U.S. corporations have invested huge amounts of money into China, theoretically to gain access to the potential billion-plus consumer market that China represents. Much of that money has contributed to China’s competitiveness in manufacturing goods for export—as much as 70% of FDI is targeted directly at manufacturing. This has another negative side affect tied to the piracy aspect—like Vegas, what goes to China stays in China. Management practices, manufacturing methodology and trade secrets are all purloined by the Chinese. The attraction of moving manufacturing facilities to China, or opening new ones there is strong, however, since many of the same benefits that domestic Chinese exporters enjoy are available, including VAT rebates.
Industrial Network Clustering
We saw this phenomenon in the U.S. in Detroit, the “motor city,” where all sorts of corollary industries sprang up around the automotive plants. We still see it to some degree in Silicone Valley, a geographic center of technology, and NYC, the nation's finance center. What is difficult for us to grasp is the scale and speed at which it is taking place in China. Whole cities are growing up around one industry, often attracting millions of workers to areas that were just sleepy villages a few short years ago. This means smaller inventories, shorter lead time, easier sharing of information, etc. This factor actually represents an area where the U.S. could compete, but it would mean changing some mindsets. If competition gets fierce enough, anything could happen.