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US re-industrialization plan may threaten China

BEIJING -- 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 U.S.' “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 U.S. exports within 5 years and the measures to increase employment, all aimed at helping the U.S. 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 U.S.' manufacturing sector alone in 2011, and this momentum has gained steam. The U.S.' 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 U.S.' economic development.

As part of its efforts to rejuvenate the slackened U.S. 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 U.S. 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.”

This situation, however, 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 U.S. is narrowing because of a decline in the U.S.' manufacturing labor cost, although China's labor cost is far below that of the U.S. average.

In 2010, the U.S.' 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.

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