Homeward bound?

Civitas, 23 May 2011

Earlier this month the Boston Consulting Group reported that the United States could witness a ‘manufacturing renaissance’ with businesses returning to the country, as the wage gap between America and China shrinks. Can other developed economies expect a similar renaissance?

The BCG reports that with Chinese wages increasing by between 15 and 20 per cent per year, and the yuan appreciating, some areas of the US will be increasingly attractive as medium-cost, high-quality manufacturing locations. Harold L. Sirkin, a BCG senior partner concludes:

“We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

By ‘net labor costs’ the report refers to labour costs which include the relative productivity of the labour, which is higher in the U.S. When shipping and inventory costs are included there could be an added incentive for businesses to relocate to America, especially when supplying the U.S. market. Could similar incentives operate in Europe or the UK?

The BCG does not appear optimistic:

‘Western Europe will continue to rely on China’s relatively lower labor rates since the region lacks the flexibility in wages and benefits that the U.S. enjoys.’

Western Europe is a large region, whose economies face different pressures, therefore predicting developments across the region can be difficult. Nevertheless, countries that use the Euro are all bound to a fixed exchange rate, limiting the ability of some countries to compete as medium-cost locations. This is especially true for countries on the Eurozone’s Southern periphery, Greece, Portugal and some parts of Italy. These two countries and Southern Italy have spent almost a decade losing ground in the international economic stakes. While countries such as Germany have captured a greater international share of high-end manufacturing production, and developing countries across the globe have continued to attract investment as low-cost locations, Greece, Portugal and Southern Italy have faced the doubled edged sword of reduced productivity coupled with rising real wages.

The real dilemma facing both Portugal and Greece is the fact that investors cannot envisage any type of economic ‘renaissance’ occurring, whether it is led by manufacturing or services. This is why the public deficits in these countries have bought their economies to their knees; without growth even relatively small amounts of debt can be debilitating.

So what about the UK? It is not hamstrung by the Euro and Stirling has depreciated since the financial crash. However, this does not necessarily mean that the UK can expect a ‘manufacturing renaissance’. Manufacturing’s future in the UK rests on creating the right kind of conditions for its success. Britain can be a medium to high-labour cost location, and compete, if other costs are kept to a minimum. This is why the Government needs to ensure that in areas it can affect: energy, taxation, regulation, it lowers costs for manufacturers.

Sadly in two of these areas: energy and regulation, the Government is adding to industry’s costs. The coalition needs to rethink its misguided renewable energy and climate change legislation and reinforce its commitment to reducing the regulatory burden for businesses. Without such action, far from a renaissance, Britain will witness a manufacturing decline.