Soaring Oil Prices Erode China's Wage Advantage

Ann All

It's no secret that companies move their manufacturing operations to countries like China to gain a labor arbitrage advantage. But a number of wrinkles in this strategy are emerging.

 

First, wages in China are rising, so much so that manufacturing facilities there are sending work to destinations like Vietnam. Second, China has struggled with quality-control issues. And now, soaring oil costs are canceling out its wage advantage.

 

According to a CIBC World Markets report, it now costs $8,000 to ship a 40-foot container from Shanghai to America's East Coast, up from $3,000 in 2000. If oil prices rise to $200 a barrel, as some economists predict, the price would nearly double to $15,000. Some Chinese imports to the United States are already slowing, says a canada.com story about the report. From the report:

The impacts are already being seen in manufacturing, where there is a high ratio of freight costs to the final sale price, such as steel production. Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the U.S. market. Underscoring this is the fact that China's steel exports to the U.S. are falling by more than 20 percent year over year, while U.S. domestic steel production has risen by almost 10 percent.

Just yesterday I wrote about the increasing number of Chinese companies establishing operations in the United States. One of the benefits of doing so, cited in a Los Angeles Times article about the trend, is cutting the cost of transporting goods to North American customers.

 

Though this seems to hold the promise that the erosion of U.S. manufacturing jobs could slow or even reverse, this likely won't happen, according to the report. Instead, Mexico will probably benefit the most. This effect could come sooner rather than later since Mexico's labor unions are accepting wage cuts and the North American Free Trade Agreement makes it easy and inexpensive for Mexico to export goods to the United States.

 


Wage concessions are necessary for Mexico to remain competitive, say Mexican leaders of automotive worker unions quoted in an Associated Press story published in the International Herald Tribune. Lower wages have helped the country win big contracts with Ford and other automakers.



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