Manufacturing Trends: Rising Wages, Labor Shortages Drive Factories Out of China

May 22, 2013
Low-wage countries in Asia, Latin America and even eastern Europe are benefitting from companies fleeing rising wages and labor shortages in China, according to the latest PIERS report.

“China’s strength in labor-intensive export manufacturing is waning as factory wages rise at a double-digit pace and labor shortages deepen,” said Mario O. Moreno, the report’s author and staff economist for PIERS/The Journal of Commerce. These labor market changes are being driven by the improving literacy rates and educational attainment of Chinese workers, as well as by increasing shortages of unskilled labor due to China’s one-child family planning policy, according to the report.

Another factor is a 2008 employment contract law that requires better working conditions and timely payment of wages, along with overtime work limitations, social insurance payments and barriers to firing workers. On average, Chinese workers’ wages increased by 15 percent a year between 2008 and 2010.

These rising labor costs are prompting factory owners to relocate facilities further inland in China or to developing countries where wages are lower and the supply of unskilled and semi-skilled workers is abundant.

The report identified 13 countries where manufacturing represents 15 percent of their GDP and wages are lower than in China or globally competitive. They include Vietnam, Mexico, India, Thailand, Brazil, Honduras, El Salvador, Pakistan, Bangladesh, Indonesia, Poland, Philippines and Cambodia.

Not all of these countries are benefitting equally from the trend away from China, according to PIERS.

Among the report’s key findings:

• Favorable trade conditions and geographic proximity with central American countries have led to growth rates of U.S. apparel imports that significantly outpace that of China, primarily due to shortened transit times for shippers.

• Lower wages and favorable exchange rates have given Vietnam an advantage in the footwear and apparel sectors, leading to an increase in U.S. market share for both sectors.

• While Poland represents a relatively small share of the global furniture market, significant currency depreciation against the U.S. dollar resulted in a compound annual growth rate for U.S. furniture imports of 19.6 percent from 2001 through 2011.

Despite the growth in manufacturing in other developing countries, China is still the world’s largest source of international exports in labor-intensive manufacturing industries, dominating both the apparel and footwear export markets.

PIERS (www.piers.com) provides a comprehensive database of global trade activity, providing trade data that spans nearly every major economy.  A free copy of “China’s Impact on the Manufacturing Exports of Other Developing Countries” can be downloaded at www.piers.com.

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