When it comes to U.S.-China trade, the U.S. objective should be to stay bigger than China. It’s too difficult and confrontational to depend on directly limiting China’s growth. For example, some say the resurgence of Huawei Technologies’ smartphone is proof that U.S. suppression has failed. The new phone was considered by Chinese media to be a victory in the U.S.-China tech war amid U.S. sanctions to block Huawei’s access to advanced chips.
Growing the U.S. economy and manufacturing sector is a better strategy. It will be easier to add 1 to 2 percent to our growth rate than to try to reduce China’s growth by 1 to 2 percent. The United States should level the playing field, reshore manufacturing and stay bigger than China.
China’s struggles
China’s post-pandemic comeback has been a struggle. Foreign direct investment (FDI) is sluggish. Geopolitical tensions and China’s own policies are driving investors away. China’s FDI fell by the most on record in the final two months of 2022, down 33 percent in November and 29 percent in December (see Figure 1).
As FDI falls, growth will continue to slow. The Chinese market will become less attractive, companies will invest even less and growth will fall further. The United States will become increasingly attractive.
China’s workforce is aging and Chinese youth unemployment is up in spite of factory labor shortages. Better-educated Chinese youth are not interested in factory work due to demographic shifts and the chance to find higher status service sector work.
China’s escalating real-estate slump threatens imports of commodities and other inputs with a property debt crises that continues to swallow up more developers. China’s exports declined by 8.8 percent in August 2023, year over year and Southeast Asia has become China’s largest export market, surpassing the United States and European Union.
Economists now see growth in China’s economy slowing to 3.5 percent in 2030 and to near 1 percent by 2050 as compared to about 10 percent until recently and prior projections of 4.3 and 1.6 percent, respectively. China is following the same trend Japan did decades ago with very rapid growth tapering off dramatically. Something like the Japanese “lost generation” may follow.
In good shape
Conversely, the United States is in relatively good shape, thanks to large government transfers to consumers and incentives for companies driving a strong labor market and solid consumer spending, all with moderating inflation. The world’s largest economy, the United States, is expanding at an annualized rate of almost 6 percent according to the Federal Reserve Bank of Atlanta. That rate will not be sustained but shows the United States can grow faster than China.
Private investment in clean energy projects like solar panels, hydrogen power, electric vehicles (EVs), and EV batteries and materials surged after the Inflation Reduction Act was signed into law in August 2022. A “uniquely American” factory construction boom from companies reshoring has nearly quadrupled real construction spending on computer, electronics and electrical manufacturing.
It looks like the United States will keep its No. 1 spot for GDP for the foreseeable future. Bloomberg Economics’ forecasts predict that China’s GDP won’t exceed that of the United States until the mid-2040s and even then by “only a small margin” before “falling back behind.” This compared to pre-pandemic forecasts of China surpassing the United States as early as the beginning of the next decade. The China slowdown means it may never overtake the U.S. economy.
Growing the economy
The best way to grow the U.S. economy is to reshore the 6 million jobs required to balance the goods trade deficit. We have much better control over what happens here than there. U.S. competitiveness should be the first objective, not Chinese suppression.
Skilled workforce development is one competitiveness factor over which we can have complete control. It is essential that the United States have a sufficient number of workers with the skill level necessary to provide the 40 percent capacity increase needed to reshore 6 million jobs. High-tech equipment and advanced processes must be deployed to achieve the required cost competitiveness and quality. These factors are the sine qua non of reshoring and rebuilding.
The U.S. dollar is 20 to 30 percent overvalued. Eliminating that excess alone would cut our trade deficit in half, adding 3 million manufacturing jobs. Having the reserve currency is a blessing for cheap debt but a curse for manufacturing.
If all companies and governments sourced using Total Cost of Ownership (TCO) instead of Free on Board (FOB) price or “landed cost,” about 20 percent of imports would be replaced with domestically produced goods, increasing U.S. manufacturing by 20 percent and cutting the trade deficit by 50 percent. See The Impact of Using TCO. Using the Total Cost of Ownership Estimator instead of manufacturing cost or FOB price when companies make siting and sourcing decisions is the best way to achieve these savings.
Are you thinking about reshoring? Our main mission is to get companies to do the math correctly using our Total Cost of Ownership calculator. By using TCO, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors. For help, contact Harry Moser at 847-867-1144 or harry.moser@reshorenow.org.
