Evidence of China's Deteriorating Advantage

Early last month, data released by the Chinese Ministry of Commerce indicated that, among other factors, increasing wages were having a negative impact on the amount of manufacturing in the country. For the first time since the financial crisis, foreign direct investment in China fell in 2012, down 3.7 percent to $111.72 billion. (1)

After several years of increasing demands by Chinese workers for higher wages and better working conditions, a tangible effect is now being seen in the amount of manufacturing work being sent to China by European and U.S. companies. While China saw a dip in FDI, Tawain and Indonesia both experienced dramatic increases of 63 and 27 percent respectively. Even within Asia, countries like Japan are moving some of their investment out of China and diversifying into neighboring countries to the South East such as Thailand and the Philippines. (2)

These shifts and changes raise several questions. First, how, if at all, should China react? The trend towards higher wages seems to be something that won't diminish in the near future, so the question becomes how can China leverage other strengths to maintain and grow its global position? Does it find other ways to lower prices or does it identify a different factor on which to compete ? Second, what does the future for low-cost manufacturing and production in Asia look like? In another 20 years, will foreign companies be looking for new countries to move their production to as wages in places such as Thailand and Indonesia follow the trend of China? Finally, from a policy perspective, what if anything should the U.S. government be doing to take advantage of these changes in order to entice companies to keep manufacturing jobs on domestic soil?

The manufacturing landscape abroad is changing rapidly and companies across the globe must stay one step ahead of these shifts if they hope to maintain a competitive advantage and survive in an increasingly competitive market. 

Sources:

(1), (2)   http://online.wsj.com/article/SB10001424127887323783704578245241751969774.html?user=welcome&mg=id-wsj