John McCloud is editor of Industry Property Journal, from which this article is excerpted.

Arlington, VA—Two new reports from the Manufacturers Alliance/MAPI warn of threats to the nation's manufacturing sector from industrial modernization in Asia and rising costs for US manufacturers compared to their trading partners. The first report, China's Surging Trade Surplus Being Driven by High-Tech Manufactured Exports: Policy Consequences of the Growing Imbalance, analyzes Chinese trade during the first half of 2006. Its author, Ernest H. Preeg, a senior fellow in trade and productivity at the Arlington-based organization, says manufacturing changes from open trade and investment by China and, to a lesser extent, other Asian nations, present serious challenges to the US.

At issue is the ability of US manufacturers to maintain their export competitiveness and long-standing leadership in technological innovation. Preeg warns of potential adverse consequences for the global economy if the issue remains unaddressed. He says the unprecedented global imbalances between growing East Asian account surpluses, especially in China, and the corresponding US deficit will lead to continued devaluation of the dollar vis-à-vis Asian currencies. However, he explains a substantial exchange rate adjustment will have advantages as well as disadvantages for both sides.

"The Chinese economy would gain from a larger share of GDP directed to domestic spending on infrastructure, health, education and personal consumption, although there would be a painful squeeze on the manufacturing sector, which is overly dependent on exports and already facing overcapacity in some sectors," the study concludes. The US manufacturing sector, on the other hand, would substantially benefit from stronger export growth and higher priced import competition, he adds.

According to the report, US manufactured exports outnumbered Chinese exports more than two-to-one in 2001. But by the first half of 2006, the Asian giant had taken the lead with $404 billion of manufactured exports compared to $367 billion for the US. The Chinese figure was $86.6 billion higher than the comparable period for 2005, boosting that nation's trade surplus 55% in the first six months of this year. If the trend continues through the end of 2006, the surplus for the year will reach $158 billion, pushing China's total trade surplus to $230 billion or 9% of the nation's GDP. The report also notes Chinese exports now are primarily high technology products, particularly in the information and telecommunications sectors. By contrast, textiles and apparel, once China's predominant exports, dwindled to 14.6% of total exports.

A separate study prepared in cooperation with the National Association of Manufacturers in Washington, DC and its research arm, the Manufacturing Institute, finds that structural costs for US manufacturers compared to nine major trading partners increased from 22.4% to 31.7% since 2003. The Escalating Cost Crisis updates an MAPI 2003 study, How Structural Costs Imposed on US Manufacturers Harm Workers and Threaten Competitiveness.

Report author and MAPI economist Jeremy Leonard calls the increase during the past three years "astonishing." There are fewer new manufacturing jobs and less money for research, development and worker training because of these escalating costs, he says. The sharp rise in non-wage costs represents a significant and long-term problem for US manufacturers and the nation's economy, adds NAM president John Engler. According to the study, the corporate tax rate proved both the heaviest burden in absolute terms and the largest contributor to the rise in structural costs, responsible for more than one third of the increase. While the US corporate tax rate has stayed the same since 2003, some trading partners have widened the gap by lowering statutory tax rates.

Leonard emphasizes that taxes are only one factor. He says natural gas prices historically offered US manufacturers a competitive advantage because they averaged about 30% lower than the prices of the nation's nine major trading partners in the mid 1990s. But by 2005, the average cost of natural gas for the US trading partners was 0.7% lower than the average US price.

Manufacturing Institute president Jerry Jasinowski says US business has grown stronger during the past two to three years because overseas markets for US products are growing again and business investment at home has rebounded. But he notes the underlying pressures that make it difficult to manufacture in the United States have not abated. To remain globally competitive, says Manufacturers Alliance/MAPI president and CEO Thomas J. Duesterberg, the US needs to reverse the trend toward higher structural costs by reducing taxes and easing regulations.

Instant Insights /

Costs, Exports Threaten US Manufacturing

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