This article from the Economist echoes some recent arguments that with China’s rising wages, manufacturing jobs could move back to the developed countries. The article says that: “for some manufacturers low wage costs are becoming less important because labor represents only a small part of the overall cost of making and selling their products.”
However, such view is questionable. If labor cost only accounted for a minimum proportion of the total production cost, why would firms care about the rising labor cost? Also, more and more products made in China are sold locally today rather than shipped back to the US or other developed markets. Therefore, for many sectors (such as softgoods) despite the rising labor cost, leaving China is not always a workable option.
One thought on “Comparative Advantage: The boomerang effect”
I agree with the article’s point of view. It would not surprised me if China’s rising wages caused manufacturing to move back to developed countries. In today’s world, companies look to find the most inexpensive sourcing options. Even if labor costs account for only a small percentage of overall costs, the small increase can still be enough incentive for companies to want to move sourcing to where labor costs are cheaper. Additionally, even though more and more products produced in China are being sold in China, majority are still being sold globally. Especially for companies like Apple, whose products have proved to be a global phenomenon, the benefit of staying in China to sell products locally is very minimal compared to the lowered costs of sourcing where labor costs are cheaper.