A Silver Lining

A few weeks ago, I noticed an article (I think it was in the WSJ, but I can't remember now) about a Chinese company that was expanding - in South Carolina. The costs associated with the expansion were comparable even with higher labor costs. Land and transportation costs were cheaper in S.C. than China. That is a major shift that I don't think most people recognize. Now, here's another article from the WSJ about manufacturing jobs returning to the US specifically because of transportation costs:

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

The fall in the dollar and the subsequent rise in energy costs is having some positive effects. This is how markets work. The fall in the dollar, which is a direct result of poor US growth, will make US investments attractive relative to foreign countries. And that investment will mean higher future growth.

The cost of doing business in China in particular has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China's currency has also appreciated against the dollar -- though not as much as some critics contend it should -- increasing the cost of its products in the U.S.

Edward Zaninelli, vice president of trans-Pacific westbound trade at Orient Overseas Container Lines in San Ramon, Calif., a major shipping line, says he's heard from customers who are moving production back to the U.S., including a maker of steel pans for car engines.

"I believe a decent amount of production could come back into the States within five years, not everything," he says. "But it won't be because of transport costs -- it'll be because other production costs have gone up and companies have realized they can have better control over their production when it's closer to home."

It's not just tranportation costs that are driving this trend and explains why the Chinese are so reluctant to let their currency rise against the dollar. The Chinese are in a race to develop the rural interior of the country before their cost advantage disappears. Right now the coastal areas are booming but the rural areas are still very poor. The Chinese government needs to use the capital produced by the coastal areas to develop the rural areas and avoid political unrest. The faster the currency appreciates, the less time they have to make that transition.

There are detrimental effects of the falling dollar but there are also some advantages. It is the advantages that are keeping the economy from falling off a cliff right now.