THE U.S.-CHINA Strategic and Economic Dialogue wrapped up in Washington Tuesday after much discussion of the now-
familiar economic imbalances within, and between, the two countries. Yet even as leaders again made promises about currencies and trade, evidence was mounting that some old assumptions regarding their relationship may no longer apply. For U.S. companies and workers, long buffeted by “outsourcing,” real and perceived, the most encouraging new reality may be the beginning of the end of China’s competitive advantages over the United States — even in manufacturing.

Over the past 20 years, China overtook the United States as the world’s leading manufacturer, surging from 3 percent of global factory output in 1990 to 19.8 percent in 2010, just ahead of the U.S. share, 19.4 percent.

But China’s cost advantage is fading, as its labor force begins to shrink, Chinese wages rise, the U.S. dollar falls and U.S. productivity grows. According to a study by the Boston Consulting Group, within four years production in the United States will cost about the same as in China, even if Chinese labor productivity grows in the meantime.

A few caveats: China’s rise has helped U.S. consumers while raising hundreds of millions of Chinese out of poverty. The United States is not about to “defeat” China in economic competition; the People’s Republic is here to stay as a global manufacturing giant. The administration should keep pushing China to play by fair global rules; Beijing’s pressuring foreign companies to transfer technology as a price of market access works to everyone’s long-run disadvantage.

And shifting production does not automatically translate into huge numbers of new U.S. jobs. To the contrary, one reason for growing U.S. competitiveness is the automation of its plants. Manufacturers have hired just 250,000 workers since December 2009, when manufacturing employment hit a postwar low of 11.5 million.

But domestic manufacturing creates jobs indirectly as well as directly, for people who build, maintain and otherwise serve the factory and its labor force. Companies also help local communities maintain a tax base to finance quality schools, police and fire services.

There are public policy lessons here: the most important may be that the U.S. commitment to free trade and flexible capital and labor markets — while politically and economically difficult to sustain — pays off over the long term. Those companies that faced, and withstood, Chinese competition for two decades, and competition from the Japanese and other “Asian Tigers” before that, emerged stronger and more capable.

A key implication is that the United States could soon be attracting manufacturing investment away from Europe, too, as the Boston Consulting Group report notes, because of that continent’s failure to reform its labor markets and raise worker productivity. In fact, Germany’s Siemens recently announced a $170 million investment that will enable it to build gas turbines more cheaply in Charlotte than in Shanghai. It would appear that the United States does have a future after all — as a highly efficient manufacturing platform for the developed world.