BEIJING – The Made in China label is losing traction with its two biggest customers. After three decades of gains, China’s share of U.S. imports has plateaued, and in Europe, it’s in decline.
The steepest losses are in the European Union, where China’s share of imports slumped to 16.5 percent in the first 11 months of last year from a 2010 high of 18.5 percent, according to data compiled by Bloomberg News. In the U.S., the needle has barely moved in the past five years, holding around 19 percent.
China’s low-cost advantage has been blunted by rising wages and an appreciating currency, with cheaper nations including Vietnam and Bangladesh competing to sell products.
With an unexpected drop in total exports in February compounding the challenges, the trends underscore the need for President Xi Jinping’s government to foster competitiveness in higher-technology items, as varied as semiconductor chips, medical-imaging equipment and airplanes.
It’s a sea change, said Andrew Tilton, chief Asia economist at Goldman Sachs Group Inc. in Hong Kong, who previously worked for the international office of the U.S. Treasury Department. China’s period of unusually strong competitive advantage in exports may have run its course.
The yuan has appreciated about 35 percent against the dollar since July 2005, wages have tripled in the past decade, and China’s labor force has begun to shrink.
The nation’s working-age population began declining in 2012, Chinese government data show. The pool of 15- to 39-year-olds – the backbone of factories making clothes and toys – has contracted by 35 million in the past five years, a U.S. estimate indicates.
The changes have led global manufacturers to begin shifting production to countries such as Bangladesh and Vietnam, which surpassed China in 2010 as the largest supplier of Nike Inc. footwear.
Higher costs and wages in China are prompting some Asian companies to set up manufacturing plants in neighboring countries. Samsung Electronics Co. is building a $2 billion plant in Vietnam that may make 120 million phones by 2015.
U.S. and European clothing makers are also looking elsewhere. Some 72 percent of chief purchasing officers who oversee a collective $39 billion in annual purchases for apparel firms expected to shift to lower-cost nations, with Bangladesh, Vietnam and India as the top three destinations for the coming five years, a survey conducted by advisory firm McKinsey & Co. in 2013 shows.
Other countries benefit
More than a decade ago, China was the darling as it entered the World Trade Organization, with expanding commerce helping it boost growth, which averaged 10.6 percent in the decade that followed 2001. The nation also reshaped the world economy, as China put cheap toys, souvenirs and jeans on retail shelves from New York to London to Paris.
Now, the beneficiaries of China’s slide in developed markets can be found as far away as Mexico. Its share of U.S. imports rose to 12.4 percent last year from 10.3 percent in 2008. Before China became a WTO member, Mexico’s proportion was 11.2 percent.
As China’s competitiveness wanes, Mexico is benefiting from its proximity to the U.S. market and lower transportation costs, said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who formerly worked at the World Bank and the International Monetary Fund.
Headset maker Plantronics is one manufacturer that has increased production in Mexico. The Santa Cruz, Calif., company announced a $30 million expansion in Mexico in 2012 after closing a plant in China where wages had climbed.
Smaller economies have also been making gains. Bangladesh’s share of EU imports rose to 0.6 percent in the first 11 months, a 76 percent increase from 2007.
China itself may be playing a role in the gains of some countries. Ghana, which has received investment from China, saw its share of EU imports increase to 0.2 percent in the first 11 months of last year, up 2.5 times from 2007.
Southeast Asian nations that were perceived to lose out from China’s WTO entry are now benefiting, with some newcomers to the exporter ranks, such as Cambodia. Its foreign investment surged almost 80 percent to $1.6 billion.
Indonesia’s potential helped lure $19.8 billion in foreign investment in 2012, almost triple the total from five years earlier, according to the United Nations Conference on Trade and Development.
The big winners would be in Southeast Asia, said Tim Condon, head of Asia research at ING Groep NV in Singapore, who previously worked for the World Bank. They are poised to experience re-industrialization with slower China growth.
Biggest growth in past?
China’s share of total global imports continues to advance, rising to 12.9 percent in the first three quarters of last year from 12.2 percent in 2012 and 9.3 percent in 2008.
For now, the world’s second-biggest economy is compensating for its decline in developed markets with continued growth in import share in developing economies.
China became the biggest source of imports into the Philippines last year, taking a 13 percent share, up from 10.8 percent in 2012 and 3.5 percent in 2002.
Even so, China’s trade report for last month underscored concern that the nation’s best years for export gains may have passed.
Shipments abroad dropped 18.1 percent from a year earlier, the customs administration said this month. While the data were subject to distortion from shifts in timing of lunar new year holidays, analysts continue to flag China’s waning competitive advantage.
China’s unit-labor costs, a measure of costs based on compensation and productivity, have climbed by 150 percent since 2000 and 70 percent since 2007, in dollar terms, UBS AG economists Bhanu Baweja and Andrew Cates wrote in a March 10 report. This has incentivized a trend toward on-shoring, or return of manufacturing, to the U.S., they wrote.