China gives some relief to US economy

Mon, 10 Oct Pre-Open

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The rising unemployment rates in the United States (US) has become a common talk of the street. As a result, it is little wonder that Americans have been protesting against the off-shoring for some time now. (Off-shoring is relocation of business processes from one country to another country due to lower cost of operations in the new locations). In the past, a lot of jobs have been transferred from the US to the countries such as China and India where labour was comparatively cheaper. This gave the companies the labour cost advantage which helped them earn higher margins. However, things are all set to change as labour costs are increasingly going up in these countries. As a result, the cost advantage is diminishing day-by-day.

According to people in the industry, rising labour costs in China is actually working to the benefit of US. In the absence of the labour cost advantage, companies find it easier to just manufacture within US as that is where their customers are. As a result, servicing the client base would become easier. The only reason they weren't doing this was to take the advantage of the cheaper labour. But when that incentive is no longer there then why make the effort of continuing production outside of the country? Some of the companies have already started shifting their business activities back to the US.

The result of this is a new trend that has been termed as're-shoring'. Re-shoring means the relocation of the business processes back to the home country. As per the research done by Boston Consulting Group (BCG), new employment opportunities would be generated in the manufacturing sector in the US due to re-shoring. As per the study, re-shoring could create jobs to the tune of 3 m in the US by the year 2020. It would help the US government in bringing down the stubbornly high unemployment rates. At the same time, it would contribute in cutting trade deficit of the country as well.

However, another school of experts doubts the continuation of re-shoring. Their skepticism is not without a reason. The Chinese government has been prudent in maintaining their competitive advantage in the past. Therefore, some experts think that China will come up with some new strategy to stop re-shoring from becoming a major trend.

But this problem brings to light a major issue for India as well. Employee costs in India have been on the rise as people have started to demand higher salaries. As a result, India is under threat as well that it would lose its labour cost advantage. If this continues India too would see a major decline in offshoring revenues in the times to come. As a result, it is high time that the Indian government wakes up to this problem and enacts the much awaited labour reforms that the business community has been demanding for so long.