BusinessWeek on US-China trade

I picked up the latest issue of BusinessWeek on the flight home, which is largely devoted to US-China trade. The cover story is on the "China Price" that manufacturers are now forced to match.

Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it.

China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game."

An interesting statistic from the article: the US is still the world's largest manufacturer, and 75% of goods consumed in the US (presumably by value) are made here (this is down from 90% as late as the mid-90's). So, very roughly speaking, a 4% trade-weighted decline in the dollar would lead to a 1% increase in inflation, assuming there is no resulting substitution of goods.