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U.S. manufacturing still most competitive worldwide, says report

Although U.S. manufacturing is currently facing meaningful headwinds from a stronger dollar and the collapse in investment in the shale energy sector, it remains the most competitive worldwide, according to a new report released by New York-based Oxford Economics.

The rapid and broad-based 20 percent U.S. dollar appreciation since mid-2014 has done some significant damage to U.S. manufacturing competitiveness. However, three factors have offset the hit from the stronger currency: the dollar was arguably the most competitive it has been before the surge; U.S. manufacturing productivity is the strongest in the world; and the U.S. has a stable regulatory framework, a flexible labor market, low energy costs, and access to a large domestic market, said Gregory Daco, head of U.S. economics with Oxford Economics.

The report makes the following additional points:

*Since 2003 productivity growth in the U.S. has outpaced most of its peers, with manufacturing output per employee rising about 40 percent (2.5 percent per annum on average) from 2003 to 2016 compared with only 25 percent growth in Germany and 30 percent growth in the U.K. While productivity growth has lagged that of Japan, the U.S. manufacturing sector remains 25 percent more productive. Likewise, while productivity has doubled in India and China, the U.S. manufacturing sector remains 80 to 90 percent more productive.

*Most advanced economies have seen similar compensation growth over the past 13 years, but stronger productivity in the U.S. has allowed it to maintain generally lower unit labor costs. Since wage growth in China has largely outpaced productivity growth, and the renminbi has strengthened, China’s unit labor costs are now only 4 percent lower than in the U.S.

*While reshoring is growing, especially in the most competitive and export-intensive U.S. manufacturing sectors, Mexico offers a nearshoring alternative with costs 10 percent lower than in China, a stable regulatory environment, and generally unhindered access to the U.S. market.

*The baseline forecast shows the U.S. dollar appreciating another 3 to 5 percent through 2017 before gradually depreciating thereafter. In this environment, the U.S. manufacturing sector will maintain its edge. Another 20 percent appreciation of the dollar, on the other hand, would certainly dent U.S. competitiveness, make China an attractive production hub again, and give Japanese manufacturers a significant advantage over U.S. firms.