1. A lower standard of living, which allows them to pay lower wages to workers.
2. An exchange rate that is partially set to be always priced lower than the dollar.
China sets the value of its currency, the yuan, to always equal a set amount of a basket of currencies which includes the dollar. When the dollar loses value, China buys dollars through U.S. Treasuries to support it. In this way, the yuan's value is always within its targeted range. As long as the yuan's value is lower than the dollar, China's goods are cheaper in comparison.
As the market economy and worldwide influence of China grows, so too does China's significance to the U.S. economy. China's manufacturing industry is highly productive, exporting goods to many Western markets, including the U.S. But the U.S. reliance on China is actually twofold; not only are we one of the biggest consumers of Chinese goods, but China is also one of our biggest creditors.
One of the greatest contributors to the U.S. indebtedness to China is the fact that the U.S. purchases far more goods from China than China purchases from the U.S. Demand in the U.S. for Chinese goods outweighs demand for U.S. goods in China by nearly 500 percent.
Sample of American companies benefiting from outsourcing to China
Microsoft, Dell, SAP, Nokia, General Electric, Alcatel-Lucent, and Unilever (UL) have meaningful engineering and IT off-shoring operations in China.
Accounting and consulting firms like Accenture (ACN), BearingPoint and Infosys Technologies are well-positioned to benefit from China's highly-educated, lower cost workforce.
Wal-Mart Stores (WMT) and other big box retailers benefit from low cost manufacturing in China.
Newell Rubbermaid (NWL) and other manufacturers have shifted much of their production to China; Newell Rubbermaid outsourced 75% of its manufacturing to China in 2007.
Now in high-wage countries like the United States and Western Europe, the services sector is the largest source of employment. For example, U.S. government statistics suggest that the service sector provides over 75% of all U.S. jobs.
Skilled Labor Bases in China and India Ready to Work
China and India both have a ready supply of skilled labor to take on outsourced tasks. A Duke University study by Gary Gereffi and Vivek Wadhwa shows that each year, the United States produces only 137,000 engineers with full engineering degrees, while China produces 351,000 and India produces 112,000. By contrast, a Bain & Company report suggests that China produces 700,000 engineers per year, and Marty McCaffrey, executive director of Software Outsourcing Research in Salinas, Calif., says that China's universities could churn out 200,000 computer science graduates annually.
America in Decline
If the U.S. can not produced more skilled people, and will no longer manufacture domestically because of cheaper labor overseas, and rely solely on a service economy, it will continue its decline. If America's government continues to allow the importing of foreign-made goods for its citizens to buy - cheaper goods made overseas (increasing the trade deficit); and allowing the Chinese to remain on par with the U.S. dollar, America will continue its decline.
China: Friend or Foe?
China has recently surpassed Japan as the world's second largest economy...and at the present rate, might also surpass the United States, and become #1.
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