China Set to Take Top Manufacturing Spot

U.S.-based manufacturers will account for 16.9 percent of global value-added factory output for the whole of 2008, with China close behind with 15 percent. By 2009, however, the positions will be reversed with China occupying the top position in global manufacturing for the first time for nearly 170 years, according to a new report.

When China entered the World Trade Organization in 2001, its imports to the United States were approximately $130 billion. In five years, that number ballooned to $328 billion. (Source: U.S. Department of Commerce, Bureau of Economic Analysis, via American Enterprise Institute for Public Policy Research (AEI)) Since then, China has continued to grow, and a revised forecast released this month by Global Insight predicts that China will secure the largest share in global manufacturing as early as 2009. Measured in real value-added terms, China is expected to surpass the U.S. as the leading global manufacturer by 2016.

Global Insight's initial projection in 2007 did not have China taking the top spot until 2021, according to conservative think-tank The Heritage Foundation.

"The basic reason is that growth in the U.S. economy has essentially been zero over the last year and will continue to struggle over the next year," says Nariman Behravesh of Global Insight.

U.S. manufacturing growth (measured in real, value-added terms) has remained above 3 percent, but it is expected to stabilize at approximately 2.2 percent by 2015. Measuring in real, value-added terms takes into account resource use, employment and productivity growth. It corresponds to the sector's contribution to overall gross domestic product (GDP) but does not account for inflation or exchange rates.

While the U.S. manufacturing growth has been relatively steady, China has been growing exponentially at a 10 percent to 15 percent compound annual growth rate over the last several years. However, Global Insight expects this growth to calm down to 8 percent by 2015.

Although Global Insight says that China's development is not a cause for concern, many Americans disagree.

Boston Consulting Group and Financial Times took an informal poll of 326 people in New York, Los Angeles, Chicago and Houston on their views of U.S. manufacturing versus China. Most respondents were pessimistic about U.S. manufacturing strength, placing the U.S. 20th globally in terms of world manufacturing output for 2007.

One Chicagoan told the survey team, "We don't make anything ?it's all from China."
Such a gloomy outlook can be attributed to numerous reasons. For example:
-Negative manufacturing news like job losses receives more publicity than plant openings;
-Capital goods for industrial use, where the U.S. is a large producer, are barely noticed by most people;
-Chinese-made goods are very visible in stores;
-It is not widely known that many Chinese imports to the U.S. are based on components made outside China; and
-Manufacturing value-added products is a difficult concept to understand.

Contrary to public perception, though, the U.S. manufacturing industry is not suffering because of China's rapid expansion. According to the National Association of Manufacturers (NAM), the U.S. remains the world's largest value-added manufacturer, producing almost a quarter of the world's industrial output. China, according to NAM's analysis, will produce only about 60 percent as much as the U.S. in 2008.

Value-added global manufacturing, estimated at $8.8 trillion in 2007, is forecast to increase by $7 trillion by 2015. China is projected to account for $2.9 trillion of that growth. People need to keep in mind that manufacturing makes up 36 percent of the Chinese economy while it only accounts for 12.5 percent of U.S. GDP, notes the Global Insight report.

More importantly, manufacturing makes up only 17 percent of worldwide GDP in nominal terms (again, not adjusted for inflation or exchange rates) compared to the service sector which makes up 65 percent. The U.S. share in global service-sector output is currently 32 percent while China's is 3.7 percent. This is expected to grow to only 8 percent by 2015.

Basically, the U.S. will likely lose some of its market share of textiles, basic metals, computer equipment and mineral product manufacturing to China, but will continue to lead in high-value industries like aerospace, pharmaceuticals and specialized equipment, MarketWatch says.

John Engler, president of the NAM, agrees that Global Insight's latest projections should be seen as a positive.

Playing down the effect of the projections, Engler told the Financial Times:
This should be a wholesome development for the US, for it promises both political stability for the world's largest country and continuing opportunities for the US to export to, and invest in, the world's fastest-growing economy.

Plus, cost pressures from rising commodity prices and labor costs will make it difficult for China to compete purely on a low-cost basis. They will eventually have to compete on quality and productivity, Behravesh says. All the while, the U.S. and other producers can focus on other opportunities in areas of economic growth like finance, information technologies and business services.

"The relative decline in U.S. manufacturing's world share is not a sign of weakening future prospects for the U.S.," the Global Insight report concludes. "Rather, China's rapid manufacturing growth will help raise its consumer income and infrastructural development needs, thus opening up vastly greater trade opportunities for the U.S. manufacturing and service industries where the United States enjoys a comparative advantage."