U.S. Manufacturing Strongest in the World – For Now

For decades Americans have been battered with messages around the demise of the United States manufacturing sector.  Some state concerns of too much of a shift to services, which is said to produce nothing.  Is goods manufacturing really fading in the U.S.?

IHS Global Insight, an economics consulting firm, has published a ranking of the manufacturing output of the leading economies, and to my surprise, the U.S. still manufactures more stuff than anyone else — $1.7 trillion in manufacturing value added in 2009, compared to $1.3 trillion from China.

The IHS report makes two assertions.  First that the American Manufacturing sector is in decline from the perspective of portion of GDP and total economic output.  And second, that China is increasing it’s economic output from  both of those perspectives.

In 2009, the United States economy was held up, in part, by $1.7 Trillion (with a T) in manufacturing output.  By comparison, China’s economy was supported by $1.3 Trillion in ouput.   What may be more important is to understand what percentage of the  Chinese economy is based on just building cute trinkets for Americans and Europeans to buy.

While manufacturing makes up only 25% of the U.S. economy, the Chinese economy is largely based upon non-technical manufacturing – raw materials and dolls, cups, trinkets and other junk.  According to Wikipedia:

Industry and construction account for 46.8% of China’s GDP. Around 8% of the total manufacturing output in the world comes from China itself.  Major industries include mining and ore processing; iron and steel; aluminium; coal; machinery; armaments; textiles and apparel; petroleum; cement; chemical; fertilizers; food processing; automobiles and other transportation equipment including rail cars and locomotives, ships, and aircraft; consumer products including footwear, toys, and electronics; telecommunications and information technology. China has become a preferred destination for the relocation of global manufacturing facilities. Its strength as an export platform has contributed to incomes and employment in China. The state-owned sector still accounts for about 30% of GDP.

Why is Chinese goods production so low-tech?  Perhaps it’s the lack of a mature service sector.  The same service sector that many bemoan within the U.S. economy.  A healthy service sector is absolutely required to produce highly complicated and technologically advanced goods.  Stryfoam cups and plastic dolls do not require the sophisticated machinery nor the complicated logistics required to produce a Caterpillar earth mover, jet aircraft or other advanced goods.  Where are the Chinese competitors to Caterpillar, Airbus and Boeing?  These high-tech goodies have far higher price points and margins than drink coasters and cheap pens.

There is also the problem of accurately understanding the Chinese economy.  True profits from up to 30% of the manufacturing sector are raked in by the government, not the private sector.  Considering the government control of the Yuan, how true are the numbers reported from State Owned Enterprises (SOE’s).

China will have to  build a highly-skilled service sector if it wants to compete with the U.S.  There is evidence that they too realize this.  The Chinese produced a three-step plan in the early 1980’s.  The first two steps were to increase GDP by several times.  The first step has been accomplished and the second is on track.  Step three is to increase per-capita income by 1950.  That will require more people to move into more complex manufacturing and services.

So while America is holding an advantage in the sophistication of our manufacturing, it appears China has a plan to build a competitive force in those areas as well.  But, for now, the United States does indeed still the manufacturing leader of the world.