Two years ago, IHS Global Insight predicted that China would surpass the United States as the world's manufacturing leader (in real value-added terms) by 2016-17. Now, the economic consulting firm is projecting the baton will be passed as early as 2011. While America produced about 20% of the world's goods last year to China's 19%, IHS says the positions will reverse next year. (Note that research by NAM's Manufacturing Institute and MAPI offer a slightly different assessment.)
Of course, many will see this change as inevitable considering China's rapid manufacturing growth and America's transition into a service economy. But in fact, it isn't.
True, over the past decade Chinese manufacturing has grown at the expense of labor-intensive, low innovation U.S. industries such as textile and furniture manufacturing, and ferrous metal smelting and rolling. More recently the Chinese have expanded their output in more sophisticated industries such as computer equipment and appliances. Yet the change reflects far more than simply the evolution of the Chinese economy. It also reflects the impact of U.S. public policy. While both the Bush and Obama administrations have touted the importance of U.S. manufacturing, according to NAM, challenges stemming from decades of bad public policy have hamstrung the sector's growth. As found in The Facts About Modern Manufacturing, compared to America's 9 largest trading partners, U.S. manufacturers face higher corporate taxes, higher tort costs, and and greater federal regulatory burdens.
Why does this matter? As I've noted before, study after study has linked a vibrant manufacturing base to increased living standards. For example, the NAM published "The Case for a Strong Manufacturing Base" seven years ago, concluding that manufacturers invest more in R&D, which stimulates investment in capital equipment and in workers, which leads to new processes and new products and generates beneficial spillovers into other economic sectors. All this economic activity leads to higher living standards.
U.S. manufacturers will continue — at least for the foreseeable future — to lead in certain high-value manufacturing industries, such as aerospace, pharmaceuticals, and advanced electrical equipment such as smart meters. But policymakers should not assume that the rise of Chinese manufacturing necessarily equates with the decline of American manufacturing. This country can, and should, do all it can to preserve that base.