U.S. Manufacturing Still No. 1 - And China?

The news media have been running this morning with a story about U.S. manufacturing that might surprise the casual observer: “U.S. still No. 1 in manufacturing.” 

It’s true that U.S. manufacturing value added – basically, the value of the U.S.’ manufacturing output – is still bigger than China’s, but only by about 13 percent.  And the value of China’s manufacturing output has been rising much faster than the U.S.’

The state of U.S. manufacturing and China manufacturing

US Manufacturing and Trade Statistics

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As a percentage of total value added (the value of all of the economy’s output) U.S. manufacturing was at 13.3 percent in 2009, roughly the same as it has been over the last three decades.  In China, in contrast, manufacturing is a far larger piece of the economy – as a percentage of total value added in China manufacturing was 43 percent in 2009.

Manufacturing in the U.S. and China as a percentage of total economic activity

US Manufacturing and Trade Statistics

Click here to expand the figure

That data squares with the notion that the U.S. economy derives much more value from services than from manufacturing, and that China makes stuff to a much larger extent.  It squares with the trade data showing that the U.S. has a trade surplus in services (it exports more than it imports) but a trade deficit in goods.

It’s this final chart, below, that really shows how things have changed over the last thirty years.  The U.S. share of total world manufacturing output has fallen from about a quarter in 1970 to about 20 percent in 2009 (a sizable decline, but certainly not precipitous).  China’s share, on the other hand, has grown from just 1 percent in 1970 to nearly 18 percent in 2009.

US Manufacturing and Trade Statistics

Click here to expand the figure

Comparative advantage and trade with China

The story actually points to what works so well about US-China trade: factories in the United States manufacture goods that fit with America’s competitive advantage – high-tech items, for example – while factories in China manufacture goods that fit within China’s comparative advantage (primarily labor-intensive, low-tech goods).  (The table U.S. and China Net Trade Balances: Merchandise and Commercial Services Trade shows the U.S. and China’s top goods and services exports.)

But we know that comparative advantage is continuously changing, and that is where education and innovation come in.  As FutureofUSChinaTrade.com moderator Bob Mittelstaedt writes, “Over the long-term, market flexibility – the ability of the education system to teach new skills, the ability of producers to produce different goods and services – is critical, because in a world with truly free trade comparative advantages constantly change.  Those countries best able to adapt to those changes will grow the fastest.”

China will continue to develop its manufacturing sophistication, and the skill level of its workforce, until it can compete in higher-tech, higher-value manufacturing sectors as well (it is already beginning to).  So the U.S. must do the same, and indications are that it is.  One of the reasons unemployment remains so stubbornly high even as corporate profits are phenomenal is that U.S. businesses have learned to do more with fewer workers – they’re more productive. 

Of course, U.S. companies need to put those unemployed people back to work (the government should help by subsidizing the development of cutting-edge industries like green technology), but when that happens, the economy has increased output per worker – it has become more productive.  As FutureofUSChinaTrade.com moderator Art Blakemore reminds us, the key to productivity increases is innovation.  “Developed economies that wish to prosper must innovate – technological innovation is the only way that developed economies continue to grow.”

A couple of months ago FutureofUSChinaTrade.com raised the question, “Should we be concerned with American manufacturing?”  The question was spurred by a Financial Times op-ed by Jagdish Bhagwati, a professor of economics and law at Columbia University, called “‘Made in America’ is not the way out.”  Bhagwati argued that an “unhelpful fascination” with American manufacturing “promises to inflict gratuitous damage on an economy that can ill afford new wounds.”

FutureofUSChinaTrade.com moderator Clyde Prestowitz responded that global rebalancing – in which the U.S. consumes less and exports more while China, Japan, Germany and others consume more and export less – is difficult to imaging unless the U.S. manufactures more.  “No one I know believes there is any way that the trade deficit can be rebalanced without a large decline in U.S. imports of manufactured goods and a large increase in U.S. exports of manufactured goods. But, of course, neither movement can occur unless the U.S. actually begins producing more manufactured goods. So, in fact, it seems that we must after all have some special concern for the fate of U.S. manufacturing.”

U.S. manufacturing and trade with China

Here’s an attempt to synthesize all this:

1)      U.S. manufacturing is important, especially if global rebalancing (trade deficit countries export more and import less and trade surplus countries expert less and import more) is a goal.

2)      U.S. manufacturing is still strong – while the real value of China’s manufacturing output has risen more quickly, the value of U.S. manufacturing has continued to increase, too.

3)      But American manufacturers must continue to boost productivity – to produce more output per worker.  That requires innovation, and education.

What do you think?

FutureofUSChinaTrade.com is a program of The Kearny Alliance