Have China’s manufacturing powers been exaggerated?
In a word, no.
Many in the economics blogosphere have mentioned Guy de Jonquieres recent FT column, Which argues that the US – not China – is the world's manufacturing powerhouse. And usually in a favorable light. Let me chime in with a dissenting voice.
De Jonquieres notes that China only manufactures ½ as much as the US. But China's economy is only around one sixth the size of the US economy. The world's largest economy should have the world's largest manufacturing sector if the term "advanced industrial economy" means anything at all.
I am all for pushing against over-generalizations that get repeated so often that they become conventional wisdom. The oft-stated argument that France isn't growing is one example. In fact, France has grown faster than either Germany or Italy over the past few years, and France grew for the same reason the US grew: soaring real estate prices have pumped up domestic demand.
But I would submit that the real story here is the growth in China's manucturing sector, not the fact that the US – the world's largest economy – continues to have the world's biggest manufacturing sector. Or the fact that the US manufacturing did a bit better than Japanese manufacturing from 1995 on. Japan, afterall, was in a prolonged slump; Japanese demand wasn't growing at all.
I don't have the data in front of me, but China's manufacturing sector was probably only ¼ the size of US manufacturing only a few years ago. Consider the trade data, which I do have in front of me. In 2001, China ‘s average monthly exports of manufactured goods were around $22b. Judging from the March data, China's 2006 manufacturing goods exports are going to average about $80b a month. That strikes me as a big change.
For the record, the US exports more manufactured goods than China. It just won't be for long if China's current export growth continues. By the end of this year, China will surpass the US.
I also wish the argument that China's exports have little value-added was subject to a bit more critical scrutiny. De Jonquieres echos the convertional wisdom:
"Indeed, to call China a manufacturing economy is something of a misnomer. In reality, it is the world's biggest final assembly shop, with minimal local value-added."
However, lots of the data that backs up this argument seems to come from 2002 or 2003. This CEPII study is an example. But a lot has changed since 2002 or even 2003. In 2002, China's monthly exports averaged around $27b; in 2006, its monthly exports will average around $80b. Even if Chinese "value-added" is constant, exporting more implies that the total value-added in China's export sector has grown substantially.
Moreover, anecdotal evidence suggests a rise in Chinese value-added –particulary in 2005, when Chinese import grow slowed significantly. The enormous amount of investment taking place in China means that the composition of China's output can change quickly. More electronic components are made in China now, for example. China is gearing up to produce high-quality steel for autos, not just the low-end stuff. And so on.
But the detailed data needed to do careful analysis of all this isn't out yet. So everyone ends up working off what I suspect is "dated" data. One big caveat: I didn't receive an advance copy of the IIE's study that de Jonquieres cites, so I don't know what data it is drawing on.
But logic tells us that the value-added in China's export sector is large enough to generate a trade surplus of around 5% of GDP (continuation of q1 export and import trends implies China's trade surplus will rise to $140b), pay for China's energy imports (another 5% of GDP, according to the IMF) and to pay for China's imports of the commodities and capital goods it needs for its domestic economic expansion.
I suspect that the value-added in China's manufactured exports is probably now over 15% of China's GDP. By comparison, total US exports of goods are around 7% of US GDP, and some of those exports have imported content.
I concede that I am working off inferences, not hard data. But China's trade surplus – assuming it is real, not disguised capital inflows, as Stephen Green of Standard Chartered argues – didn't come out of nowhere. China has been able to sell enough "assembly" to pay for a very rapidly rising bill for commodity imports, have enough cash left over to pay for a few Boeings, GE generators and the like and still have some left over to help China build up its reserves. The US, by contrast, doesn't pay cash for much of anything anymore.
Finally, much of the de Jonquieres column seems to be based on an Oxford Economics study. That study was financed by the China Businesss Forum, itself a part of the US-China Business Council. They hardly sound like a disinterested party. I was a bit surprised – to be honest – that de Jonquieres didn't mention that the China Business Forum sponsored this study in his column.
I am not technically adept enough to comment on the methodology Oxford Economics used to assess the impact of China on US jobs, or the Mark Weisbrot critique Oxford Economics' study. Weisbrot argues that its focus on the overall benefits of the US-China trade ignores important issues about the distribution of those benefits. I am inclined to agree: It doesn't take a lot of econometrics to figure out that the impact of China — and others - on the US manufacturing sector is one reason why home mortgage delinquencies are rising strongly in Indiana, Ohio and Michigan.
But I did think Oxford Economics was spinning that basic data fairly hard. And when I feel like I am being spun on things I know well, I start to get suspicious about things I don't know as well
Let me mention a few reasons why I felt spun.
- Oxford Economic's estimate for the 2005 Chinese current account surplus was on the low side– $110b. China's 2005 trade surplus alone was $100b – and in recent years the current account surplus has significant exceeded the trade surplus. $130b strikes me as a more reasonable estimate.
- Oxford Economics opted to compare that surplus in dollar terms with that of Japan ($154b in 2005, according to the recent data) and Germany. They didn't present the same comparison as a percent of GDP. Such a comparison would show China in a much less favorable light. Moreover, Germany is part of a broader currency union that ran a small current account deficit in 2005. French and Spanish deficits offset Germany's surplus. Looking at Germany alone is misleading.
- I understand presenting the data in dollar terms. I don't understand not presenting the same data as a percent of GDP. Particularly when Oxford presented China's steel production in per capita terms …
- Oxford Economics noted that China's current surplus is small relative to the oil-exporters. That is very fair. But shouldn't the fact that China's surplus has risen in the face of an oil shock also be mentioned?
- Some data was presented in ways that rather obviously – if you know the data – skew the results. For example, they presented a chart showing China's share of the US bilateral trade deficit. It was 20% in 1997, and it is around 20% now. What does that leave out? The fact that overall deficit increased enormously over that time period, so the US bilateral deficit with China rose substantially as a share of US GDP. Why not show the bilateral deficit with China – even the bilateral deficit with China adjusted for Hong Kong – as a percent of US GDP?
- Oxford Economics presented a graph showing very rapid growth in US imports from China and relatively slow growth in US imports from the rest of Asia, but didn't include the (easily calculatable) growth in overall US imports from Asia. I suspect there is a reason for that: the overall growth in US imports from Asia was rather impressive in 2004 and 2005, and showing that data would undermine the argument that Chinese is just doing the final assembly that used to be done elsewhere in Asia.
China is, of course, doing much of the assembly that used to be done elsewhere in Asia. But that isn't all that it is doing either. There is a rather simple test. Are US imports from Asia going up or going down as a percent of US GDP?
The answer: Overall US imports from the Pacific Rim went down sharply in 2001. The tech bust meant fewer electronics imports. Add in a recession and 9.11. But US imports from the Pacific Rim have been growing strongly since 2003. Oxford Economics could have done the same graph I did last week. Or they could have shown the evolution in the United States' overall trade balance with East Asia, as Saleh Nsouli of the IMF did.
They just didn't. I doubt the resulting graphs would have pleased the China Business Forum. Call me suspicious.
“China is, of course, doing much of the assembly that used to be done elsewhere in Asia.”
As far as value add, I have to wonder if you could build a computer totally out of parts manufactured in the US? I doubt it.
It seem to me they are doing everything up the manufacturing chain. Watch what happens when Delphi closes most US manufacturing and moves it to China.
I think more of Delphi’s manufacturing have disappeared, or moved to Toyota and Toyota’s suppliers and that will continue than will move to China. Toyota has been increasing their manufacturing in the USA year after year.
I think Toyota knows more about the best way to manufacture than GM, Delphi or anyone else. That they don’t manufacture in China (using the outsourcing model) is not because they didn’t think of it. Toyota just knows that manufacturing close to the customer is the best manufacturing strategy (Toyota Production System – lean manufacturing.
Toyota is manufacturing in China, to serve the Chinese market (in fact they opened a Prius plant there).
China only manufactures ½ as much as the US. China’s economy is only around one sixth the size of the US economy.
In dollar terms or adjusted for PPP ?
Because if RMB is 40 % undervalued, then that would mean, CHina manufactures about as much as the US in real terms if those numbers are in dollars.
I think Toyota has very little in the way of a relationship with Delphi.
I also think that that Toyota buys the bulk of their parts from “keirets”, not US suppliers.
DF — GDP is in $. Adjusted for PPP, China’s economy is about 1/2 the size of the US. PPP adjustment would increase the dollar value of china’s domestic manufacturing, but, I suspect not the dollar value of China’s manufacturing (or assembly) for exports. but those kinds of calculations are not my forte, so i would defer to the opinion of others.
Incidentally, I would be most interested in any (informed) argument suggesting that Chinese value added in the export sector hasn’t risen significantly since 2002 or even 2003. I am not wed to any position here — I only tried to highlight somethings that seemed a bit at odds, namely the argument that China’s value-added in the export sector is very low and the evidence suggesting china value added has risen faster than its (rapidly rising) bill for imported raw materials/ capital goods that are not inputs into the export sector.
Like many of the international economic comparisons made in this forum and elsewhere, intelligent debate and analysis are thwarted by fundamentally flawed statistics. While numbers based on market exchange rates be relevant from an international buisness perspective, they fail to represent productive reality.
PPP adjustments are the only reasonable way to measure real economic strength, and by that figure China’s output is already 2/3 the size of the US, and it’s industrial output is almost 2x ours. The figures may sound ridiculous, but for a detailed, comprehensive macroeceonomic dataset, i’ve found no better source than the Groningen Growth and Development Center, http://www.ggdc.net. The figures they provide include at least basic output information for nearly every economy of interest, and are used by the Worldbank and Conference Board among others. The figures I referenced for China/US came from the CIA Worldfactbook, which contrary to it’s undeserved reputation for exaggeration actually provides a lower estimate of China’s relative position than the more officious GGDC.
Irrespective of the source, every PPP adjusted estimate of China’s output shows it at ~ 2/3rds of the US value, a value which is far more probable than the 1/6 value which market exchange rates ascribe to a state with more than 4x our population following decades of robust growth. While I concede that PPP remains a far from perfect measure, I contend that, for purposes other than the conduct of international buisness, PPP is the only reasonable measure on which to base international analyses.
http://atimes.com/atimes/China_Business/HD13Cb05.html
China and the art of (standards) war
“The Chinese government is establishing high-technology standards that differ from international standards,” said Dennis Fernandez, of Fernandez & Associates, a California-based intellectual-property consulting firm. “In effect, foreign high-technology intellectual property rights are not only losing value, but the high-technology standards [that China is creating] are also incompatible with international high-technology standards, [which consequently are] making entry into China’s market difficult for foreign companies with intellectual property rights in high technology.”
For tech, the gold is in the standards and the US will probably lose out in the future……..
Wow. So suppose the dollar falls massively, Chinese see their import cost fall, but they find harder to export. Most probably, they face over production.
The US may lose to China in the long term, but if history is any guide, China will suffer a bigger crisis than the USA.
The US has risen has a major super power by letting other powers confront in world wars and come up in the end to reap up the gains.
THe good question is can China do the same ?
A confrontation between the USA and Russia over the middle east would suit its need well. I don’t know it’s really difficult to see how a major crisis will not lead to major wars, given history, and how we may have a war without the destruction of the planet. Or will we have fake wars à la 1984.
I’m growing gloomier and gloomier. Gee.
The best for China would be a confrontation between europe and the USA over the middle east. I can’t see a sign of this coming so far.
About the only advanced Industrial manufacturing left in the United States involves the Defense Industry. The commercial industry has long ago migrated offshore to Asia. Although Dell and IBM are American Corporations, they have actually outsourced manufacturing to Taiwanese and Chinese corporations. Even advanced technology microprocessor semiconductors produced by Intel are stamped with the label of “made in Malaysia”. And the latest Boeing 787 will actually have more Japanese content with the high-tech composite wings “made in Japan”.
Ironically, the Pentagon justifies increased military spending based on the rapid technology rise of Chinese Industry. The Washington Consensus views the Chinese as a threat to US global military hegemony. In other words, the US military will eventually have to bomb China in order to promote democracy. “Deterring or defending against potential aggression by the PRC is the strongest argument for the F-22A,” said Christopher Bolkcom, the top warplane expert at the nonpartisan Congressional Research Service, using initials for the People’s Republic of China. See below article.
Pentagon justifies Huge military spending on perceived China Threat to US
http://news.yahoo.com/s/nm/20060414/ts_nm/china_usa_arms_dc
Suggestive stuff from FIAS on China’s outward FDI. Value-added might be a helpful macro indicator, but it doesn’t loom large in Chinese managerial objectives. Moving up the value-added chain apparently takes a back seat to seeking and securing markets. (Interesting hints of incipient gluts in the goal-achievement slide.) Competitive dominance will matter most in the long run, and technology and HR know-how now look less important, as competitive advantages, than brands at home, or pricing abroad. They can buy market share like Japanese firms did, and milk scale economies to innovate later on.
In France up to very recently (a new law allows it but it is not implemented yet) you couldn’t really borrow against a not yet fully paid house, so I don’t think the housing bubble is increasing consumption in France.
http://guerby.org/blog/
Apart from borrowing against your house, there are old fashioned wealth effects — higher home values = save less = consume more. the correlation between rising housing and domestic demand growth in europe seems pretty robust; see the work by Daniel Gros.
You surely mean that the US is the second biggest exporter of manufactured goods, unless Germany has suddenly become a big exporter of non-manufacturer goods.
guest — you are right, i made appropriate changes. of course, if you net out Germany’s exports to the eurozone, its number would fall a bit.
Ask the unemployed and underemployed former US manufacturing workers.
Delphi has already moved much of its manufacturing overseas and is trying to provoke a strike so it can speed upi the transition (General Motors is desparately trying to rpevent the strike, and may ahve enough clout ($$$) to do so.
Dana Corp is right behind Delphi. Nice little Chapter 11 and away we go.
About the only advanced Industrial manufacturing left in the United States involves the Defense Industry
That’s just not so. Check out medical devices… companies like Medtronic, Guidant, St Jude… even J&J and GE Medical have massive domestic mfg positions… as do most all their suppliers.
There is also a lot of ‘processed’ food manufacturing… this used to be a small industry & ‘low value’ but not anymore. Walk the freezer isle sometime – it blows my mind how much ‘processing’ goes into such small servings (okay – I’m an old fart and buy ‘bulk’ & ‘fresh’ and actually ‘cook’ – but the market is there, BIG & growing).
Then there is a whole lot of small ’specialty’ maufacturers in niche markets all over the US… many selling internationally (my BIL works in one in rural northern Wisconsin – almost everything they make sells off-shore – mostly Asia).
US mfg is under tremendous pressure – no doubt about it & alot of the wounds we lick have been self inflicted (terrible policy on the part of the US – fiscal & trade negotiations).
But there is plenty still here worth saving if we did a few things right. And it isn’t all defense.
I agree with dryfly. A lot of auto production (and auto parts) production is still in the US as well (counting the transplants), not that you would know it from reading say Sebastian Mallaby’s latest ode to the success of the US in the intangible economy. Hollywood and hedge funds are much sexier than Delphi and Dana.
Brad–I have come back from my Easter holiday, and found your very interesting article.
First of all, as have been alluded in your article, and emphasized by many scholars of Wissenschaftssoziologie in the past, studies sponsored by interest groups tend to favor them explicitly or implicitly in various ways. An extreme case is an article written by a chief economist of an investment bank. But, of course, this does not mean that its analysis is necessarily flawed, though naturally subject to suspicion. Therefore, I admire your effort to seriously try to refute the analysis made by Oxford Economics for the China Business Forum, rather than dismissing it outright.
Having said that, I don’t think you have succeeded well in refuting the analysis by Oxford Economics. This is not because your statistical analysis is deficient (actually, much better than that by Oxford Economics), but because China’s manufacturing powers have been exaggerated in reality. Half of China’s exports are supplied by foreign companies in China, and most of excellent manufacturers are really foreign-controled or affiliated. China cannot produce good steel, engine or tool machine. Even in the textile and footwear industries, designs and production methods are dominated by foreign companies. Many well-managed factories rely on foreign (or foreign-trained) managers. Therefore, apart from cheap labor and violation of intelectual property rights, China’s manufacturing powers are still very weak.
However, in the long run, China’s manufacturing powers cannot be underestimated. Already, in some manufacturing sub-sectors, excellent Chinese companies are emerging. I would say that in ten years, China’s textile and footwear, and more importantly, electronics industries will overwhelm the world. Petro-chemical and steel may also become very competitive.
On the other hand, manufacturing powers, which are really microeconomic, managerial and technological powers, and are as such so difficult to build up in the short run, cannot be rebuild so easily as well, once lost. In that sense, it is worrisome that the US manufacturing powers are erroding while housing, construction and retail industries are attracting human resources so much in the US.
In case of a crisis what would you rather have :
I guess both PPP and Forex coversions have their own merit. I would prefer to see Forex converted #, and PPP as a reference.
But it is definitely WRONG is one adds the alleged 10% (or exaggerated 40%, even if the number is right) ‘undervaluation’ to a PPP value. Because PPP itself is independent of exchange rate, i.e. if exchange rate raises by 10%, PPP factor should drop by 10%, isn’t it?
therefore, i do not understand where the 2/3 value comes from.
i think you are definitely right there is continuous and significant improvement in productivity and value-added in China.
however, it is also correct that at the micro-level (i.e. per whatever) China is still far behind many other countries in the world.
it is also right that US created more value in ‘non-manufacturing’ sector, i believe. otherwise, how do we explain the wealth accumulated in silicon valley?
in my opinion, we also need to take a broader scope of other source of revenues, esp intangible goods. e.g. where is a MS Windows CDROM manufactured? If it is exported from US, how much has it been recorded in US Custom? What about Hollywood movies and DVD?
this might sound like an argument against trade protectionism. but for US itself, it is benefitial to look at this objectively, and quantitatively. because this helps US to look forward to boost its own competitiveness.
perhaps the real estate bubble is not just due to cheap credit, perhaps real wealth created by expats working abroad repatriating money also contributed? perhaps the tax paid by ex-pat US citizens as well?
for free market advocates, everything will work out by itself. unfortunately, there are strong voices to intervene on the free market today. without realizing the true impact of these factors, the risk is to intervene the market in the wrong direction, which could be adversive, if not disastrous, to US itself.
“Or will we have fake wars à la 1984′
we had one already it was called the kold war
we have one now of a different sort
the war on terror
” if you net out Germany’s exports to the eurozone, its number would fall a bit”
germany is the euro zone’s
equivalent of our mid west
so far not so rusty
but watch out
this is fun
is spain the zone’s
future southern california ????
its eventual greatness
of course
has a problem
so far barcelona won’t play la
China has *tried* to force companies to use its standards, but with only one exception, it’s failed. The only exception where the Chinese government has been able to successfully mandate use of a standard (i.e. GB) is with Chinese language processing, and even there part of the success is that its not that hard to move between GB and Unicode.
What I meant by Delphi’s manufacturing had “moved” to Toyota was that cars GM was manufacturing are now manufactured by Toyota. So if Delphi plants close, many won’t move to China they will just close. Toyota has been adding capacity (their own and suppliers) in the USA but they have struggled to keep up their growth of sales. So they import more cars from overseas than they would like (I think the same is true for suppliers – Toyota suppliers based in North America will continue to grow as they can develop those suppliers). They will increase the percentage of manufacturing done in the USA for the USA market because they see that as the best way to manufacture within the system of managing a worldwide company.
New Surge by China Ousts UK as No 4 Economy
Foreigners Added $86.9 Billion in US Assets in Feb
I understand now John, but Toyota did just announce a new plant for Canada, not the US and cited healthcare as a major reason.
@me,
it is easy to verify JH’s case.
just check the total number of car part manufacturing jobs, and the total employment number of auto industry in US.
if you cannot find that data, total number of made in USA car may also be indicative.
toyota of course will open a factory in canada, canadians also buy cars. but the cost is pretty high to ship one from SC to BC.
healthcare cost. this is an important question.
not sure if brad will address this.
IMO it is just too expensive, physicians and pharmacos are making too much, in almost every country, esp in US.
so you entered NAFTA, knowing that you have your competitive advantage in some areas and disadvantage in others. hoping that you can sell more Boing planes than buying Camrys from Canada.
The problem is, if this disadvantage is structural (Healthcare?) and it is such an important factor as to change the decision of a factory site. are you going to fix yourself? or are you going to shut the gate?
Brad is so right on this issue.
The direction of change is critical. The fact that the U. S. still has some export ability is a residual, left over from past glories.
The share that manufacturing industries have of all private industries share of U. S. value added was 23% in 1980 and 14% in 2004. The decline has been especially steep since 1998, going from 18% to 14%.
The share that manufacturing industries have of all corporate profits were 44% in 1980 and 17% in 2005. The decline has been especially steep since 1998, going from 25% to 17%.
Anyone who has relatives who will be residing in the U. S. in the next two decades should read these numbers and weep. Why is it that so many people are determined to avoid looking at reality?
Brad,
I think it depends on your definition of value added I guess. To me value added means profitability. The ROE of the Shanghai and Shenzhen indices is between 5-6%. Since most of that is manufacturing and materials I won’t bother segmenting ROE by sector but since the US is so service dependent I will segment. The ROE of the listed US manufacturing sector is around 20%. These numbers are mostly back of the envelop but even if China was slightly higher and the US was slightly lower it still reflects the fact that US manufacturing is very value added and Chinese manufacturing is value destructive. 6% isn’t above anyone’s cost of capital. Profit is supposed to act as a signal to encourage investment. In the case of China this signal doesn’t work so you have significant over-investment. I was in China 2 years ago and met management of many of the listed companies. Although some of the SOEs talk a good game (thanks to their western bankers) their numbers say otherwise. They are mainly focused on market share gain and volume growth. Profitability is a minor consideration. Don’t even bother asking about strategic issues because all you will get is McKinsey BS regurgitated line-for-line.
Not that over the long-run China won’t adjust and improve but just that right now I can’t buy into the fact that China is doing much in the way of value added manufacturing. If they are they are hiding it well because I didn’t see any signs of it.
I put up a chart on Shanghai real estate
http://www.aleablog.com
surprise…surprise…
I’m confused at terminology ‘value added’. De Jonquieres claiming there is little ‘value added’ in China strikes me as a pretty ridiculous statement, especially after stating that China is the worlds largest workshop. If labour is not value added, what is? When assembling $5 worth of components adds $3 to the sale price of that item (even though the cost of value added may only have been $0.10) then it is easy to understand why the trade imbalance with China is so high. I would feel more comfortable with the whole scenario where the Chinese people to actually be working in conditions other than those that perpetuated their economic quandary (i.e. earning wages so low that their economic condition only marginally improves over time). Companies like Delphi, once clear of their US responsibilities will be able to substitute well-paid union jobs for subsistance labor rates in China while holding on to profitable contracts and ditching non-profitable ones (or turning them into profitable ones by manufacturing in China). I don’t see much advantage to US workers or Chinese workers, only to Delphi profits and the US consumer (if s/he has a job, maybe s/he can afford to buy one of GMs cheaper cars, filled with Delphi China components…)