China displaced the U.S. as the world’s largest manufacturing nation in 2010 and widened its lead in 2011, according to recently published data from the United Nations, but a new Manufacturers Alliance for Productivity and Innovation (MAPI) report notes that China faces a difficult long-term transition that requires major structural economic and political reforms.
In "China Is the World’s Largest Manufacturer, and by an Increasing Margin," Daniel J. Meckstroth, Ph.D., MAPI chief economist, writes that the country’s ascent in manufacturing importance has been in the making for decades. Based on the dollar value of manufacturing value-added, China was the eighth largest manufacturing economy in 1991, third in 2001, and first in 2011.
Manufacturing value-added in China totaled $2.35 trillion in 2011 while U.S. manufacturing value-added was $1.9 trillion, according to figures estimated by the United Nations based on the international classification of manufacturing. China accounted for 20.7 percent of world manufacturing in 2011, an increase from 18.9 percent in 2010. Conversely, the U.S. share of global manufacturing declined from 18.4 percent in 2010 to 16.8 percent in 2011.
“China attained this ranking through a combination of price increases, exchange rate appreciation, and an extremely fast growth rate in the physical volume of manufacturing value,” Meckstroth said. “Over the 10-year period ending in 2011, these changes produced an 18.8 percent per year change in the dollar value of Chinese manufacturing value-added compared with 2.8 percent annual growth of U.S. manufacturing value-added.”
Meckstroth warned that such a disparity should be expected given that China is a large, rapidly emerging, densely populated country while the U.S. is a large, advanced, lightly populated country growing at a relatively modest pace.
To make more relevant comparisons between disparate economies, the report noted a dramatic reordering of the rankings when using per capita manufacturing value-added as the metric. With this measurement, the most manufacturing-intensive economies are Germany ($8,874 per capita), Japan ($8,780), Korea ($6,477), and the United States ($6,082). China ranks 11th ($1,772).
While China’s growth model is the envy of the developing world, challenges loom. Academics point out that China has many characteristics that make a growth slowdown likely, including a rapidly aging population, volatile inflation rates, undervalued exchange rate, and low consumption shares of GDP.
“Labor shortages in urban areas should continue to drive rapid increases in wages, eroding some of the cost advantage of Chinese manufacturing,” Meckstroth said. “Eventually, growth will depend more heavily on an expanding service sector, where difficult structural changes are necessary to promote productivity growth. The Chinese will eventually exhaust the easy productivity gains from imported technology and technology transfer, and they will have to rely more on their own R&D.
“The growth rate in China is bound to slow – what remains to be seen are the magnitude of change and the timing,” he concluded.