Changing Places

THE UNITED STATES AND THE People's Republic of China have not yet reversed their positions in the world manufacturing hierarchy, but the trend lines are not good. In 2006, China will almost certainly overtake the United States as the number one exporter of manufactured goods. This is all the more remarkable because as recently as 2001 the manufactured exports of the United States were more than double those of China.

Nor is there any reason for comfort in the composition of Chinese exports, as an analysis by the Manufacturers Alliance/MAPI shows. Labor intensive industries account for only 25 percent of Chinese manufactured exports, with higher technology now accounting for as much as 60 percent of the total. As with the Japanese before them, the Chinese are rapidly moving up the technology food chain.

As one would expect with this remarkable growth in manufacturing, the machine tool sector has responded with increased consumption. In 2000, China consumed less than half as many machine tools as U.S. factories. By 2002, China had drawn even.

In two short years after that, China's consumption reached double the U.S. level. Not surprisingly, given the trend lines, China's machine tool consumption is likely to be three times ours this year.

That rapid pace in the employment of machine tools reflects the demands of both internal consumption and a manufactured export growth that is, to say the least, remarkable.

From 2002 to 2005, China more than doubled its manufactured exports. While textiles and apparel still led the way with $115 billion in exports, machinery excluding electronics accounted for $43.5 billion last year and had a much faster growth than the traditional textiles and apparel sector. In keeping with the new emphasis on high technology exports, scientific instruments and road vehicles and parts grew 54 percent and 33 percent respectively, substantially faster than the 22 percent growth for textiles and apparel (despite the phasing out of WTO quotas).

What do all these statistics mean for public policy?

First of all, China is not simply accomplishing this dramatic manufacturing growth on the back of its underpaid workers. It is the higher tech and more capital intensive industries that have grown the fastest. Modern factories and productivity enhancing machinery have played a large role.

Second, the strategy of undervaluing their currency by as much as 40 percent and then slow-walking all remedial measures to correct the undervaluation has been an important factor in all this growth. How much of a factor we do not know; but under-pricing your goods by as much as 40 percent can be a powerful stimulant to export growth.

Third, since the Chinese are producing more and more sophisticated products, the only way to compete is by producing even more sophisticated products.

The U.S. Government needs to recognize the challenge posed by China, and put more money and resources into public sector research and development.

President George W. Bush acknowledged this in the State of the Union message, but few resources were devoted to becoming competitive - and almost none in the manufacturing sector.

Congress also might turn its attention to this problem. The U.S. has the highest corporate tax rate of any country but Japan, while China gives 10-year tax holidays to some high tech investors. Getting serious about regulatory and legal reform also would help. Most of U.S. industry spends more money on tort litigation than R & D. Republicans are portrayed as the party of big business. But lately they sure aren't acting like it. America's position as the predominant manufacturing nation in the world is being eroded, and no one in Washington seems to be paying attention. If they are, they certainly are not doing enough to reverse the trend.