China Overtakes US in Manufacturing – Does it Matter?

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A few months back a good friend of mine suggested that my lack of concern over China’s growth rates and economic prowess signaled ignorance about China’s imperialistic tendencies. Big Brother is watching she said. Watch out for who you associate with in China. Beware of what they might want from you were her warnings. Being the non-conspirator that I am I just shrugged my shoulders. Why should we fear China? Are we at risk if China (once again) becomes a super power? Is it a zero-sum game whereby if China wins, we lose?

Personally, I don’t think so. Just spend some time with your average Chinaman and you will find he/she is strikingly a lot like you or me.  He/she wants to send his children to good schools, have a nice house, drive a nice car and enjoy some quality time with friends and family. Take over the world? That seems like a stretch. So how can one be so nonplussed with headlines like this one, “China to overtake US as largest manufacturer?” Well, it just doesn’t seem to be a big deal. It’s also no wonder that a country with 3.5+ times more people than us may one day overtake us as a manufacturing center.

But isn’t this growth just part of the normal industrialization process? In fact, one might argue it affords more, not less opportunities for US firms of all types. According to John Engler, President of the National Association of Manufacturers, “This should be a wholesome development for the US, for it promises both political stability for the world’s largest country and continuing opportunities for the US to export to, and invest in, the world’s fastest growing economy,” as quoted in this Financial Times article. Industrialization also moves countries beyond manufacturing into more service oriented, knowledge based economies for which the US has become a global leader.

The notion of comparative advantage, described by Adam Smith in The Wealth of Nations can help explain the value of buying metals and related products from say China: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” (Book IV, Section ii, 12) As many commodity sourcing professionals in the US know, imports have become much more expensive this year, due to the value of the dollar and other rising costs but indeed they are offset when the finished product is exported. In that sense, does the relative size of manufacturing in China overtaking manufacturing in the US really matter?

–Lisa Reisman

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