Why China's 'Dominance' of Manufacturing Is Misleading

Gaudy statistics aside, the country has struggled to do what it needs to do -- move up the value chain.
chinagarmentbanner.jpgReuters

On Monday, The Atlantic wrote a story based on an International Business Times infographic that portrayed China's enduring prominence in manufacturing. Remember, though; prominence is not the same as success. (Just consider this sentence: "Alex Rodriguez continues to be a very prominent baseball player.") China will play a major role in global manufacturing for years -- and probably decades -- to come. But the country's role is not a healthy one, and the weaknesses in Chinese manufacturing outshine the huge numbers displayed in the graph.

The apparently dominant Chinese industries listed in the infographic, such as cell phones, shoes, and cement, suffer from three different problems:

  • China doesn't make as much as it seems
  • China doesn't want to make as much as it does
  • China soon won't be able to make as much as it does

In the category of not making as much as it seems are computers and cell phones. Here, China is an assembler, not a manufacturer. The components of computers and cell phones are made elsewhere, shipped to China, and then boxed there. The advanced technology jobs in design and precision manufacturing of semiconductors are located elsewhere, while Chinese workers essentially provide the packaging.  This is why Beijing so much wants to move up the production value chain, and why Chinese trade surpluses are exaggerated.

The second category contains industries plagued by overcapacity. Air conditioners, cement, ships, and solar cells are just four of these, with steel and other construction materials probably in evenworse shape. Air conditioners have long seen in oversupply and sales fell 20 percent last year. The story with cement is similar. China has been able to continually make more than anyone uses, but is it a sign of strength, especially with the government trying and failing to rein in production year after year? In shipbuilding and solar, the situation is that much worse: Excess capacity has led to huge losses.

Last are the products that are trending down. China has been the world's dominant textile-maker, a category including shoes, but production is starting to shift to lower cost countries such as Vietnam. Domestic pork output is unsustainable due to progressive loss of arable land, which was one of the factors in Shuanghui's $4.7 billion bid for Smithfield foods. China very much wants to limit coal output for reasons of water use, air quality, and carbon emissions. A net exporter in 2007, the country is now the world's leading importer. And ideally, Beijing would substitute shale for coal, but the country doesn't have the capability.

Size matters in industry, but brains matter more. China doesn't know how to make some of the things it wants to make and seems not to know how to stop making things it makes too much of. Its prominence is unquestionable -- but success is another story.

Derek Scissors is a resident scholar at the American Enterprise Institute and adjunct professor of economics at George Washington University.

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