Which Nation Leads in Manufacturing?

Which nation leads in manufacturing? That seems like a simple question.

The answer is complicated, however, and can hurt or boost national pride; can affect foreign policy; can sway domestic policy on education, taxes, and other issues; and, in today’s new age of mercantilism, can lead to tariffs supplanting free-trade agreements.

Actually, there are two answers, both of which are factual but have widely different implications.

One answer is that China leads in manufacturing. After all, it produces $4.7 trillion in value-added manufacturing output per year, and the United States, at No. 2, produces $2.9 trillion.

In other words, China produces 1.6 times more than the US does in value-added manufacturing.

Note: “Value-added” is the value of goods produced minus the cost of materials and supplies used in producing them. It is a common measure that avoids double-counting.

On the other hand, China’s lead in manufacturing output becomes less alarming when the population difference between the two countries is taken into consideration. The negative can even turn into a positive when expressed as follows: Although China’s population is 4.26 times larger than America’s, it produces only 1.6 times more.

In other words, on a per capita basis, the US produces a lot more than China does.

In fact, of large, developed economies, the US ranks second in per capita output of value-added manufacturing, behind No. 1 Germany, which has a fourth of America’s population. The US even outranks S. Korea and Japan on this measure.

America’s strong dollar affects these rankings, but not enough to change the conclusion that the US is doing quite well in manufacturing output on a per capita basis.

It’s also doing quite well in such non-manufacturing sectors as finance, software, marketing, consulting, and other services. The more that these sectors do well and account for a larger share of GDP, and the less employment in manufacturing due to automation, the more that Americans are left with the misimpression that domestic manufacturing is in dire straits—and the more that politicians and media play to this misimpression.

Americans are also left with the misimpression that they are not doing very well financially compared to the rest of the world. But the fact is that American households have about 80 percent more disposable income than French and British ones. And the average American home is twice as large as the average British home.

It’s debatable how much of China’s rise is due to the theft of trade secrets, to unfair competition, to a communist version of mercantilism, or to the traditional economic development path of building an export economy as a way out of poverty before building a consumer economy. It’s not debatable, though, that China’s population of 1.4 billion would make it an economic powerhouse even if none of that were true.

It also makes a war between the US and China a sobering thought. If both countries were to lose 327 million people in a war, the US would be left with zero people while China would be left with over a billion. At the risk of sounding idealistic, maybe both nations should stop demonizing and antagonizing each other.

Speaking of war and national defense, the US has fallen behind China in such critical industries as shipbuilding and rare earth minerals, in spite of leading China in per capita manufacturing output. Government subsidies and/or tax incentives might be necessary to close these gaps, especially if the demonizing and antagonizing worsen, even if the cost of domestic production would be considerably higher than the cost of importing the critical materiel.

Which brings us to the subject of tariffs.

It is believed in some quarters that American manufacturing can’t compete without across-the-board tariffs. But opinions on that subject are driven to a large extent by how people answer the opening question.

In any event, the odds are good that China will eventually be a leader in both total manufacturing output and per capita output, as it climbs the value chain with its increasingly well-educated workforce. Donald Trump and his advisor Peter Navarro would disagree, but tariffs won’t change that.

Mr. Cantoni can be reached at craigcantoni@gmail.com.