Saturday, April 15, 2006

China's Manufacturing Economy

Topic: economics, manufacturing

Brad Setser posts on manufacturing comparisons: Have China’s manufacturing powers been exaggerated?

I am all for pushing against over-generalizations that get repeated so often that they become conventional wisdom. The oft-stated argument that France isn't growing is one example. In fact, France has grown faster than either Germany or Italy over the past few years, and France grew for the same reason the US grew: soaring real estate prices have pumped up domestic demand.

But I would submit that the real story here is the growth in China's conventional wisdom to improve our understanding of the real situation. I agree with him that the growth in China's manufacturing sector is the most important story.

But, to me, that story is so over-reported that many get the wrong impression. The constant mention of the erroding manufacturing sector on the USA I believe leads many to think it is shrinking and small. Yet output continues to increase and the share of worldwide manufacturing output is holding steady. China is gaining substantial ground but the Chinese increase has largely come from Japan and Europe. To me this understanding is important because of my felling about the misperceptions of many. But this is nothing more than my judgement.

Two factors that are also reported have truth. First manufacturing plants have been shutting down in the USA and the production has been replaced by Chinese production, in many cases. Second manufacturing jobs are decreasing in the USA. However, this decrease is often mentioned as "moving the jobs elsewhere" which to me is misleading since the overall number of manufacturing jobs worldwide continues to decrease. The decrease in the USA has been less than it has worldwide therefore to me the main cause should be seen as manufacturing productivity increases worldwide (though this is open to debate).

By gaining better understanding of what the data actually shows I think we will better be able to predict what will happen in the future and be better able to design sensible policies.

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