In an announcement that sounds tiresomely
routine, China has been identified as having crossed one more economic
landmark. In mid-March 2011, consultancy firm IHS Global Insight released
a study which suggests that China has become the world's largest manufacturing
nation. The data from IHS Global Insight estimates that in current dollars,
world manufacturing output in 2010 was $10,078 billion. That reflects
an inflation-adjusted growth of 9.7 per cent relative to 2009. That is
good news for the US and other G8 governments looking for signs of a recovery.
But what may not be good news for them is that China accounted for 19.8
per cent of that production, which places the country for the first time,
after (reportedly) more than 150 years (Financial Times, March 14, 2011),
at the top of the global league in terms of manufacturing output share.
The US which followed with 19.4 per cent has been displaced from its more
than 100 year presence as the largest manufacturing nation in the world.
With manufacturing might still considered a reflection of a nation's true
economic strength, this does constitute an important milestone in China's
development history.
This news comes not long after the announcement that, measured in terms
of nominal GDP converted to dollars at official exchange rates, China
had, in 2010, overtaken Japan as the world's second largest economy. Figures
from Japan released recently showed that Japan's nominal gross domestic
product was worth $5,474 billion in 2010 compared with China's $5,879
billion. That too was a significant milestone. For many years before that
China had been ahead of Japan only when GDP was measured in purchasing
power parity (PPP) terms. PPP is an indicator that takes into account
relative prices and therefore the command over goods that a dollar of
income provides. Since with lower wages and prices, a dollar in China
when converted to RMB delivers more purchasing power, Chinese GDP measured
in PPP dollars is significantly higher than at official exchange rates.
Hence, becoming the world's second largest economy at official exchange
rates did mark an important transition. There are only two features that
seem to discount this achievement. The first is that though it has overtaken
Japan, China is far behind the US, with less than two-fifths of its GDP
in nominal terms. The second is that with a population of more than 1.3
billion, when compared with Japan's 128 million and the United States'
307 million, China's per capita nominal GDP in 2009 was less than a tenth
that in both Japan and the US.
Assessments of this kind are likely to be invoked to dilute the significance
of China's achievement. The arguments that would be resorted to would
be diverse. One of course would be that China has managed to garner this
success not because of its technological prowess or manufacturing discipline,
but because of the use of its large and cheap reserve of labour as well
as hidden and/or open subsidies from the state. That argument would be
strengthened by referring to the role of US (and other) multinationals
which have relocated capacities to China in the latter's manufacturing
export success. The latter is crucial.
Exports have been particularly important for manufacturing growth in China.
The exports of manufactured products rose at 20 per cent per annum between
2000 and 2009, and the share of manufactured exports in total exports
rose from 88 to 95 per cent. It is also true that foreign-invested firms
account for a large share of manufactured exports from China and that
the ratio of manufactured exports to aggregate and manufacturing GDP has
been high and rising, till the recent recession. According to China's
Ministry of Commerce (MOFCOM), foreign invested enterprises, which were
responsible for over half of China's exports, accounted for 30 per cent
of the country's industrial output. This dominance increases in the case
of high technology exports. According to one estimate, as much as 40 per
cent of exports from foreign invested enterprises consist of high technology
goods. If that be true, as much as 70 per cent of the $377 billion worth
of hitech goods exported by China in 2009 was produced by the FIEs. China,
therefore, may be engaged in the production of a diverse range of manufactured
goods, but the knowledge required for that production is in substantial
measure controlled by firms originating in the US.
To boot, licensing the use of this knowledge delivers significant revenues
to firms from the USA, far exceeding that received by other countries.
What is noteworthy is that both receipts and payments of royalties in
the case of the US are in transactions with affiliated firms. That is,
the US is reaping the benefits of its control over knowledge through transactions
conducted with affiliates abroad. It continues to be a net exporter of
manufacturing technological know-how sold as intellectual property.
Underlining this becomes important because of the remarkable performance
of China in terms of the relative share of the high technology sectors
in its manufacturing sector. In the world as a whole that ratio rose from
11.66 per cent in 1985 to 19.08 per cent in 2005. The EU's performance
tracked this trend well, with the relevant share rising in its case from
9.66 to 14.26 per cent. The US performed better, with the share in its
case rising from 13.7 to 24.2 per cent. But it was China's performance
that was remarkable, with the hi-tech share in its case rising from 8.4
to 29.4 per cent of manufacturing value added over this 20 year period.
Even over this long period, China's rise in the global league tables for
hi-tech manufacturing was the result of a rapid expansion of exports.
The ratio of export sales to revenues rose from 25 per cent in 1985 to
more than 75 per cent in the mid-1990s, only to moderate later as domestic
consumption of high technology products rose along with incomes. By 2005
that ratio had fallen below 60 per cent, because of a rise in domestic
consumption and not because of a decline in exports. Even if led by US
transnationals, it delivers foreign exchange revenues to the Chinese economy.
It is this export success that leads to the visible fear of China outside
its borders. Exports of goods and services were estimated at close to
two fifths of GDP before the 2008 crisis broke. But that figure has come
down since and is likely remain low as China seeks to redirect growth
and rely more on home demand. Yet the fear of the emerging giant is unlikely
to subside. This is because its low per capita income and large population
makes its rise more ominous in the eyes of its global rivals. Being low
on the per capita league table allows China to aspire to high growth rates
for decades to come. When growth occurs at that level of per capita income,
the demand it generates tend to be more intensive in manufactures, energy,
and mineral resources. Add to this the fact that the size of the population
that will benefit from that potential growth is immense and the pressure
this puts on the world's resources, besides its environment, is likely
to be huge. The threat that this poses to countries that rose to dominance
in a context of cheap and ample resources and raw materials should be
obvious.
However, as of now they are likely to put a brave face on, declaring that
China's success is not China's but that of the United States.