Will China take over world manufacturing.

• Author: Rowen, Henry S.
• Position: Last Word

China is becoming the workplace of the world, so we are increasingly told. Jeffrey Garten, dean of the Yale School of Management, writes, "Will China's importance to global manufacturing soon resemble Saudi Arabia's position in world oil markets?" And the world economy might "soon become dangerously vulnerable to a major supply disruption [in China] caused by war, terrorism, social unrest, or a natural disaster" (Business Week, June 17, 2002).

Its growth in manufacturing is impressive. Manufactured goods exports rose during the 1990s at a 15 percent annual rate to about $220 billion in 2000. On one estimate, China now makes 50 percent of the world's telephones, 17 percent of refrigerators, 41 percent of video monitors, 23 percent of washing machines, 30 percent of air conditioners, and 30 percent of color TVs. Many companies in the United States, Japan, Taiwan and elsewhere are moving operations there. Jobs are shrinking in Mexico's factories as work shifts to China. The building space of foreign contract manufacturers grew from 1.6 million square feet in June 1999 to 5 million square feet two years later.

The causes are China's opening to the world; its abundant supply of cheap, competent labor (with wage rates 5 percent of those in the United States or Japan and one-third of Mexico's--and no trade unions); a high savings/capital formation rate; and an influx of direct investment that brings technology with it. Moreover, there are still around 300 million workers in low-income, primary producing sectors, largely agricultural, that is a reserve pool of labor for industry.

Nonetheless, those who argue that Chinese manufacturing is going to dominate the world soon, if ever, are missing some basic facts. Perhaps their most important oversight is neglect of its manufactured imports, which are almost as big as its exports, about $180 billion in 2000. These include large purchases of Boeing and Airbus aircraft, Intel microprocessors, GE turbines, and much more. I recently visited a clothing factory in China and saw that much, perhaps most by value, of the equipment being used came from Italy and Germany. Many such imports are needed to produce the goods exported. The result for China in 2000 was a positive balance of manufacturing trade of about $40 billion and amount that is less than 1 percent of total world industrial production.

Several things will keep China from sustaining a large manufacturing trade surplus. One is a rapidly growing...