China to overtake US as largest manufacturer

China is set to overtake the US next year as the world’s largest producer of manufactured goods, four years earlier than expected, as a result of the rapidly weakening US economy.

The great leap is revealed in forecasts for the Financial Times by Global Insight, a US economics consultancy. According to the estimates, next year China will account for 17 per cent of manufacturing value-added output of $11,783bn and the US will make 16 per cent.

Last year the US was still easily in the top slot and accounted for a fifth of the total. China was second with 13.2 per cent.

John Engler, president of the National Association of Manufacturers, a Washington-based trade group, played down the effect of the projections. It was “inevitable” that China would take over on account of its size, he said. “This should be a wholesome development for the US, for it promises both political stability for the world’s largest country and continuing opportunities for the US to export to, and invest in, the world’s fastest-growing economy.”

As recently as last year, Global Insight economists predicted that the US would retain the top position until 2013, but a large downward revision in likely output this year and next is expected to cause the US to slip more quickly than had been expected.

The data underline the surge of China’s manufacturing-led economy in the past 20 years. In 1990, before economic reforms began to work, it accounted for a meagre 3 per cent of global manufacturing. Manufacturing accounted for just 17.5 per cent of global gross domestic product in 2007, but much activity in the considerably larger area of services, for instance in retailing, distribution, transport and communications, depends on it.

The expected change will end more than a 100 years of US dominance. It returns China to a position it occupied, according to economic historians, for some 1,800 years up to about 1840, when Britain became the world’s biggest manufacturer after its Industrial Revolution.

Global Insight counts manufacturing production for countries – including the activity of foreign-owned companies and local ones – as value-added output.

Value-added data are arrived at by subtracting “inputs” – such as purchases of materials, parts and services – from raw “gross output” as measured by the sales of individual companies. The data also use current-year figures.

If inflation adjustments are used to put the numbers in constant prices, the expected US position looks better, because its inflation over this period is predicted to be lower than China’s.

By Peter Marsh in London
Published: August 10 2008

Source: Financial Times

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