Comparative manufacturing

This Free Exchange post is illuminating:

CONTRARY to popular belief, America's manufacturing base has not entirely vanished. Americans do, in fact, still make things. Manufacturing employment has shrunk considerably since peaking in the late 1970s, but this has largely been a product of productivity growth. As it happens, America remains the world's largest manufacturer, responsible for 20% of global manufacturing. China's share is currently around 12%.

This ratio has been moving steadily in favour of China, and it seems fairly clear that within a decade China's share will overtake America's. This has been cause for some hand-wringing in the press, a recent example of which is this piece in the Wall Street Journal, with additional comments added by Noam Scheiber. But one wonders: why should America, with 5% of the world's population, produce 20% of the world's manufactures?

We could try and make a comparative advantage or factor endowments argument to justify persistent American dominance in manufacturing, but in practice, developed nations tend to devote more or less the same share of employment to industry—between 20% and 30%—and tend to involve themselves in intra-industry trade. Everyone produces some manufacturing goods, and then trades them with other rich nations that produce similar goods (think automobiles, for example).

If developed nations tend to employ similar shares of their labour force in manufacturing and tend to use broadly similar technologies, then we should expect that manufacturing shares should correspond roughly with population shares. And this is generally what we observe—among developed nations.

But China is an emerging market. At present, output per person is well below the developed nation average; over time that will rise. And at present, the share of the labour force in manufacturing is around 50%; over time that will fall. And China, of course, has a little over 1.3 billion people.

So if over time output per person rises to developed nation levels and the share of the labour force in manufacturing declines to developed nation levels, then we would expect China to produce about three to four times as much manufacturing output as America. Note that this need not be excessively damaging to the American economy, which obviously imports many manufactures from other, smaller developed nations.

America will have to get used to not being the biggest kid on the block, I'm afraid.