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https://www.barrons.com/articles/china-manufacturing-semiconductor-electronics-us-competition-51661894538

About the authors: Joseph Quinlan is the chief market strategist for Merrill and Private Bank, Bank of America . Lauren Sanfilippo is a senior investment strategist at Bank of America.

America is a manufacturing powerhouse, holding commanding positions in industries ranging from paper products to pharmaceuticals. That’s the good news. The bad news is that China’s manufacturing might continue to expand and exceed America’s in a number of key sectors like electrical equipment, chemicals and computers. 

Recent figures from the United Nations’ “International Yearbook of Industrial Statistics” make that conclusion unmistakable.  

China ranks first in terms of share of global output in 16 categories of 22 manufacturing categories tracked by the U.N., while second in six others. The data is from 2019, the most recent year available. China continues to dominate in light industries such as apparel and textiles, general sectors like basic metals and electrical equipment, and higher-end activities like computers and transport equipment. There’s hardly a sector in which China does not have at least a 20% global market share, while commanding 40%+ shares in electrical equipment, basic metals and computers. In textiles, apparel and leather, China’s share is more than half. 

Put another way, if global manufacturing were akin to the Olympics, China would take gold or silver in every event.

Even more impressive, and in sharp contrast to today, China ranked first in only three categories in 2000—tobacco, textiles and leather. In the span of two decades, state-directed industrial policies married with China’s cheap labor and foreign direct investment inflows have transformed a one-time backward, agrarian economy into one of the preeminent manufacturers in the world. 

China’s manufacturing dominance remains formidable even despite the changes brought about by the pandemic. Global supply chains are becoming more dispersed and less China-centric, at least superficially. But relative to the rest of the world, no other economy has as large a skilled labor force and as efficient an infrastructure system, nor doles out as much in terms of state subsidies and incentives than China.

According to the U.N. data, China accounted for 29% of global manufacturing output in 2019 versus America’s share of 17%. Japan (8%) and Germany (5%) ranked a distant third and fourth, respectively.

That’s another way of saying that the contest for global manufacturing supremacy boils down to the United States versus China. It’s a two-nation race with great strategic importance. The country that prevails will gain first-mover advantage in a number of key industries, attain pole position in setting global industrial standards, and secure a competitive leg-up in critical third markets like India, the Middle East and Africa.

Many investors are under the impression that the U.S. is not in the business of making “stuff” and that America’s manufacturing capacity has either been allowed to atrophy or be shipped offshore. But nothing could be further from the truth.

America is a manufacturing superpower: Of the 22 manufacturing categories tracked by the U.N., the U.S. ranked first in six categories and second in 13 others, underscoring the breadth and competitiveness of American manufacturing. In only three sectors—apparel, motor vehicles and leather—did the U.S. fail to rank either first or second. Meanwhile, between 2000 and 2019, America’s global manufacturing share actually edged higher in a number of sectors, including beverages, paper products, and refined petroleum products. Overlay America’s strengths in semiconductors, and the overall health of U.S. manufacturing is relatively robust.

That said, this race is far from over.

China’s manufacturing lead is not insurmountable. After all, China’s labor force has peaked, wages are rising, and more state-control of industry could ultimately choke off future innovation and manufacturing growth. Recall that in the 1970s and 1980s, U.S. industry was largely written off in the face of rising competition from Germany and most notably Japan. American firms, however, reset and regained market share over the subsequent decades. 

The U.S. public and private sectors have awakened to the challenge of China and are focused on reinvigorating U.S. domestic manufacturing activities. The recently passed CHIPs and Science Act and the Inflation Reduction Act are public-sector programs that speak to and address America’s slipping global manufacturing position.

Also needed are more liberal immigration policies to attract the world’s best and brightest to the U.S.; greater participation of women in science, technology, engineering, and math); massive reskilling and retraining of the U.S. labor force; greater apprenticeship opportunities for younger U.S. workers in manufacturing activities; and a 21st-century overhaul of America’s crumbling infrastructure, with a particular emphasis on 5G and artificial intelligence. 

Recent supply-chain difficulties have made it clear that the production of physical goods remains essential to the future health of the economy. That’s especially true at a time when the physical supplies of food, medical equipment, armaments, semiconductors, to name a few key products, are in short supply and increasingly subjected to nationalist whims. In the end, the renewed focus on bolstering U.S. manufacturing activities couldn’t come at a more critical time.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.

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