America Beats China in Manufacturing

Oct. 30, 2007 Special to ABCNEWS.com — -- As China continues its meteoric rise, life -- and commerce -- in America have become saturated with three words: "Made in China." The abundance of low-cost goods has made life less expensive, but as some critics argue, it has drained the country of factory jobs, as companies shutter plants and head east.

Indeed, the trade gap between China and the U.S. would be better described as a canyon. In 2006, China exported $287.8 billion worth of goods to the U.S. Meanwhile, the U.S. exported $57.2 billion to China, according to the U.S. Census Bureau.

But, the U.S-China trade deficit doesn't provide a complete profile on American productivity. While China excels at producing low-cost, labor-intensive goods, like sneakers, plastic toys, and clothes, America's factories actually churn out far more products, and they're worth a lot more money.

Click here to see what products are made in the U.S.A. at our partner site, Forbes.com.

According to Dan Ikenson, associate director of the Cato Institute's Center for Trade Policy Studies, America manufactures 21% of the value in the world's manufactured goods—China's share is growing, but it only makes up 8% of the pie.

America remains at the top of the value chain, producing high-quality, high-technology goods for domestic consumers and the rest of the world. As highlighted by this year's raft of "Made in China" recalls--toothpaste, pet food, and Mattel's embarrassing $21 billion toy recall, China's reputation is less than spotless.

According to Dan Griswold, director of the Cato center, there are three main factors that favor U.S. production. Goods are usually made in the U.S. if they're heavy to transport, require high technology or are capital intensive as opposed to labor intensive.

Take the U.S. auto industry, for example. The market for autos is dominated by U.S., Japanese and Korean products, but many of these foreign companies, like Honda, Nissan, and Toyota own U.S. factories. Foreign companies use U.S. factories to stay close to the consumer and save on freight costs. China could do the same--but its technology reputation still lags behind its Asian counterparts. If the American public is wary of Chinese-made toys, imagine how a China-stamped auto would fare in its debut year.

America excels in high-technology goods, such as biotech and aerospace equipment, because it has a large, highly educated workforce with the resources to invest in research and innovation, Ikenson says. And, unlike China, America has strong property protection laws. "High technology requires proprietary processes, patents, copyrights, so patent holders want to keep their technology close to home," Ikenson said.

Furthermore, if there is a premium on creative design, China doesn't have the edge. China has built an empire on being the world's "bargain basement" factory, but for all its resources and manpower, the country has a dearth of globally recognized designer brands.

This is perhaps best evidenced in the fashion industry. Most lines of premium demin, such as True Religion, which retails for $200 a pair and up, are manufactured in the U.S. If you move up the fashion ladder to couture houses like Chanel, you're still far away from China. The crème de la crème of the high end preserve their brand value by manufacturing their goods in traditional fashion centers such as Italy or France, and avoid the low-cost, low-quality stigma associated with Chinese production.

But China is on the move. As its wealth expands, and it becomes a middle-class society, it is looking to gain more recognition for innovation and design. Evidence of change has already surfaced. In July, China's biggest automaker, Chery, signed a 10-year deal with Chrysler to jointly launch the first Chinese-made cars in America and Europe. The first Chery cars are expected to hit American shores within two years.

Nevertheless, China still has a long way to go. "The anxiety of advanced technology coming out of China is misplaced. China's high technology is still only DVDs and laptops," Cato's Griswold says. "It will be quite some time before China carves out a role as a leader in the designer markets."

China's innovation revolution also faces some serious hurdles. First, there's the omnipresent government. Although China's Communist party has relaxed its regulations, some critics say its policies continue to intimidate businesses. "Under an authoritarian, one-party system, creativity and expression tend to be short-changed," Griswold says. The country will also have to beef up its intellectual property laws to encourage technological development.

Nevertheless, regardless of what China does, or how fast it moves up the value chain, it certainly won't last at the bottom of the value totem pole for long. Really low-end production is starting to move to new markets. Companies are starting to follow the "China plus one" trend, says Adam Segal, the Maurice R. Greenberg Senior Fellow for China Studies at the Council of Foreign Relations.

Given China's perceived instability and the steady rise in production costs, as China matures, "companies know you have to have production outside of China as well," says Segal. Today, the "plus one" trend often means Vietnam. Although Vietnam lacks China's manpower--population there is 85 million, versus China's 1.3 billion--it has many qualities of a "young" China.

Over the next several decades, other countries, such as Bangladesh, Cambodia, the Philippines and parts of Africa are expected to step up--they're already beginning to do so. "Not Made in China" may very well take on a life of its own.