The US is the world’s sole military superpower. It spends more on its military than the ten next highest spending countries combined. China is now the world’s sole manufacturing superpower. Its production exceeds that of the nine next largest manufacturers combined. This column uses the recently released 2023 update of the OECD TiVA database to paint an eight-chart portrait of China’s journey to superpower status and the asymmetric impact that its dominance has had on global supply chains.
I'm not an expert on China, but during ongoing work on global supply chain disruptions with my co-authors Rebecca Freeman and Angelos Theodorakopoulos, I've noticed a stark fact that I don’t think is as widely known as it should be. China is the now world’s sole manufacturing superpower.
This column uses the OECD’s recently released 2023 update of their invaluable TiVA database to show, in eight charts, how this came to be. I will skip the historical Chinese reform narrative as that has been well covered by real China experts (e.g. Wang 2023, World Bank 2013, Ranganathan 2023).
The world’s big players in manufacturing
The charts in Figure 1 show two views of global manufacturing shares in 2020 (the latest year in the database). The left panel displays world shares in terms of gross production; in the right panel, the same is shown in terms of value added. The distinction is in intermediate inputs: Chinese gross production equals the total sales of Chinese manufacturers; Chinese value added is their gross production minus the purchased intermediates.
Six nations manufacture at least 3% of the world total. China is followed by the US, Japan, Germany, India, and South Korea. Note how the world has changed. Only three of these are long-established industrial economies; the other three are newly industrialised economies. Four of the G7 don’t make the cut. The chart separately identifies nations with shares of at least 2%, and on the left, this includes Italy, France, and Taiwan (two of the G7, the UK and Canada, don’t make the cut). In the right panel (value-added basis), the UK makes an appearance with a share just above 2%.
When it comes to gross production, China’s share is three times the US’ share, six times Japan’s, and nine times Germany’s. Taiwan, Mexico, Russia, and Brazil now have higher gross output than the UK. Canada is further down the ranking, in 15th place.
Unprecedented industrialisation
China’s industrialisation is unprecedented. The last time the ‘king of the manufacturing hill’ got knocked off the throne was when the US surpassed the UK just before WW1. It took the US the better part of a century to rise to the top; the China-US switch took about 15 or 20 years. China’s industrialisation, in short, defies comparison.
The right panel shows that China’s share now exceeds that of the next largest manufacturers combined. This remarkable fact helps us to understand current US-China trade tensions, and the magnitude of supply chain disruptions that occurred when China dialled down its production during Covid. India (not shown separately) was the second fastest share gainer: its global share of manufacturing production rose by two percentage points since 1995.
China’s rise has slowed and looks to have stagnated at about a third of world output. To confirm this, however, we will need more recent data since the last two years in the sample are muddled by events related to the Covid-19 pandemic. The World Bank’s World Development Indicators (WDI) has data to 2022 for value added, and these conform to the flattening narrative, but the WDI do not report gross production data.
China’s dominance is less stark in exports (Figure 3), though the rise is equally amazing. In 1995 China had just 3% of world manufacturing exports, By 2020, its share had risen to 20%. The corresponding fall in the G7 share was less dramatic than for its share of production. This is explained by the meteoric rise in Chinese domestic consumption, which has absorbed an increasing share of its manufacturing production since 2004. Not shown in the charts is that China’s export to production ratio, having peaked at 18% in 2004, is 13% in 2020 – almost back to its 1995 level of 11%. The same diagrams in the Annex are shown for a value-added basis.
Asymmetric supply chain exposure: G7 and China
The global supply chain indicators that Rebecca Freeman, Angelos Theodorakopoulos and I developed last year (Baldwin et al. 2022) provide a convenient way of identifying foreign production exposure in supply chains (eight of our new indicators can be found in the TiVA 2023 update). Two of our new indicators are particularly intuitive when it comes to portraying global supply chain exposure.
Foreign Production Exposure: iMport side (FPEM). This shows the share of all industrial inputs (including domestically sourced inputs) that one nation sources from another on a scale of 0 to 100. FPEM accounts for exposure on a look-through basis in the sense that it looks through the suppliers-to-suppliers veil to discover the purchasing nation’s reliance on production in the selling nation.
Foreign Production Exposure: eXport side (FPEX). This indicator reflects the share of a nation’s gross output of intermediate goods that is exported to a particular partner. It is a measure of exposure on the sales side.
Putting together the pieces, this shows a remarkable, historical, world-shaping asymmetry in supply chain reliance between China and other major manufacturing countries. Politicians may wish to decouple their economies from China. These data suggest that decoupling would be difficult, slow, expensive, and disruptive – especially to G7 manufacturers. For explicit estimates, see the simulation studies by Felbermayr et al. (2023) and Goes and Bekkers (2022).
Before closing this chapter on the China rise story, it is important to say that the massive asymmetry has nothing really to do with China. It has to do with China’s superpower standing in manufacturing. To see this, imagine what the charts would look like if they displayed the facts for OPEC and the G7 in the petroleum sector. We would see that the G7 is massively more dependent on OPEC supplies than vice versa. The next chapter of the story redirects the spotlight to the China level.
China’s balance of trade by sector, supply chain engagement, and openness
What does the rise to superpower status look like from the shores of China? One convenient, if simplistic, yardstick of a country’s competitive profile is its balance of trade by sector.
The left panel of Figure 5 shows the balance of exports less imports in the major sectors: manufactures, agriculture, mining, and services. The overall trade balance, which is just the sum of the sectoral balances, is shown with the thin black line. The pattern is as clear as it is unsurprising. China is a net exporter of manufactured goods and a net importer of everything else – agriculture goods, mining goods and fuels, and services. Both the positive and negative net balances have been growing quickly. Plainly, China is a big importer and a big exporter. Overall, it ran surpluses in the late 2000s, which then decreased and turned negative in 2018 and 2019 (black line).
The right panel provides important hints about the evolution of China’s manufacturing. It charts the evolution of the country’s net exports of intermediate inputs and final goods. Until the mid-2000s, China was a typical offshore destination: a net importer of intermediate inputs and a net exporter of final goods that embodied the imported inputs. From about 2002, China became a large net exporter of intermediate goods as well as final goods.