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Extra8/12/2008 12:01 AM ET

China set to trump US in manufacturing

The switch, while inevitable, is happening sooner than anticipated because of the abrupt deterioration of the American economy.

By the Financial Times

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

The great leap is revealed in forecasts for the Financial Times by Global Insight, an economics consultancy based in Boston. According to the estimates, next year China will account for 17% of manufacturing value-added output, while the United States will make 16%.

In 2007, the United States was still easily in the top slot and accounted for a fifth of the total. China was second, with 13.2%.

John Engler, president of the National Association of Manufacturers, a trade group based in Washington, D.C., played down the effect of the projections.

It was inevitable that China would take over on account of its size, Engler said. "This should be a wholesome development for the U.S., for it promises both political stability for the world's largest country and continuing opportunities for the U.S. to export to, and invest in, the world's fastest-growing economy," said Engler, a former Republican governor of Michigan.

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

The data underline the surge of China's manufacturing-led economy of the past 20 years. In 1990, before economic reforms began to work, it accounted for a meager 3% of global manufacturing.

Manufacturing accounted for just 17.5% 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.

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Up the value chain
China plans to advance beyond low-skilled, low-cost, low-margin manufacturing of toys, pens and clothes. Its leaders want to move up the value chain and take on the world's biggest corporations for business and prestige.
The expected change will end more than a 100 years of U.S. dominance. It returns China to a position it occupied, according to economic historians, for 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 through the subtraction of "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 adjustments are made to put the numbers in constant prices, the U.S. position looks better because its inflation rate is predicted to be lower than China's.

This article was reported and written by Peter Marsh for the Financial Times.

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