News in Charts: Is the ‘March of the Makers’ over for China?

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

When discussing his vision for the struggling UK economy in his 2011 Budget speech, Chancellor George Osborne referred to a ‘Britain carried aloft by the march of the makers’, where future economic growth would be more balanced and driven by the manufacture of goods.[1] While his vision of Britain did not come to pass, his words provide a very apt description of China’s rise over recent decades. The future prospects for China’s manufacturers are, however, unlikely to be quite as bright.

China’s rapid ascent to become the world largest manufacturer and goods exporter was unprecedented. Its share of global merchandise exports was around 2% in 1990 and was still only 5% at the time of its accession to the World Trade Organization in 2001. But it rapidly surpassed Japan, the US and Germany to become the world’s largest goods exporter by 2007. And it was not finished there. China’s share of global merchandise exports has continued to soar, and is now broadly equal to the combined shares of Germany, the US and Japan.

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The sub-industry data sheds further light on China’s meteoric rise to become the ‘workshop of the world’.[2] Between 2006 and 2020, its global market share increased by approximately ten percentage points in the export of machinery, building materials, clothing and accessories, plastics and rubber, and in the category ‘other manufacturing’ (an umbrella term which includes industries not elsewhere covered in the chart). The gains were smaller, but nonetheless impressive, in transport equipment, metals, and chemicals and minerals. Reflecting its huge gains, China now accounts for over a third of global exports in clothing and accessories, and around a quarter in machinery.

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Fathom’s proprietary RiCArdo dataset allows the identification of sectors in which China shows a revealed comparative advantage (RCA). RCA measures a country’s exports in a particular sector as a share of that country’s total exports, relative to the same calculation for the rest of the world. If a country has an RCA greater than 1, that sector holds a greater importance to that country’s exports compared to the world average, and hence, the country can be said to specialise in that field.[3]

China clearly has a large comparative advantage in many areas of goods exports, particularly in clothing and accessories and in machinery. These two sectors represent around three-quarters of its exports, with machinery alone accounting for over 40%. By contrast, in the export of services it only has a comparative advantage in one of the ten sub-sectors — construction services — with its RCA being well south of one in most of the others.

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There have been some interesting trends in RCAs. China’s huge comparative advantage in clothing and accessories peaked in the early part of the previous decade and has since fallen back somewhat. This is likely to reflect the rise of several low-cost competitors. There is also tentative evidence that its comparative advantage in machinery may have peaked. In services, the marked rise in its comparative advantage in construction services is probably the result of China’s ‘Belt & Road’ initiative, where it has been building major infrastructure projects around the globe. Its comparative advantage appeared to be consistently increasing in telecommunications, computer and information services, although the rise looks to have tailed off in recent years. This may reflect the international restrictions on companies such as Huawei.

Slowing demand growth in major export markets after the Great Financial Crisis diminished a major tailwind behind China’s manufacturing rise. Despite the surge in exports during the pandemic, the prospects for the sector look increasingly challenging. At the bottom end of the value chain, Chinese exporters will continue to face stiff competition from lower cost producers. More importantly, frosty international relations, the pandemic, and Russia’s invasion of Ukraine, have significantly increased the onus on companies in advanced economies to build more diverse and less China-centric supply +chains. Greater restrictions on technology transfer and on the Chinese purchase of Western companies may also impede China from building market share in some high tech segments of manufacturing. Meanwhile, its lack of specialism in many service industries in contrast with its Western peers and countries such as India, may limit market share advances in this area.

The charts above and others are available on Refinitiv’s Datastream Chartbook, under ’05. Fathom’s Proprietary Indices’ and ‘RiCArdo database’. To find out more about Fathom’s RiCArdo tool and how it could help you, or to subscribe to the database, which is available for a wider set of countries, please contact: enquiries@fathom-consulting.com.

[1] 2011 Budget: Britain open for business – GOV.UK (www.gov.uk)

[2] These industry sectors have been categorised and grouped by Fathom from over 1000 export products, allowing us to better reflect the composition of select industries.

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