Record foreign debt (Nouriel Roubini already argued a couple of years ago that the next emerging market crisis candidate was the US..), sinking currency, army tied up in an ill conceived foreign adventure costing trillions, all the classical signs of ‘imperial overstretch’ are there. Others are not sitting still..

From Newsmax:

• China Manufacturing Set to Roar Past U.S. Tuesday, August 26, 2008 4:39 PM
• The manufacturing dominance that the United States has held for the past century may be coming to an end. According to Global Insights, last year the U.S. was still easily in the top spot, accounting for a fifth of the total. China, meanwhile ranked second with 13.2 percent.
• Now the company’s estimates show that next year China will account for 17 percent of manufacturing output, and the U.S. will make up 16 percent.
• Data from Global Insight show the U.S. will have to return the No. 1 position to China, which, according to economic historians, ranked first in manufacturing for nearly 1,800 years up to about 1840, when Britain became the world’s biggest manufacturer after its Industrial Revolution.
• “China is by far the world’s biggest manufacturer of steel. Last year it made more than one third of the 3 billion tons of steel produced in the entire world,” says Peter Marsh, a manufacturing editor for the Financial Times, who recently spent two weeks visiting some 15 manufacturers in China.
• Global Insights’ predictions said the U.S. would retain the top spot until 2013. But the economics consultancy now says a large downward revision in likely output this year and next is expected to cause the U.S. to fall from the No. 1 spot more quickly than originally had been expected.
• Marsh notes that China’s manufacturing prowess is growing rapidly and that the country is using technology increasingly similar to more developed nations.
• For example, Anshan Steel, which began operating in 1916, initially benefited from technologies brought by the Japanese. After the communist revolution, the government relocated the company’s senior managers to other factories, where they shared their knowledge.
• Last year, Anshan produced 16 million tons of steel, the second-largest output in China, and the seventh-largest in the world. The company employs 50,000 people and expects to reach 35 million to 40 million tons next year, an output that would easily make it one of the top five steel producers globally.
• “We hope we will become the most competitive steelmaker in the world’s largest steel producing country. At the end of this round of (economic) adjustment, the best steelmakers will emerge stronger and the weak ones will disappear,” a company executive says.
• Expanding abroad is Anshan’s next goal, one that may well be aided by Indian steel giant ArcelorMittal, which is currently pursuing an alliance that may include swapping stock.

A couple of observations:

1. One could argue that it’s not a disaster, in fact, there is something of a silver lining when polluting industry moves elsewhere
2. This is an era of globalization, those part of the value chain move there where they are best suited, that means a lot of industry moves to China. It could be argued that it is something of a ‘natural’ process, akin to when advanced economies shifted from agriculture to industry
3. As long as highly value-added services (R&D, design, marketing, etc.) remain in the US, it has little to worry about, and that still seems to be the situation
4. However, there are downsides to these physical break-up of the value chain, for instance, production people need to be able talk on a regular basis to engineers designing products and production processes, as products can be desiged in such a way as to minimize production cost, and the production staff will have valuable info on that.
5. That’s is only one example of situations in which physical proximity would stimulate the exchange of hard to codify (so called ‘tacit’ knowledge) which can be crucial in today’s competitive environment
6. Also, logistical chains become more stretched, with today’s high energy cost, this also has a downside.
7. The biggest danger is that having the manufacturing parts of the value chain might be used as a springboard to move up the value chain and start doing the design, marketing and R&D stuff, with the added advantages of much shorter communication lines, logistical chains, and cheaper labour.
8. This is already happening. It began by contract manufacturers that first started to bolt together the parts for foreign brands. Then they moved into the parts production themselves, then into design, then they often came up with brands of themselves.
9. China is especially well placed for this, with its output of engineers, it can use it’s low cost advantage and manufacturing base to move up the value chain. It’s large and rapidly expanding market that is difficult to crack for outsiders offer it another advantage in the marketing game and those cheap and plentiful engineers, having gained practical and tacit knowledge in industry might also move to R&D

So, ultimately, manufacturing is a base as it’s often tied to other activities that could very well be performed elsewhere as well. The hollowing out of American manufacturing is not a good sign. The main force working against it, funny enough, are the rising cost of transport because of energy shortage.