Musing on the Middle Kingdom & More: The Great Hollowing Out

How US manufacturing got where it is (and it's not good)

With all the tariff threats going on, I started thinking about just how we (the US) ended up where we are. How is it that China has become “the factory of the world”? And what would it take for the US to bring at least some of its manufacturing back home? Is it even possible?

And here, because it’s March and promising spring, is a bouquet of balloons. Enjoy!

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The Great Hollowing Out

When my generation “discovered” China in the 1980s, we were thrilled. After being fundamentally closed to us since the “Liberation” in 1949, China unexpectedly began to open up. The blinds were being pulled back and small openings were appearing, giving us a peek into a fascinating country about which we knew very little.

As early as 1983, some American students were given permission to attend selected Chinese universities, and some Chinese students were allowed to study at universities in the United States. For the most part, we seemed to like each other. In fact, I think many of my generation fell in love with China, if not with an individual at least with China as a whole. The Chinese saw economic opportunity in American, and the Americans saw the chance to learn about an exotic and ancient culture. I know a number of Chinese who married Americans in that era, and a number of Americans who married Chinese. Many of these marriages are still intact.

The adventurers were quickly followed by the businesspeople. Many Chinese entrepreneurs quickly recognized in the U.S. market an opportunity to make money by manufacturing goods in China less expensively than Americans could and selling them competitively in U.S. markets. American businesspeople saw the opportunity to buy goods less expensively in China and sell them at a profit at home. There was a fortuitous confluence of motivations. In addition, the Americans harbored the hope that in the fullness of time, Chinese would be earning enough money to buy American products as well. And, because of China’s enormous population, roughly three times that of the U.S., they envisioned someday getting rich selling American products there.

Examples of both (Chinese selling into the U.S., and Americans selling into China) abound, although there are many more of the former than the latter, because the U.S. was a much richer country. Early examples of the former are obvious: clothing, housewares, bedding. The father of one of our employees at our joint venture bank in China (2011- 2023) got rich in the 1990s and early 2000s manufacturing comforters in China’s western provinces and selling them to American department stores like J.C. Penny’s.

By the way, while American businesspeople followed in the footsteps of “adventurers” of the 1980s, our government followed in the footsteps of our businesspeople. In the 1990s and into the early part of the 21^st century, our own U.S. government joined the lovefest. When the Soviet Union disintegrated in the late 1980s, we believed we had “won” the cold war. Our only remaining worry (outside of the Middle East) was China. It was a Communist state, of which there were very few left. But it was large and slowly growing more sophisticated scientifically and technologically. Our government became very enthusiastic about welcoming it into the community of nations, which we dominated. If we helped China integrate into the world order that had come into being in the wake of WWII, we thought, it would slowly become less autocratic. In other words, it would become “more like us.” Accordingly, one of our greatest achievements, we thought, was engineering China’s accession into the World Trade Organization in 2001.

Back to business

In the past 40 years, Chinese manufacturing expertise has grown significantly. In forty years, China has become the world’s largest manufacturer. It still makes comforters and sells them in the U.S. at a significant profit, but today it makes almost everything imaginable—not just simple things either, but technologically highly sophisticated things as well. Take a close look at all the things you buy through Amazon today, and you will find that the majority are “made in China.” You can also get much larger items than those available through Amazon. Today, China is the world’s largest producer of ships. And trains. And automobiles, including electric vehicles. And batteries for electric vehicles. And drones. And patented medicines. And processed rare earths that are used in the manufacture of many other products, including batteries, and electronic equipment, and military equipment. A seemingly inexhaustible list.

Many things that we think of as being American, such as Apple iPhones and HP printers for computers, are merely designed in the U.S. and manufactured in China. Could we still manufacture them here in the U.S. if we had to? Maybe, and maybe not. There is no doubt that we have—to a certain extent—lost our ability to manufacture as well as China. And definitely to manufacture as competitively as China.

There are many who believe that losing our manufacturing expertise will eventually “bleed backwards” into our ability to design as well.

So, what difference does this make?

I believe that it makes a lot of difference, and that the ramifications of this shift are much greater than we might think at first glance.

And how did it happen?

A number of trends enabled China to become as technologically proficient, strong, and competitive as it is today. First, Chinese people are hard-working, and they have been historically very good at deferring gratification.

Second, with the exception of the Mao years (1949-1976), the Chinese placed a lot of value on education. And since Mao’s death, China has sought out educational opportunities throughout the world, and in particular in the United States. Even today, there are approximately 300,000 Chinese students at American universities, compared to approximately 1,000 American students at Chinese universities.

Third, China has focused on importing technologies from other, more advanced countries. This has been done in a variety of ways, some legitimate and others less so. In other words, the Chinese have bought, borrowed, and in some cases stolen technology from elsewhere and brought it home.

Of particular note, China consciously and planfully, has sought out companies that have technologies that its leaders need and persuaded those organizations to come to China. That has not been difficult because American companies have always been eager to sell product in China, in hopes of capturing some slice of its billion-person population. Even with only a small percentage of the market, they reasoned, the profits could be enormous. China has taken advantage of that yearning.

Typically, the CCP (Chinese Communist Party) has insisted that foreign companies enter into joint ventures with Chinese companies. The implicit “deal” looks like this: if you bring your company to China, we will allow you to sell into our market. Which is huge. In exchange, you will have to share your technology with us, through your joint venture partner. More recently, the CCP has added an additional feature: all Chinese companies are required to share any technology they have, whether they developed it themselves or got it from you, with the PLA (People’s Liberation Army). In cases where American companies were noncompliant, the CCP tried another tack. It will require you to source components locally. To do that, you will have to share your technology with your (Chinese) component producers. Eventually, they will band together, form a company that is the mirror image of yours, and compete with you, at first locally, and eventually globally.

These practices have enabled China to achieve global dominance in a number of industries.

In doing so, American manufacturing has lost ground. In 2000, the U.S. accounted for 25% of global manufacturing, and China for 6%. In 30 years, by 2030, China and the U.S. will have traded places. In other words, the U.S. will account for 11% and China will account for 45%.[1]

So, back to the original question: Of what significance is this?

I don’t know. At least, I cannot predict the future. But I do know what kinds of changes it has wrought so far. Our manufacturing sector has been hollowed out. Our manufacturing belt has turned into the rust belt. Working class families have had to accept much lower paying jobs in the service sector (the proverbial flipping burgers or ride-share driving), or become unemployed. And to the extent that they have become unemployed, in many cases they have lost hope, and often turned to drugs. Entire areas in the Midwest have been hollowed out, first by job loss, then by subsistence pay at McDonalds or Walmart or Uber, and sometimes—after losing all hope—by addiction, first oxycontin and then heroin, which is often laced with fentanyl originating in China and funneled through Mexico into the United States.

Recently, we have begun focusing on solving the problem of low wages by eliminating wages altogether. We can do that through robotics.

An Uber driver recently complained to me that “robots [in the form of self-driving cars] are taking the money out of the pockets of Uber and Lyft drivers and putting it into the pockets of the wealthy.” Sadly, many of the (soon to be former) Uber drivers are ill-equipped, in terms of both interest and aptitude, to become management at ride-share companies or designers of robots.

The answer, I think, is education. But even there we are faltering. Our universities are slowly going broke and disappearing. Their best hope is to attract students from other countries. There are more Chinese students in the U.S. than from any other country. And the preponderance of them enroll in the hard sciences. Because there are proportionally fewer of them, and because they prefer other topics, fewer American students are studying those same difficult subjects.

Where has all of this taken us?

In 2024, China registered a trade surplus of around $1,000,000,000,000 (that’s one trillion dollars). What does that mean? China sold more goods to the rest of the world than they bought from the rest of the world. In 2024, the U.S. imported about $500,000,000,000 (five hundred billion dollars) worth of things from China, and China imported about $150,000,000,000 (one hundred and fifty billion dollars) worth of stuff from the United States.

Let’s get rid of some of these zeros. The U.S. made up about 33% of China’s trade surplus last year, and China’s purchases from the U.S. only represented 15% of its total trade surplus. This is a slightly simplified figure, but proves a point. Moreover, most of what China imported from the U.S. was raw materials, like soybeans, rather than value-added items, like ships and machinery and solar panels, which we import from them. Historically, this has been the trade flow from colonies (raw materials) to their conquerors, which supplied (at a cost) finished goods. Hmmm.

If the U.S. were manufacturing more stuff, using American labor, and buying less stuff from China, more Americans would have relatively better paying manufacturing jobs (as opposed to relatively poor paying service jobs, like working in a call center, driving ride-share, flipping burgers, etc.).

Of course, these same workers might have to pay more for the “made in America” stuff than they would otherwise pay for the stuff made in China. However, from a national security point of view, we might not be so dependent on medicines and facemasks made in China. Being as dependent as we are on such crucial Chinese-made goods clearly gives China leverage that we may prefer it didn’t have.

The worst ramification of this somewhat lopsided relationship is that we Americans are slowly forgetting how to manufacture, and—even worse—we are not keeping pace with China in terms of manufacturing expertise. China is clearly pulling ahead of us. It’s a vicious circle—the less we manufacture here, the more manufactured goods we buy from China. The more manufactured goods China sells us, the better the Chinese get at manufacturing. And the less we manufacture ourselves, the relatively less manufacturing expertise we retain or acquire.

It will not be easy to solve this problem. Trump is trying to deal with it by putting additional tariffs on goods manufactured in China. However, the tariffs will not be paid by China. They’ll be paid by American consumers, in the form of higher prices. Or American consumers will buy fewer products made in China. But if they buy fewer Chinese-made products , will Americans simply do without? Are there other alternatives? Can Americans “reshore” our manufacturing capability? And, if we can, can we do it quickly enough? And can we make those same products cheaply enough that Americans can afford them?

There are at least two fallacies in the approach that Trump is taking toward China. One, his approach will drive up prices—and at a time when he is promising to reduce inflation. Two, he does not appear to have a plan B, meaning: If we don’t buy so much stuff from China, from whom will we buy it?

And “reshoring” manufacturing itself would cost a lot. After all, Chinese goods are relatively cheap for two reasons. First, because Chinese workers are paid far less than American workers. Second, because manufacturing in China is heavily subsidized by the Chinese government. Is Trump prepared to subsidize American manufacturing? I don’t think so.

A good example of what I’m talking about would be electric vehicles. China will be producing more than half a million extra (more than they expect to sell within China) electric vehicles in 2025. These vehicles will sell for around $30,000 or less. The comparable electric vehicle manufactured in the U.S. might cost $60,000. And its battery might not be as good. Furthermore, Trump has already made clear that he would not subsidize the manufacture of electric vehicles in the U.S., even though plenty of people have voiced interest in buying them. Unlike the Chinese leaders, Trump doesn’t even believe in climate change.

And if he did, wouldn’t that smack of industrial policy? And don’t both Trump and his Project 2025 supporters abhor industrial policy?

Free markets, especially those without industrial policy, will inevitably come in second when competing with “not so free markets” galvanized by industrial policy. Even if we wish it were otherwise.

If you can solve this puzzle, you should run for President. But first, you should organize a very large PAC.

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[1] Noah Smith, Noahpinion Substack, www.noahpinion.blog, Dec. 4, 2024, based on information provided by the United Nations Industrial Development Organization.