Is the USA in 'irreversible decline'?

(The third industrial revolution The Economist, 21 April 2012)

Put bluntly new manufacturing technologies, especially 3D printing, are smashing China's low wage business model. Yes Chinese manufacturing will continue to grow; but not manufacturing employment which, according to the Economist, peaked in 2009. Chinese companies, like their rich-country counterparts, are being forced to automate more and more. However China has a long way to go before it matches US manufacturing productivity.

But why do I say that China is not a manufacturing power? Maybe its productivity is lagging but it manufactures an awful lot.

The reason is that very often Chinese companies do not own the intellectual property for the items they manufacture. Rich country manufacturers from the US, South Korea, Taiwan, UK, Japan and others use China as a "manufacturing platform" to capitalise on low wages and a disciplined labour force. But most of the profits accrue to the rich country companies. For example, ARM, the company that designs some of the chips in the iPhone, makes a greater profit from each iPhone than any company based in China.

Of course this is changing. Chinese companies are investing increasing sums in R & D. They are moving up the value chain. Chinese companies like Huawei are already world-class.

But this process of developing intellectual property is a much slower than simply being a manufacturing base. I have no doubt that in time China will become a genuine manufacturing giant; but they're there yet.

Because of the importance of the American market inventors outside the US usually register patents on what they consider to be commercially valuable inventions with the US Patent Office. Foreign patents granted in the US have become a popular indicator of a country's innovativeness.

So let's see how China ranks. Look at the table below. It shows the number of patents registered with the US Patent Office in the year 2011 for selected countries.

(Source: United States Patent Office)

Recall that China has now overtaken Japan as the world's number two economy. It has almost ten times Japan's population. Yet it lags even behind Taiwan in terms of patents registered.

Note also that the traditional European innovation powerhouses, Germany, France and the UK, all file more patents than China despite having smaller economies and populations.