China’s manufacturing sector has been pivotal to the country’s rapid economic rise. Yet China’s industrial might has become a source of friction as the United States, Europe, and other economies seek to defend and nurture their own manufacturing sectors. In the face of mounting geopolitical tensions, Chinese leader Xi Jinping is doubling down with repeated calls for China to become a “manufacturing power” (制造强国) and lead the world in producing high-value, high-technology goods. This ChinaPower tracker examines these dynamics through 10 charts, visualizing the rise of China’s manufacturing sector and Beijing’s efforts to cement its industrial superpower status for future decades.
China’s Manufacturing Dominance
China has rapidly leaped from underdog to global manufacturing leader. In 2004, China accounted for under 9 percent of global manufacturing output. By 2011, China had surpassed the European Union (EU) to become the global manufacturing leader. China’s lead has widened since then. In 2023, China’s manufacturing value-added reached $4.66 trillion, which was 29 percent of the global total, and more than the next four largest manufacturing economies combined (the United States, Japan, Germany, and India).1
China’s manufacturing boom has led to seismic shifts in global trade patterns. For decades, Chinese manufacturers leveraged affordable labor and large economies of scale, coupled with significant state support, to outcompete foreign companies. As Chinese producers sold their goods on the global markets, consumers in developed economies like the United States were able to afford cheaper products, but the manufacturing sectors in many countries struggled to compete. Some economists and policymakers have dubbed this phenomenon the “China shock.” Many of the impacts of these shifts persist today, and the subsequent political backlash has contributed to a growing appetite for tariffs and industrial policies in many advanced economies as they attempt to make their own manufacturing sectors more competitive in global markets.
How China Became a Manufacturing Powerhouse
Economic liberalization catalyzed China’s manufacturing boom. China’s emergence as a manufacturing leader can be traced to a series of political and economic shifts initiated during the “Reform and Opening” (改革开放) period that began in the late 1970s. This transition opened China’s doors to an influx of foreign investment that was used to build factories and industrial infrastructure. At the same time, Chinese workers relocated en masse from rural agricultural industries to urban manufacturing hubs, boosting the economy’s labor productivity. China’s manufacturers reaped additional benefits from reduced trade barriers after China joined the World Trade Organization in 2001. Through this combination of affordable labor, abundant capital, and a favorable political climate, the Chinese manufacturing sector grew at an average annual rate of 12 percent from 1995 to 2015.
Chinese manufacturing growth has been propelled by both foreign and domestic demand. From the mid-1990s to 2008, export-oriented production grew faster than production for domestic uses. This changed after 2008 as the Global Financial Crisis reduced foreign demand and Chinese manufacturers pivoted to focus more on the domestic market. This was accompanied by policy shifts that channeled manufacturing output into domestic investments, such as upgrading factories and infrastructure, in order to produce more advanced, high-value goods.
Domestic consumption of Chinese-manufactured goods has grown as well, but more slowly. In recent years, several Chinese economists have argued for the need to increase domestic consumption of manufactured goods, but policymakers have stopped short of taking major steps to reorient manufacturing output.
Chinese economic policymakers have favored coastal provinces to become manufacturing centers. China’s economic development is significantly imbalanced, with coastal provinces receiving preferential treatment and greater liberalization throughout the country’s Reform and Opening period. Manufacturing operations in coastal provinces benefit from lower transportation costs, better urban infrastructure, and subsidies and other preferential policies provided to designated special economic zones (SEZs).
Guangdong, Jiangsu, and Zhejiang provinces have become particular hot spots of manufacturing activity, measured by the number of manufacturing firms. Major urban centers like Beijing and Shanghai have seen a decline in manufacturing over the last decade as their leaders have shifted away from traditional manufacturing to reduce pollution and pivot toward high-tech and service industries. Today, some inland provinces are beginning to make headway toward greater manufacturing as a result of improved infrastructure and rising labor costs in coastal provinces.
Climbing the Value Chain
Chinese manufacturers have shifted from producing cheap, low-value-added goods to producing more sophisticated products. In 1995, clothing and other textiles accounted for 20 percent of China’s total exports while electronics amounted to less than 9 percent. By 2020, that picture was flipped: electronics accounted for 24 percent of China’s exports and textiles were just 10 percent.
This process, often referred to as climbing the value chain, requires capital investment and technical know-how to build and operate upgraded manufacturing facilities. In previous generations of industrial planning, Chinese manufacturers absorbed these production factors from foreign firms, leading to frustrations about technology transfer that fueled trade tensions in the 2010s. In some areas, however, Chinese technology leaders have now caught up to—or surpassed—their international competitors, necessitating a greater reliance on domestic innovation.
Despite advances, Chinese leaders are not resting on their laurels; they are spending heavily on industrial policies to dominate strategic areas. In 2015, Xi Jinping’s government launched the “Made in China 2025” (中国制造2025) initiative to achieve breakthroughs in ten key sectors: new advanced information technologies; automated machine tools and robotics; aerospace and aeronautical equipment; maritime equipment and high-tech shipping; modern rail transport equipment; new-energy vehicles and equipment; power equipment; agricultural equipment; new materials; and biopharma and advanced medical products.
China’s government is backing such ambitions with massive spending on industrial policy to support businesses through direct subsidies, R&D support, cheap credit, preferential tax rates, and other measures. A CSIS study estimated that in 2019 China spent the equivalent of over 1.7 percent of its GDP on industrial policy—well over twice the level of the next highest country studied (South Korea) and more than four times the U.S. level at the time. Yet Chinese approaches to industrial policy have had mixed results. High levels of support often lead to a glut of firms competing against each other in a race to the bottom, resulting in wasteful spending and abandoned investments. In these cases, competing manufacturers often sell excess goods abroad at low costs, causing global market distortions and stoking concerns about “overcapacity.”
To climb the value chain, Chinese manufacturers are pushing to innovate with stepped-up spending on R&D for manufacturing. Research and development are critical to the innovation process and to producing products that are competitive in the global marketplace. In China, manufacturing R&D spending has nearly tripled in the past decade, with almost half of the spending concentrated in electronic and machinery equipment manufacturing. China’s overall R&D spending still lags that of the United States but has begun to converge when expressed as a percentage of overall GDP. Notably, the government has historically played a larger role in supporting R&D in China than in the United States, but business-funded R&D still plays the most significant role in both countries.
In certain key high-tech industries, Chinese efforts are paying off, resulting in surging exports. In recent years, China has rapidly transformed from a net importer of passenger vehicles to a massive net exporter.2 Likewise, China’s exports of lithium-ion batteries—an increasingly vital part of global energy transition efforts—have surged to record levels.3 In these two industries, Chinese manufacturers have achieved world leadership in terms of innovation and affordability, capturing large global market shares and undercutting foreign competitors in the process. However, China’s rapid emergence in these areas has disrupted markets, leading to protectionist countermeasures, including the U.S. and EU imposition of tariffs on Chinese electric vehicles.
China’s manufacturing capabilities still lag behind competitors in key, strategic technologies like computer chips and aircraft. Despite Beijing’s ambitions to foster indigenous innovation in these two sectors, China’s domestic champions have struggled to catch up to the global leading edge. Beijing’s ambitions of fostering a national semiconductor industry date back as early as 1950s, when China’s State Council identified semiconductor technology as a key national priority. Despite this longstanding prioritization, China’s semiconductor industry continues to import critical semiconductor manufacturing equipment, leaving it exposed to U.S.-led export controls.4
Aircraft manufacturing has proven challenging for China as well, and Chinese airlines remains heavily dependent on planes developed by U.S. and European industry leaders Boeing and Airbus.5 China is finally making progress toward closing this gap with the recent debut of its first domestically developed aircraft, the Commercial Aircraft Corporation of China (COMAC) C919. Yet the C919 still relies heavily on parts from the United States and other countries, highlighting China’s continued import dependence in the aircraft industry.