We Need an Allied Effort to Establish New Global Manufacturing Hubs to Compete With China

A core concept of regional economics is agglomeration, the idea that the economic strengths of a region are greater than the sum of its parts. Companies benefit from being in places like Silicon Valley because of interactions with other companies, good international airports, skilled workers, venture capital firms, strong research universities, and the like.

The same concept is true for manufacturing economies. For almost 75 years, American manufacturing hubs like Detroit, Clevland, St. Louis, and Chicago thrived and grew because of agglomeration: skilled workers, rich supplier networks, training institutions, specialized infrastructure.

Think about agglomeration as a centripetal force, keeping activities clustered, limiting outward movement, and attracting or growing new activity. But centrifugal forces work as well—either the attraction of another stronger agglomeration economy or other regions with lower costs. Spatially, economies are in constant tension between these two forces. A combination of lower costs outside the U.S. manufacturing belt and strong agglomeration economies in other places led to significant weakening of U.S. manufacturing agglomerations.

So, how does a region or country with little activity build a strong agglomeration economy? This was China’s dilemma in the 1970s when Deng Xiaoping decided it had to industrialize. But how could China compete against manufacturing leaders that were vastly more productive with higher-quality output? Low costs helped, but they were not enough. There were lots of countries in the 1970s with costs as low as China, and few of them succeeded.

Chinese leaders understood this, so they developed an incremental strategy: First, attract foreign manufacturers by dangling incentives of grants, tax holidays, and the like. But at the same time, work hard to build agglomeration effects by supporting domestic suppliers to large multinational factories, boosting technical training in specific skill areas, and attracting similar kinds of manufacturers to certain places, especially special economic zones, each one specializing in various parts of the supply chain.

China doubled down on this strategy in the 1990s, and with its accession to the WTO signaling to foreign investors that the Chinese market could be used as an export hub, manufacturing grew even more. As a result, China accounted for 35 percent of global manufacturing by 2023, up from around 5 percent in 1995.

That share grew and consistently improved over time, to the point where China developed the strongest manufacturing agglomeration pull in the world. The range and depth of its manufacturing capabilities cannot be equaled anywhere in the world. This is why, even with the tariffs placed on Chinese exports in the last 7 years, plus the increased pressure on Western multinationals to diversity out of China, the process has been quite slow. And even with China’s increased wages and growing political tensions with the West, it will be hard to erode this world-beating manufacturing hub.

Perhaps some production moving to places like Africa, India, Mexico, and Vietnam will cause some Chinese deindustrialization, but that is likely to be a long, slow process. So, the West needs to accelerate that process by focusing on building up one or two alternative global manufacturing hubs outside of China. The reason is that creating a robust manufacturing alternative to China is a chicken-or-egg process. Companies may not invest in a particular country because manufacturing is not strong enough, and therefore a country does not build up its manufacturing resources and attractiveness.

To overcome this, the United States and core allies should establish a joint global manufacturing hub competition. The idea would be that countries would compete for designation, in part by reforming restrictive regulations, boosting skill development, ensuring adequate financial incentives, reducing corruption, and ensuring adequate infrastructure. The one or two winning countries would then benefit both from more aid from the United States and allies, and agreements that governments would craft with their leading manufacturers to concentrate their foreign manufacturing investment in the winning nations. Perhaps as a test case, the initial hub competition could be focused electronics manufacturing.

Likely candidates would need to have several characteristics, including a sufficiently large population so that companies would not run out of available workers, as seems to be the risk in places like Vietnam. Table 1 lists several nations with populations over 130 million. In addition, winning countries should have reasonable business regulations and adequate overall innovation environments. And of course, they should be friendly to the West, which should entail removing most trade barriers with Western nations. Promising candidates could include Bangladesh, India, Indonesia, and Mexico.

Table 1: Current and potential manufacturing hubs

One argument against this idea is that the United States should be doing all it can to create manufacturing jobs at home, not in low-wage nations that compete with U.S. labor. This is misguided. First, federal policy can and should do both. Second, it is naïve to believe that significant low-skilled manufacturing will return to the United States as U.S. costs are too high. Finally, the main goal should not be boosting U.S. jobs (unemployment is quite low, after all). The goal should be to slow China’s continued rise. If 25 million manufacturing jobs could be moved from China to one or two new hubs, that would break China’s manufacturing monopoly in many sectors. Moreover, if Mexico was a winning hub, the benefits to the United States would be significant, as there would be significantly less incentive for illegal immigrants to enter the United States—and, because U.S. trade linkages with Mexico are significantly higher than with China, it would lead to considerably more U.S. exports.

Finally, some might argue these hubs would end up being used by Chinese firms to avoid U.S. tariffs. But that issue can be addressed by ensuring that any tariffs on Chinese industries apply to the firms, regardless of their location.

To date, most allied nations have focused principally on boosting their own capabilities vis-à-vis China. It’s time a new approach to build up some other countries’ capabilities and erode China’s centrifugal advantage.