Across sharply different political systems and historical paths, Germany, Japan, and China share a foundational commitment the United States abandoned:
manufacturing is a strategic national system that requires deliberate institutional support, not a residual sector left to market punishment.
In each case, capital allocation, labor relations, education and training, and state policy are organized around sustaining productive capacity. The United States instead reshaped its political economy to favor capital mobility, short-term financial returns, and labor market flexibility—yielding deindustrialization, workforce polarization, and the erosion of technological capabilities. These outcomes reflect structural design choices, not cultural preferences.
I. Germany: Coordinated Capitalism and the Mittelstand Model
Germany represents the clearest democratic-capitalist alternative to the U.S. model.
1. Industry-Embedded Skill Formation as the Foundation of German Manufacturing Strength
Germany’s manufacturing strength rests on a skill formation system that is structurally embedded within industry itself rather than outsourced to individuals or detached educational institutions. Its dual vocational training model integrates firms, labor unions, and the state into a nationally coordinated framework for producing skills. Most students enter apprenticeships that combine formal classroom instruction with paid, firm-based training, ensuring that education is directly aligned with the practical requirements of production. Training standards are nationally standardized and portable across employers, reinforcing skill quality while allowing labor mobility without skill degradation.
Crucially, German employers treat workforce development as a collective, long-term obligation rather than an individual risk borne by workers. Firms invest continuously in training because skills are understood as a shared industrial asset essential to competitiveness, not as a private credential whose returns are uncertain. This institutionalized commitment generates a deep reservoir of technicians, machinists, and industrial engineers capable not only of operating advanced manufacturing systems but also of incrementally improving them over time. The result is a resilient production workforce that supports high-value manufacturing—precisely the kind of industrial human capital the U.S. system persistently fails to produce at scale.
2. Export-Led Specialization and Global Leadership in Industrial Niches
Germany’s manufacturing competitiveness is built not on suppressed wages or the mass production of consumer goods, but on sustained dominance in specialized, high-value industrial niches. German firms lead global markets in areas such as machine tools, power transmission systems, industrial furnaces, packaging equipment, robotics, and other forms of advanced specialty machinery. These sectors demand precision engineering, deep process knowledge, and long-term investment—capabilities that reward coordination and expertise rather than cost cutting.
This strategy has translated into exceptional export performance. By 2009, German producers were global export leaders in a majority of internationally comparable engineering sectors, and manufactured exports per capita were nearly five times those of the United States. Export scale allows firms to amortize high domestic labor and regulatory costs across global markets while keeping production anchored at home. Rather than hollowing out domestic industry, Germany’s export-oriented specialization reinforces local production capacity, sustains high-skilled employment, and embeds manufacturing at the core of its economic model.
3. Family Ownership and Patient Capital as Pillars of Industrial Stability
Germany’s manufacturing system is anchored by the Mittelstand: a dense network of family-owned, mid-sized firms whose ownership structures strongly favor long-term productive investment over short-term financial extraction. Because control remains concentrated within families rather than dispersed among transient shareholders, profits are typically reinvested in tooling, workforce training, and incremental process innovation. Strategic decisions are guided by intergenerational continuity and industrial stewardship rather than quarterly earnings targets.
This long-term orientation translates directly into employment and capacity stability during economic downturns. Instead of responding to demand shocks through mass layoffs, German firms rely on institutional mechanisms such as Kurzarbeit, which temporarily reduce working hours while preserving skilled labor. During the 2009 crisis, this approach limited employment losses despite a sharp collapse in global demand, allowing firms to retain accumulated expertise and rapidly rebound once conditions improved. In contrast to the U.S. model—where layoffs permanently dismantle productive capacity—the German system treats labor and knowledge as assets to be protected, not costs to be discarded.
4. Sustaining Manufacturing Prosperity Without Wage Suppression
Germany demonstrates that a robust manufacturing sector is fully compatible with high wages when productivity, labor institutions, and investment are aligned. Elevated labor costs are offset by high productivity levels rooted in advanced skills, capital intensity, and continuous process improvement. Rather than triggering industrial flight, strong unions play a coordinating role by linking wage moderation to firm-level and sector-wide investment commitments, ensuring that rising compensation is matched by rising productive capacity.
This system of social partnership reduces adversarial labor relations and stabilizes expectations on both sides of the employment relationship. The outcome is not deindustrialization, but the preservation of a large and durable middle class whose livelihoods are directly tied to industrial employment. Germany’s experience directly contradicts the notion that manufacturing competitiveness depends on low wages, showing instead that institutional coordination can sustain both industrial strength and broad-based prosperity.
II. Japan: Firm-Centered Skills and Production-First Governance
Japan arrives at similar outcomes through different institutions.
1. Firm-Centered Skill Development and Internal Labor Markets in Japan
Japan’s manufacturing system embeds skill formation directly within firms rather than relying on nationally standardized apprenticeship systems. Long-term employment relationships create strong incentives for continuous, cumulative training, allowing firms to invest in workers with the expectation that skills will be retained and deepened over time. Employees are routinely rotated across tasks and functions, producing a multi-skilled workforce in which engineers, technicians, and shop-floor operators share overlapping competencies rather than occupying rigid occupational silos.
This internal labor market structure preserves tacit knowledge—process expertise and problem-solving capabilities that cannot be easily codified, transferred, or offshored. Such embedded know-how forms the foundation of kaizen and lean production, where continuous improvement depends on close integration between design, engineering, and production. By contrast, the U.S. model externalized training to the labor market, shortened job tenure, and treated skills as portable commodities, allowing critical production knowledge to erode and weakening the feedback loops essential to sustained manufacturing excellence.
2. Production-Oriented Corporate Governance and Resistance to Financialization
Japanese manufacturing firms have historically operated under a system of corporate governance that subordinated finance to production rather than treating shareholder returns as the primary objective. The main-bank system provided patient, relationship-based capital that prioritized long-term industrial viability over short-term profitability. Cross-shareholding arrangements within keiretsu networks further insulated firms from hostile takeovers, reducing pressure for asset stripping, downsizing, or short-term earnings manipulation.
Within this framework, profits were largely reinvested in productive assets, supplier relationships, and process improvement rather than extracted through share buybacks or financial engineering. Even after partial liberalization of financial markets, Japanese manufacturers remain far less financialized than their U.S. counterparts. This relative insulation has preserved capital intensity, stable supplier networks, and accumulated production know-how, allowing firms to sustain complex manufacturing capabilities that are difficult to rebuild once dismantled.
3. Upstream Export Dominance and Structural Centrality in Global Manufacturing
Japan’s manufacturing strength lies not in mass final assembly, but in global leadership over upstream and intermediate goods that are largely invisible yet indispensable to modern production. Japanese firms dominate critical inputs such as precision machine tools, industrial robotics, specialty chemicals, and advanced materials and components. These products require deep technical expertise, sustained process innovation, and exceptionally high reliability, making them difficult to substitute or replicate.
By controlling these upstream positions, Japan occupies a structurally central role in global manufacturing value chains, even when final assembly is performed in other countries. This strategy ensures persistent export strength, technological leverage, and resilience against relocation pressures. In contrast, the United States allowed many comparable upstream capabilities to erode, forfeiting the quiet but decisive control over industrial bottlenecks that anchors long-term manufacturing power.
4. Employment Stability as a Core Instrument of Industrial Strategy
In Japan, employment stability functions as an implicit but powerful form of industrial policy. Firms are structured to absorb economic shocks internally rather than externalizing adjustment costs onto workers. During downturns, hours worked, bonuses, and profit margins are adjusted first, allowing firms to weather short-term declines in demand without dismantling their workforce. Layoffs are treated as a last resort, not a default response.
This practice of labor hoarding preserves firm-specific human capital and accumulated production knowledge that would be costly—or impossible—to reconstitute once lost. Japanese firms accept periods of stagnation or reduced profitability in exchange for long-term productive continuity. By preventing large-scale job displacement, this approach limits downward mobility and labor-market polarization, standing in sharp contrast to the U.S. model, where cyclical shocks often translate into permanent employment loss and enduring industrial erosion.
III. China: State-Coordinated Industrial Strategy at Scale
China represents a third model: explicit, state-led industrial coordination across decades.
1. State-Led Long-Term Planning and Strategic Industrial Direction
China’s industrial development is guided by explicit long-term planning that defines national priorities and aligns resources accordingly. Through Five-Year Plans and targeted sectoral strategies, the state identifies key areas such as advanced manufacturing, electric vehicles, semiconductors, artificial intelligence, and energy systems as pillars of future competitiveness. Initiatives like Made in China 2025 are designed not merely to catch up with existing leaders, but to enable technological leapfrogging through coordinated investment, scale-building, and capability accumulation.
These national objectives are operationalized through a hierarchical system in which central goals cascade down to provincial and municipal governments, translating strategic intent into concrete targets and implementation mechanisms. Unlike the United States, where explicit industrial direction is often politically stigmatized or ideologically rejected, China treats strategic coordination as a legitimate and necessary function of economic governance. This clarity of direction allows capital, infrastructure, and institutional effort to be mobilized toward long-term productive outcomes rather than dispersed through short-term market signals.
2. Patient Capital and Financial Alignment with Industrial Objectives
China’s industrial strategy relies on a financial system deliberately aligned with long-term productive goals rather than short-term market discipline. State-owned banks play a central role by supplying patient, long-horizon financing to strategically prioritized sectors. Firms in these industries are permitted to operate at low or even negative profits during extended scale-up phases, reflecting an emphasis on capability building, learning-by-doing, and future competitiveness rather than immediate financial returns.
This approach channels capital toward production capacity, infrastructure, and technological accumulation instead of asset inflation or speculative activity. By relaxing profitability constraints in the short run, China enables the rapid development of capital-intensive industries that require massive upfront investment and long gestation periods. In contrast, the U.S. financial system, governed by hard market discipline and shareholder-return imperatives, would typically starve such sectors of funding before they could reach viable scale.
3. Regional Implementation and the Construction of Industrial Clusters
China translates national industrial strategy into concrete outcomes through strong regional execution by provincial and local governments. Central priorities are operationalized via instruments such as Special Economic Zones and purpose-built industrial parks, where firms benefit from coordinated access to subsidized land, reliable utilities, logistics infrastructure, and tailored local support. These regions function as implementation hubs, aligning investment, production, and workforce development around targeted industries.
The result is the deliberate formation of dense industrial clusters in which manufacturers, suppliers, specialized service providers, and logistics networks are co-located and mutually reinforcing. Such ecosystems accelerate learning, reduce transaction costs, and support rapid scaling across entire value chains. In contrast, the United States allowed comparable supplier networks and regional manufacturing systems to fragment under market pressures, weakening the agglomeration effects that underpin sustained industrial competitiveness.
4. Strategic Standards and Regulatory Market Design
China treats standards, regulation, and market access as active instruments of industrial strategy rather than neutral constraints on economic activity. Technical standards are set in ways that favor domestic firms and technologies, shaping product design and production processes to align with national capabilities. Regulatory frameworks are used to guide consolidation, encourage upgrading, and steer firms toward higher value-added segments of production.
Market access rules further influence industrial structure by determining which firms can compete, scale, or enter protected segments during early development phases. Rather than relying on abstract notions of “free markets,” China deliberately designs markets to serve long-term industrial objectives. Through this approach, competition is structured to accelerate learning, capacity building, and technological advancement, ensuring that market outcomes reinforce, rather than undermine, strategic production goals.
5. Integrated Technology Acquisition and Production-Oriented Innovation
China organizes innovation as a state-directed, production-linked process rather than as an isolated research activity. Heavy public investment in research and development is closely coordinated with industrial priorities, ensuring that scientific advances are directed toward sectors with clear scaling and commercialization pathways. Industry–university collaboration is structured to support applied research, process improvement, and rapid transfer of knowledge from laboratories to factory floors.
In parallel, China actively pursues strategic technology acquisition from abroad to accelerate capability building and reduce developmental gaps. Innovation performance is evaluated not by patent counts or abstract research output, but by the ability to scale technologies, integrate them into production, and achieve commercial viability. This emphasis on deployment and learning-by-doing ties R&D directly to manufacturing outcomes, reinforcing a system in which technological progress is measured by industrial impact rather than symbolic indicators.
IV. Why the U.S. Structurally Resists All Three Models
The United States does not simply fail to replicate these systems; it is institutionally configured to oppose them.
Core Structural Barriers
- Shareholder primacy elevates short-term extraction over reinvestment in productive capacity.
- Financial sector dominance redirects capital, talent, and policymaking away from industry.
- Weak labor institutions undermine coordination and systematic skill formation.
- Antitrust ideology treats necessary coordination as illegitimate or unlawful.
- Education detached from production shifts training costs onto individuals rather than firms.
- Federal fragmentation obstructs coherent national industrial strategy.
- Market-fundamentalist ideology delegitimizes active industrial policy.
These constraints reflect not isolated policy failures, but self-reinforcing systemic incentives that reproduce industrial decline.
V. A Shared Structural Lesson from Divergent Industrial Models
Despite their sharply different political systems and historical trajectories, Germany, Japan, and China converge on a single governing principle: manufacturing succeeds when capital, labor, education, and the state are institutionally aligned around production. In each case, economic coordination is designed to reinforce productive capacity, skill accumulation, and long-term industrial continuity rather than short-term financial optimization. The specific mechanisms vary, but the underlying logic is consistent—manufacturing is treated as a strategic system that must be actively sustained.
The United States adopted the opposite alignment. Capital was prioritized over production, finance over industry, labor flexibility over skill formation, and short-term returns over institutional continuity. These choices systematically weakened the foundations of domestic manufacturing. As a result, deindustrialization was not the outcome of technological inevitability or cultural preference, but the predictable consequence of a political-economic model that privileged financial extraction over productive development.
VI. American Ideological Divergence and Smil’s Historical Rebuttal
Where Germany, Japan, and China institutionalized manufacturing as a strategic system, the United States moved in the opposite direction, guided not only by policy choices but by a deeper misinterpretation of what constitutes economic advancement. Vaclav Smil’s Made in the USA: The Rise and Retreat of American Manufacturing provides the historical and intellectual context for this divergence. His analysis explains why the United States rejected the foundational premises shared by all three counterexamples, even as their industrial systems continued to deliver productivity, innovation, and social stability.
Smil shows that the United States became an outlier by embracing the myth of postindustrial superiority—the belief that a service-dominated economy represents a higher stage of development and that manufacturing is a transitional or expendable sector. Unlike Germany, which treats manufacturing as the core of national competitiveness, Japan, which embeds production at the center of firm organization and innovation, and China, which explicitly defines manufacturing as a pillar of national power, the United States interpreted the expansion of services as evidence of progress. Smil argues that this belief rests on a conceptual error: services are structurally downstream from manufacturing and depend on manufactured infrastructure such as machinery, energy systems, electronics, and transportation networks. The U.S. failure, in his view, was not empirical mismeasurement but analytical misclassification.
Central to Smil’s critique is the rejection of the idea that high-tech innovation can substitute for production capacity. Germany, Japan, and China all preserve tight feedback loops between design, engineering, and manufacturing, ensuring that innovation is tested, refined, and scaled through production. The United States alone accepted the premise that intellectual property, design, and finance could replace domestic manufacturing. Smil documents the consequences of this belief: the near-total exit from consumer electronics production, persistent trade deficits in advanced technology goods, and the erosion of the “chain of experience” that links R&D to process engineering and scale-up. As a result, the U.S. excels at elite innovation but struggles to commercialize it domestically, while its counterparts convert cumulative production learning into durable industrial leadership.
Smil further emphasizes manufacturing’s irreplaceable role in sustaining a broad middle class. Across the counterexamples, manufacturing provides stable, well-paid employment for non-elite workers, supports cumulative skill formation, and ties wage growth to productivity rather than credential inflation. In contrast, the U.S. transition toward services coincided with the collapse of middle-skill jobs, labor-market polarization, stagnant median wages, and rising inequality. Smil explicitly rejects the claim that “potato chips and microchips” are economically equivalent, arguing that manufacturing uniquely anchors supply chains, generates large multiplier effects, embeds innovation in real production problems, and supports social mobility at scale.
Smil’s historical account clarifies why the United States was uniquely receptive to the belief that deindustrialization was benign. If services are considered equivalent to manufacturing, industrial policy appears unnecessary. If innovation is separable from production, offshoring seems inconsequential. If finance is assumed to allocate capital efficiently, coordinated reinvestment becomes superfluous. These assumptions align seamlessly with the structural features of the U.S. political economy—shareholder primacy, financial dominance, weak labor institutions, and antitrust ideology. In this sense, Smil does more than document industrial decline: he explains why the United States was ideologically predisposed to accept it.
VII. Summary & Implications
Taken together, Smil’s historical diagnosis and the empirical experiences of Germany, Japan, and China converge on a single conclusion: no advanced economy has sustained innovation, strategic autonomy, or a stable middle class by abandoning manufacturing. The U.S. experience is therefore not evidence of historical inevitability, but of ideological exceptionalism. While other nations treated manufacturing as a permanent strategic foundation—aligning capital, labor, skills, and the state around production—the United States treated it as a disposable input, mistaking the short-term financial returns from that choice for genuine economic success. The result was not accidental failure but a system that succeeded at producing financial gains alongside labor polarization and industrial fragility.
Germany, Japan, and China demonstrate, through distinct institutional paths, that high wages are compatible with competitiveness, coordination outperforms atomization, skills must be deliberately produced, and innovation without manufacturing is ultimately hollow. Smil explains why the United States rejected these lessons, and why reversing the outcome would require not incremental adjustment but a systemic inversion of priorities—precisely what the entrenched structures of U.S. political economy are designed to resist. Together, they show that American deindustrialization was neither natural nor technologically determined, but the consequence of a profound misunderstanding of what economic maturity truly entails.
References
- Made in the USA: The Rise and Retreat of American Manufacturing. Vaclav Smil. The MIT Press (2013). https://finance.yahoo.com/news/china-graduates-1-3-million-140500624.html
- “China Is Winning. Now What?”. Nathan Simington. American Affairs Volume VIII, Number 3 (Fall 2024): 3–23. https://americanaffairsjournal.org/2024/08/china-is-winning-now-what/