"In industries where output can be measured in physical terms, a Chinese worker produces 2–3 times as much physical output as an American one." — Weijian Shan (Context: Comparing physical labor productivity in manufacturing)
"Tesla exemplifies this: its Shanghai workers are twice as productive but paid 17–18% as much as their US counterparts in nominal US dollar terms." — Weijian Shan (Context: Discussion on the decoupling of productivity and wages)
"Protectionism leads to lower productivity by reducing incentives for innovation, efficiency, and resource reallocation." — Weijian Shan (Context: Explaining the decline in US steel industry efficiency)
"The difference in manufacturing wages between the US and China reflects the gap in national income levels rather than in manufacturing labor productivity alone." — Weijian Shan (Context: Explaining why highly productive Chinese workers earn less)
"US steel output per labor hour has declined by since 2017. This protection has made the US steel industry progressively less efficient." — (Context: Analyzing the impact of tariffs on domestic industry)
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This report challenges the prevailing view that Chinese manufacturing is less productive than Western counterparts. By analyzing five key industries—Shipbuilding, Integrated Steel, Electric Vehicles, Solar PV, and Cement—Weijian Shan demonstrates that Chinese workers often produce 2 to 3 times more physical output per person than US workers. The "paradox" lies in the fact that this physical dominance does not translate into higher nominal value-added or wages, largely due to US protectionism that keeps domestic prices artificially high and a national income gap driven by China's less productive services sector.
Key Takeaways
Physical vs. Nominal Gap: China’s physical productivity is 2.4x the US average across studied sectors, but its nominal value-added advantage is only 1.2x due to higher US price points.
Protectionism Drag: High tariffs in the US protect domestic firms from competition but result in significant efficiency declines and higher costs for consumers.
Tesla Case Study: The Shanghai Gigafactory produces more than double the vehicles of the California factory with a smaller workforce, proving efficiency is a result of process and scale, not just cheap labor.
Wage Decoupling: Manufacturing wages are determined by the aggregate productivity of a nation's entire economy, meaning high-performing Chinese factory workers are effectively "taxed" by the lower productivity of the broader economy.
Sector Dominance: In industries like shipbuilding and solar, China has reached a scale where US competition is virtually non-existent or relies entirely on heavy subsidies.
Detailed Summary by Topic
Methodology of the Productivity Study
Weijian Shan selects five industries where output can be measured in physical units (tons, cars, ships) rather than just dollar value. This bypasses the distortion of exchange rates and local price levels. Data is sourced from 10-K filings and annual reports for 2023 and 2024. The core finding is a massive physical productivity lead for China that is masked in traditional economic value-added metrics.
Case Study: Steel and Cement (The Tariff Trap)
The report highlights a structural divide in steel. China uses integrated mills, while the US relies heavily on mini-mills. Comparing only integrated mills, Chinese workers produce 3.2x more steel per worker. However, because US steel prices are 75% higher than international prices due to tariffs, the nominal value-added looks nearly equal. This protectionism has backfired: US steel productivity has dropped 32% since 2017 as the lack of competition stifles efficiency.
Case Study: Tesla and the EV Revolution
Tesla provides a controlled experiment because it produces identical models in Shanghai and California.
Shanghai: 1,000,000 cars with 20,000 workers.
California: 464,000 cars with 22,000 workers.
Despite lower sale prices in China, Shanghai workers generate twice the nominal value-added of US workers while earning a fraction of the salary.
Unraveling the Wage Paradox
If Chinese workers are more productive, why are they paid less? Shan argues that wages are set by the opportunity cost of labor across the whole economy. Because China’s massive services sector and rural economy are less productive than the US's, the base wage remains low. Effectively, highly efficient manufacturers subsidize the rest of the country's lower national income level.
The Impact of Protectionism on Innovation
The report cites IMF and Frankel/Romer studies to argue that trade barriers lead to a long-term decline in labor productivity (approx. 0.9% loss after 5 years). By barring Chinese products, the US creates an inflationary shield that allows domestic firms to remain inefficient while charging consumers double the international rate for commodities.
Data & Figures
Data Point
Value
Context
Physical Productivity Lead
2.4x
Avg physical output of Chinese workers vs US
Nominal Value-Added Lead
1.2x
China's lead measured in USD
Tesla Production (Shanghai)
1,000,000
Annual units with 20,000 employees
Tesla Production (California)
464,000
Annual units with 22,000 employees
Steel Price Differential
75% higher
US steel prices vs international due to tariffs
US Steel Efficiency Decline
32%
Drop in output per labor hour since 2017
Cement Price (US vs China)
$148 vs $55
Per ton price in respective markets
Nominal Wage Gap
I. The Core Productivity & Scale Data
Data Point
Value
Context/Source
Global Manufacturing Share
~30%
China ($4.7T) vs. US ($2.9T)
Industrial Robots Installed
>50% World Total
Automation density leader (2024-2025)
Smart Factories
30,000+
Advanced "Lighthouse" manufacturing
Median Physical Productivity
2.37× Advantage
Units per worker/hr vs. US
Nominal Productivity Distortion
1.2× Advantage
Adjusted for China’s lower domestic prices
US Wage vs. China
5-6× Higher
Structural labor cost disparity
Tesla Shanghai Wage
17-18% of US
Efficiency at lower cost base
EV Production Scale
II. The "New Three" & Energy Moat
These metrics represent the "Green Tech" dominance that now accounts for ~11.4% of China's total GDP.
Data Point
Value
Context
"New Three" Export Value
~$180B (1.3T Yuan)
EVs, Batteries, Solar (2025)
Solar Market Share
80% Global
Dominance in upstream/downstream
Solar Output Multiplier
70× US Output
China produces 1 Terawatt/year
Battery Export Value
~$101B (2025)
75% of global cell production
Industrial Electricity
~$0.08 vs. ~$0.12/kWh
33% cheaper power for factories
Steel/Cement Price Gap
75% higher in US
Input material cost disadvantage
Rare Earth Processing
~85–90% Share
Control of high-tech supply chain
III. Innovation & Human Capital
China has transitioned from "imitation" to "iteration speed" dominance.
Data Point
Value
Context
Annual STEM Graduates
~1.4M (CN) vs. ~800k (US)
Human capital pipeline
National R&D Spend
$506B (2024)
48% increase since 2020
Critical Tech Lead
37 of 44 categories
ASPI Critical Tech Tracker
Product Iteration Cycle
12-18 Months
vs. 3-4 years for Western legacy firms
High-Speed Rail Network
45,000km
Internal supply chain logistics speed
IV. Strategic Summary
Vertical Integration: China's low outsourcing rate (<5%) creates a "Cluster Effect" where suppliers and assemblers are co-located. This reduces the Physical Productivity gap because parts don't travel across oceans before final assembly.
The Deflationary Moat: While the US faces "Nominal" distortions, the Real advantage lies in energy and materials. By controlling the price of Electricity, Steel, and Lithium, China ensures that Western "re-shoring" faces a permanent 30-50% cost penalty.
Speed over Scale: The 30,000 smart factories are not just about volume; they are about Software-Defined Manufacturing. This allows Chinese firms to pivot production lines to new models in half the time of US competitors.
Stories & Anecdotes
The Two Gigafactories: Shan uses the Tesla comparison to debunk the idea that China’s advantage is just "sweatshops." The Shanghai plant's automation and logistics represent a leapfrog in manufacturing technology.
The Integrated Mill Divergence: He explains that the US has largely abandoned integrated steel making in favor of scrap-based mini-mills. By comparing the remaining US integrated mills to China’s modern fleet, he shows how the US industrial base has aged behind tariff walls.
References & Recommendations
People Referenced:
Weijian Shan (Executive Chairman, PAG) - Lead author and researcher.
Jeffrey Frankel & David Romer - Authors of a 1999 study on how free trade boosts growth.
Research & Articles:
IMF Study (2019) - Shows that tariff increases reduce labor productivity.
Tesla 10-K Filings - Primary data source for EV comparisons.
Speakers & Credentials
Weijian Shan: Executive Chairman of PAG, one of Asia’s largest private equity firms. He is a PhD graduate of UC Berkeley and a former professor at the Wharton School, providing a bridge between Western academia and Chinese industrial reality.
Gavekal Research: A leading independent macro research firm known for its contrarian views on global capital flows and the Chinese economy.
Actionable Next Steps
Supply Chain Re-evaluation: Companies should assess if their US-based manufacturing is efficient or merely protected by tariffs.
Productivity Arbitrage: Investors should look at companies that successfully export Western management to Chinese industrial ecosystems.
Monitor GDP Deflators: Watch China's GDP deflator, as domestic competition keeps export prices low and physical productivity high.
Factor in PPP: Use Purchasing Power Parity rather than nominal USD to avoid underestimating the volume of physical economic activity.
Jul 13, 2026
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