East Asia’s economic policymakers have identified the manufacture of advanced intermediate goods as the key to economic leadership. Such goods include the highly purified materials, the precisely engineered components and the state-of-the-art production machines needed by other nations to make the world’s consumer goods.
The special significance of advanced intermediate goods is not fully appreciated these days but it is worth recalling that their manufacture was dominated by the UK in the nineteenth century. The United States succeeded to leadership in the early twentieth century and it was in turn overtaken by Japan, and, to a lesser extent, Germany, in the late twentieth century. It is a fair guess that China will come to dominate many of these industries within a few decades.
Why are these industries so important? They are generally both highly capital-intensive and highly knowhow-intensive. That means that scale economies are often decisive. So is protectionism, particularly in the early stages of a nation’s “targeting”of an industry. These industries typically shake down into tight oligopolies and, in not a few cases, effective monopolies or duopolies.