I am curious. How does Germany do it? It has high labor cost yet it maintains its manufacture leadership and has export surplus. China and Germany become manufacture powerhouses yet have vast difference in labor cost structure.
Germany and Japan pursue their own national industrial policies--unlike the United States, which doesn't really have one. The industrial policy of Germany and Japan is to compete in high-value, highly specialized niches, where there are few competitors. This way they maintain high profit margins to support middle class wages at home.
Germany's exporters get rebates on the VAT taxes of the goods they export. The United States has a big disadvantage compared with Germany in this respect. German manufacturers receive government subsidies, and there are investment incentives. In the US, the tax incentives encourage offshoring production. Labor unions sit on the board of directors of German manufacturing firms. Unlike the US, labor has a voice at the table in Germany.
Japan also has an industrial policy, with significant government subsidies to support targeted niches. Japan's Ministry of Finance engages in vigorous exchange rate intervention to keep the Yen undervalued (read: mercantilism, similar to China's currency policy). China has extensive subsidies: cheap land, tax holidays and cheap government financing. It does have environmental regulations--but China doesn't enforce them. Multinationals can pollute with abandon in China--and the subsidy that they receive is someone else's negative externality. This is hardly the level playing field that underlies any reasonable interpretation of free-trade policy.
These realities stand in stark contrast to Ricardo's classical notion of comparative advantage, the heart of which involves full employment. A true reckoning of comparative advantage should include the impact of negative externalities.
Can you find references for these German government subsidies for exporters and their percentage value per exported unit?
The US also runs a very complex series of industrial subsidies too, but it seems to be somewhat ad-hoc and therefore difficult (outside of WTO complaints such as Boeing-Airbus) to explore.
The key to being a net exporter (which is not quite the same as being a "manufacturing powerhouse", but _is_ what China and Germany have in common) is government policies repressing domestic consumption and productivity that is high given the wage structure. As long as your population is forced to consume less than it can produce, chances are you will be able to export the surplus somewhere.
Both Germany and China have such policies, in fact. It means that in both cases consumption (aka "the standard of living" as it's typically measured, for better or for worse) is lower in both than it could be if workers' spending power were allowed to match labor productivity.
High value goods mostly, the same thing the US builds. China is a powerhouse of simpler things (though improving); Germany does the complex stuff (automobiles, machine tools, bullet trains, etc.)
On a related note, US is also a manufacturing powerhouse still. Its manufacturing GDP per capita is only about 20% below Germany - and absolutely it is the largest in the world by far (using nominal conversion rates). It though is producing far higher value per employee than Germany, and astronomically higher than China.
