China Is Pulling Up the Ladder Behind It

SHOUMITRO CHATTERJEE is Assistant Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and a Nonresident Scholar at the Carnegie Endowment for International Peace. ARVIND SUBRAMANIAN is a Senior Fellow at the Peterson Institute for International Economics. From 2014 to 2018, he served as Chief Economic Adviser to the Government of India. He is a co-author, with Devesh Kapur, of A Sixth of Humanity: Independent India’s Development Odyssey. How Beijing’s Export Strategy Will Keep Poor Countries Poor Shoumitro Chatterjee and Arvind Subramanian China is increasingly embracing the mantle that comes with being a global superpower. Its rise is forcing the rest of the world to assess its credentials as a potential hegemon and a provider of public goods. And in one significant area, its strength may be a real weakness. Many poorer countries fear that China’s economic rise will not leave room for them to industrialize. Unlike the United States and European countries, which in the past helped facilitate the industrialization of poorer countries (including China), Beijing is currently on track to have the opposite effect. China is not merely climbing the technological ladder; it is pulling up the ladder behind it. It dominates the new commanding heights of manufacturing—electric vehicles, solar panels, batteries, drones—but it has not vacated the older, labor-intensive sectors through which it and other rich and middle-income countries escaped poverty. In effect, China is trying to do what economic theory says no country should be able to do: retain comparative advantage in almost everything. That gambit is all the more striking in an era when global imbalances are once again widening. China’s trade surplus measured as a share of world GDP is at a historic high. The International Monetary Fund has warned that external imbalances and the attendant trade consequences are generating negative spillovers for trading partners. As Brad Setser and Shahin Valée wrote recently in Foreign Affairs, Chinese currency manipulation is undermining the global trading system. The last great era of Chinese surpluses, roughly in the first decade of this century, produced what several scholars have called the first “China shock”: a surge of exports into the United States that hollowed out swaths of American manufacturing. That shock transformed American politics and helped create a rare bipartisan consensus against free trade and against China. The new shock is different. It is landing less in the United States, where tariffs, bans, and national security restrictions have blunted Chinese import competition by fiat. It is more visibly affecting Europe, and especially Germany, whose industrial model was built around the internal combustion engine and its associated high-end engineering ecosystem. China’s rise in electric vehicles and green technologies has turned a commercial challenge into an existential one for many European industries. But the focus on how China’s economic strategy affects the United States and Europe has obscured a larger problem. The most consequential victims of the current China shock are not workers in Detroit or Stuttgart, but future workers in places such as Addis Ababa, Dhaka, Lagos, Nairobi, Phnom Penh, Surat, and Tirupur. Their losses cannot be measured mainly in job cuts or factory closures, but rather in terms of factories never built, export markets never entered, capabilities never accumulated, and development paths never opened. That is the real toll of what is now called the “China squeeze.” The stakes of the China squeeze are immense. The issue is not only hundreds of billions of dollars in forgone exports, it is whether latecomers to development still have access to the most reliable path of structural transformation the world has known. Historically, almost every country that escaped from poverty to prosperity did so by relying on manufacturing exports: garments, toys, footwear, furniture, electronics assembly, and other sectors that absorb large numbers of less-skilled workers while building firms, logistics, know-how, and state capacity. China benefited enormously from an open trading system that allowed it to lift hundreds of millions of people out of poverty through manufacturing for the global market. China’s own rise may now block that same path for countries poorer than itself. Much of China’s manufacturing trade surplus (the difference between its exports and imports) sits precisely where poorer countries should have their greatest opportunity. Of China’s total manufacturing surplus of about $2.2 trillion, roughly $700 billion to $1.4 trillion is concentrated in low-skill-intensive sectors such as apparel, footwear, toys, furniture, and electronics assembly, the very areas in which low- and middle-income countries with vast labor pools compete most directly with China. The simplest measure of this dynamic is China’s share of glob

China Is Pulling Up the Ladder Behind It

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