How China may be blocking poorer nations from industrialising – Firstpost

For nearly three decades, China’s rise has been celebrated as one of the greatest economic transformations in modern history. Hundreds of millions were lifted out of poverty, global supply chains were redrawn, and Beijing emerged as the workshop of the world.

But a new research paper is now asking an uncomfortable question: What if China’s success is preventing poorer nations from repeating the same journey?

A working paper published by the Peterson Institute for International Economics argues that China’s continued dominance in low-skilled manufacturing is compressing the industrialisation opportunities historically available to developing economies.

The paper, China’s Mercantilist Squeeze on Developing Countries , is authored by Shoumitro Chatterjee of Johns Hopkins University and former Indian chief economic adviser Arvind Subramanian. It introduces a term the authors believe could define the next phase of globalisation: the “China Squeeze.”

China’s rise is no longer just a Western problem

Much of the world’s focus on China’s export dominance has centred on the United States and Europe.

In America, Donald Trump’s tariffs drew political energy from the belief that Chinese imports hollowed out US manufacturing. In Europe, China’s aggressive expansion into electric vehicles and green technologies has triggered fears about industrial decline, especially in Germany.

But the new paper argues that the consequences for low- and middle-income countries have received surprisingly little attention.

That omission matters because a substantial portion of China’s manufacturing surplus remains concentrated in labour-intensive sectors such as apparel, footwear, leather and textiles,  precisely the industries through which poorer countries historically industrialised.

According to the authors, China today occupies an unusually large share of global manufacturing space despite becoming significantly richer and more technologically advanced. That, they argue, is historically abnormal. The manufacturing ladder may be disappearing. Industrialisation has traditionally followed a predictable path.

Countries moved from agriculture into low-skilled manufacturing before eventually graduating into advanced industries. Japan followed that path. South Korea and Taiwan followed it. China itself followed it after the 1990s.

As wages rose in richer countries, they gradually vacated labour-intensive industries, creating export opportunities for poorer economies entering the global market. The paper argues China is not vacating that space.

Using value-added trade data, the researchers show that China continues to dominate global low-skilled manufacturing exports at levels far beyond historical precedents.

In sectors such as apparel, textiles, footwear and leather, China now accounts for roughly half of global value-added exports.

Even more strikingly, the study argues that conventional export statistics actually understate China’s dominance because more and more of the global supply chain is being internalised within China itself.

In simple terms, China may be exporting fewer finished T-shirts than before, but a growing share of the value embedded inside those products — from inputs to assembly — is still being generated within China.

The result is what the authors describe as a shrinking industrialisation corridor for poorer nations. Hundreds of billions in lost export opportunity To measure the scale of the squeeze, the paper compares China’s export dominance with two benchmarks.

The first benchmark looks at labour endowment. Since low-skilled manufacturing is labour-intensive, countries with large pools of low-cost labour should, theoretically, command export shares proportional to their workforce.

China no longer fits that pattern.

The study finds that China’s share of global low-skilled manufacturing exports is now vastly larger than its share of the developing world’s labour force would suggest.

According to the paper, China’s “excess” low-skilled manufacturing exports amount to roughly $365 billion across low-skilled sectors.

The second benchmark is historical.

When today’s advanced economies were at income levels comparable to modern China, they had already started moving away from labour-intensive manufacturing. China, by contrast, continues to dominate those sectors.

The contrast becomes particularly sharp after adjusting for modern globalisation and trade integration. At China’s current level of development, advanced economies historically occupied around 8 percent of global low-skilled manufacturing demand. China today controls roughly 27 percent.

That gap, the paper argues, represents manufacturing space that poorer economies might otherwise have occupied.

The squeeze is also happening inside poorer countries The problem, the researchers say, is not limited to global export markets. Chinese imports are increasingly overwhelming domestic industries across developing economies themselves. Using imports as a share of GDP, the study finds that the post-global financial crisis “China Shock” has actually become larger for low- and middle-income countries than for advanced economies.

In many developing nations, local manufacturers are now competing directly with low-cost Chinese imports in sectors where they once expected to build domestic industrial capacity. At the same time, China imports surprisingly little low-skilled manufacturing from poorer countries.

The paper finds that China’s imports of labour-intensive goods remain dramatically smaller than what advanced economies imported at comparable income levels.

That means poorer nations are simultaneously losing export markets abroad, losing domestic market share at home, and finding limited access to China’s own consumer market.

Is the playing field fair? One of the most politically sensitive questions raised by the paper is whether China’s dominance reflects market competitiveness or policy distortions. The authors stop short of making definitive claims, partly because detailed Chinese firm-level data are no longer available to outside researchers.

But they argue there is suggestive evidence that policy intervention plays a major role.

China’s manufacturing wages, for instance, are now far higher than many of its competitors. In apparel manufacturing, average wages in China are roughly five times higher than Bangladesh and substantially higher than India and Vietnam.

Ordinarily, such wage increases would have pushed labour-intensive industries elsewhere. Yet China’s export strength persists. The paper points toward exchange-rate policy as one possible explanation. The IMF recently estimated that the renminbi’s real effective exchange rate may still be undervalued by roughly 16 percent.

The researchers also highlight evidence of extensive foreign exchange interventions and industrial policy support that may be reinforcing China’s competitiveness. A deeper geopolitical question. Ultimately, the paper argues that the issue is bigger than trade economics. It is about whether the traditional pathway to development itself is breaking down.

Historically, rising powers created manufacturing space for poorer followers. The United States did so after World War II. Japan did so for East Asia. Later, the Asian Tigers created space for China.

But the paper warns that China’s current trajectory risks preventing poorer nations from making that transition altogether. The implications are profound.

For countries across South Asia, Africa and Latin America, labour-intensive manufacturing has long been viewed as the most reliable escape route from poverty. If that ladder disappears, the development model that shaped the modern global economy may no longer work. And that, the paper suggests, may become one of the defining economic tensions of the 21st century.