The world has, for the most part, welcomed the trade truce between the US and China. Exporters, in particular, are hoping for a period of quiet that would allow them to adjust to a new world with higher tariffs and more restrictions.
Yet for workers and companies across the developing world, the possibility of a return to a “status quo” ante is not an entirely comforting notion, either. A new normal that preserves China’s dominance of global trade hurts them far more than it does the US or other Western nations.
A new index from Bloomberg Intelligence that examines the export potential of various major economies explains why. China is still at the top of the table, and there is a big gap between it and the closest competitor, India. Most emerging markets only marginally outperform developed economies, the index shows.
That is not how it is supposed to go. As labor costs in China converge with higher-productivity markets, it should look like a less attractive source of goods. Trade-driven sectors should start moving out of the country — or, in the index’s terms, other developing economies should demonstrate greater or at least comparable export potential.
Instead, China’s lead in other factors — from energy costs and logistics efficiency to straightforward technical know-how — is so great that it still has no peers.
It is impossible to overstate how unusual this is in world history. Several countries and regions have had their moment dominating world trade — the UK, the US, Japan — before stepping aside and letting others grow. As they became richer, they moved to different slots in the supply chain, allowing lower-value goods to be made in places with reduced costs.
China, instead, continues to dominate every rung of the supply chain, from low to high-margin manufacturing. Three-quarters of the country’s enormous trade surplus with the world continues to come from goods that are manufactured using relatively basic skills, and it still has over half the global market share in such sectors, calculations by economists Arvind Subramanian and Shoumitro Chatterjee showed.
Other estimates, with a more restrictive definition of low-skills production, come out a little smaller: Harvard University’s Gordon Hanson in 2020 assessed that China’s share of labor-intensive manufacturing was about one-third.
Either way, it is an anomaly. The market share does not fit with the other things known about that economy — that its working-age population is declining, and average wages are several times those in its struggling competitors.
There could be several reasons for the emergence of the inconsistency. A persistently undervalued currency could account for it, as could hidden subsidies for inputs such as energy.
However, part of the reason is that Beijing has deliberately intervened in the natural process of global development. Because the corollary of one country’s economy growing and a second, poorer peer overtaking it in terms of export potential is that the savers, investors and corporations of the first country start moving capital and technology to the second.
That is how manufacturing spread across the developed world and the Asian Tigers.
In the heyday of British economic hegemony, London’s bankers financed half of the world’s foreign investment. A large proportion of US railroad bonds were denominated in sterling. By the time the US dominated trade a century later, it in turn was the origin of almost half of outward investment globally. During its boom years in the 1980s, Japan’s share of world investment overtook the US’.
That is what happens when companies in trade-surplus nations are allowed to freely plan for the future and find the best returns on their capital. That is not how Beijing allows its economy to work. What it earns from trade is directed instead at creating excess capacity at home, or toward long-gestation projects meant to further embed China at the center of global manufacturing.
That means that Chinese companies get a low return on their savings, and its savers and pensioners are poorer than they should be. It also means that workers throughout the rest of the developing world are cut off from their potential. They need Chinese companies to use their technological skills and hoarded capital to build factories that would train and employ them.
China’s leaders are not allowing that to happen. They want to stay at the top of that export potential table, and do not care if, as a consequence, the developing world is deprived of its destiny. If Beijing has its way, nobody else will ever get rich.
