International Relocation of Production and Growth

The relocation of production from developed to developing economies in recent decades greatly impacted product and labor markets, generated political unrest, and revived protectionism. Using data on approximately 5,000 products, this paper describes the relocation process over the 1996-2014 period and assesses its effect on cross-country growth. The relocation of production to developing countries –mostly but not only to China– had a significant negative impact on the growth of the low-income countries that were the initial exporters of the relocated products. According to our preferred estimation for the 1996-2006 period and for a country at the first quartile of the income distribution, a one-standard negative deviation of the country's exposure to the relocation process reduced its annual growth by 0.69 percentage points. However, the growth impact was zero or not significant for high-income countries similarly exposed to the relocation of their initial exports. High-income countries facing increased competition from developing economies changed and upgraded their export baskets, whereas low-income countries failed to do so under the same circumstances.