China's mercantilist squeeze on developing countries

Concern over China's trade surplus is again resurging in the United States and Europe, but less attention has been paid to what China's surplus means for low- and middle-income countries. Despite becoming a richer and higher-tech economy, China continues to occupy a large share of global low-skill-intensive export markets such as apparel and footwear, precisely where low- and middle-income countries compete most directly. The authors document what they call a "China Squeeze," which is limiting the industrialization opportunities traditionally used by these countries to grow their economies and create jobs. -Key Takeaways - The "China Squeeze" affects low- and middle-income countries through three major channels: intense competition in global export markets, rising Chinese import competition in their own domestic markets, and limited access to China's own consumer market for low-skill-intensive exports from developing countries. - The scale of the squeeze is historically unprecedented and may represent hundreds of billions of dollars in lost exports and forgone jobs in labor-intensive manufacturing in developing countries. - Macro indicators on wages, productivity, and exchange rate policy suggest that distortions, especially an undervalued renminbi, may have played a role. Regardless of the cause, China's dominance may be closing off the traditional manufacturing-led development path for low- and middle-income countries.