The US and other high-income countries have their own set of concerns about China’s role int the world economy–but the concerns for low- and middle-income countries may be even more severe. A standard way of thinking about the process of global economic development is as a sort of ladder. Low-income countries start out with economies that are heavy on agriculture and subsistence farming. However, they gradually take a step up into low-skill manufacturing (textiles is a classic example), and then with additional capital investment they can take another step into higher-skill manufacturing. As manufacturing displaces agriculture, their service economy begins to expand as well, and the service jobs in everything from logistics to health care, from finance to education, and the broad category called “professional and business services,” all expand as well.
But what happens if the bottom step of the development ladder, the move into low-skilled manufacturing, is blocked by the presence of China in the global economy? Shoumitro Chatterjee and Arvind Subramanian argue that China’s ongoing global presence in low-skilled manufacuturing is shutting off the early steps to economic development for low- and middle-income countries around the world. They make the case in “China’s Mercantilist Squeeze on Developing Countries” (Peterson Institute for International Economics, Working Paper 26-7, May 2026).
For example, consider China’s share of global markets in the kinds of low-skilled production that has in the past often been an early rung on the development ladder. The size of global market is measured by domestic value-added of those exports (after some inputs were imported ). Notice that high-income countries dominated these global markets in the 1960s, but then moved on to other industries. However, despite China’s rapid growth in the last few decades, it continues to dominate these markets.
If China’s share of these low-skilled goods should be in decline, by how much? The authors tackle this question in a few ways. For example, they look at China’s share of low-skill/low-paid workers in the world economy, and how it has declined over time, and they look at the history of how today’s high-income countries reduced their global presence in these industries. No matter how they slice it, China is competing very directly in world markets with the low- and middle-income countries of the world in precisely the industries that have often been an early step toward economic development. Moreover, China imports very little of these goods, so it does not act as a buyer in international markets in these areas. As the authors write:
What matters is that China is occupying a larger share of the global value chain in precisely the sectors where poorer countries would otherwise expect to compete. … Not enough attention is being paid to China’s persistent, even rising, occupation of export space in low skilled goods and the attendant impact on the development prospects of low- and middle income countries—the China Squeeze. This impact—hundreds of billions of dollars in foregone LMIC exports—has been felt most acutely in global markets but also in China’s imports in LMIC markets and low access to China’s markets as well. The magnitudes are sizable enough to stymie their structural transformation and ability to escape from low- and middle-income status.
At some level, it doesn’t matter whether China’s position, blocking ability of developing countries around the world, arises “naturally” from China’s economic growth or “unnaturally” from policies of China’s government that offer its manufacturing and exporting firms a direct or indirect subsidy. But the question of “why” is nonetheless intersting.
As one piece of data, Chatterjee and Subramanian look at wages in the apparel industry across countries. Wages in China are way up–but this has not meant a shift of global apparel exports to countries with lower wage levels, as one might expect.
As another piece of data, the authors look at changes in manufacuturing productivity over time. China’s productivity growth in manufacturing has slowed, while other competing countries have seen sharp rises. But again, contrary to what one might expect, this has not led to a lower share for China in low-skilled manufacturing.
Comparing direct and indirect government subsidies across countries is an enormous task, and this paper doesn’t take it on. But the authors do suggest that, in their judgement, perhaps the most likely reason for China’s ongoing global dominance in these low-skilled manufacturig jobs is that China central bank acts to keep its exchange rate artificially low. The result is that China’s exports to the rest of the world are cheaper than they would otherwise be, while China’s imports are more expensive than they would otherwise be. Of course, this also helps to explain China’s consistent pattern of large trade surpluses.
