Over the past decade and a half, financial, health and geopolitical shocks have shaken global trade. The 2008 global financial crisis devastated the banks that financed much of world trade, then triggered a secular decline in economic growth. In 2020, the Covid-19 pandemic shut down factories and disrupted global supply chains. And now Russia’s invasion of Ukraine has disrupted food and energy supplies, threatening to divide the world along geopolitical lines.
Some argue that these three shocks could even lead to the death of globalization. But the reality is likely more complex: the disruptions are likely to transform the global trading system rather than shrink it, with the impact varying from country to country. Significantly, China will likely lose, while India might even win.
Beginning in the early 1990s, developing countries advanced as a group for nearly two decades, rapidly catching up with the living standards of rich countries. This convergence has been facilitated by hyper-globalization, in which trade liberalization and steep declines in transport and communication costs have rapidly increased opportunities for the developing world. China and India have benefited enormously, leading to the largest reductions in poverty the world has ever seen.
This golden age ended with the global financial crisis of 2008. Since then, national growth trajectories have varied considerably. China’s deceleration has been dramatic: after decades of double-digit annual expansion, gross domestic product (GDP) growth has now slowed to nearly zero. But other countries like India have continued to grow (with the exception of pandemic-hit 2020), albeit less rapidly on average than before. Why the difference?
The global shocks have proven particularly damaging for China as they have added to a continued secular loss of competitiveness, as the migration of labor from farms to factories has begun to reach its limits, driving up prices. wages. Shoumitro Chatterjee of Johns Hopkins University and one of us (Subramanian) estimated that the decline in competitiveness has caused China to lose about $150 billion in exports.
Moreover, the shocks themselves had an asymmetric impact. After 2008, trade in goods stopped growing as a percentage of world GDP, while trade in services continued to grow. This has hit China harder, as it is a manufacturing powerhouse, while India is a competitive service player. As a result, China’s export-to-GDP ratio fell from its pre-2008 peak of 36% to 18.5%, while India’s declined much less, from 25% to around 19%.
The long-term consequences of the shocks could be very serious for China. For starters, the country has reached an inflection point in its development, where it must navigate the difficult transition from middle-income to upper-income status. When South Korea reached China’s current level of development (a GDP per capita of about $15,000 in purchasing power parity terms), continuing its transition required an increase in exports of 25 percentage points of GDP.
The prospect that China could replicate this seems remote, largely because the global political will to absorb Chinese exports has reached its limits. The Covid-19 shock has forced a reassessment of globalization as countries seek to reduce their dependence on imports of essential goods such as pharmaceuticals.
Additionally, Russia’s invasion of Ukraine has led to a broader geopolitical realignment, with the United States and its allies on one side and Russia and China on the other. This reorganization comes on top of a longer-running superpower rivalry between the United States and China. Harsh Western sanctions against Russia and the resulting weaponization of interdependence have further deepened the geopolitical divide.
Meanwhile, China’s growth model is under tremendous strain. The housing and construction boom that fueled the economy’s rapid expansion for decades has come to an end, leaving many top developers on the brink of bankruptcy. Demographic trends are much more unfavorable than the country’s official demographic statistics indicate. And President Xi Jinping’s embrace of state intervention is undermining entrepreneurship and economic dynamism – the national sources of growth.
This will make China more dependent on exports, just at a time when global demand is falling. Therefore, the Chinese growth model could be in even more trouble than many realize.
But as China’s outlook darkens, those of other countries brighten. For example, countries like Vietnam, Bangladesh and Indonesia have increased their exports at extraordinary rates. All have seized the opportunity created by the $150 billion of manufacturing export space that China has freed up.
At the same time, global shocks have increased opportunities for service exporters. The Covid-19 pandemic has prompted service companies to allow their staff to work from home. But if workers at a Boston-based company can connect from Boise, then why not from Bangalore? Indeed, trade in services has exploded in recent years, to the benefit of India.
Similarly, the “friend-shoring” of production will stimulate countries perceived as friends of the West. A growing number of companies have left Russia and foreign capital is fleeing China, aggravated by Mr. Xi’s domestic policies. At the same time, integration efforts within the US-led alliance are intensifying, with India resuming negotiations on free trade agreements with the European Union and the United Kingdom. .
But to take advantage of the shocks of globalization that have differentially favored services and open and pluralistic democracies, India will have to change its political orientation. It will have to reverse its recent refocusing and open up economically. At the same time, it must improve what we call the “economic and political policy-making software”, guaranteeing the rule of law, fair treatment of all investors, strong national institutions and social stability, which are all essential to creating an environment conducive to sustained economic growth.
In sum, the three shocks of globalization have reduced opportunities for China while expanding them for India. Of course, China can overcome its challenges, just as India can take the lead. But in each case, success will require a reassessment of current national policies and governance.
Subramanian is a Senior Fellow at Brown University and a Nonresident Distinguished Scholar at the Center for Global Development. Felman is director of JH Consulting. © Syndicate Project, 2022