Why the ‘China squeeze’ argument does not add up

AI/CAI MENG/CHINA DAILY

The claim that China is "squeezing" developing countries out of manufacturing opportunities is built on flawed assumptions, selective use of data and questionable methodology, resulting in conclusions that are misleading and at odds with the realities of global trade.

In May, the Washington-based Peterson Institute for International Economics published a report titled "China's mercantilist squeeze on developing countries". Its central argument is that even as China moves toward higher incomes and more technologically advanced industries, it retains an unusually large share of global exports in labor-intensive manufacturing.

The report argues that this has cost low and middle-income economies hundreds of billions of dollars in exports and large numbers of jobs, making it harder for them to follow the traditional path from low-cost manufacturing to advanced industrialized status.

It goes further, attributing China's competitiveness to policy distortions rather than fair competition, and suggests Beijing should voluntarily make room for economies in lower-end manufacturing.

The report's conclusions do not stand up to scrutiny. They are built on a zero-sum view of global trade, selective use of data and country samples, and questionable benchmarks that disregard productivity differences and profound changes in the global economy.

Modern global value chains rarely operate so neatly. Over the long term, a country's export growth can generate demand elsewhere through higher incomes, supplies of intermediate goods and overseas investment. In many labor-intensive industries, China and other developing economies increasingly function as complementary parts of the same production networks rather than simple substitutes.

The textile and garment industry illustrates this. The United Nations Commodity Trade Statistics Database shows that in 2024 more than 60 percent of fabric imports into Vietnam, Indonesia, Colombia and Thailand came from China.

Data from the Bangladesh Trade and Tariff Commission show that China has become the largest supplier of machinery, raw materials and accessories to Bangladesh's textile and garment industry. These inputs support a ready-made garment sector worth about $47 billion and have helped Bangladesh become the world's second-largest clothing exporter after China.

Nor do broader trade figures suggest that developing economies have simply been crowded out. According to UN Trade and Development, global trade surpassed $35 trillion for the first time in 2025, rising 7 percent from a year earlier. Developing economies' share of global exports increased from 29 percent in 2000 to about 46 percent in 2025. Even excluding China, their combined share rose by 6.1 percentage points.

The report's definition and measurement of China's supposedly excessive share of low-skilled manufacturing are also fundamentally flawed. It acknowledges that China's share of global low-skilled exports has declined since 2015, but argues that conventional customs statistics understate China's position. Using value-added trade calculations, it puts China's share at 64 percent.

Yet that number is highly sensitive to the comparison group. The calculation excludes developed economies with substantial textile, leather and footwear industries, including Italy and Portugal, and compares China primarily with developing countries. Recalculations using the report's own underlying data show that including developed-country producers would reduce China's share of value added in low-skilled manufacturing from 64 percent to 49 percent.

More fundamentally, the report's benchmarks for determining what China "should" export are difficult to justify.

One benchmark assumes that a country's share of global exports in labor-intensive manufacturing should broadly correspond to its share of the world's low-skilled labor force. Exports above that level are treated as excessive. On this basis, the report estimates that China has displaced about $110 billion of exports in garments, textiles, leather and footwear and roughly $365 billion across all low-skilled sectors.

But workers are not interchangeable units of production. Labor productivity varies enormously across different economies. China's manufacturing wages are already several times those in countries such as Bangladesh and India. If Chinese factories can remain competitive despite paying substantially higher wages, productivity, infrastructure, industrial clustering, supply-chain efficiency and business organization must form part of the explanation.

The 1960s were characterized by higher tariffs, expensive shipping, limited international production networks and no cross-border e-commerce. China industrialized in an era of much deeper global integration, sophisticated supply chains and technology-enabled manufacturing. Comparing export penetration across these two periods fails to take into account the fundamentally different economic structures that have evolved.

The report also gives insufficient weight to the sources of China's competitiveness. It notes that wages in China's garment industry are about five times those in Bangladesh and four times those in India. Yet Chinese manufacturers have retained significant market share through automation, flexible supply chains capable of handling small and rapidly changing orders, dense industrial clusters, efficient logistics and digital platforms such as cross-border e-commerce.

China has helped developing countries address infrastructure bottlenecks through overseas construction and development projects, transferred manufacturing capacity through investment, technology cooperation and training, and built overseas economic and trade cooperation zones that support industrial clusters.

A pattern is emerging in which China supplies intermediate goods, machinery and components, partner economies undertake processing and assembly, and finished products are sold around the world. Rather than eliminating industrialization opportunities, such networks can lower the initial cost of building manufacturing capacity and shorten the time required for developing economies to join global supply chains.

Against this backdrop, attributing the broader industrialization difficulties of developing countries principally to Chinese exports overlooks constraints closer to home, including inadequate infrastructure, electricity shortages, substandard ports, weak business environments and inconsistent economic policies.

It also overlooks barriers imposed by advanced economies themselves. Carbon-related trade measures, stringent rules of origin and other regulatory requirements can raise the cost of entering rich-country markets for low and middle-income economy exporters.

Global monetary tightening can compound those pressures by triggering capital outflows, currency depreciation and heavier debt-service burdens, leaving governments with fewer resources for infrastructure and education.

Competitiveness cannot simply be reclassified as "excess" whenever one producer performs better than its rivals. Nor should productivity gains, supply-chain efficiency and industrial clustering automatically be treated as evidence of unfairness.

Developing countries therefore need more than another economy being told to surrender manufacturing market share. They need better infrastructure, access to technology and finance, functioning supply chains, and a more open and transparent international trading environment.

The debate ultimately comes down to how global development is understood. If manufacturing is a fixed pie, and trade is a zero-sum game, China's gains must indeed be somebody else's losses. But the experience of the past two decades points to a more complex reality: global trade has expanded, developing economies have increased their export share and production has become increasingly organized through, and structured around, cross-border networks.

The challenge is not to decide which country should voluntarily produce less. It is to ensure that more developing economies acquire the infrastructure, skills, investment and market access needed to produce more themselves. On that test, the claim that China must "make room" for the Global South mistakes the nature of both modern manufacturing and economic development.

The writers are assistant research fellows at the Chinese Academy of International Trade and Economic Cooperation.

The views do not necessarily reflect those of China Daily.