China’s Existential Threat to Emerging Market Economies

The model of development followed by most developing countries has been to gradually move up the value chain of manufactured goods while at the same time establishing control of the production of the basic inputs of industrialization which are steel, cement, ammonia, and plastics.

This model of development worked well for many of the current middle income emerging market countries. Brazil and Mexico, for example, developed its steel, cement, ammonia and petrochemical industries in the 1950s and 1960s while it concurrently dominated the process of mass production of motor vehicles, capital goods and many other basic consumer goods. Those years were the golden years for these countries and were broadly perceived as economic “miracles.” Most middle-income Asian countries (Thailand, Malaysia, Indonesia) repeated this process in the 1960s, 1970s and 1980s with similar success, now followed by Vietnam.

This process of basic industrialization was achieved with foreign investment and the transfer of mature technologies from the U.S. and other developed countries. The technologies were easy to transplant to developing countries and had the advantage of being scalable to different markets and often  large generators of low-skill “quality” jobs. Generations of Brazilians were integrated into the modern economy and learned the skills of industrialization and the routines of modern enterprises by working in manufacturing, and they entered into the middle class and became consumers (e.g., Brazil’s current president, Lula, worked in an auto plant in Sao Paulo in the 1960s as a metalworker before becoming a union leader).

Two things happened to dramatically undermine this trend. First, the neoliberal revolution of the 1980s spawned the “Washington Consensus” for free trade and capital movements and the great wave of hyper-globalization of the past decades. Second, in the 1980s,  China entered the phase of rapid development, following the path set by Brazil and others: exploiting foreign investment and technology transfer to dominate the production of the basic inputs of industry (steel, cement, ammonia and plastics) and the mass production of consumer and capital goods.

While the mass production technological cycle (“Fordism”) was exhausting itself in both the industrialized world and middle-income emerging markets, giving way to the Information and Communication Technology revolution (ICT), China gave it new life. With abundant cheap labor and clever incentives, China became the dominant global producer of most basic industrial goods,  replacing production capacity in both developed and developing markets. In a neoliberal era of free markets, multinationals gladly offshored the mature mass production function to China, to gain access to cheap labor, subsidies and lax environmental rules. The combination of a large and growing domestic market and access to international markets gave China a scale advantage which previous fast-growing developing countries had never enjoyed during this period of learning to dominate the mass production process.

The degree to which China has taken over the mass production paradigm is shown in the following charts: 1. Global Primary Energy Consumption; 2. Global steel production; 3. Global cement production; 4. Global ammonia production; 5. Global plastics production. The growth of output that China has experienced in all of these areas is astonishing in a historical context. China consumed one third the primary energy consumed by the U.S. in 1980 and 1.7 times as much in 2021; it produced about the same amount of steel as the U.S. in 2000 and now produces 10 times more; China’s cement output in 2020 was 27 times the U.S.’s peak production year; China produced 2.5 times more ammonia than the U.S. did in 2021; and China now produces 1.5 times the plastics made by the U.S.

 

As China moves up the manufacturing value chains, it now seeks to dominate global markets for consumer durables, such as computers, televisions and cars. The charts below show the astronomical growth of China’s car production and its recent progress in tapping export markets. China’s growth in auto production over the past decade is greater than the entire growth of the industry on a global basis. And now, China’s auto firms, as the economist Brad Setser recently noted, are ramping up exports. In a few years’ time, Chinese passenger car exports have grown to surpass those of the U.S. and Korea and match those of Germany. Most of these highly subsidized exports are finding their way to developing countries.

The extension of the mass production technology cycle was an unequivocal boon for China but a mixed blessing for developed countries and the middle-income emerging markets. In exchange for cheap consumer goods and high corporate profits, manufacturing sectors were decimated, jobs were lost and income inequality and political rage increased. Moreover, while the mass production cycle was extended, with dire consequences for CO2 emissions, the potential benefits of the ICT revolution were delayed. Instead of focusing on making industry more productive and greener, Silicon Valley has channeled most of ICT investments into social networking, search, delivery and gaming applications.

For developing markets, China’s rise is an existential threat. Unless they can defend themselves with tariffs, they are condemned to handing over their consumer demand for manufactured goods to China in exchange for commodities.

6 thoughts on “China’s Existential Threat to Emerging Market Economies”

  1. Excellent points. Contrary to conventional wisdom, the emergence of China might represent an enormous threat to other emerging markets as they become providers of basic products. Brazil seems to be a poster-child of this effect.

    1. Brazil is very vulnerable as it has already deindustrialized and is more than ever dependent on commodities. With the increase in oil production over the past decade, the BRL needs to be much lower and tariffs much higher for Brazil to have any competitiveness in manufacturing.

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