Over the past decade and a half, financial, health, and geopolitical shocks have pummelled world trade. The 2008 global financial crisis devastated the banks that financed much of the world’s commerce, and then triggered a secular decline in economic growth. In 2020, the Covid-19 pandemic closed factories and upended 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 might even lead to the death of globalisation. But the reality is likely to be more complex: The disruptions will probably transform the global trading system rather than shrink it, with the impact varying across countries. Significantly, China will probably lose, while India might even gain.
Starting in the early 1990s, developing countries advanced as a group for almost two decades, rapidly catching up to rich countries’ standards of living. This convergence was facilitated by hyper-globalisation, whereby trade liberalisation and large declines in transport and communication costs swiftly increased opportunities for the developing world. China and India benefited enormously, leading to the largest reductions in poverty the world has ever seen.
This golden age ended with the 2008 global financial crisis. 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 almost zero. But other countries such as India have continued to grow (apart from in pandemic-hit 2020), albeit less rapidly on average than before. Why the difference?
The global shocks have proved particularly damaging for China because they have come on top of an ongoing, secular loss of competitiveness, as labour migration from farms to factories has started to reach its limits, causing wages to rise. Johns Hopkins University’s Shoumitro Chatterjee and one of us (Subramanian) estimated that declining competitiveness has caused China to lose out on about $150 billion worth of exports.
Moreover, the shocks themselves have had an asymmetric impact. After 2008, trade in goods stopped growing as a share of global GDP, while trade in services continued to rise. This affected China more severely, because it is a manufacturing powerhouse, whereas India is a competitive services trader. As a result, China’s exports-to-GDP ratio decreased from its pre-2008 peak of 36 per cent to 18.5 per cent while India’s declined by much less, from 25 per cent to about 19 per cent.
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 needs to navigate the difficult transition from middle-income to upper-income status. When South Korea attained China’s current level of development (a GDP per capita of roughly $15,000 in purchasing-power-parity terms), its further transition required exports to surge by another 25 percentage points of GDP.
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The prospect of China being able to replicate this seems remote, in large part because the world’s political willingness to absorb Chinese exports has reached its limits. The Covid-19 shock has forced a reassessment of globalisation, with countries seeking to reduce their reliance on imports of critical goods such as pharmaceuticals.
Moreover, 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 reordering comes on top of a longer-standing superpower rivalry between the US and China. The severe Western sanctions against Russia and the resulting weaponisation of interdependence have further sharpened the geopolitical divide.
Meanwhile, China’s growth model is under huge stress. The real estate and construction boom that powered the economy’s rapid expansion for decades has come to an end, leaving many leading developers close to bankruptcy. Demographic trends are far more adverse than the country’s official population statistics indicate. And President Xi Jinping’s embrace of state intervention is undermining entrepreneurship and economic dynamism — the domestic wellsprings of growth.
This will leave China more dependent on exports, just at a time when global demand is dimming. Consequently, the Chinese growth model may be in even more serious trouble than many believe.
But as China’s prospects darken, those of other countries are brightening. For example, countries such as 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 vacated.
At the same time, the global shocks have increased opportunities for services exporters. The Covid-19 pandemic has encouraged services firms to allow their staff to work from home. But if workers for a Boston-based firm can log in from Boise, then why not from Bengaluru? Indeed, services trade has boomed over the past few years, benefiting India.
Similarly, “friend-shoring” of production will boost countries perceived to be friendly to the West. A growing number of firms have exited Russia, and foreign capital is fleeing China, aggravated by Mr Xi’s domestic policies. At the same time, integration efforts among the US-led alliance are increasing, with India having resumed negotiations on free-trade agreements with the European Union and the United Kingdom.
But to gain from the globalisation shocks that have differentially favoured services and open, pluralistic democracies, India will need to change its policy direction. It will need to reverse its recent inward turn and become more open economically. At the same time, it needs to improve what we call the “software of economic and political policymaking,” ensuring the rule of law, even-handed treatment of all investors, robust domestic institutions, and social stability, all of which are critical for creating a favourable environment for sustained economic growth.
In sum, the three shocks to globalisation have squeezed opportunities for China while enlarging them for India. Of course, China can overcome its challenges, just as India can seize the initiative. But in each case, success will require a reassessment of current domestic policies and governance.
Subramanian is a senior fellow at Brown University and a distinguished non-resident fellow at the Center for Global Development. Felman is director of JH Consulting. ©Project Syndicate, 2022