By Dani Rodrik
As China continues to capture global markets in manufacturing and its trade surpluses grow, it is increasingly viewed elsewhere as a country whose economic growth comes at the expense of the rest of the world. China’s industrial policies and growth model at large, the critics complain, are beggar-thy-neighbour. The term “beggar-thy-neighbour” has an interesting history. It refers to an old children’s card game in Britain, as depicted in Charles Dickens’s 1861 novel Great Expectations, where the objective is to win all the cards in the deck. It made its first appearance in economics in Adam Smith’s portrayal of mercantilist thought in Wealth of Nations. Mercantilists mistakenly taught nations, wrote Smith, “that their interest consisted in beggaring all their neighbours.” But it was Joan Robinson, the Cambridge economist and contemporary of John Maynard Keynes, who popularised the term in an essay written in the 1930s.
Robinson wrote at a time of generalised unemployment caused by a collapse of aggregate demand—what we would subsequently call Keynesian unemployment. Many governments deployed mercantilist policies, such as import tariffs or currency depreciations, that they hoped would improve the home country’s trade balance. The goal was to increase domestic employment by diverting demand from foreign goods and services to domestic ones. As Robinson pointed out, these policies were zero-sum from a global perspective. A country could increase its trade surplus or reduce its trade deficit only if other countries’ trade balances were changed by the same amount in aggregate. Mercantilism could help employment in one country only at the expense of greater unemployment in others. Robinson called these policies “beggar-my-neighbour.” The term eventually transmuted into “beggar-thy-neighbour,” which came into use in the late 1960s and eventually supplanted the original version.
Superficially, Robinson’s description would seem to apply to China’s policies, since its export surplus requires other countries to run trade deficits. The big difference, however, is that we are no longer in a world of deficient aggregate demand. Unemployment rates are 4.2% and 6.3% in the United States and Germany, respectively, compared to 25% and 30% at the height of the Great Depression. Boosting aggregate demand and employment is not a policy priority in any of the world’s major economies. When economies run near full capacity, it is not clear that trade deficits should be a cause for concern. After all, they represent a transfer of purchasing power from surplus countries (China), which can lead to higher consumption or, more desirably, investment. By this logic, China’s surpluses might as well be called enrich-thy-neighbour.
What, then, would make China’s surpluses a problem? First, macroeconomic imbalances can create financial instability and increase the risk of a crisis. Second, insofar as they produce “excess capacity” and “over-production” in many manufactured sectors, China’s surpluses may promote industrial decline in deficit countries. And third, they can aggravate distributional and social problems in deficit countries. These concerns are often justified, but they do not imply that China’s economic gains come at other countries’ expense. For the most part, they call for appropriate responses from the affected countries, rather than for major adjustments in China.
Governments concerned with the macroeconomic and financial consequences of large deficits have a large menu of policy options. They can rein in their fiscal deficits, tighten prudential regulations, tax capital inflows, and depreciate their currencies. When deficit countries complain that their policy choices are restricted, it is often because they are trying to eat their cake and have it, too. The US government, for example, refuses to do anything that would reduce the attractiveness of US assets. So, it reaps benefits as the world’s financial centre, while griping about the trade deficits that are at least partly the result.
Deficit countries also have options when it comes to manufacturing, but they must be clear about their objectives. Complaints about excess capacity are often misplaced. The consumer benefits of cheap Chinese goods are real regardless of whether they are the result of genuine productivity or government subsidies, and in this case, it is mostly the former. There is no evidence that China intends to exercise (or ever has exercised) monopoly power in the manufacturing sectors of concern, so predatory pricing is not an issue either. Job losses in affected industries can be socially costly, but governments should recognise that, with or without Chinese competition, manufacturing is no longer an employment-creating sector.
The adverse impact on import-competing firms is also real. But policymakers in advanced economies should be concerned about Chinese competition in manufacturing only to the extent that their own manufacturing firms generate technological and learning spillovers for other firms and sectors in the economy. This may be true in some segments, but certainly not across the board. Where the argument carries weight, it calls for selective domestic policies that target market failures and externalities in those segments directly. In other words, countries worried about China’s impact on their manufacturing sectors should deploy their own versions of China’s industrial policies.
In all the discussion on beggar-thy-neighbour policies, we should not forget renewables, where China’s industrial policies have generated enormous enrich-the-world effects. China’s subsidies, public venture funds, and other policies to promote investments in solar, wind, electric vehicles, and batteries have produced a veritable revolution in renewable energy. The dramatic reduction in the costs of alternative sources of power is the best news the world has had in the fight against climate change. In pursuing its own technological and commercial advantage, China has also delivered a major global public good.
China’s critics might have a stronger point when they argue that China’s overall macroeconomic posture is harmful to China’s own economy—that it is beggaring itself. The country’s unbalanced strategy, with its heavy emphasis on exports of manufactures and repression of consumption, has delivered high rates of economic growth, but may well be due for a redesign. Still, outsiders should be wary of second-guessing policymaking in a country that, for the last 50 years, has delivered the most impressive economic performance in history.
The writer is Professor of International Political Economy at Harvard Kennedy School.