The Chinese Export Boom: Industrial Policy and Good Luck

In the three decades since economic reforms were enacted in the late 1970s, the Chinese economy has doubled in size roughly every 7 years.  Although growth has been steady, the composition of growth has changed markedly.  Over the past decade, Chinese growth has become increasingly reliant on trade as illustrated by the current account surplus rising from less than 2 percent of GDP to more than 10 percent at its peak.  What can account for this explosion in exports?

 Our paper uses finely detailed Chinese export and import data (8-digit HS codes of exports to the world and to the United States) combined with U.S. trade data to explore this question.  Although exchange rate policy clearly boosted the trade surplus, and the structure of the economy, e.g. abundant cheap labor, encouraged investment, these alone can not account for the changing composition and acceleration of exports between 2000 and 2010.  We find that the growth in exports is most likely a product of effective Chinese industrial policy. 

 Growth in Chinese exports between 2002 and 2007 was dominated by industries where capital and/or electricity are important inputs.  As is well known, the iron & steel and aluminum industries have both benefited from capital and energy subsidies.  Less recognized is that these subsidies contributed to China becoming a dominant exporter of certain classes of “new” technology goods.  This trend is obscured in the readily available 2-digit Chinese trade data and can only be seen in the more detailed data, as most of these new goods fall in the broad machinery and equipment categories.  [Almost a quarter] of non-metals export growth is accounted for by the increase in just three products: cell phones, LCD screens, and laptops.  In addition, the destinations of the exports of these new goods were broad-based and not limited to the United States.

 Finally, we use the data to show that the growth in exports did not directly compete with existing U.S. manufacturing jobs.  Therefore, the tremendous decline in the U.S. manufacturing workforce following the 2000 recession is not directly attributable to the increase of Chinese exports.  However, the sharp rise in imports from China may have put downward pressure on new manufacturing growth in the United States.  The growth of China may therefore have had an indirect impact on U.S. employment.