The China Squeeze: A response to our critics

Our recent PIIE working paper and the subsequent Foreign Affairs article detailed how China's manufacturing export strength is curbing poorer countries' opportunities to industrialize—what we call the China Squeeze. Our work has attracted considerable responses, including from the Chinese Foreign Ministry. In particular, Adam Tooze in his widely read Substack (Chartbook) has engaged seriously and thoughtfully with the China Squeeze as well as with the book on India (A Sixth of Humanity: Independent India's Development Odyssey), co-written by one of us. Behind his responses and those of others lie five incorrect propositions, namely:

1. The China Squeeze is primarily an Indian concern.
2. China Shocks 1.0 and 2.0 are real but not the China Squeeze.
3. The inability of low- and middle-income countries to industrialize has little to do with the China Squeeze and everything to do with their domestic failures.
4. China's continuing dominance of low-skill-intensive products is the result of technological factors and is not unusual because every development path is unique.
5. Rich countries did not "cede" space in low-skill sectors out of benevolence and there is no reason to expect China to do so.

Consider each in turn.

1. An Indian concern

By invoking the arguments made in the book A Sixth of Humanity, and the Indian failure to develop low-skill manufacturing, Tooze insinuates that the China Squeeze is an Indian pre-occupation: I am concentrating on India because it is the great counterpart to China and the unspoken reference point of the "China Squeeze" discourse.

Our China Squeeze articles focus on low- and middle-income countries (LMICs) (without any reference to India) and make very clear that the China Squeeze afflicts many countries and not just India. That Chinese competition threatens industrialization is best answered by developing countries themselves. Several countries have faced the heat. Policymakers in the Association of Southeast Asian Nations (ASEAN), for example, have long discussed how to deal with the Chinese export juggernaut (see this extensive reporting by the Financial Times). Student riots in Indonesia have been attributed to shrinking industrialization there caused by Chinese competition. The Financial Times reported that around 60 textile factories in Indonesia closed between 2022 and 2025.

It is not just in the reporting that we see the China Squeeze but in the data. The figure below shows that LMICs' anti-dumping actions against Chinese companies have risen from negligible amounts to 52 by 2025. This rise broadly corresponds to the rise in China's global export market share (figure 2 of our PIIE working paper), which peaked in the mid-2010s. The average number of measures increased from about 13 between 2000 and 2014 compared with 33 between 2021 and 2025. (The number of anti-dumping investigations increased three-fold from about 15 to 54 over the same periods.)

India has the highest number of such measures imposed against China, but Brazil, Turkey, Vietnam, South Africa, Indonesia, Pakistan, Peru, Argentina, Malaysia, and Thailand have been consistent users. In some ways, these actions are the real reflection of LMIC concern about Chinese competition.

2. China can Shock the West but not the Rest

Tooze distinguishes China Shocks 1.0 and 2.0 from the China Squeeze because the former are "real" and the latter is "counterfactual." This distinction and use of the phrase "counterfactual" is odd, even off, because conceptually, all three scenarios are counterfactuals, i.e. – "what would happen if …".

More fundamentally, the distinction suggests that Chinese export manufacturing capability can adversely impact Western manufacturing but not that of LMICs. In other words, Chinese competition is only a reality for the rich West but not the poor Rest, as if even the "privilege" of victimhood is the preserve of the former.

Complementing our mechanism is that of Atkin, Costinot, and Fukui,[1] who show that the rise of China has stalled development of African economies by holding back their growth capability. Moreover, the data reported above on actions taken by LMICs against imports from China only corroborates this.

If competition from China in their own markets is real, competition in third markets (the China Squeeze) is no less so. The difference is that in their own markets, they can take action, which is visible; in third markets, they have no instruments to respond. Because we don't see these instruments in third markets, we may be tempted to infer that Chinese competition does not exist.

3. Domestic failures not China Squeeze

As Tooze puts it: "Can anyone with a straight face suggest that the main problems afflicting the development of South Africa or Nigeria, the great centers of mass underemployment in sub-Saharan Africa, are cheap competition from China driven by Beijing's industrial policy or an undervalued RMB [Chinese currency]?" And, "As countless cases attest, low-wage low-income developed [sic] economies are not by themselves the makings of a competitive production base."

This veers towards a simplistic, even crude, binary.[2]

Two things can be true at the same time. India and other LMICs could export more and compete more successfully relative to China in lower-skilled exports if their domestic capability (human capital, institutions, and policies) were better. AND that holding domestic capability constant, they could export more if China were less competitive or Chinese policies "less assertive."

Even the book A Sixth of Humanity does not create the binary which Tooze attributes to it. That the Chinese export and growth miracle had nothing to do with open rich country markets and everything to do with China's actions is Tooze's misunderstanding of the book's thesis. As he puts it: "…don't look to slots opening up in the division of labour thanks to the liberal mindedness of advanced economies, look to the contrasting political economy of the Maoist PRC [People's Republic of China] and India's post-independence political economy."

Furthermore, even Chinese scholars and policymakers have acknowledged that open markets in the West and China's accession to the World Trade Organization (WTO), which created global opportunities, were critical to China's economic success. That economic convergence in general and China's and India's growth take-off in particular coincided with the era of hyperglobalization is the thrust of the article in Foreign Affairs by Dev Patel, Justin Sandefur, and one of us.

4. China's dominance not unusual

Stripped of the rhetoric, Tooze's core substantive argument seems to be that there is nothing unusual about a country as rich as China continuing to dominate low-skill industries. He says, "It may be true that Europe and the US exited relatively early from low-skill work. But clearly technology has changed. ….. What is overwhelmingly dominant in explaining the persistence of "low-skill" manufacturing in China are surely the network effects of complex supply chains. Indeed the label of "low-skill" may miss the point."

Ours is not the only work documenting the unusual nature of China's trade. Yasheng Huang's Substack poses the question exactly as we do: "The puzzle is not why China exports cars but why it is still exporting t-shirts." Our benchmarks are China's share of global exports relative to its share of the world's unskilled labor force and China's global export share relative to the export shares of today's rich countries at comparable points in their development trajectories. Huang's benchmark is the ratio of exports to imports of these products over time. To be sure, from a methodological standpoint, each benchmark rests on a different set of assumptions and is therefore not definitive. What makes the argument serious, even compelling, is that all of them point in the same direction, all showing that the departure from the relevant benchmark is so quantitatively large as to warrant the "unusual" tag. This has direct implications for LMICs hoping to develop their manufacturing sectors.

It is also important to clarify that we neither suggest that every country's export share should be proportional to its labor force share, nor does our core argument require this. Our first benchmark is based on a symmetric-country assumption: If countries had similar fundamentals—that is, similar preferences and technologies—then a country's share of world exports should be broadly commensurate with its share of the world's low-skilled labor endowment. Cross-country differences in any given year can, of course, arise from differences in these fundamentals. They are not the core of our argument.

The real puzzle is the evolution of the export market share over time. Around 1995, China's share of global exports was similar to its share of the world's low-skilled labor force. Since then, China has lost labor force share while continuing to gain global export market share, and the resulting gap is now quantitatively very large. This is also consistent with Huang's central argument: China's ratio of exports to imports of unskilled goods has risen over time, whereas Ricardian theory would predict that it should decline with development and rising wages.

China's unusual trade performance over time may reflect some combination of two sets of factors: (a) an increase in Chinese productivity relative to other countries, arising from technology, scale, logistics, supply chains, and organization; and (b) policy-induced distortions, including wage suppression and an undervalued exchange rate, for which the International Monetary Fund (IMF) and Brad Setser have provided considerable evidence.

Tooze embraces a specific subset of the first explanation: the network effects arising from complex supply chains. But his claim that these forces are "overwhelmingly dominant" and matter far more than distortions in explaining China's dominance of low-skill sectors, is bold and unsupported by the evidence. We would be the first to admit that neither we nor others have established the relative contributions of these factors. But to claim that the explanation is entirely superior Chinese efficiency falls into the same binary trap. More likely, all of these forces are at play. Their effects cannot be dismissed merely by relabeling dominance as efficiency.

There are two further points. First, while Tooze's emphasis on supply chains, agglomeration, logistics, and technology is plausible, it explains the persistence of China's advantage; it does not establish the absence of adverse effects on latecomers. Indeed, network effects may be one of the mechanisms through which the squeeze operates. Second, control over supply chains, logistics, and intermediate inputs may itself be distortionary if it gives China market power. When capabilities accumulate through production, an incumbent's dense supplier ecosystem can simultaneously raise global efficiency today and make it harder for potential competitors to acquire the capabilities needed tomorrow. This mechanism is central to many antitrust cases against large technology companies in the United States.

There is also more than one piece of evidence pointing to the operation of the second set of factors. Mattoo, Mishra, and Subramanian (2017) document that renminbi appreciation has a significant positive effect on LMIC exports to third markets—the precise mechanism underlying a China Squeeze. Moreover, China's export share has fallen and risen since the mid-2010s (figure 13 of our working paper), roughly in line with movements in the renminbi. Such variation over relatively short horizons is less likely to be explained by slower-moving factors such as wage compression and superior efficiency.

And, of course, there is the obvious question: If the renminbi is as undervalued, China's external surplus as large and as concentrated in low-skill manufacturing, and German manufacturing as threatened as Brad Setser has argued, why would these forces not also affect the export performance of competing LMICs?

5. Obligation to "cede" export space

In our work, we used the phrase "ceding" export space that could be interpreted as normative prescription. Many critics argued that today's rich economies did not "cede" space out of some sense of benevolence towards poorer countries. It followed that there should be no obligation for China to do so. We agree with both propositions. However, to the extent that export space occupation happens for reasons of policy interventions by China, that would merit normative conclusions.

A final thought. It is undeniable that an unseemly China-bashing pervades Western discourse. However, the reflex reaction to that must not be China-boosterism or China-apologism. Chinese mercantilism has delivered many global benefits (the Great Moderation, greening the world economy, etc.), as one of us wrote recently.

But there should be scope for discussing its potential harms without being written off as "tendentious" and "one-sided." If Western imperialism, specifically British mercantilism, caused harm and de-industrialization in the colonies, balance demands that Chinese mercantilism be subject to similar scrutiny. China cannot be exempt from historical analysis or indeed placed outside of and beyond history just because we find some current Western attitudes to China disagreeable.

Notes

1. "Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom?" Review of Economic Studies, Volume 93, Issue 3, May 2026, pages 1455-1493.  

2 . See Pseudoerasmus in his Substack piece.