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View all search resultsThe mother of all economic shocks is Chinese mercantilism
The latent bias that leads analysts to place the US at the center of the global economy has caused many to overlook just how game-changing Chinese mercantilism has been.
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An employee works on the production line for solar panels at a factory of GCL System Integration Technology in Hefei, Anhui province, China, on May 16, 2024. (Reuters/China Daily)
I
n the long sweep of history, China’s economic performance over the past 50 years will obviously stand out for the sheer scale and pace of quality-of-life improvements within that country. But China’s impact on the rest of the world has still been underappreciated.
True, if the retrospective gaze were confined to global shocks in the post-World War II period, a few defining ones would be the 1970s oil embargos, which led to a large and permanent productivity slowdown in advanced economies; and the 2008 financial crisis, which brought globalization to a screeching halt and called into question the American model of finance-addled capitalism. The United States Federal Reserve’s policies have also had clear global effects. For example, Paul Volcker’s tightening in the early 1980s precipitated a developing-country debt crisis, and the quantitative easing that began under Ben Bernanke ultimately fueled capital flows to emerging markets, thus sustaining high growth in the 2000s.
But Chinese mercantilism has arguably been even more consequential than any of these episodes. If it has not been recognized as such, that is because it has not been a one-off event, but rather a more persistent force that is often conflated with China’s growth performance more broadly. The latent bias that leads analysts to place the US at the center of the global economy has caused many to overlook just how game-changing Chinese mercantilism has been, in terms of both global public goods and global public bads.
On the asset side of the ledger, three entries stand out. The first is Chinese mercantilism’s contribution to the Great Moderation. After the high inflation of the 1970s, global inflation declined and remained low until the COVID-19 pandemic. While sound monetary policymaking and central-bank independence were important factors, it was China’s aggressive mercantilism that consistently supplied the world with low-priced manufactured goods. Low inflation resulted from a combination of substantially rising prices of non-tradable services such as health and education (where productivity growth is more elusive), and falling or stagnant prices of traded goods, courtesy of China.
Without China’s contribution, central bankers’ job in advanced economies would have been far more difficult. While serving as governor of the Bank of England, Mark Carney often spoke about the beneficial impact of “globalization” on the Great Moderation. But “globalization” abstracts from the real source.
The second global public good deriving from Chinese mercantilism concerns climate-change mitigation. The renewables revolution is mostly a solar one, and it has been made possible by the supply of low-cost Chinese solar panels and, increasingly, batteries (which provide power when the sun isn’t shining).
Before the solar revolution, climate policy was stuck in the calculus of trade-offs, sacrificing current consumption via carbon taxes for future gains in reduced emissions. Since the politics of selling that to a present-oriented public proved impossible, serious progress on climate change stalled in rich countries. But now, Chinese mercantilism has rendered emissions reductions compatible with growth and dynamism, making the renewables revolution available to all countries. Future generations may well thank China for staving off, or at least delaying, dire planetary outcomes.
