The impact of globalization has been a double-edged sword, lifting millions out of poverty while sparking fears about wages and job security. As advanced economies faced factory closures and wage pressures, political movements demanding protection from foreign competition gained traction. This phenomenon, evident across democracies, has led to a rise in skepticism towards openness and multilateralism.
Economists' perspectives on this issue have evolved. Twenty years ago, trade's role in inequality was downplayed, but now, research highlights the 'China Shock' as a significant factor. Studies show that China's export surge post-1990s caused job losses, lower wages, and slower recovery in manufacturing sectors across various countries. This effect is not limited to advanced economies; developing nations also face wage declines due to intensified international competition.
The China Shock is part of a broader trend: the sustained expansion of exports from developing economies. In a recent study, researchers analyzed this global export expansion and its impact on inequality. Using extensive trade data covering 5,000 products and 168 countries from 1996 to 2017, they investigated whether this expansion increased within-country inequality.
The study constructed an index to measure exposure to international relocation of production (IRP). This index tracks whether a country's initial exports were subsequently taken over by richer or poorer economies. The results indicate that exposure to IRP from poorer economies ('IRP to the South') leads to significant increases in inequality. Economies specialized in products that relocated to poorer nations experienced rising inequality.
The impact of IRP is substantial. For countries with GDP above $400 billion, IRP exposure to the South accounts for 20-40% of inequality rise. For major economies like the US, China, and Japan, this exposure explains a significant portion of their inequality growth. Other economies, like Germany and South Korea, also saw notable increases in inequality, with IRP to the South contributing 10-20% to this rise.
IRP is a key driver of inequality, but it's not the sole factor. Technology, domestic institutions, and structural changes also play a role. The study goes beyond Gini coefficients and analyzes how IRP affects different income groups. It finds that IRP to the South leads to income redistribution from the broad middle class to the top decile. This aligns with Milanovic's 'second Kuznets wave' theory, where the national middle class is squeezed while top income shares rise.
The negative impacts of IRP are not evenly distributed, affecting specific regions, sectors, and workers. These shocks are not automatically offset by new opportunities. The inequality costs associated with IRP have fueled political backlash and protectionist pressures. A blanket protectionist approach is not the solution; targeted interventions are needed. Active labor market policies, place-based industrial investments, and redistributive tools are essential to counteract the concentration of adjustment costs. While these interventions may have distortionary effects, they are necessary to ensure the political sustainability of globalization and to support those bearing its costs.
