Why is manufacturing-export-led growth so difficult?

Richard Baldwin, 瑞士洛桑国际管理发展学院 (IMD) - 商学院 14 June 2024, Factful Friday

Introduction.

Global trade is shifting. And this, in turn, is transforming realities for trade and development. Want some evidence? Here are the two most relevant facts from my recent Factful Friday:

1. Manufacturing-export-led growth was common among middle-income countries up to 2008. Since then, it is quite rare.
2. Service-export-led growth, by contrast, was known before 2008, but it has flourished since 2008.

The upshot of the two facts is clear. While manufacturing-export-led growth was a good idea before 2008, it no longer is.

Today’s Factful Friday digs into some of the facts and economic mechanisms behind these changes. I start with charts that document the three facts that were, I believe, decisive in changing the realities of trade and development.

Three decisive facts.

The turnkey facts, in my view are:

• Goods exports and FDI have peaked, while services exports have not.
• Emerging economies share of service exports is low but growing fast.
• Export-led growth has changed.

I showed the third fact in last week’s Factful Friday, so I’ll take the first two one by one.

Goods exports & FDI peaked; services exports did not.

The chart below reveals that since 2008 manufactured exports and Foreign Direct Investment (FDI) have stagnated. Before 2008, manufactured exports grew significantly faster than GDP (not shown), but post-2008 export growth slowed to match that of GDP. This is famously known as slobalization. Manufactured exports grew significantly faster than GDP before 2008, but the two are growing in tandem now.

The difference with service exports is as obvious as a pig in a parlour. ICT-enabled service exports continued to grow as fast as they did in the go-go days of the 1990s and early 2000s. By “ICT-enabled trade” I mean what is technically known as “Other Commercial Services” in the WTO data. It is all commercial services minus transportation and tourism.

This suggests that manufactured exports are no longer the primary drivers of growth.

Shifting the focus from trade to services, the next chart shows how the focus of FDI has shifted to services. This is from a recent report on fragmentation (UNCTAD 2024), showing how service activities have come to dominate global FDI flows. From 2004-2007, about two-thirds of all the activity was going to service sectors, and about a quarter was going to manufacturing. In the most recent data from 2022-2023, over 80% of FDI is promoting service activities, with only 13% for manufacturing. So, in terms of this form of openness and globalization, it is a game of services, not of manufacturing.

Emerging economies’ share of service exports is low but growing fast.

The left chart below shows that ICT-enabled service exports are now dominated by developed countries (as defined by the UN). They accounted for 64% of all these exports in 2021. China and India each had 5%.

The right chart, however, shows that these modern service exports, which is just another name for ICT-enabled exports, have been growing faster in emerging economies at least since 2016. The blue line shows that since 2016, where I put both curves to 100, developed country exports have risen by about 40%, while emerging economies have risen by almost 60%.

The sharp contrast in the relative growth of developed and developing nation service exports can be seen in more detail in the next chart. This focuses on intermediate service exports – that is to say, exports that are sold from businesses to businesses, not to consumers directly.

The chart focuses on two categories of these intermediate services the 1st is information and communication services and the 2nd is other business services which consist of professional technical and administrative services. As the chart shows, the evolution of emerging market exports, shown in orange, have risen 50 to 100% faster than they have from developed nations.

One last chart since I just couldn’t resist sharing. It comes from the recently published (in a journal even!) paper, Baldwin, Freeman and Theodorakopoulos (2024), that makes the argument that the future of trade is services, especially intermediate services.

The chart (left panel) below shows a more detailed breakdown of world ICT-enabled service exports. The right chart shows how the leading emerging economies are all seeing faster service export growth than the world average. It breaks out the emerging economies whose ICT-enabled service exports (or OCS exports as they are poetically known among service trade stat literati) amount to at least ? of one percent of world OCS exports in year 2019. OCS stands for Other Commercial Services (all but transport & tourism).

One surprising point is how fast China’s service exports are growing. In a future Factful Friday I’ll have to dig into how important (in a statistical sense) this is to China’s growth.

Export-led growth changed.

The chart below shows the share of three classes of countries in income groups using the OECD TiVA database: 17 lower-middle-income countries, 16 upper-middle-income countries, and 43 high-income countries. High-income countries dominate the sample because it’s an OECD database.

Focusing on the left chart, we see that from 1995 to 2008, manufacturing export growth was significant for many developing countries. Almost 60% of lower-middle-income countries saw value added in their manufactured exports grow faster than GDP (that’s my definition of export-led growth and I’m sticking with it!). For upper-middle-income countries, it was 80%. But after 2008, the situation changed entirely, with just over 10% of both lower-middle and upper-middle-income countries seeing manufacturing export growth. High-income countries also saw a decline, but today I want to focus on developing countries.

The right chart shows service export growth, which has had an entirely different ride. It is more common after 2008 than it was before 2008.

Why is manufacturing-export-led growth so rare now?

There are really two reasons for this.

Global trade landscape shifts towards a post-industrial future.

First, before 2008, the exports of manufactured goods at the global level grew faster than GDP (see chart below). This meant that before 2008, the average nation was experiencing manufactured-export-led growth – defined as the growth of the domestic value-added embodied in manufactured exports growing faster than GDP.

Since 2008, the global trend has reversed. As the chart shows, world GDP has grown 34 percentage points since 2008. The value-added-content in manufactured exports, however, has grown only 16 percentage point since 2008. In short:

• The global trade landscape changed in a way that hindered the old, tried-and-true path for trade-assisted development.

Others got there first.

The second reason is the much tougher competition post-2008. Manufacturing-export-led growth was a brilliant idea for a half dozen emerging economies. As the chart below shows, six nations, what I call the I6, experienced manufactured export growth that was extraordinarily rapid. How rapid?

• These six emerging economies wrestled 28 percentage points of world manufacturing GDP from the G7 (France, Germany, Italy, Britain, Japan, Canada and the US) in just two decades.

Should we start referring to the I6 as the “industrialized countries” and the G7 as the “deindustrialized countries”? Just a thought...

While one cannot be assured of causality, it is interesting to note that the world share of all the other countries in the world was basically flat when this gargantuan reversal was going on. Regardless of whether the I6’s achievement directly hindered the exports of other emerging economies, it is undeniable that the competitiveness of markets for low-end manufactured goods soared in these years.

The I6 are far from a homogeneous group. As faithful readers of Factful Friday will know, China's influence was overwhelming.

The competition for upstarts goes from mild to wild.

China’s dominant role can be seen in one of my favourite China charts, which was first featured in a VoxEU column I wrote this year (Baldwin 2024). The numbers are astonishing.

• Measured by gross output (not GDP), China’s share of world production rose from 5% in 1995 to 35.4% in 2020. That’s amazing.
• The combined total of the next nine largest manufacturing nations amounted to 34.6% in 2020.
• The G7’s collective share fell by 33.5 percentage points.
• The combined share of India and Korea rose by 2 percentage points.

• If we throw India and Korea into the emerging economy pot along with China, the figures tell us that the world of manufacturing saw 37 percentage points shift from the G7 to emerging economies.

So, yes, manufacturing-export-led growth did work for emerging economies back in the day. However, a close examination of the right chart shows that the “shocking share shift” from G7 to emerging economies slowed substantially around 2015.

Can it still work now?

China has wages that are low compared to G7 nations and technology that is far above that of most developing countries. Moreover, China enjoys massive scale economies and has an industrial base that is wide and deep. Just witness how fast China went from zero to hero in Electric Vehicles.

The upshot of this is that competition for newcomers has become dramatically stiffer since 2008. Manufacturing-export-led growth went from a stroll in the park to a marathon in quicksand.

I’m not blaming China, and indeed, the charts don’t establish causality. But it is not too hard to imagine that breaking into manufactured exports was a whole lot easier for low-wage nations when China had only 5% of world production. And of course, there are exceptions.

China is offshoring production to other emerging economies as its wages rise – especially labour-intensive products like apparel, as the chart below shows. From 2005, which was the year that China started turning inward and thus stopped following the export-led growth model, the share of textiles in the country’s export bundle fell from 36% to 14%. The importance of food also fell. Note that China’s export share drop in textiles was almost perfectly matched by a share-rise in electronics.

Summary and concluding remarks.

The key facts relevant to the question in this essay’s title are twofold:

• Manufacturing-export-led growth was a going concern before 2008, but now the business model is almost bankrupt.
• The business was so good for emerging economies that now over 35% of all world manufacturing takes place in the top three emerging economy manufacturers (China, India and Korea).

That reality, which I believe but have not proved, makes it hard for other emerging economies to follow the same path. There are exceptions, of course. Vietnam, for example, seems to be making a good job of manufacturing-export-led growth, but precious few others are.

The other interesting fact illustrates wrong answers to the question in the title.

• Emerging economies’ share of service exports is low but growing fast.

This tells us that the answer to the title is not that we are facing a case of “export pessimism”. It is not a case of deglobalisation or slobalisation fettering trade and development. Almost 90% of middle-income developing nations enjoyed export-led growth after 2008 – but it was services doing the leading, not manufacturing.

Why are trade and development intertwined?

Since you’ve slogged through all these pages of facts and fancies, I thought I’d tax you with another bit of rumination.

For many, if not most development economists and policymakers, industrialisation and development are two words that mean the same thing. But that is going to have to change. What won’t change, however, is the connection between trade and development.

Leave aside a few behemoths, most developing country have domestic markets that are too small to support a self-sustained rapid growth phase. This is obvious for manufacturing. Imports are essential to get access to world-class parts and components, and exports are essential to attain minimum efficient scale.

But I would argue that it is also true for service-led development. Bear with me for a moment.

Think about city-states like Luxembourg. Their growth is based on services, not manufacturing, but the whole construct would collapse if they shut its borders to imported goods. And if we admit that, we also have to admit that such countries have to export something to pay for the imports. Another way to think about it is to look at the ‘trade account’ of cities inside nations. Cities run massive trade deficits in goods but pay for it with service exports.

This needs some more thought, and indeed the world needs some new trade and development models that explain how a booming Bangalore could boost India-wide growth.

References.

Baldwin, R (2011). “Trade and Industrialization after Globalization’s Second Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters,” NBER WP 17716 (Dec 2011). Eventually published in Robert Feenstra and Alan Taylor (Eds.), Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, Chapter 5, pp. 165–212. University of Chicago Press, 2014.

Baldwin, R (2016),?The Great Convergence: Information technology and the new globalisation, Harvard University Press (Chapter 3).

Baldwin, R (2019),?The Globotics Upheaval: Globalization, robotics, and the future of work, Oxford University Press.

Baldwin, R (2023). Where in the world are manufacturing jobs going? Factful Friday, 22 December 2023, Linkedin, https://www.dhirubhai.net/pulse/where-world-manufacturing-jobs-going-richard-baldwin-x1zbe/

Baldwin, R, and R Forslid (2020). Globotics and Development: When Manufacturing is Jobless and Services are Tradable, NBER WP 26731. ?https://www.nber.org/papers/w26731

Baldwin, R. (2024, January 17). China is the world’s sole manufacturing superpower: A line sketch of the rise. VoxEU.org. https://cepr.org/voxeu/columns/china-worlds-sole-manufacturing-superpower-line-sketch-rise

Baldwin, R. (2024, June 7). Is export-led development even possible anymore? [LinkedIn post]. LinkedIn. https://www.dhirubhai.net/pulse/export-led-development-even-possible-anymore-richard-baldwin-nusge/?trackingId=I%2FjRQMyLSQaBF1uaic29SQ%3D%3D

Baldwin, R., Freeman, R., & Theodorakopoulos, A. (2024). Deconstructing deglobalization: The future of trade is in intermediate services. Asian Economic Policy Review, 19(1), 18-37. https://doi.org/10.1111/aepr.12440

Rostow, W. W. (1960). The stages of economic growth: A non-communist manifesto. Cambridge University Press.

Rugman, A. M. (1981). Intra-industry trade and the multinational enterprise. Oxford University Press.

UNCTAD. (2024). Global economic fracturing and shifting investment patterns: A diagnostic of 10 FDI trends and their development implications. UNCTAD. https://unctad.org/publication/global-economic-fracturing-and-shifting-investment-patterns