The impact of globalization has been a double-edged sword, lifting millions out of poverty while sparking deep concerns about wages and job security. This article delves into the complex relationship between global trade, inequality, and the political fallout.
The China Shock and Beyond: Unraveling the Global Relocation of Production
Over the past three decades, advanced economies have witnessed a stark contrast: while consumer goods became more affordable, they also experienced factory closures and wage pressures. This has fueled political movements advocating protectionism. Economists' views on this matter have evolved, with a growing recognition that trade plays a significant role in rising inequality.
The China Shock, a surge of Chinese exports post-1990s, has been a focal point, revealing persistent job losses and wage declines in advanced economies. However, this is just one aspect of a broader phenomenon: the expansion of exports from various developing economies.
Our recent research extends this analysis, examining the international relocation of production and exports (IRP) across multiple countries. Using extensive trade data, we investigate whether this global expansion has contributed to inequality within nations.
Exposure to IRP and its Impact on Inequality
To assess the distributional consequences, we've developed an index measuring a country's exposure to IRP. This index indicates whether a country's initial exports have shifted, on average, to richer or poorer economies. Our empirical approach builds on Autor et al.'s (2013) framework, adapting it to a multi-origin, multi-destination context.
We find that increased exposure to IRP from poorer economies (IRP to the South) leads to a significant rise in within-country inequality. This trend is particularly evident in economies initially specialized in products that later relocated to poorer countries.
Quantifying the Impact of IRP on Inequality
The magnitude of this effect is substantial. For major economies like the US, China, and Japan, exposure to IRP to the South accounts for 20-40% of the observed rise in inequality over the 1996-2017 period. For other economies with notable inequality increases, such as Germany and South Korea, IRP to the South explains a smaller but still significant portion (around 10-20%).
Who Gains and Who Loses?
Our analysis goes beyond a single inequality index, delving into how relocation shocks affect different income groups. We find that the income shares of the lower-middle and middle classes tend to decline with exposure to IRP to the South. Conversely, the top decile's income share increases. This suggests a redistribution of income from the broad middle class to the top.
Policy Implications
The negative shocks from IRP are not evenly distributed, and new opportunities may not automatically offset these impacts. The inequality costs associated with IRP have fueled political backlash and protectionist pressures. Targeted interventions, rather than blanket protectionism, are necessary to address these distributive pressures. Active labor market policies, place-based industrial investments, and redistributive tools are essential to support those bearing the adjustment costs of globalization.
This article highlights the complex interplay between trade, inequality, and political responses. As globalization continues to shape our world, understanding these dynamics is crucial for informed policy decisions.
