The China Manufacturing Squeeze: Can Developing Economies Still Climb the Industrial Ladder?

China’s manufacturing dominance is driven not only by subsidies but also by market scale, automation and competitive supply chains, creating both risks and opportunities for developing economies. Governments should prioritize skills, technology, logistics, trade openness and domestic reforms, while development partners and businesses use Chinese-linked supply chains to support jobs, investment and higher-value manufacturing.

China's growing dominance of global manufacturing is creating a difficult development challenge for emerging economies, but blaming Beijing's subsidies alone risks missing a more important lesson. A World Bank Policy Research Working Paper by Alessandro Barattieri and Aaditya Mattoo argues that China's strength also comes from its huge domestic market, intense competition, diverse provincial economies and rapid automation. For governments, development partners, and businesses, the implication is clear: successful competition will increasingly depend on domestic reforms, skills, technology, efficient services, and integration into global supply chains.

Beyond Subsidies: The Real Engines of China's Manufacturing Power

China has expanded its global presence across low-, middle-, and high-skill manufacturing, from apparel and consumer products to solar panels, electric vehicles, and industrial equipment.

Government support has played a role. Research examined in the paper estimates Chinese state support to listed firms at about 4.4% of GDP, comprising roughly 2% in direct subsidies, 1.5% in tax incentives and 0.9% in interest and land subsidies. In shipbuilding, China's global market share increased from below 10% to almost 50% between 1998 and 2014.

But industrial policy has costs. One estimate suggests it reduced China's aggregate total factor productivity by around 1.2%. Foreign antidumping and countervailing measures can also wipe out approximately 22% of the revenue growth that subsidies would otherwise generate.

China's enormous domestic market provides a deeper advantage. Evidence cited in the study suggests larger provincial markets remove 2% to 8% more low-productivity firms than smaller markets. Surviving businesses gain scale while intense competition encourages innovation.

For developing-country governments, simply copying China's subsidy programmes without its market scale, infrastructure and industrial capabilities could therefore prove expensive and ineffective.

Robots Are Rewriting the Rules of Low-Cost Industrialisation

Automation represents an even bigger challenge. Historically, rising wages encouraged manufacturing to migrate from richer economies toward countries offering cheaper labour. China's increasing use of industrial robots could disrupt that pathway.

Automation allows Chinese manufacturers to compensate for rising wages and a shrinking workforce. This means low-income economies cannot assume that labour-intensive industries will automatically relocate as China becomes richer and older.

Currency movements add another competitive pressure. Historical evidence cited by the researchers suggests a 10% depreciation of the renminbi could reduce competing developing-country exports by about 1.5%–2% at product level, with losses reaching 6% where competition with China is particularly intense.

For policymakers, low wages can no longer be the centrepiece of an industrial strategy. Reliable electricity, efficient ports and logistics, digital infrastructure, skilled workers, access to imported technology and predictable regulation will increasingly determine whether countries can attract manufacturing investment.

China's Supply Chains Can Create Jobs, Not Just Competition

China's expansion has nevertheless delivered substantial benefits to developing economies. Between 1995 and 2019, a one-percentage-point increase in China's per-capita GDP growth was associated with an average 0.2-percentage-point increase in per-capita growth elsewhere in the developing world.

Commodity exporters benefited particularly strongly. The estimated contribution reached about 0.40 percentage points for Angola and 0.45 percentage points for Brazil, compared with approximately 0.1 percentage points for Bangladesh and the Philippines.

But commodity dependence carries a development risk. Several African and Latin American economies expanded raw-material exports to China while importing manufactured goods, potentially slowing their transition toward more complex industries.

Bangladesh, Cambodia and Vietnam demonstrate another route. China's share of global apparel exports increased from 22% in 2000 to 42% in 2010, but subsequently declined to 28% in 2024, creating space for other exporters.

Access to Chinese inputs has been critical. East Asian imports of Chinese intermediate goods rose from approximately $13 billion in early 2020 to $25 billion by 2025. Evidence from Vietnam associates Chinese consumption-goods imports with an employment decline of about 0.3%, but intermediate-goods imports with an employment increase of roughly 0.5%.

For private companies, the distinction matters. Cheap Chinese finished products can displace domestic producers, while competitively priced machinery, textiles, electronics and other inputs can strengthen local production and exports.

Domestic Reform Is the Strongest Defence Against the China Squeeze

The paper argues that developing countries have limited ability to force changes in Chinese industrial or exchange-rate policies. Weaknesses in WTO enforcement and the limited ability of international institutions to influence large economies make domestic reform a more practical response.

Vietnam provides evidence of the potential gains. Services liberalisation between 2008 and 2016 was associated with annual productivity increases of 2.9% in services and 3.1% in manufacturing industries using those services. Research cited in the paper also suggests removing international transport-service barriers could cut global trade costs by up to one-third and increase average long-term incomes by as much as one-fifth.

International development partners can support this transition through investments in logistics, digital infrastructure, technical skills, trade facilitation, regional integration and stronger competition rather than focusing narrowly on industrial subsidies.

Private-sector stakeholders also need to move beyond competing primarily through cheap labour. Technology adoption, workforce skills, efficient supply chains and access to competitive intermediate goods will increasingly determine survival.

The central lesson is not that developing countries should abandon manufacturing because China is too powerful. Nor is protection alone likely to solve the problem. Countries that remain dependent on commodities, protect inefficient firms and underinvest in skills and technology risk becoming trapped in low-value activities. Those that combine global supply-chain integration with stronger competition, better infrastructure, open services markets and sustained investment in human capabilities have a better chance of turning China's rise from an industrial threat into an opportunity for jobs, investment and higher-value economic transformation.