China's New Growth Strategy: Implications for Middle-Income Economies

Acquiring human capital and climbing the manufacturing ladder are development policy goals shared by most middle-income countries. What happens when a large economy with active industrial policy expands into sectoral niches occupied by middle-income trade partners? We build a multi-country, multi-sector general equilibrium model and perform counterfactual experiments assessing the effects of China's human capital investments and industrial policies on trade, production, and factor returns elsewhere in the developing world. The model features skilled and unskilled labor as primary inputs as well as trade in intermediate goods. Simulation results suggest that China's growth strategy may cause middle-income economies to lose global export shares in more skill-intensive sectors and to be pushed toward blue-collar and resource-based exports. The effects are especially notable in Southeast Asia. Skill premia fall, reducing incentives to invest in human capital. In the absence of policy responses, these trends might dim long-run development prospects.