Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms
Denmark is profiting from sales of a "miracle" medicine, while China is dumping vehicles in foreign markets to compensate for weak domestic demand.
Denmark and China are both experiencing export booms of high-value products that reflect their businesses’ ability to make goods that consumers in the rest of the world want.
But there is an important distinction between the surge in sales of Danish-designed pharmaceuticals and the sudden transformation of China into a major exporter of motor vehicles—and this distinction tells us something important about the ways that economic integration can improve or degrade living standards.
In Denmark, the rise in pharmaceutical exports reflects an increase in total production that increases supply and potential living standards for everyone. Something new was invented that has become both popular and profitable.
China’s auto export boom, by contrast, has not been a consequence of higher production, which remains below the peak of 2018. Instead, it is simply the flip side of persistent weakness in the domestic market. Chinese producers are avoiding the costs of that weakness by dumping their wares on the rest of the world, to the (temporary?) benefit of consumers elsewhere and to the detriment of non-Chinese producers.
What follows are some thoughts on how these diverging experiences fit into the framework that Michael Pettis and I laid out in Trade Wars Are Class Wars.
Globalization (vs?) Prosperity
There are two complementary ways to think about the relationship between trade and growth:
Trade makes markets larger, which means more consumers to sell to and more competition among businesses.
Globalized trade and finance (partly) break the link between a given society’s production and spending. That allows any given society to produce more or less than it uses domestically for consumption and investment, with surpluses from some supplementing—or displacing—domestic production in others.
The key difference between these two perspectives is that, in the first, “more trade” is always unambiguously good for society as a whole, while in the second, the net effect is at least as likely to be negative as positive even if some segments of society do very well in the process.
Heightening competiton can create the risk that particular workers and communities lose out, potentially severely, but the far more important consequence is that it raises aggregate productivity and living standards.1 American cars got better once they had to compete with German, Japanese, and Korean imports. Similarly, the existence of Airbus has probably done more to improve the quality and pricing of Boeing’s civilian products than anything a regulator alone could have accomplished.
From this perspective, governments should promote deeper trade links while being mindful of compensating the “losers” from heightened competition. (This is the orthodox economic policy recommendation.) The European Union’s single market2 is the best example of how to do this in a multi-country context, although it remains incomplete in important ways.
This “micro” focus on the market structure effects of trade is not strictly wrong, but it is inherently limited because it assumes that trade is reciprocal (imports are paid for with exports). That means it ignores both the financial flows that enable persistent trade surpluses and deficits as well as the sensitivity of aggregate domestic production to global conditions. Yet it is these macro relationships that explain so much of the creative potential—and the destructive power—of economic integration.
Ideally, the globalized economy is one in which societies that are richer can help poorer societies invest in development without needing to sacrifice their current consumption. Foreign production supplements (limited) domestic output as investments build productive capacity. Imports rise far more than exports as consumption and capital spending rise more than current production. The gap gets financed by foreigners who amass claims on future production. Everyone ends up better off as the new investments come online, production rises, and foreigners get a decent return on capital.
While that sometimes happens3, it is at least as common, if not more common, for these imbalances to be generated by maldistributions of income in surplus countries that suppress demand and fuel debt bubbles. As we explained in Trade Wars Are Class Wars, the downside of global economic and financial integration is that problems in one society get “dumped” elsewhere. That is bad enough, but even worse is that the existence of this “escape valve” encourages the sorts of destructive behaviors that threaten the sustainability of the open international system. As we put it in the conclusion:
By preventing political and industrial elites in the surplus countries from facing the consequences of their actions, the open system has enabled destructive behavior in the rest of the world…The perverse result is that deepening globalization and rising inequality have reinforced each other. Businesses across the world use international competition as an excuse to push for lower wages, weaker environmental and safety regulations, preferential tax regimes, and regressive transfers…Companies everywhere fight for larger shares of a global market even as they collaborate to suppress the size of their domestic markets. This is the very definition of “beggar thy neighbor.” Because “competitiveness” has become a euphemism for pushing wages down, either directly or through currency depreciation and weaker social safety nets, the fetish of competitiveness has generated a global spending shortage. Trade wars are an almost inevitable consequence of globalization as it has been practiced.
From this perspective, states should focus on sustaining domestic spending while limiting financial risks and preserving their domestic manufacturing base. The U.S. government seems to have come to around to this view over the past few years, but many other jurisdictions have not.
Comparing Denmark and China Today
This puts the differences between the Danish pharmaceutical export boom and the Chinese auto export boom into stark relief.