CHAPTER 3 Competing with Giants: Who Wins, Who Loses?

The rapid growth of China and India in recent years has raised many questions about the implications for the world economy. Will most countries gain? Or will the outcome be brutal competition in a narrow range of products and consequent declines in the prices of developing country exports that impoverish not just India and China, but other developing countries? If some countries lose from increased competition, as found by Freund and Ozden (2006) and Hanson and Robertson (2006), which countries and which products will face the most serious competition. And finally, will the industrial countries face ever-more-sophisticated exports from China and India destroying the jobs of skilled workers in today’s advanced industrial countries? Or will the benefits of lower prices from China and India allow real incomes in industrial countries to continue to rise strongly? Are the pessimists right? While it is certainly the case that rapid increases in exports of any given product must be accommodated by a decline in its price, three recent developments have the potential to at least attenuate these stark scenarios of relentless competition. One is the rise of two-way trade in manufactures, which makes the recipient countries the beneficiaries of improvements in efficiency in their trading partners (Martin 1993). Another is the growth o