The China Effect on Manufacturing Productivity in the United States and Other High-income Countries

From a macroeconomic perspective and using input-output techniques, this article investigates to what extent, and how, the growing use of Chinese intermediates has contributed to the labour productivity growth within the manufacturing production processes of 22 high-income countries. The main result — based on almost 400 global value chains during the period 2000-2014 — is that this productivity effect is significant and economically relevant. This is also the case for the United States. The effect holds before and after the financial crisis, is robust to different specifications, and is identified in almost all production processes. Three mechanisms behind the identified pattern are — tentatively — identified: reduced employment, reduced prices, and productivity enhancing functional specialization. However, China is not special: the absolute productivity effect of the growing use of Eastern European intermediates seems to be even larger. Finally, China and Eastern Europe are special in relation to the high-income countries: growing intra-trade of intermediates among the high-income countries is associated with weaker productivity growth.