China Reshapes the Global Industrialization Pattern: From the "Squeeze" Theory to a New Division of Labor in Industrial Chains

Over the past few years, the debate over China's trade surplus has gradually spread from the United States and Europe to developing countries. A report released by the Peterson Institute for International Economics (PIIE) claims that by dominating low-skill manufacturing, China has squeezed the industrialization space of latecomer countries, costing them tens of billions of dollars in exports and millions of manufacturing jobs each year. This "squeeze theory" has considerable appeal in some Western policy circles because it fits a familiar narrative: China has become a behemoth of global manufacturing, leaving less and less room for others.

Such a judgment, however, rests on a double misreading of trade data and global industrial dynamics. It treats international production as a fixed-size pie, rather than a dynamic network continuously shaped by investment, technology diffusion, and shifting comparative advantages. In fact, the rise of China's manufacturing has not prevented other economies from industrializing; rather, it is changing the way industrialization is achieved.

Upgrading Export Structure: From Selling Products to Selling Production Tools

The real change is often hidden in the evolution of a country's export structure. According to Chinese customs data, the share of intermediate goods in China's exports was about 42% in early 2015, rising to 46% by mid-2025; over the same period, the share of consumer goods exports fell from 37% to 31%. This means that an increasing share of China's exports consists of machinery, equipment, components, and production technology, rather than final goods directly aimed at consumers.

The industrial significance of this shift is crucial. When a country exports capital goods and intermediate goods, it is not only a competitor but also a provider of tools for the industrialization of other economies. China's exports of mechanical and electrical products to ASEAN and Africa have grown rapidly, and a large part of them is used for local factory construction, production line assembly, and technological upgrading. In other words, China is transforming from the "world's factory" into the "supplier of factories."

This role change is similar to the path taken by Japan and Germany during their industrial upgrading, but on a larger scale and at a faster pace. It shows that the core competitiveness of China's manufacturing has shifted from labor-intensive assembly to complex manufacturing segments, including high-end components, precision machinery, and industrial software. Perceptions that still linger on the idea that "China only produces shoes and socks" are clearly behind the times.

The Statistical Illusion of the "Squeeze Theory"

Proponents of the "squeeze theory" argue that China's low-skill manufacturing exports account for nearly 65% of the global total, far exceeding the reasonable share corresponding to its labor force size, thereby squeezing other low-cost countries. This argument implies a questionable assumption: that export competitiveness is mainly determined by the number of workers. In reality, whether a country can win manufacturing orders depends on factors such as logistics networks, infrastructure, electricity supply, supplier ecosystems, and institutional efficiency. Having more workers does not mean a stronger manufacturing sector; otherwise, India and Bangladesh would have already become global manufacturing centers.More importantly, this static comparison of export shares overlooks the dynamic process of industrial relocation. China's labor-intensive manufacturing and the capacity expansion in Southeast Asia and Africa are coexisting, not opposing, relationships. In recent years, Chinese enterprises have continuously expanded their investment in Indonesia, Malaysia, Thailand, Vietnam and other countries, forming a new regional division of labor in fields such as electronics and automobiles: R&D, core components and key technologies remain concentrated in China, while assembly and downstream production are gradually dispersed to other emerging economies.

This division of labor is essentially an extension of the global production network, not a zero-sum game. Chinese enterprises' overseas investment brings employment and technical training while maintaining close ties with domestic supply chains. The result is not "pulling away the ladder," but making the ladder longer and wider.

Structural sources of competitive advantage

The "squeeze thesis" also tends to attribute the competitiveness of Chinese manufacturing to exchange rate manipulation and industrial subsidies, but the evidence is insufficient. China has repeatedly stated and demonstrated the transparency of its industrial policies, and research by international institutions also shows that China's support policies focus more on emerging strategic industries such as electric vehicles, batteries and renewable energy, rather than traditional labor-intensive sectors.

At the same time, wage levels in Chinese manufacturing are significantly higher than in many developing countries such as Bangladesh and India. Yet Chinese manufacturers remain competitive thanks to industrial clusters, supply chain efficiency, infrastructure quality and economies of scale accumulated over decades. These are structural advantages, not the result of policy distortions. On the contrary, as China's labor costs rise, some labor-intensive industries naturally migrate to lower-income economies, which in itself creates space for latecomer countries.

South-South cooperation: reshaping the path of industrialization

From Africa to Southeast Asia, Chinese investment is participating in local manufacturing projects and industrial park construction. From Tangier Tech City in Morocco to economic and trade cooperation zones in Zambia and Ethiopia, Chinese enterprises bring not only factories and jobs, but also technical training, supply chain management and market access. International institutions such as UNIDO also emphasize that technology transfer, investment flows and access to clean technology are crucial to the industrialization of developing countries.

China is also expanding market access. In May 2025, China announced zero-tariff treatment for all 53 African countries that have diplomatic relations with it. This does not require anyone to give up market share, but rather promotes common development by expanding productive capacity and creating new opportunities. South-South cooperation is not simple aid, but a combination of changing comparative advantages and mutually beneficial economic interests. China provides capital, technology, manufacturing capacity and market access, while developing countries gain entry points to infrastructure, industrial ecosystems and global supply chains.

ConclusionThe popularity of the "squeeze theory" reflects that some observers still measure the new industrial landscape with an old yardstick. The growth of China's manufacturing industry is not an obstacle to global industrialization, but the beginning of a new paradigm. It enables more economies to enter the global manufacturing network at a lower threshold by leveraging the equipment, technology, and investment that China provides. For latecomer countries, the challenge is not that China is too strong, but how to find their own place through deep integration into this network. China is not the one pulling away the ladder, but the builder of a new one.