How can authoritarian governments in developing countries open up their economies to trade and investment while managing political risks? Was China's turn back to a state-led development model inevitable? As this book shows, the growth and evolution of China's economic model has been the result of specific political risks that arise in the face of trade openness, and the ways in which these risks and the threat of crises have strengthened particular actors within the Chinese state, leading to greater prioritization of redistribution and control over market forces.
Economic interdependence presents a double-edged sword for authoritarian regimes. Openness facilitates the economic growth necessary for maintaining popular and elite support. At the same time, uneven distributional effects can pose both short and long-term risks to authoritarian stability. I focus on the case of China, which is at once the world's largest trading nation and one of its most durable authoritarian regimes.
To manage the general dislocation and uneven development caused by globalization, the Chinese government has implemented a modified form of embedded liberalism, using decentralized fiscal and social policy responses to redistribute at the local level. This has helped to maintain political stability as China became increasingly integrated in the global economy. However, the severity of external economic shocks also require major statist interventions to maintain political stability. I argue that in the face of trade shocks, authoritarian regimes turn to statist interventions that facilitate spatial redistribution and industrial reallocation. This reduces short and long-term political risks.
To test my argument, I examine China's response to the 2008-2009 financial crisis, which constituted a major trade shock. I create a subnationally-disaggregated measure of trade shock exposure for China, based on the location and industrial classification of all Chinese firms, combined with product-level data on changes in US imports following the 2008 financial crisis. Leveraging the crisis as an exogenous shock, I show that, counter-intuitively, the Chinese regime responded with a state-led geographical reallocation, shifting government investment toward regions less negatively impacted by the shock, reinvesting in state-owned enterprises, and catalyzing industrial upgrading to reduce economic interdependence and future risks.
This statist intervention partially attenuated political risks, but also led to industrial overcapacity and excessive debt. Furthermore, it has empowered statist coalitions within China and halted broader market-based reforms. This has shifted the orientation of China's economic policies toward a greater role for the state. We see these legacies in the form of more active, state-directed trade and industrial policies, such as "Made in China 2025". Despite initial optimism after China joined the WTO, imperatives of regime stability have led to political limits on economic liberalization in the world's largest trading nation.
The findings from this book advance research on how states respond to the distributional effects of globalization, as well as the consequences of these responses for economic liberalization. In addition, the book explains the international and domestic political drivers of China's trade and industrial policies, which pose increasing concern to scholars and policymakers today.
1. China in the Global Economy: State Capitalism and International Trade
2. Theory: the Limits to Economic Liberalization
3. Political Risks of Economic Interdependence
4. Globalization and Decentralized Redistribution
5. Trade Shocks: Global Crises, Domestic Stability
6. Statist Legacies: China's Trade and Industrial Policies After the Crisis
7. Economic Interdependence and Redistribution in Comparative Perspective
8. Concluding Implications