At the turn of the century, Europeans grew used to a strange combination: buying increasingly better goods while nearly all services were rising in price. A new television offered more features than the old one and cost less. Computers gained power without becoming more expensive at the same pace. Dressing a family became more affordable. At the same time, visiting the dentist, paying university tuition, dining at a restaurant, or calling a plumber grew ever more costly.
Behind that divergence lay, among other factors, China. The European debate about the Asian giant has shifted its tone. Globalization, competitiveness and supply chains have given way to strategic autonomy, resilience, or the de-risking. The pandemic, the war in Ukraine and the rivalry between Washington and Beijing have reinforced the idea that an excessive dependence on China poses an economic and geopolitical risk for Europe.
That reading has some foundation, but it leaves out a significant part of the story. The public debate has focused mainly on the costs of the so-called China Shock: Western deindustrialization, the loss of manufacturing jobs, strategic dependencies and political discontent in many industrial regions. Economic literature has studied these effects extensively. Yet, the benefit millions of consumers enjoyed has been overlooked.
“Globalization, competitiveness and supply chains have given way to strategic autonomy, resilience or the ‘de-risking'”
China was probably the strongest disinflationary force in the world economy in the first two decades of the 21st century. There is no need to idealize globalization or embrace Beijing’s stance to recognize this. Without that manufacturing capacity, it is hard to understand why inflation stayed so low for so long and why the world Europe seeks to build will, presumably, be more expensive.
Since 2000, the leading Western economies have shown a very similar pattern. Services—education, health care, hospitality, personal care, or home repairs—have risen in price steadily. By contrast, many manufactured goods barely increased in price or even became cheaper in relative terms. Consumer electronics, textiles, appliances and furniture followed a trajectory distinct from the rest of the economy.
Part of that divergence can be traced to 2001, when China joined the World Trade Organization (WTO). Its accession added hundreds of millions of workers to the global economy and massively expanded worldwide manufacturing capacity. Western firms moved production to Asia, supply chains became global, and competition among manufacturers intensified to an unprecedented degree. In that process, industrial automation, the logistics revolution and technological advances joined in.
“China was probably the largest disinflationary force in the world economy in the first two decades of the 21st century”
The effect was a huge rise in the global supply of manufactured goods. For consumers, the change was gradual and almost invisible. Buying a television, a computer, or a washing machine became cheaper even as those products improved in quality and features. What was attributed to technological progress alone was also the result of a globalization that turned China into the world’s great factory.
The macroeconomic consequences were deeper than is often admitted. Economists have long explained that labor-intensive services tend to become more expensive. It is Baumol’s cost disease, described by William Baumol. A teacher, a doctor or a waiter cannot multiply their productivity at the pace of an automated plant. Their wages, however, must rise to compete with the rest of the economy. If productivity grows hardly at all, those costs end up being passed on to prices. That is why services become persistently more expensive in almost all advanced economies.
Spain makes that dynamic easy to observe. The massive arrival of cheap manufactured goods from Asia helped to curb inflation in categories such as electronics, appliances, textiles or furniture. At the same time, the growing weight of tourism and services pushed up the prices of labor-intensive activities, such as hospitality, dining, personal care or certain professional services.
According to Spain’s National Institute of Statistics (INE), services now account for nearly 76% of GDP and around 80% of employment. That structure makes Spain especially exposed to inflationary pressures arising from labor costs. While traded goods benefited from international competition, much of the services sector remained outside that competition and passed on to the consumer the rise in wages and other costs.
“A teacher, a doctor or a waiter cannot multiply their productivity at the pace of an automated plant. Their wages, however, must rise to compete with the rest of the economy”
Between the early 2000s and the pandemic, the relative cheapening of goods partly offset the rising costs of services. Inflation did not disappear; it shifted. Prices continued to rise, but mainly in activities that could not be offshored or benefited from international competition. That balance allowed central banks to keep exceptionally low interest rates, boosted consumption and sustained a period of macroeconomic stability that today seems hard to repeat.
The Definition of a New Equilibrium
That equilibrium also carried costs. Many industrial regions in the United States and Europe underwent a deep transformation. Millions of manufacturing jobs disappeared or were replaced by activities with lower added value. Economic literature has documented how the China Shock fed regional inequality, weakened certain communities and contributed to the rise of populist and protectionist movements.
Precisely because these costs were visible, the benefits stayed more hidden. Almost no one attributes the affordable price of a laptop or a washing machine to China’s trade integration. Nor is it easy to perceive that, for twenty years, inflation was lower than it likely would have been without that global manufacturing capacity. The costs were concentrated in specific places and sectors; the benefits were spread among hundreds of millions of consumers. Policy tends to respond more to the visible losers than to the dispersed winners.
Europe is now trying to correct many of those vulnerabilities. The European Commission is pushing an industrial policy that would have been unthinkable a decade ago. Battery manufacturing is subsidized, the auto industry is shielded from Chinese competition, suppliers of critical raw materials are diversified, and strategic production capacities are being rebuilt.
The path ahead seems hard to avoid. With the pandemic, foreign dependence ceased to be a mere technical efficiency question and began affecting essential products. Russia’s invasion of Ukraine delivered an even tougher lesson: interdependence can also be used as a means of pressure. In parallel, the US–China rivalry has narrowed the room to run an economy based solely on cost criteria.
“Hardly anyone attributes the affordable price of a laptop or a washing machine to China’s trade integration”
The problem is that this correction will come at a cost. Producing more within Europe means paying higher wages, stricter environmental standards, and supply chains deliberately less efficient. Diversifying suppliers entails giving up part of the economies of scale that made the great era of globalization possible. Maintaining strategic inventories costs more than operating with the just in time model. Economic security does not replace efficiency. It makes it more expensive.
The Spanish Case and the Future of Strategic Autonomy
In Spain, this tension threads through the economic agenda of the government of Pedro Sánchez. Reindustrialization has become one of its pillars, backed by European funds to attract investments in batteries, semiconductors, green hydrogen or electric cars. The plan adheres to a Brussels-led logic: regain productive capacity in sectors deemed strategic.
How well that strategy works will make it harder to reproduce the incredibly low price environment that characterized the first two decades of the 21st century. A portion of the consumer dividend came precisely from producing outside Europe. Bringing production back means regaining industrial employment and reducing vulnerabilities, but also accepting higher labor costs, tougher regulatory standards and, presumably, higher prices.
The political debate has been slow to take on that part of the equation. For too long it has been conveyed that Europe could reduce its dependence on China, bring factories home and strengthen its strategic autonomy without noticeable consequences for citizens. As if simply changing the production location would preserve the same prices, the same competitiveness and the same standard of living.
Societies can choose among different models of economic organization, but they rarely can keep all the advantages of each. Globalization offered efficiency and cheap goods in exchange for growing strategic dependence. The new industrial policy promises more resilience and more autonomy, but sacrifices part of that efficiency.
“There has been a narrative that Europe could reduce its dependence on China, bring factories back, and reinforce its strategic autonomy without consequences”
The China debate has been dominated by the costs of globalization. It is understandable: they were visible, concentrated and politically explosive. The benefits, however, were spread among hundreds of millions of consumers and therefore went almost unnoticed. Now, as the West tries to correct the imbalances prompted by China’s integration into the world economy, it is beginning to realize that some of those benefits weighed more than it seemed. China exported manufactured goods and, with them, a large dose of deflation.
Strategic autonomy may be a historical necessity. The lessons from the pandemic, the war in Ukraine and the rivalry among great powers make it hard to advocate a naive return to early-century globalization. But it is wise to stop presenting it as if it were free of cost. Its price will be measured not only in billions of euros earmarked for industrial subsidies or in new battery factories. It will gradually appear in the price of many everyday goods. The next decade may not bring an end to trade with China, but it could close the chapter in which globalization contained, almost without consumers noticing, a decisive part of inflation.
Methodological note: The chart takes as reference a visualization published by the Financial Times on the different evolution of prices for labor-intensive services and tradable goods. To replicate the exercise, monthly data from Eurostat’s Harmonized Index of Consumer Prices (prc_hicp_midx) for Spain, France, Germany and the United Kingdom are used. An editorial sample of COICOP sub-indices representative of tradable and durable goods—such as clothing, footwear, furniture, appliances, cars, audiovisual equipment or computers—and of labor-intensive services—such as medical and dental services, maintenance, transportation, education, dining, accommodation or hairdressing—was selected. Each series is converted to an annual average and re-scaled with base 2000 = 100.
