New Advantages in Economies of Scale Amid Deglobalization

Economies of scale refer to the phenomenon in which market agents (i.e., firms) at the microeconomic level increase economic benefits by expanding the scale of production, as evidenced by the decrease in average total cost due to increased output. Applying this to the macro level, a country's population or market scale expansion will drive more sophisticated division of labor and transactions, thereby improving economic efficiency. According to the theory of economies of scale, large countries could undergo stronger industrial development and faster economic growth and achieve greater wealth than small countries. However, insufficient emphasis has been placed on scale in existing macroeconomic analysis, in our view, and the reality is that many small economies are wealthier than large ones. During the era of globalization over the past few decades, some small countries enjoyed economies of scale brought by the global markets through their participation in division of labor and cooperation in global industry chains. In the era of deglobalization, however, small countries’ ability to participate in the global division of labor and to enjoy economies of scale at a global level becomes limited. Instead, the importance of statehood in political terms has increased, and large countries can accumulate stronger competitive advantages by leveraging their large scale. In addition, the development of the knowledge economy, especially the digital economy, amplifies the scale advantages enjoyed by large countries, in our opinion. China is one of the biggest countries in the world in terms of population and economy, which we believe lays a foundation for it to leverage scale advantages under new circumstances. Developing a market economy and promoting internal market competition are key to translating large scale into economic growth, in our view, which requires an expansion of domestic consumption and development of a unified domestic market. We believe attention could be paid to address the market failure caused by distortions such as externalities (a cost or benefit caused by a producer but not borne by that producer) and monopolies and in particular, to improve governance mechanisms for real estate, finance, and the digital economy. Against the background of deglobalization, scale advantages both provide a new source of economic growth for large countries and lay a foundation for cross-border cooperation. Large countries enjoy advantages in the new landscape of division of labor in global industry chains thanks to their larger industrial systems and tighter integration among different parts of their industry chains. Leveraging its domestic industrial system, China can strengthen industry chain integration with other countries, facilitate in-depth cross-border cooperation, and improve industrial efficiency and security, in our opinion.