Article originally in the Financial Times. Other articles .
Martin Wolf is the main economic commentator of the Financial Times.
What end of the trade war between the United States and China should be wished by people who are not from these countries? They should want to lose both sides. It is true that Donald Trump’s approach is much worse than just an intellectual inconsistent: it is deadly for any global rules based on cooperation.
Some people even think that the collapse of such “globalism” is desirable. In my opinion, it is stupid to imagine that a world controlled by a ferocious “superpower” would be better than the one we have now. Although Trump’s protectionism must play, Chinese mercantilism must not win, because it also causes considerable global difficulties.
US minus 24 percent
To understand the problems faced by the world economy, it is useful to start with the topic of “global imbalance”, which was much discussed in the period before the global financial crisis and euro area crisis between 2007 and 2015.
As stated in the latest report of the International Monetary Fund on the World Economic Outlook, China and European creditor countries (especially Germany), they achieve permanent surpluses, while the United States has compensatory deficits.
As a result, the pure international investment position of the United States in 2024 was minus 24 percent of the world’s output. Since America has a business balance and current account deficit and also has a comparative advantage in the field of service, it also has large production deficits.
And what of it?, A passionate supporter of the free market would ask. Even a less passionate free market advocate could rightly note that the United States were lucky that they had lived above their conditions for decades.
This may not be a problem: no one will be able to force them to repay their obligations. They also have ways, elegant and less elegant than avoiding insolvency. Inflation, currency, financial repression and mass bankruptcies of businesses come to mind.
Chronic fiscal deficits
In this relatively self -satisfied view of large and persistent global imbalances, at least three large gaps can be seen. The first is that they have become politically harmful – so harmful that they helped Trump twice to win the presidential election.
The second is that on the side of the excess of the accounting book there are interventions with a negative sum to move the global balance of economic power. Although international relations are not just about economic power, it is certainly their key part.
The third is that the counterbalance of foreign deficits is an unsustainable home debt. In combination with financial instability, this debt can lead to huge financial crises, as was the case between 2007 and 2015.
Sector savings and investment balance are the magnificent indicators of this last challenge. Foreigners have had a significant surplus of savings for the United States for decades. American businesses have also been in balance or surplus since the beginning of this decade, while US households have been in surplus since 2008. Since these sector balances must be equal to zero, the home counterbalance of the common account deficit of the United States is chronic fiscal deficits.
The fear of the Chinese machinery
If real interest rates were high, fiscal deficits could be the driving force of chronic external deficits. But the opposite is true: real interest rates were either low or very low.
Keynesian hypothesis seems to be correct: the influx of net foreign savings, which was reflected in the surplus of the capital account (and the deficits of the current account), required large fiscal deficits, because American domestic demand would otherwise be chronically insufficient. China is not the only player on the other side of the global balance. However, it is the most important.
In my opinion, Michael Pettis is right when he claims that the world economy cannot easily absorb a huge economy in which household consumption represents 39 percent of GDP and the amount of savings (and thus investment) corresponds to this.
It is also clear that this has helped powered by Made in China 2025, which Rhodium Group considers successful. The existing industrial powers inevitably fear this Chinese machinery.
Who will win the trade war?
This returns us to the question of who wins the trade war between America and China. I claimed that China, partly because the United States became so untrustworthy, and partly because China has the opportunity to expand their domestic demand and thus compensate for lost demand from the United States.
Matthew Klein in his excellent newsletter on the Substack portal replies that China has had this option for a long time, but has not used it. My answer is that China has to do this now, and therefore it really decides to extend demand, instead of accepting a huge home decline. We’ll see.
We will immediately be interested in the result of the trade war between America and China and the possible development of Trump’s duties. However, we must not ignore the broader context. Business policy should not be assessed in isolation. As the founders of the post -war trading system, especially Keynes himself, knew, its success also depends on the adaptation of global macroeconomics and thus on the functioning of the international monetary system.
Europe must be re -considering
In the first phase of the post -war period, the United States had huge surpluses of a current account, but they recycled loans. In the second phase, until 1971, their surpluses were reduced. This led to the end of the dollar binding if the general floating course associated with the inflationary destination, at least in countries with high incomes.
This system worked well enough before China’s rapid rise. This ended with an era during which the United States could function as a creditor and expenditure body of the last instance, which was tested by Japan and Germany in the 1980s, which became politically and economically inoperative.
Trump’s unpredictability and focus on bilateral agreements are truly unreasonable. However, the old economic order under the leadership of the United States is now unsustainable. America will no longer serve as a level of last instance. The world – especially China and Europe – must begin to think again.
© The Financial Times Limited 2025. All rights reserved. It must not be further spread, copied or modified. Ringier Slovakia Media is responsible for providing this translation. The Financial Times Limited is not responsible for the accuracy or quality of the translation.
