In a recent Financial Times column, Martin Wolf argues that the United States and China are engaged in a "war of neo-mercantilists." China, in his view, is particularly well equipped for this struggle because of its enormous manufacturing base, high savings rate, technological advances and control over strategic supply chains, including batteries, solar panels, rare-earth processing and electric vehicles. The United States has important advantages of its own, particularly in energy and finance, but its industrial policy is less coherent.
Wolf's argument is closely connected to the old debate on global imbalances, that has been recently revived and analyzed by Adam Tooze, who correctly notes some of its limitations.* Like the earlier discussions of the "global saving glut," exchange-rate manipulation and excess Chinese saving, Wolf's column interprets China's persistent trade surplus as a central source of international instability. Weak Chinese domestic demand and an allegedly undervalued renminbi allow China to export its excess production, forcing other countries to absorb deficits and suffer the contraction of their tradable sectors. The "second China shock" is thus presented as a more technologically sophisticated version of the same basic imbalance.
China's surpluses create adjustment problems for other countries, and its industrial exports can undermine manufacturing elsewhere, as they did in the US (see this old post). But Wolf's argument places too much weight on macroeconomic imbalances as the source of Chinese power. China did not acquire its position in electric vehicles, telecommunications, renewable energy, machinery and artificial intelligence simply because its exchange rate was depreciated or because its savings rate was high. An undervalued exchange rate can assist industries that already exist. It cannot create technological capabilities, engineering knowledge, supplier networks or integrated industrial systems. Here both the role of the Chinese developmental state, and the US own openness to the Chinese economy, in what has been called development by invitation, played a role.
These capabilities resulted from a long process of industrial policy, public investment, directed credit, technology acquisition and the protection and expansion of domestic firms. The trade surplus is better understood as one manifestation of this productive transformation than as its fundamental cause. China could raise wages, expand consumption and reduce its external surplus while retaining most of its industrial and technological power. Conversely, a revaluation of the renminbi would not recreate the productive capacities that have disappeared in the United States. It would require industrial policy in the US, which by the way, was never completely abandoned either (see here).
The focus on imbalances also obscures the monetary and financial hierarchy of the international system. Wolf treats China as a major creditor and the central manufacturing economy. The latter is correct, but the dollar remains the principal international currency, US financial markets remain the main destination for global wealth, and the Federal Reserve remains the ultimate provider of international liquidity. In other words, the notion that the US is a debtor that depends on funding from China is an analytical misconception rooted in a misconception about the working of the international monetary system. The United States can run external deficits in its own currency in a way that no peripheral economy, and not even China, can. This is no burden imposed on the United States by foreign savings. It confuses US strength, its financial power, with a weakness.
The conflict between China and the United States is therefore not adequately described as a confrontation between a surplus country and a deficit country. It is a struggle between China's growing productive and technological power and the continuing monetary, financial and geopolitical power of the United States. Global imbalances are part of this conflict, but they are not its underlying explanation. Wolf sees many of the relevant facts, but the old language of savings, exchange rates and current accounts prevents him from fully connecting them.
The literature on the imbalances is built on a fundamentally misleading premise, that global imbalances reflect excess saving in some parts of the world flowing into the main deficit country, the US. In that story, the rest of the world finances American excess consumption. But this reverses causality. It is not Chinese or German thrift that drives the system, but the central role of US demand, finance, and the dollar. Capital does not passively flow from savers to borrowers. It is actively created within a hierarchical monetary system in which the United States occupies a privileged position. The US expenditures lead to higher level of activity globally, without any danger of US default.
From this perspective, the persistence of global imbalances is not puzzling at all. It is structural. The dollar-based international system requires US deficits and the accumulation of surpluses elsewhere. This is not a temporary distortion, nor a pathology to be corrected, but a defining feature of contemporary capitalism. As noted above, the real asymmetry is not between surplus and deficit countries per se, but between those that issue internationally accepted liabilities and those that do not. The United States is not simply another deficit country. It is the anchor of the system.
* Adam Tooze had discussed the global imbalances, in a more perceptive way than the older debate, recently. Tooze's central argument is that the language of "global imbalances" is an old framework that obscures new forces (Trump, AI, China, fiscal crisis). In this case he is debating Michael Pettis (see Pettis more recent reply here). Pettis revived J. A. Hobson's idea that inequality within leading economies generates underconsumption, pushing capital outward and producing geopolitical conflict. Applied to the present, this suggests that domestic imbalances in countries like China generate export surpluses and capital outflows, which in turn create tensions with deficit countries like the United States. Tooze correctly points out some of the historical and institutional limitations of the analogy, but falls short of providing an analytical critique.
