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Roula Khalaf, publisher of the FT, selects her favorite stories in this weekly newsletter.
How should the outsiders want to end the trade war between the United States and China? They should want them both to lose.
It is true that Donald Trump’s approach is much worse than the incoherent intellectual: it is lethal for any cooperative global order. Some people think that a collapse of this “globalism” is even desirable. In my opinion, it is a nonsense that a world led by “great powers” predators would be higher than we have. However, while Trump’s protectionism must lose, Chinese mercantilism does not have to win, as it also creates important global difficulties.
To understand the problems of the world economy, it helps to begin with the subject of “world imbalances”, which was a lot of discussing in the world financial crises and the euro zone of 2007-2015. In the following years, these imbalances have made smaller, but the general image has not changed. As the most recent of the IMF World economic perspectives Notes: Nations of China and European creditors (especially Germany) have had persistent surplus, while the United States have had a deficit compensation. As a result, U.S.’s net international investment position was less than 24 percent of global production in 2024. From the United States, the United States manages account deficits and current account and has a comparative advantage in servicesIt also has great deficits in manufactures.
So what would you ask you a passionate free score? In fact, even a little and so-peeled free marker could, with a good reason, emphasize that the United States has been fortunate enough to live beyond their means for decades. This should not be a problem: no one, after all, will be able to force the United States to pay their liabilities. It also has ways, elegant and not so elegant, by default. Inflation, depreciation, financial repression and mass corporate failures come to my mind.
However, at least three major holes can be seen in this rather complacent view of large and persistent world imbalances. The first is that they have become politically harmful, so harmful, in fact, which helped Trump to choose the President, twice. The second is that, on the surplus side of the register, there are negative negative interventions designed to change the overall balance of economic power. While international relations not only refer to economic power, the latter is certainly a crucial part.
The third is that the counterpart of external deficits is usually an unsustainable domestic loan. Combined with financial fragility, the latter can lead to great financial crises, as it did between 2007 and 2015. Sector saving and investment balances revealed indicators of the latter challenge. Foreigners have been a significant surplus of savings with the United States for decades. North -American companies have also been in balance or surplus since the early 2000’s, while North -American homes have been surplus since 2008. Since these sectoral balances have to be added to zero, the domestic counterpart to US current account deficits has been chronic tax deficits.
If the real interest rates had been high, the tax deficits may have been driving chronic external deficits. But the opposite has been true: the real interest rates have been low or very low. Keynesian hypothesis seems correct: the entry of foreign net savings, which is shown in surplus capital account (and current account deficits), made large tax deficits need, because national demand in the United States would have been chronically insufficient.
China is not the only player on the other side of the global record. But it is the most important. Michael Pettis In my opinion, it is correct that the world economy cannot easily accommodate a huge economy in which the consumption of homes is 39 percent of GDP and saving (therefore the investment) corresponding. What is also clear is that the latter has also helped to promote what the Rodi group judges a success Made in China by 2025 Politics. Inevitably, the existing industrial powers are afraid of this Chinese juggler.
This returns us to last week issue: Who will win the trade war between the United States and China? I argued that China would do it, partly because the United States has become so unreliable and partly because China has the option of expanding national demand and, therefore, compensating for the demand of the United States. Matthew Klein responds, in his excellent substitute The overload, That China has long had this option, but it has not used it. My answer is that China has to do so now and will therefore choose to expand demand instead of accepting a huge domestic fall. We’ll see.
The result of the United States-Chinese trade war and the possible evolution of Trump’s rates are immediate issues. But the broadest problems considered should not be ignored. Commercial policy should not be in isolation. As those who founded the postwar commercial system, especially Keynes, their success also depends on the global macroeconomic adjustment, and how the international monetary system works.
In the first act of the postwar period, the United States made great surplus current account, but were recycled in loans. In the second act, until 1971, the surplus of the United States eroded. This caused the end of the dollar PEG and widespread flotation as inflation oriented, at least among countries with high income. This system worked well enough before the rapid increase in China. With this, the time during which the United States could act as a borrower and Spender of the last resort, tested in the 1980’s by Japan and Germany, became politically and economically unmatched.
Trump’s unforeseen and focus for bilateral offers are indeed nonsense. But the old United States -led economic order is now unsustainable. The United States will no longer serve as a balancer of the last resort. The world, especially China and Europe, has to think again.
