Shanghai’s Bund captures the contrast at the heart of today’s debate. Its neoclassical colonial buildings reflect the city’s former European financial influence, while the skyline across the Huangpu River symbolises China’s present economic power.
That transformation has changed the focus of discussions about global imbalances. Earlier debates centred on current-account positions and the relationship between national saving and investment, including the United States’ deficit and the surpluses of countries such as Germany. The current debate is more concerned with the consequences of China’s surplus and its dominance in strategic industries.
China’s scale is central to the shift. Its economy has expanded rapidly and is now the world’s second-largest by nominal dollar GDP. China also holds a larger share of global manufacturing than the combined shares of the United States, Germany and Japan, and has become a leading producer in an increasing number of strategic sectors.
Geopolitical concerns have encouraged governments to prioritise resilience and national security through industrial policy and protectionism. This approach, described as neo-mercantilism, is partly driven by the belief that the decline of manufacturing employment caused the rise of populism and that Chinese success is primarily the result of subsidies. The analysis argues that these views overlook China’s long-term investment plans and the scale of its domestic market, which has enabled companies to grow and compete globally.
Protectionist measures have so far produced limited results. After a decade of higher tariffs, sanctions and import restrictions, the United States has not reduced either its trade deficit or its dependence on China. Direct imports from China have fallen, but trade has been redirected through third countries.
The article distinguishes between macroeconomic imbalances and sectoral competitiveness. China’s current-account surplus is linked to the collapse of its property sector rather than to a specific trade policy, just as the United States’ trade deficit is linked to its fiscal deficit. Policies that increase Chinese domestic consumption or stabilise the property market could reduce the surplus, but they would not necessarily weaken China’s position in global manufacturing.
The industrial gap is therefore presented as primarily sectoral. China’s sustained investment in strategic industries has strengthened its manufacturing leadership, while Europe has focused excessively on saving rather than investment and, particularly in Germany’s case, relied too heavily on past industrial strength.
The macroeconomic environment also currently favours China. The property-sector downturn is creating deflationary pressure and improving the competitiveness of its real exchange rate during a period of rapid technological progress. Europe could theoretically pursue a weaker exchange rate, but inflationary pressures limit that option, and the euro area’s trade surplus does not create a strong tendency towards depreciation.
Because the problem is mainly sectoral, the proposed response should also be sectoral rather than centred on exchange rates. China manages its currency while maintaining a closed capital account, but a fully floating currency could potentially depreciate further, as occurred in 2015.
Managing the industrial deterioration in Western economies will require offensive measures, including investment in advanced sectors and regional industrial policies to support the transition. Tariffs and quotas alone are unlikely to provide a durable answer. Any European strategy for a possible trade conflict with China would first require stronger domestic industrial capacity to withstand retaliation.
The broader geopolitical competition is unlikely to disappear. China and the United States are investing heavily to secure technological leadership and control strategic sectors. China has spent years seeking greater self-sufficiency in natural resources, while the United States has adopted a similar strategy through increased investment in the Western Hemisphere.
Europe remains exposed because it lags in technology and depends on external supplies of natural resources, while uncertainty over Ukraine adds to its vulnerability. The region’s future influence will depend on whether it can turn investment into a modern industrial base. Without that effort, protectionist defences will remain neither effective nor credible, and Europe’s geopolitical influence will continue to weaken.
Sources: El País Economía.