Global imbalances and the China challenge

China’s trade surplus is widening, its manufactured exports are surging, and the political backlash is intensifying. This column argues that the widening trade surplus reflects not just macroeconomic imbalances but a growth model aiming at industrial and technological dominance, sustained by high saving, capital controls and exchange-rate management. The resulting comparative advantage, engineered through scale, subsidies and learning, is self-reinforcing and hard to challenge. Partners should coalesce around a common agenda combining renminbi appreciation alongside stricter international disciplines on subsidies and market access.

Global imbalances are back at the top of the policy agenda. The US deficit is important, but the most striking development is China’s trajectory. Its trade surplus is widening, its manufactured exports are surging, and the political backlash is intensifying. Europe is especially exposed, with its car industry under severe pressure.

The situation has triggered an intense policy debate. The IMF and economists associated with it emphasise the macroeconomic origins of the problem (Gopinath et al. 2026, IMF 2026). Since the current account is, by identity, equal to national saving minus domestic investment, priority should be given to domestic rebalancing. China should consume more, Europe should invest more, and the US should reduce its fiscal deficit. Correct those policies, the argument goes, and exchange rates would adjust while pressure on the global economy would ease (Weder di Mauro et al. 2026)

Other observers point to the significant undervaluation of the renminbi – between 12% and 21% according to the latest IMF Article IV consultation (Nageswaran and Srinivas 2026, Setser 2026). Given that China operates an administered exchange-rate regime, this situation largely reflects a policy choice.

This column is closer to that second view. But it also takes a longer-term perspective and draws broader conclusions about how to address the China challenge. We argue that, while imbalances appear as inequalities between macroeconomic aggregates, they are deeply rooted in fundamental differences in growth models and approaches to international trade. They call for a renewed approach to international economic relations and a longer-term view of exchange-rate adjustment.

We make three arguments.

China’s model is different

First, China has a distinct model of growth and integration into the global economy. When China joined the WTO in 2001, Western governments assumed that economic integration would gradually produce convergence. China would embrace the liberal understanding that underpinned the global trading system; market forces would play a larger role, and its priorities would come to resemble those of other major trading nations.

China has indeed become much richer – a major achievement. But convergence has not followed. On the contrary, since 2015, its approach to international economic relations has increasingly diverged from that of the rest of the world. Western countries trade because they want their consumers to access cheaper goods. China trades to put its producers and technology in a dominant position. Its objective is first to achieve greater self-sufficiency and then to establish lasting industrial and technological superiority in as many sectors as possible. This was already clear in 2015 with the adoption of the “Made in China 2025” objectives, and it has since been confirmed and expanded in the recent 15th plan. Industrial capacity is not simply there to meet demand. It is an asset in its own right: a source of technological capability, national resilience, and geopolitical influence.

Comparative advantages can be created

Our second argument is analytical. China’s economic strategy rests on a simple insight: comparative advantage is not inherited. As Krugman (1987) emphasised 40 years ago, it can be created. Competitive advantage can emerge through scale and learning. The more an industry produces, the more efficient it becomes and the more it learns. Success becomes cumulative. Typically, protection and subsidies would initially help some industries to achieve scale. The initial improvement may be reinforced further through learning. The pattern of comparative advantages is altered as a result. China has understood and applied this better than most western governments. Empirical evidence over recent years confirms that domestic subsidies boosted net exports in China’s targeted sectors (Jean 2026).

Together, scale and learning effects generate powerful dynamics. The striking feature of China’s success in electric vehicles, batteries, solar panels, and other advanced manufactures is not the existence of an ex ante comparative advantage. It is the cumulative interaction of scale, learning, industrial policy, and global market penetration. Once established, this technological lead can become difficult to challenge, as learning itself creates a barrier to entry. The resulting dynamics are illustrated, for the car industry, in Figures 1 and 2. 

Figure 1 Average of subsidies by firms’ headquarters location in the automotive sector (percentage of annual firm revenue)

Note: Subsidies comprise government grants, income-tax concessions, and below-market borrowings.
Source: OECD MAGIC database.

Figure 2 China’s car exports (thousands of cars, trailing 12-month sum) 

Source: Authors’ calculations based on China’s customs statistics (heading HS8703), as retrieved from Global Trade Tracker.

But even for China, domestic demand is not sufficient. To reach the necessary scale, firms must export. Gaining global market share is therefore not a by-product of success, it is a condition for achieving it. The external surplus and excess capacity are symptoms, not objectives. They are natural consequences of a development model that relies on foreign markets to sustain industrial scale.

The analytical foundations for such policies have existed for decades. What receives less attention is their cost. This model requires substantial transfers of resources, both to foreign consumers and within the Chinese economy.

Internationally, foreign consumers benefit from inexpensive Chinese electric cars, batteries, and solar equipment. They are subsidised, directly or indirectly, by Chinese workers and taxpayers. In the short run, this is a real gain. But importing countries also see cheap imports as a threat. While they raise purchasing power today, they may weaken the industrial base on which future income depends. The static gain comes at the cost of a dynamic loss.

Within China, households must be incited, even forced, to support producers and exporters through high savings, limited social protection, preferential credits and subsidies. Household consumption, while growing fast, is lower than what China’s income and productivity would otherwise permit.

This is where the exchange-rate regime matters, together with controls on the capital account. An appreciation is clearly negative for exports in the short run and has therefore been resisted by China. But the longer-term effects are even more important. Movements in the real exchange rate affect the relative price of tradable and non-tradable goods. A real appreciation reduces the profitability of the tradable sector and draws labour and capital toward non-tradable activities. This is precisely the opposite of what the strategy seeks to achieve. Appreciation must therefore be prevented. Even more important, because investment is driven by long-term expectations, the exchange-rate regime must credibly limit the risk of future appreciation. To make this strategy sustainable, the gross foreign inflows potentially attracted by productive activities’ high rates of return must also be controlled: capital inflows, like natural-resource windfalls, can crowd out manufacturing (a ‘financial resource curse’; see Benigno et al. 2025). 

The policy therefore combines high saving, capital controls, exchange-rate management, and industrial policy. These instruments are usually analysed separately: capital controls as financial repression, exchange-rate management as mercantilism, subsidies as trade distortions, and high saving as a macroeconomic imbalance. Taken together, however, they form a coherent strategy. They limit domestic adjustment, keep resources in tradable sectors, preserve competitiveness, and help build dynamic comparative advantage.

A common agenda to confront realities

Our last argument concerns policy responses. China’s partners must confront three realities. First, the problem is not simply one of inadequate policy coordination; it results from conflicting national strategies. Willingly or not, Chinese consumers are more patient and bear a larger sacrifice of current consumption in pursuit of longer-term, sometimes non-economic, objectives. 

Second, dynamic comparative advantage has been allowed to operate largely unchecked for more than a decade, and competitive positions secured through scale and learning are now deeply entrenched. China’s position in critical minerals, manufacturing, and key supply chains gives it considerable leverage.

Third, the multilateral trading system is much weakened, international economic relations have become more transactional. Many countries, particularly in the emerging world, now have strong incentives to pursue opportunistic strategies and often to accommodate, rather than challenge, China.

For advanced economies, especially Europe, tariffs or import barriers can provide only temporary relief, at best. China’s partners need to create, if not a new order, at least a new framework for rebalancing economic relations. Henry Kissinger, hardly an advocate of confrontation with Beijing, wrote of the need to construct a “network of incentives and penalties” capable of shaping China’s perceptions and creating the conditions for cooperation (Kissinger 1994: 717). Over time, China’s major trading partners need to coalesce around a common agenda, combining stricter and more effective disciplines on industrial policy and subsidies with greater reciprocity in market access.

In the immediate future, exchange-rate adjustment is the most direct remedy. The IMF, within its surveillance mandate, is uniquely placed to call for an appreciation of the renminbi, which is fully justified. Even though such a call would probably not directly influence China, it would help coordinate views and expectations about world imbalances and their consequences. Appreciation would reduce competitive pressure on China’s trading partners while shifting purchasing power toward Chinese households; it might feed deflationary trends, but in this case, it will give the government additional reasons to counter it with more proactive budget policies. Ideally, it should even be accompanied by an agreement about a credible path toward future appreciation as China continues to converge toward advanced-economy income levels. Together with stricter disciplines on subsidies, this would contribute both to external rebalancing and to the internal reallocation of resources from production toward consumption.

Source : VOXeu