By N Chandra Mohan, The writer is an economics and business commentator based in New Delhi
France’s President Emmanuel Macron rightly underscored the danger of growing imbalances which threaten the global rules-based trading order during his fourth visit to China earlier this month and also in the Financial Times. Despite all the bonhomie of a state visit, his comments highlighted the escalating tensions between Europe and China over the dragon’s burgeoning trade and investment imbalances. China’s trade surplus with the rest of the world has in fact hit a historic $1 trillion-plus this year till November. In sharp contrast, the world’s most powerful economy, the US’s trade deficit with the rest of the world registered an equally historic $1.2 trillion last year. Macron’s discomfiture is that Europe—as indeed the rest of the world—suffers collateral damage in the hegemonic struggle for dominance between Washington and Beijing that is fragmenting the global economy broadly into US-centric and China-centric blocs.
Hegemonic Tug-of-War
US President Donald Trump’s disruptive tariffs on China—despite a fragile trade truce—has only worsened matters by redirecting its exports to Europe and other markets, increasing its bilateral surplus by 19.5% year-on-year (y-o-y) to $266.7 billion till November, according to China’s customs data. While the dragon has sharply reduced its reliance on the US market—its trade surplus is down by 21% y-o-y to $257 billion—due to Trump’s tariff wall, its surpluses have sharply risen in other destinations like the Association of Southeast Asian Nations members, Africa, and Latin America. China’s surplus with India, for instance, is up 13% to $105.6 billion despite higher imports from India. All of this is a recipe for increasing frictions with trading partners if they resort to higher tariffs and other measures to protect their domestic manufacturing bases from the onslaught of cheap Chinese imports. Beijing must heed Macron’s warnings.
France’s concern is that Europe is at the last stop before a crisis; that unless there is a course correction, this state of affairs will worsen global fragmentation. Macron’s approach, however, sharply contrasts with that of Trump who is resorting to punitive tariffs to reduce the US’s deficit. Although that playbook is also available to Europe, the French President instead prefers a more cooperative than confrontational approach to addressing imbalances with China. He realistically recognises that these are both the result of weak productivity in Europe and China’s policy of export-driven growth. Both Europe and China have the means to reverse these imbalances if the continent’s fragmented single market is considerably strengthened and savings are unleashed to spur innovation and faster economic growth. “Levelling the playing field for investment across the two regions would raise the share of domestic demand as a source of growth,” argues Macron, adding that while Europe has invested 240 billion euros in China, China has invested only 65 billion euros in Europe. Rebalancing investment flows are bound to result in greater two-way flows of trade between Europe and China.
Currency and Deflation Trap
Beijing, for its part, must redress these imbalances that have the potential to worsen global trade tensions and result in 1930s type of beggar-thy-neighbour protectionism. The International Monetary Fund’s MD also stated that as the second largest economy in the world, China is simply too big to generate much growth from exports; that continued dependence on export-led growth risks furthering global trade tensions. This is happening as domestic demand is persistently weak in part since the property sector is on a shaky footing. This has depressed consumer confidence leading to deflationary pressures, which in turn has resulted in a depreciation of the renminbi vis-à-vis the US dollar. Macron forcefully emphasised that Europe’s competitiveness—as indeed the rest of the world’s—should not be a casualty of renminbi and dollar depreciation. This issue will be indeed at the heart of the Group of Seven (G7) French presidency’s agenda next year. Rebalancing therefore is necessary to stimulate greater domestic demand to absorb these surpluses that make global imbalances increasingly unsustainable.