Paris - Global imbalances are moving back to the top of the policy agenda, reflecting angst about the “second China shock.” As China’s industrial exports have surged while imports have stagnated, its growing trade surpluses have become a problem for everyone

The familiar recommendation to address this state of affairs is for China to consume more, Europe to invest more, and the United States to consolidate its fiscal position. But these prescriptions are incomplete, because each fails to capture the industrial and technological dynamics that are now at work.

At the root of the problem is the increasing asymmetry and concentration of industrial production and capacity in a few countries. Today’s imbalances are not simply the result of poor macroeconomic coordination. Rather, they reflect strategic behavior and a departure from the bias toward openness on which the postwar trade order was built.

Gone is the idea that countries would try to maximize consumer welfare within a shared rules-based system. Instead, trade and industrial strategies in China and some other economies have exploited two old lessons of economic theory.

First, in modern economies, scale and learning decide all. A sector’s performance improves as it gains size, and productivity increases and unit costs decline as experience accumulates. Together, scale and learning interact to generate increasing returns and create cumulative dynamics, where performance strengthens performance and ensures economic and technological dominance.

In other words, comparative advantage, as the Nobel laureate Paul Krugman emphasized as early as 1987, is created, rather than arising from underlying national endowments. China owes its spectacular success in electric vehicles, batteries, and solar panels not to some pre-existing comparative advantage, but to a cumulative interaction of scale, learning, industrial policy, and global market penetration.

Second, to generate this dynamic, firms must export, because domestic demand is rarely sufficient to reach the scale needed for technological leadership. Gaining global market share is not a by-product of success but rather a condition of it.

Meanwhile, to channel domestic resources toward research, production capacity, infrastructure, and industrial ecosystems requires policies that force savings and shift investment from non-tradable to tradable sectors, including through exchange-rate management. The risk of periodic oversupply and imbalances is seen as an acceptable cost of building scale in strategic sectors.

The analytical foundations for such policies have existed for decades. What is less often noticed is their price. By pushing exports and constraining consumption, such a strategy implies running sustained current-account surpluses. A current-account surplus is necessarily associated with a net export of capital—the economy necessarily produces more than it consumes and invests at home, which is both a financial and a real transfer to the rest of the world. Its workers and households forgo part of the goods and services they could otherwise enjoy. The difference is saved and exported.

These financial and real transfers are inseparable—two expressions of the same strategy. And herein lies the paradox: Countries receiving the transfers increasingly object to them.

In terms of welfare, European consumers should welcome cheap electric vehicles, batteries, and solar panels that are subsidized directly or indirectly by Chinese workers and taxpayers. But Europeans instead see them as a threat, which is rational from a dynamic perspective. Cheap imports may raise purchasing power today, but they can destroy the industrial base on which tomorrow’s income depends. The transfer is generous in the present, but costly in the future.

The calculus is inverted for the surplus country, which sees present transfers as a small price to pay for unleashing the cumulative process of learning-by-doing, through which comparative advantage becomes larger and increasingly irreversible. The current-account surplus is not the final objective. It is a means to achieve market and technological dominance.

A useful complement to this strategy is capital controls. Controls on outflows keep domestic savings at home, while restricting inflows prevents the economy from rebalancing from tradable to non-tradable sectors—the opposite of what the strategy aims to achieve. Capital inflows strengthen the currency, weaken exports, and support consumption. They accelerate domestic absorption before scale and learning are secured, thus impeding the pursuit of comparative advantage.

These drawbacks explain why several Asian economies, China above all, have combined high savings, capital controls, exchange-rate management, and industrial policy. Each of these instruments is usually analyzed separately, with capital controls treated as financial repression, exchange-rate management as mercantilism, subsidies as trade distortions, and high savings as a macroeconomic imbalance. But, together, they form a coherent strategy for blocking normal domestic adjustment, keeping resources in tradable sectors, preserving competitiveness, and building dynamic comparative advantage.

The liberal assumption that all countries seek to maximize consumer welfare within a common trade-policy framework was too simple. We must accept the reality that different countries have different objectives with different time horizons. Global imbalances reflect deliberate strategies that use trade surpluses as instruments of industrial policy. The question is not just how to cope with insufficient coordination, but how to respond to conflicting strategies.

Acknowledging reality is a prerequisite for devising effective policy responses. But that doesn’t mean advocating aggressive tariffs and retaliation, which at best may provide short-term relief (at consumers’ expense), while failing to address the underlying dynamics that caused the problem in the first place.

Instead, different trade and exchange-rate disciplines will be required. In a world of powerful externalities and pronounced asymmetries, large actors may continue to have natural incentives to pursue export promotion and strategic dominance. If so, only effective red lines on market access and domestic subsidies can keep them in check. Otherwise, scale will compound itself, and the largest players will become harder to challenge.

Benign neglect of exchange rates is no longer tenable. Trade rules cannot be separated from exchange-rate policies and capital controls. Active surveillance of exchange-rate policies should therefore become a core part of the trade regime. As long as this goes unrecognized, the rules designed to govern international economic relations will remain little honored and often breached.
 

> Read the article on the Project Syndicate's Opinion Page

> To go further, read "The Transfer Paradox. Rethinking Global Imbalances", Ifri Memos, July 2026, by Sébastien Jean & Jean-Pierre Landau