I wrote a few days ago in relatively general terms about imbalances in international trade. Now there is increasingly heated debate about the Chinese imbalance, which, according to many pundits, poses a massive threat to the global economy and to Germany. Many also refer to it as the Chinese imbalance 2.0.

Indeed, after several decades of relatively balanced trade, China has once again recorded a significant trade surplus in recent years. The International Monetary Fund estimates a current account surplus of 3.7 per cent for last year, after the surplus had hovered around the 2 per cent mark since 2010. However, this still leaves China a long way from the peak levels of 2007/2008, when the figure had reached almost 10 per cent.

I published an article on the subject in November 2025, from which I have reproduced a few sections here. There is a recent update at the very end.

“These days, however, new findings are constantly emerging that are supposed to show that China is becoming a real threat to the global economy. The Financial Times, for example, presents a chart showing that, for the first time since 2010, China has a surplus in trade in capital goods with Germany. This looks very striking – and yet is largely normal. Brad Setser has published a major piece at the Council on Foreign Relations arguing that China’s rapidly rising trade surplus is a global problem, but this too is unconvincing.

The chart in the Financial Times is also striking in that it shows that, in all the years since 2010, Germany has maintained a massive surplus in trade with China. In Germany, everyone probably regarded this as a normal outcome of German superiority. Now it’s gone, and there’s grumbling in the German underground that something must be amiss if the Chinese suddenly dare to try to oust us from the world markets in our areas of specialisation.

I’m experiencing a sense of déjà vu, because there was a time in Germany when people were in a panic over an Asian competitor who, however, turned out to be a toothless tiger over time. In the early 1980s, the then German Minister for Economic Affairs, Otto Graf Lambsdorff, travelled to Japan and returned with the conclusion that we would have to throw all conventional notions of economics out of the window, because the Japanese were in the process of overrunning us.

A Chinese threat?

Setser initially draws on a graph showing that, as a percentage of Chinese GDP, the export surplus in manufactured goods is now significantly larger than in recent years. There can be no doubt about that, but it is quite astonishing that the surplus is still considerably smaller than it was at the start of the century. Let us recall: at the start of the century, it was primarily Western companies that were manufacturing in China at rock-bottom prices and exporting from there to the whole world. By combining German high-tech with low Chinese wages, they were able to sell at incredibly low prices and still rake in high profits. Nobody got upset about this because it was the ‘good’ Western pioneer companies in China that were benefiting from it.

Now that China is once again showing a rising trade surplus, it is naturally (and unsurprisingly) no longer being driven by as many Western companies as it was back then. And now, would you believe it, for the past few years China has even been exporting more cars than before – and even more cars than Japan, which had previously been the world leader. But what is so special about that? A country that is considerably larger than Japan is, after many decades, overtaking its neighbour because it has managed to catch up technologically – in other words, doing exactly what any reasonable person would expect of a successful developing country. Yet the anger of those being overtaken is plain to see. There is good reason to believe that the new Japanese government is stoking political tensions with China for such reasons as well.

At first glance, a graph in which Setser compares China’s manufacturing surpluses with global GDP is also impressive. It shows that in recent years, China’s surplus has far exceeded those of Japan and Germany. In its heyday (the 1980s), Japan once achieved a surplus of one per cent of global GDP; Germany reached only 0.5 per cent in 2009/2010, whilst China now stands at almost two per cent. The US has a deficit of more than one per cent. But what does that tell us? A nation whose population is almost ten times that of Japan’s and fifteen times that of Germany’s is overtaking both countries in absolute terms (relative to global GDP). So what?

Up to this point, Setser deals only with the trade balance data, but not with the current account, which, according to IMF data, most recently closed with a surplus of around 2 per cent of China’s GDP. Ultimately, however, it is always only the current account that can indicate a real imbalance in trade, because services are not inherently inferior to goods.

Setser plays this down, calling it ‘statistical shenanigans’, but without offering any truly compelling argument as to why the estimates of the current account deficit should be so inaccurate. The current account deficit as a percentage of GDP is undoubtedly the only relevant indicator, and the IMF has a monopoly on calculating these figures.

The political response

In a reasonable political assessment of China’s successes, one must continue to acknowledge that China, as a catching-up economy, still possesses absolute cost advantages. Its wage levels remain significantly lower than in the West. If it succeeds in utilising or copying Western technology, this situation will remain unchanged for several more years. This applies particularly to industry. Consequently, almost all complaints about dumping from China are unjustified.

(See a more detailed explanation on the wage issue in China at the end)

However, one could also expect a catching-up country to largely balance its current account – if one were prepared to do so oneself. Germany, as the ultimate mercantilist, is out of the running from the outset. Anyone who has boasted extremely high current account surpluses for over twenty years and was even proud of them has forfeited any right to criticise other countries for rising surpluses. This also applies to the EU as a whole, which defends its (German) surpluses.

It should also be noted that, as the euro appreciated against the US dollar, the Chinese currency also depreciated against the euro.

However, anyone wishing to change the currency situation would have to pull off a far greater feat than anyone in Europe is currently capable of. Thus, the European Commission will continue to impose tariffs on China in the coming years, based on unfounded allegations of dumping. As always in history, the rich countries will fight tooth and nail against a development that merely demonstrates that wisely led developing countries do indeed have a chance of asserting themselves against the Western top dogs.”

That was the text from six months ago.

Here is a recent update:

The wage issue in China is, however, largely misunderstood, presumably even in China itself, if one takes note of the comments made by some Chinese officials. It is completely misunderstood by Western economists. They simply have no grasp of this issue because they still believe in the fairy tale of the comparative advantages that a developing country is supposed to have. Absolute advantages are, by assumption, excluded in the prevailing neoclassical trade theory.

Unlike the Western countries with which it competes, China is only on a par with Western technology in a few areas. Viewed across the entire economy, the level of productivity in China is still far lower than in the West. Estimates vary widely, but it is certainly less than half that of Germany when calculated in a single currency.

Consequently, the overall level of wages in China is also much lower than in the West, as wages must align with productivity. Assuming, as is realistic, that wages for comparable work in China do not diverge significantly, regardless of the sector in which people work, wage levels remain low even in sectors that now employ the most advanced Western technology. Consequently, Chinese or Western companies can combine relatively low wages with high productivity in these sectors. Unit labour costs are consequently very low. All production in China (whether Western or Chinese) that can achieve such a combination is highly competitive. Companies can either lower prices more than the competition or make significantly higher profits per unit whilst keeping prices unchanged.

This absolute advantage has nothing to do with dumping or state subsidies, but is simply a reflection of the real lag that the Chinese economy still faces. Although this advantage will diminish over time as Chinese wage levels converge with those of the West, it is likely to persist for another ten to twenty years. Countries such as Japan and Korea also had this advantage and have since lost it. China, however, is considerably larger and should therefore certainly be urged by the international community to do everything possible to avoid running persistently high current account surpluses despite this advantage. Allowing a certain degree of real appreciation of its own currency is the most important measure.