Last week, China’s trade surplus crossed the threshold of one thousand billion dollar for the first time. In the first eleven months of 2025 alone, China exported one trillion dollar more than it imported. It is a milestone that both illustrates the export strength of Chinese industry and exposes the deep problems in China’s growth model, while further fueling calls for protectionism in the rest of the world.
Donald Trump is unpredictable in many respects, but his views on the trade balance have been consistent for decades. As early as the late nineteen eighties, he publicly complained about trading partners allegedly exploiting America. In an interview with Playboy in 1990, he said that “our allies are making billions by ripping us off.” That conviction has remained unchanged ever since. The president looks at the balance of payments the way an entrepreneur looks at a corporate balance sheet. Deficits are losses and therefore “bad,” surpluses are profits and therefore “good.” That explains his obsession with reducing the trade deficit and his preference for import tariffs and a weaker dollar. The only problem is that an economy is not a real estate business.
There is, in fact, no direct relationship between the current account balance and economic prosperity. Deficits do not automatically mean that a country is “losing”; they often reflect strong domestic demand from consumers and companies that import more. But that does not mean that large external deficits are entirely harmless. The last time America recorded a surplus was almost 35 years ago. The flip side of these persistent deficits is that the US has built up a substantial foreign debt position. And while that does not necessarily have to be problematic if the borrowed money is invested in productive capacity, that has hardly been the case in America.
As a result, America has become dependent on the confidence of foreign investors, something Mark Carney once described, as governor of the Bank of England, as “the kindness of strangers.” The dollar’s status as the world’s reserve currency helps, but it does not grant a license for unlimited deficits. The US net international investment position is now almost 80 percent of GDP in the red. And whereas America used to earn more on its foreign assets than it paid out to foreign creditors, that advantage has disappeared.
The gradual deterioration of America’s balance of payments is a ticking time bomb beneath the economy and global financial markets. To understand what is actually needed, a simple model by Australian economist Trevor Swan is helpful. He distinguished between two forms of economic equilibrium: internal balance (low inflation and full employment) and external balance (a sustainable current account). The crucial insight is that there is only one combination of domestic demand and exchange rate at which both equilibria are achieved simultaneously.
Where do the two largest economies stand today? America is running a large current account deficit, while inflation is a bigger problem than unemployment. China is posting that record surplus, while deflation and weak consumer spending are plaguing the economy. The Chinese growth model, based on export-driven production and state-directed investment, is running out of steam. Weakness in employment and wages, combined with falling house prices, has undermined domestic consumption.
Export has become the only way out
That is bad news for the global economy. China has changed from a locomotive pulling everyone along into a drag on global consumer growth. The country is exporting its problems to the rest of the world while postponing domestic reforms. The renminbi has fallen on a trade-weighted basis over the past year, which is hard to reconcile with a country running structural trade surpluses.
The solution does not lie in exchange rate adjustments alone. What is needed is a coordinated approach: an expansion of domestic demand in China and a restraint of demand in America. For the US, that ideally means higher taxes to put public finances in order. Current import levies have the same effect as a tax on American consumption; they work much like an increase in value added tax. Stronger Chinese demand could absorb American exports and keep the US at full employment while public finances are repaired. At the same time, it would breathe new life into the Chinese consumer and reduce the trade surplus.
Unfortunately, the risk is high that things will move in the wrong direction. Chinese policymakers have sought more fiscal room to stimulate this year, but are usually reluctant to use fiscal stimulus. Raising taxes is a political mortal sin in the US. Remarkably, import levies with the same effect are not yet seen as a tax increase. The fundamental challenges of such policy coordination between Beijing and Washington make a “grand bargain” even less likely.
The trade deficit is not the result of unfair competition that can be corrected with import tariffs, but of deeply rooted structural imbalances in both the American and Chinese economies. A “level playing field” is not created through import tariffs, but through fundamental reforms on both sides of the Pacific. As long as those fail to materialize, the time bomb will keep ticking.
Han Dieperink is chief investment officer at Auréus Vermogensbeheer. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co.