From Neue Zürcher Zeitung's TheMarket.ch, May 14:
Europe’s economies have benefited from globalization. Now they – especially Germany – must adapt to a new world order. To avoid becoming a shock absorber between the U.S. and China, Europe must act decisively.
As trade tensions intensify and the post-Cold War era of economic globalization gives way to one more fragmented and contested, it is tempting to see the shifting balance of global trade through the lens of the U.S.-China rivalry. But this view is incomplete – it is not just Washington and Beijing who must adapt to a changing world order. Europe, among the greatest beneficiaries of the last four decades of globalization, faces a reckoning of its own.
Since the late 1970s, the global trading system has relied on a particular architecture: a small group of countries, most notably the United States, the United Kingdom, and Canada, absorbed persistent trade deficits so that others – China, Germany, Japan, South Korea, and the Nordic economies – could run large, consistent surpluses.
These surplus economies systematically repressed domestic consumption in favor of export-led growth, using tools such as low wages, undervalued currencies, credit controls, and industrial policy to bolster manufacturing. Because these tools suppress domestic demand, they require that the resulting excess production be offloaded abroad. After all, if some countries are to produce more than they consume, other countries must consume more than they produce.
Those other countries are mainly the United States and its anglophone peers. With deep, flexible financial markets and open capital accounts, the U.S., U.K., and Canada became the natural destinations for the foreign savings of surplus countries, absorbing roughly two-thirds of the global total.
As hundreds of billions of dollars in foreign capital poured into their economies, their currencies appreciated and trade deficits deepened. The benefits of this system – cheap imports, abundant capital – were real, but so were the costs: deindustrialization, inequality, excess consumption, and rising household and government debt.
Now, however, this era is ending.
A reversal of America's longstanding role
Across both the Trump and Biden administrations, the U.S. has made clear its desire to reduce its trade deficit, rebalance its economy and revive manufacturing. This shift is about more than tariffs or reshoring supply chains; it represents a reversal of America’s longstanding role as the world’s consumer of last resort. As Washington begins to push back against absorbing the surpluses of others, the implications for the rest of the world – especially for Europe – will be profound.Trade, after all, must balance. If the United States reduces its deficit, surplus countries must either reduce their surpluses or find new deficit countries to fill the gap. Neither outcome will be easy.
For surplus economies in Europe and East Asia, their surpluses are not incidental but structural. They reflect compressed wages, export dependency, and weak domestic consumption. Rebalancing will require wrenching changes: reforms to labor markets, changes in fiscal priorities, and perhaps most difficult of all, a reallocation of income from corporate and exporting sectors toward households.
China is a case in point. Since the collapse of its real estate bubble, Beijing has leaned even more heavily on exports to support growth. But if Washington pushes back, China’s manufacturing overcapacity must go elsewhere. That «elsewhere,» for all practical purposes, is Europe.
This creates a dilemma for the EU, especially for countries like Germany whose economic model is rooted in export surpluses. Europe finds itself caught in a tightening vice: squeezed between an America looking to revive domestic manufacturing and a China desperate to preserve domestic stability by exporting excess production....
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