Michael Pettis Warns of Impending Global Trade Rebalancing, Says China Will Bear the Costs
Quick Look
Michael Pettis argues that a great rebalancing of global trade is imminent, with China likely to bear the adjustment costs due to structural imbalances, weak domestic consumption, and its vulnerability in a power-driven system where deficits are sustained by debt or joblessness.
AI-generated summary
Why It Matters
Michael Pettis has long argued that persistent global trade imbalances are unsustainable and will eventually require adjustment, with costs falling on weaker economies due to power dynamics in the international system.
Michael Pettis says a great rebalancing is coming and China will pay for it. It’s strange how the man who insists that power decides who pays never tests his claim on Washington. The Beijing-based economist has been warning that a great rebalancing is coming since he published a book called The Great Rebalancing. That was in 2013.
His latest Foreign Affairs offering? You guessed it: “A Great Rebalancing Is Coming: Who Will Bear the Costs of a Global Trade Adjustment?”
It’s the same plot: Today’s trade imbalances are untenable. China, Germany and a few others sell far more than they buy. America buys far more than it sells. And for a rich economy, a permanent deficit means either more joblessness or more debt. How about both?
Then Pettis’ history tour. Oil money recycled into Latin America, blown up by rising interest rates in the early 1980s. East Asia in 1997. Southern Europe after 2008. Every imbalance ends. Every ending hurts. It may soon be China’s turn. Perhaps.
He is right about one thing: who suffers and pays in a crisis is decided by power, not virtue. Weak countries pay because they can’t borrow on their own terms, defend their currencies or slow down capital flows without triggering a crisis. He thinks America is best placed to escape an impending crisis, and China is most exposed to it. Why?
The IMF puts China’s current account surplus at 3.3 per cent of gross domestic product (GDP) for 2025. December retail sales grew 0.9 per cent, the weakest since late 2022. Household consumption accounts for only about 40 per cent of GDP.
What to Watch
AI outlook — possibilities, not facts
China will face increasing pressure to reduce its current account surplus and boost domestic consumption
Likely · Within months
Open Questions
- What specific mechanisms will trigger the rebalancing?
- How will China respond to external pressure to rebalance its economy?
- What role will European surplus economies play in the adjustment process?
