If a ‘great rebalancing’ is coming, will China really have to pay for it?

According to economist Michael Pettis, a "great rebalancing" is on the horizon, and China will have to bear the costs of it. However, it's peculiar that Pettis, who insists that power determines who pays, fails to apply his argument to the United States. In his latest book, "A Great Rebalancing Is Coming: Who Will Bear the Costs of a Global Trade Adjustment?"

Pettis argues that today's trade imbalances are unsustainable, with China, Germany, and a few others selling more than they buy, while America purchases more than it sells. This surplus leads to either more joblessness or more debt for a rich economy, which Pettis suggests could be both.

Pettis traces the history of imbalances, including those in Latin America in the 1980s, East Asia in 1997, and Southern Europe after 2008. He believes that every imbalance ends, and every ending hurts. Pettis asserts that who suffers and pays in a crisis is determined by power, not virtue. He argues that the United States is best positioned to avoid an impending crisis, while China is most vulnerable to it.

The reason for this, according to Pettis, is that the IMF estimates China's current account surplus at 3.3 percent of gross domestic product (GDP) for 2025. While retail sales in December grew by only 0.9 percent, the weakest since late 2022, household consumption accounts for only about 40 percent of GDP. This suggests a spending problem for China.

Pettis acknowledges that one country's surplus is another's deficit and that debt is someone else's asset. However, he uses this perspective to paint a one-sided picture of China, which has a current account surplus of 3.3 percent of GDP, while the United States has a $40 trillion national debt and a $1.8 trillion deficit in fiscal 2025, equivalent to 5.9 percent of GDP and 100 percent of GDP, respectively.

Pettis argues that the United States has no choice but to keep the dollar as the reserve currency, use it as a sanction weapon, and enjoy the cheapest borrowing in the world, while imposing the bill for its deficit on China. He claims that ending US dollar dominance would be fiercely opposed by Washington, Wall Street, and big business.

He believes that Americans want to work more and buy less, which is why he recommends imposing tariffs on China. However, he fails to consider the costs of this rebalancing for everyone else.