Tensions between US and China point to more pain ahead

Members of the International Monetary Fund at a meeting in Washington, DC (Pic: Flickr/IMF)

The world economy faces potentially dire consequences without action to reduce “global imbalances” between the US and China. That was the warning the International Monetary Fund (IMF) loan shark issued last week.

China has a huge—and growing—trade surplus as its exports soar, while the US has a huge trade deficit. This means the US is buying more from other countries than it’s selling to them.

“History shows”, the IMF opines, “that large imbalances can unwind abruptly through capital flow reversals, asset price corrections and weaker growth.”

In other words, it can lead to currency devaluations and interest rate hikes, stock market crashes and recession.

The IMF, which was set up as part of the US liberal capitalist order after 1945, points out the US is continuing to run a massive trade deficit. It is 0.9 percent of world Gross Domestic Product (GDP)—the total value of goods and services produced in the world.

This exceeds the surpluses of the European Union (EU) and China combined.

This is despite Donald Trump’s tariffs, which were intended to reduce imports and bring manufacturing back to the US. Instead, his tariffs have pushed up US inflation to 3.5 percent, well above the Federal Reserve’s target of 2 percent.

At the same time, imports are increasing due to the massive investments in AI infrastructure. The US is relying on a huge inflow of foreign investment to finance its trade deficit.

If there’s any significant change in capitalists’ willingness to invest in the US, it will have dramatic implications.

That vulnerability has been increased by the growing role of hedge funds and other financial institutions, which are fickle investors.

The IMF is also worried that imbalances between the US and China will continue to increase international tensions and trade wars.

The Chinese trade surplus has continued to grow and now represents some 0.6 percent of world GDP. The EU is itself now considering serious restrictions on Chinese imports.

In order to address the dangers posed by these huge and persisting imbalances, the IMF is proposing co-ordinated international action.

In short, it wants the US to reduce and China to increase its domestic spending.

But the contradictions of capitalism are not so easily overcome. Inter-imperialist rivalry is more intense than ever and there are huge political and economic costs and barriers to changing these imbalances.

Consumer spending in China has been depressed for years ever since the Chinese property bubble burst.

China lacks a comprehensive social security system—despite supposedly being a “communist” state.

Many people in China had become dependent on growing property values, which have now slumped, as insurance against sickness and old age.

So now they are having to save more.

On top of that, local government is hamstrung with debts that used to be financed by property boom land sales. The Chinese central government itself seems relatively content to see economic growth through exports.

As for the US, economic growth is currently being powered almost solely by massive AI investment and spending by the richest 10 percent of the population. On paper, they have seen their wealth rise massively through the stock market boom.

Steps to curb AI-related imports would raise prices. And it would threaten the sector’s profitability, which is needed to justify the loans and stock market valuations it receives.

Curbing consumer spending would mean hitting that richest 10 percent, which is not something Trump has any intention of doing.

And if spending growth were to slow in the US, it would exacerbate the enormous federal government budget deficit.

There is no painless way out of the multiple contradictions of contemporary capitalism.

We can rest assured that the bosses and the governments that represent them will seek to impose most of the pain on the working class and the poor.

It’s our job to build the resistance to that now.