Global Imbalances as a Source of Power

• Current account balances as a source of geopolitical power: How surpluses and deficits create mutual dependencies
• The US and China as mutually dependent antagonists: Why Europe faces a strategic dilemma
• The new mercantilism is changing investment: What this means for investors

Why Current Account Balances are becoming a Source of Geopolitical Power

When China imposed export controls on rare earths in 2025, production lines in parts of European industry temporarily ground to a halt. The episode illustrates how current account balances and capital flows, long considered a specialist area of international economics, have become a matter of strategic dependencies and economic policy leverage. Global imbalances are widening again – and, alongside growth, inflation, interest rates and earnings, are consequently attracting greater attention from investors.

The political response to these tensions is a new mercantilism. It follows in the tradition of classical mercantilism, which sought to strengthen domestic production and exports through far-reaching government intervention. Today, the available instruments include tariffs, subsidies, export controls, currency management and local production requirements. Costs and competitiveness are no longer the sole determinants of the international division of labour; governments are intervening increasingly in trade and capital flows.

China and the US have the greatest leverage – albeit on opposite sides of the economic relationship. China has vast industrial capacity and strong positions in key supply chains and strategic raw materials. This enables the country to influence global supply. The US, by contrast, has one of the world’s most important consumer markets, the world’s leading reserve currency in the US dollar and the largest capital market. It therefore not only provides demand but also offers an investment destination for other countries’ excess savings.

This creates mutual dependence. China’s surplus model relies on other economies – particularly the US – accepting corresponding deficits and demanding Chinese goods. Conversely, these deficits are partly financed by capital inflows from surplus countries, meaning that the creditor does not automatically hold the stronger position. After all, surpluses and deficits must balance globally: surplus countries export not only goods but also capital, while deficit countries absorb that capital and provide the demand without which the surpluses could not arise.
 

China’s Surplus: both Strength and Dependence

China’s leverage lies on the supply side. The country’s current account surplus reached a historic high of around USD 735 billion in 2025, accompanied by net capital exports of a similar magnitude. The surplus is structural: China’s model, which prioritises investment and exports over private consumption, keeps the savings rate high and household demand low. At the same time, government support and the expansion of substantial production capacity have given Chinese companies strong positions in future-oriented technologies, enabling them to gain market share and drive down prices.

However, the surplus also exposes the model’s weakness: domestic demand is failing to keep pace with production, meaning that a significant share of output has to be sold abroad. This imbalance is being exacerbated by the property crisis. One of the most important channels for domestic investment is losing significance, increasing the pressure to invest excess savings abroad. If major markets are closed off, China must find new customers, strengthen consumption or reduce capacity. Industrial strength and dependence on foreign demand go hand in hand.
 

The US Deficit as a Strategic Lever

The US occupies the opposite position. Its current account deficit is often regarded as evidence of insufficient savings and industrial vulnerability. However, this view falls short. The United States is one of the world’s most important consumer markets and is also home to its largest and most liquid capital market. This allows it to attach conditions to market access, incentivise local production and control strategically important technologies. The central role of the US dollar and the country’s financial infrastructure also enables it to exclude individual states, banks and companies from payment systems or access to financing.

The current account deficit is therefore not merely an expression of insufficient savings but also a consequence of the US’s unique role in the global trade and financial system. Surplus countries can invest their savings there in liquid assets considered safe on a scale that few other capital markets can offer. Nevertheless, the domestic political costs are rising: growing external liabilities, large fiscal deficits and the decline in industrial capacity are fuelling the perception that the existing system comes at the expense of American jobs and production.

Developments that were long accepted as a side effect of the dollar’s dominance are therefore increasingly being met with tariffs and government intervention. This policy shift became particularly apparent with the broad expansion of US tariffs in 2025: the United States is increasingly attempting to use access to its market to redirect trade flows and relocate production to its own shores.
 

Europe caught between the Blocs

Germany and the EU face a particularly difficult situation – not least because Germany itself contributes to global imbalances through its large surpluses and foreign assets. For decades, the German model benefited from open markets and demand from China and the US; that foundation is now coming under pressure. German companies face strong competition in China, other emerging markets and the European single market – particularly in key industries such as automotive manufacturing, mechanical engineering, chemicals and electrical engineering. In addition to the familiar structural challenges affecting Germany as a business location, there is the threat of an external demand shock that lower energy costs, reduced bureaucracy and conventional reforms alone are unlikely to offset.

Europe therefore faces a strategic dilemma. Open markets remain economically advantageous. However, if China and the US selectively promote domestic production, shield strategic sectors and channel state-supported Chinese overcapacity into the European market, the pressure on Europe to adopt protectionist countermeasures will increase. Failing to respond would mean accepting the erosion of Europe’s industrial base. Protectionism and targeted industrial policy are thus becoming less a matter of choice and more a response to changing rules of the game.
 

What the new Mercantilism means for Investors and Capital Markets

For investors, the new mercantilism means that geopolitical risks will play a greater role in valuations. Alongside growth, margins and valuation levels, the positioning of a business model within the emerging economic blocs is becoming increasingly important.

Companies with regionally diversified revenues, resilient supply chains and the ability to manufacture locally are likely to gain in importance. By contrast, business models that depend on individual consumer markets, cross-border supply chains or global economies of scale are likely to come under greater pressure.

At the same time, higher government spending, more expensive production and lower economic efficiency could increase inflationary pressure and term premia. In currency markets, vulnerability is likely to rise particularly where current account deficits coincide with volatile capital inflows and there is no meaningful reserve currency status.

Ultimately, diversification is becoming more challenging. In addition to asset classes, investors should therefore pay closer attention to regions, currency areas, consumer markets and supply chains. The new mercantilism is unlikely to weigh on capital markets uniformly; instead, it is likely to widen the gap between winners and losers.