concerns about an aggressive beijing displacing an inward-looking washington as leader and guarantor of global trade were heightened this week when donald trump announced monday he would quickly pull the u.s. out of the trans-pacific partnership. his remarks were soon followed by shinzo abe, who said a tpp without america <u+201c>has no meaning.<u+201d> statements from beijing seem to confirm the validity of these concerns. tu xinquan, an economist who has advised beijing on trade issues, told reporters last week that <u+201c>if the u.s. gives up its leadership here, of course china will take the role.<u+201d> on sunday in peru, president xi jinping pointedly championed globalization against a tide of rising protectionism. but it would be nearly impossible, given china<u+2019>s economic requirements, for it to replace the u.s. at the center of global trade. even china<u+2019>s official voice, the people<u+2019>s daily, pointed out monday how unlikely it was that china could <u+201c>overtake the u.s. to lead the world.<u+201d> this is because china must accommodate high and rising trade surpluses to moderate a stark trade-off between rising debt and rising unemployment. after years of deep imbalances and accelerating credit growth, china this year met its 6.7% gdp-growth target<u+2014>needed to stabilize employment<u+2014>only by growing debt in a frightening amount equal to more than 40 percentage points of gross domestic product. debt limits are a major constraint on china<u+2019>s difficult adjustment. the country must therefore rely on its trade surplus for crucial breathing space, with each percentage point of surplus substituting for about 10 percentage points of debt. to see how this affects china<u+2019>s leadership role, consider how the u.s., only after 50 years as the world<u+2019>s largest economy and a negligible governance role, finally came to dominate global trade. this occurred over two separate periods. the first ran for roughly five decades beginning with world war i. two highly destructive world wars left all the world<u+2019>s major economies acutely short of capital<u+2014>all except for the u.s., which began the period as the world<u+2019>s largest surplus nation and its main exporter of savings. this inevitably put america at the center of the emerging economic order. by the 1970s, conditions were very different. the other advanced nations had rebuilt their economies, global savings were abundant and other forms of demand determined the growth rates for most economies. rather than receive access to scarce capital, these countries wanted instead to export capital, i.e., to expand demand by increasing exports of tradable goods while constraining imports. with its flexible financial system and the gradual elimination by the 1970s of all capital restrictions, the u.s. quickly adapted and began running large deficits, the costs of which, in the form of unemployment and consumer debt, america was willing to absorb for political advantage. this is the key reason why china cannot replace the u.s. as the leader of global trade. participants in a trading system whose dominant member, like the u.s., runs large, persistent deficits grow faster with higher net exports, whereas in a trading system whose dominant member must run large trade surpluses, like china, participants must absorb net imports and so accept lower growth. only undeveloped economies that eagerly need capital would willingly join the latter. for three decades americans ran deficits willingly. but recently, with a lowered u.s. share of global gdp, higher income inequality and the end of the cold war, the costs have become more difficult to bear, especially in periods of slow growth, when countries replace faltering productivity with mercantilist policies. while china is usually singled out for criticism on this score, other countries have behaved even more irresponsibly. germany<u+2019>s surplus, for example, built mainly on weak wage growth and a cheap currency, became the largest in history this way. opposition to trade, particularly among americans most vulnerable to unemployment and consumer debt, was therefore inevitable. but rather than other countries reorganizing around the surpluses china requires, it is more likely that over time global trade will become unstable and increasingly contentious. that is in fact closer to the historical norm than the anomalous stability of the four decades before 1914 and the six after 1945. a u.s. retreat from trade would clearly be damaging to global prospects. many economists argue that it will also damage u.s. prospects. but they are almost certainly wrong. history suggests that intervention usually benefits diversified economies with large, persistent trade deficits, especially when driven at least in part by distortions abroad. but the world doesn<u+2019>t have to face that trade-off. washington can still reverse the u.s. deficit while preserving the benefits of stable global trade if it convenes a meeting of major trading nations, as it did in 1944 at bretton-woods, to design a new regime, one that is more difficult to game and allocates costs sustainably. this will likely happen eventually, but the sooner the better, for both the u.s. as well as today<u+2019>s surplus countries. mr. pettis is a finance professor at peking university.
america<u+2019>s trade advantage - wsj
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