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We are living in a mercantilist era. By this I mean one in which the concerns of policymakers are as much those of security as of prosperity. This, as I argued in “The dangerous triumph of neo-mercantilism”, threatens both the stability of the world economy and relations among great powers. China is also better suited to mercantilism than the US and EU.
Mercantilists seek power and security or, in other words, the ability to bully others and resist being bullied by them in turn. How might one measure these capabilities? The obvious approach is to assess economic size, self-sufficiency and monopoly power. Yet, as the late Henry Kissinger wisely argued, “no nation can achieve absolute security. Absolute security for one nation means absolute insecurity for all nations.” The more frightening you become, the more others will unite against you.
Consider China. Its economy is roughly the same size as that of the US. It is now at or close to the frontier in the most important technologies, including, it increasingly appears, artificial intelligence. Its progress in this regard is stunning. The US is more self-sufficient in energy. But China has a far larger labour force, and vastly higher investable savings: in 2025, its gross national savings were 43 per cent of GDP, against a mere 17 per cent in the US. China also has a far bigger manufacturing sector: in 2024, China’s manufacturing value added was nearly as big as those of the US and the Eurozone together. Its prowess in renewable energy and electric vehicles has become remarkable.
As Bridgewater Associates, the well-known hedge fund, noted in October 2025, the US is energy self-sufficient as a result of its abundant supply of domestic oil and gas but faces constraints on its ability to expand its supply of electricity. China is self-sufficient in electricity because of its coal and renewables. But it has vulnerabilities in the supply of oil and gas. The war with Iran has highlighted this weakness.
Yet China has achieved powerful monopolies in global supply chains. Among these are those in solar photovoltaics, lithium-ion batteries, rare earths and magnets, gallium and germanium, and shipbuilding. Some of the above create effective chokepoints, as China demonstrated so effectively in its tariff war with the US.
The ability to supply so many things that others cannot is a source of coercive power. China’s high degree of self-sufficiency also reduces its vulnerability to coercion by others, while its size makes it an important market for many countries. In all, China’s ability to exercise economic power is huge.
As Brad Setser of the Council on Foreign Relations noted in a recent discussion with Princeton’s Markus Brunnermeier, people now talk of a “second China shock”. Here are some of the main points, beyond those noted above.
First, China’s macroeconomics are very different from those that obtained before the global financial crisis and, even more so, before the end of its property boom. Exports are surging, but domestic demand has stalled. Second, its export surplus in manufacturing is now around 2 per cent of world GDP, which is “roughly twice the largest surplus Japan ever ran”. Third and most important, China shows an unexplained negative net income of around $125bn on its net foreign investments. But it should, on reasonable assumptions about the income it earns on its $4tn in net foreign assets, have a surplus of some $100bn. As a result, Setser argues, the renminbi is by now some 30 per cent undervalued.
In other words, China continues to display a standard feature of mercantilism: lasting trade and current account surpluses.
As a result, China’s policies look unavoidably threatening to much of the world. If a major trading partner runs huge and persistent trade and current account surpluses, everyone else has to run offsetting deficits. This leads to the shrinkage of sectors specialising in producing tradeable goods and services, as well as huge domestic financial deficits. These, in turn, create protectionist pressures of the kind we have been seeing in the US and increasingly the EU. Yet high-income countries are not the only victims of China’s push for dominance in manufacturing. Among them, argue Shoumitro Chatterjee and Arvind Subramanian, are also the poor countries whose development it blocks.
A striking feature of Chinese development has been the decline in its rate of economic growth from over 10 per cent two decades ago to a low of 4.3 per cent in the year to the second quarter of 2026. Even the latter almost certainly exaggerates growth of market-led supply. After the bursting of the property bubble, the economy is not generating a supply of investment opportunities large enough to absorb its colossal savings. But, as the longstanding China watcher Stephen Roach notes, the long-needed rebalancing towards consumption remains stillborn. Under Xi Jinping, the priority of higher consumption will, it seems, never be recognised.
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Yet China is an effective mercantilist power, though even it cannot avoid the shortcomings of this approach. The US, too, is now mercantilist, though in a far less coherent manner. The EU is also being forced in a similar direction.
Brunnermeier argues that in this world one needs to calculate a “resilience account” alongside the current account, which “would net out our geopolitical dependency: how easily the goods in the current account can be sourced from other countries.” This idea is clever. But who then wins?
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