Michael Pettis

In the former case, if a country believes that this is an important industry, it can protect itself by also subsidizing the same industry. In the latter case, however, it will permanently lose manufacturing share.

Yes, but there is a legitimate argument that temporary subsidies can permanently alter comparative advantage (Alexander Hamilton's infant industry argument). The problem arises when temporary subsidies come at the expense of domestic demand, i.e. when they are pad for by households.

Exclusive | China to set GDP growth range, providing policy flexibility in 2026: sources Establishing a range for the official growth target, to be revealed in March, would suggest tolerance for some deceleration amid challenges.

SCMP: "China’s government is likely to set this year’s economic growth target in a range between 4.5 per cent and 5 per cent, according to three sources briefed on the matter."

If true, this is important (but not unexpected) news.
sc.mp/wlix5?utm_so...

China Youth Unemployment Falls to 16.5% Seasonal easing helps push the December jobless rate to its lowest level in the second half

Caixin: "China’s youth unemployment rate fell to 16.5% in December 2025. Youth unemployment typically peaks during the summer graduation season before easing toward year-end. Despite the improvement, youth unemployment remained higher than a year earlier."
www.caixinglobal.com/2026-01-22/c...

2/2
The problem only arises because China's EV export revenues are not balanced by imports of goods in which China has a comparative disadvantage.

The problem is not unbalanced trade in specific sectors, but rather overall unbalanced trade. That's what the world must address.

China Makes Too Many Cars, and the World Is Increasingly OK With It Concerns about overcapacity were justified. But now, no matter?

1/2
There is nothing wrong with the world importing EVs from China. If China has a comparative advantage in producing EVs, it should be a net exporter to the rest of the world. That's how global trade works best.
www.bloomberg.com/news/newslet...

None of those change the BoP constraints.

12/12
Trump's desire to acquire Greenland may be pretty silly, but this doesn't justify saying even sillier things in response. Selling US Treasuries that had been acquired as a way to resolve domestic imbalances cannot happen without recreating those massive imbalances.

11/12
Some people might argue that if Europe was to sell off US Treasuries in a chaotic way, this could disrupt the US economy. That's true, of course, but the resulting collapse in the US trade deficit would be even more disruptive for Europe and the world.

10/12
The most likely case is that foreign capital inflows drive up US debt (to prevent a rise in unemployment), in which case a net European sale of US assets would have little impact on US interest rates and would even allow the US to rebuild its manufacturing sector.

9/12
If foreign capital inflows drive up US unemployment, for example by causing less-competitive US factories to close, then a net European sale of US assets would indeed drive up US interest rates, but in a process that would entail faster US economic growth.

8/12
What constrains US investment is far less likely to be scarce saving than weak demand, which a European sale of US assets would actually help resolve by pushing down the value of the US dollar and thus making US manufacturing more globally competitive.

Foreign Capital Inflows Don’t Lower U.S. Interest Rates Contrary to conventional thinking, net foreign capital inflows do not lower American interest rates (unless they do so by raising U.S. unemployment). A tax on foreign inflows is therefore unlikely to ...

7/12
What matters is whether foreign capital inflows into the US drive up US investment, US unemployment, or US debt. If they drive up US investment, a net European sale of US assets will indeed harm the US economy, but this is unlikely to be the case.
carnegieendowment.org/china-financ...

6/12
As for the claim that the sale of US Treasuries will drive up US interest rates, this is one of those things that everyone says mainly because everyone else says it. It isn't true. It really depends on the how foreign purchases of US assets affect the domestic US economy.

5/12
nor China will accept the currency and trade-account impacts of massive net capital inflows), or it must tolerate a large and rising trade deficit, with all the implications these entail for domestic growth and domestic manufacturing.

These are the only practical options.

4/12
If Europe sells its holdings of US Treasuries, it must either replace them with other US assets, in which case nothing substantial will have changed, or it must replace them with assets of other countries, which mostly means risky developing-country assets (neither Japan...

3/12
These analysts seem to forget that you cannot change your capital account without also changing your trade account, and that you cannot change your external imbalances without also changing your internal imbalances.

2/12
For all the huffing and puffing, Chinese holdings of US assets actually increased. This shouldn't have been a surprise. If you run massive trade surpluses, you have no choice but to acquire foreign assets, and if you won't acquire the alternatives, you must buy US assets.

Treasuries could be Europe’s best defence for Greenland The region’s vast holdings of US government debt give it leverage with the Trump administration

1/12
This talk about Europe's ability to wield its holdings of US Treasuries as a political tool is as divorced from reality as the talk about China's ability to wield its holdings of US Treasuries as a political tool.
www.ft.com/content/7d64...

7/7
sure that either they or their major trade partners are intervening in their external accounts in order to export the costs of domestic imbalances.

And yet if these persistent trade imbalances have never been a problem for the WTO, it is fair to ask what reason it has to exist.

6/7
We can accept that major commodity exporters with tiny populations run persistent surpluses, or that rapidly growing developing economies are net importers of capital, but when large, diversified manufacturing economies run persistent imbalances, we can be pretty...

5/7
With a few exceptions, however, if major economies run persistent surpluses for years and decades, this is sufficient proof that their governments are intervening in trade, even if that intervention shows up in ways that economists don't understand.

4/7
In a world in which governments did not intervene aggressively in their external accounts, temporary trade and capital flow imbalances would set off adjustments that would eliminate those imbalances, This would allow production to shift globally to its most productive use.

3/7
As Keynes (and many others) pointed out nearly a century ago, evidence that a country is intervening in trade shows up very clearly in the form of persistent, beggar-thy-neighbor trade surpluses. If the latter exists, then the former exists.

2/7
The fact that decades of the largest, persistent trade imbalances in history have largely been WTO compliant suggests strongly that the WTO is more about maintaining legal fictions than it is about discouraging the adverse impact of trade intervention on the global economy.

1/7
EU commissioner for trade Maroš Šefčovič is absolutely right to question the usefulness of the WTO: "If the WTO is to meet today’s challenges, its rules must be fair and deliver balanced, legitimate outcomes. Currently, they do neither."
www.ft.com/content/2ff1...

Yes, but it would mean a stronger RMB and a smaller trade surplus. China buys foreign assets (e.g. US debt) to keep the RMB weak. The problem is that this would undermine China's manufacturing competitiveness, so that China may rebalance via slower GDP growth rather than higher consumption growth.

6/6
But without an acceleration in consumption growth, the only other way to raise the consumption share of GDP would be for GDP growth to slow sharply, and in a way that did not also drive down consumption growth. This is broadly what Japan did in the 1990s.

5/6
The only other possibility I can think of would be for local governments effectively to boost household wealth by directly or indirectly transferring assets equal to roughly 1 percentage point of GDP every year to households. This would likely require deep political reform.

4/6
One possibility would be a technological breakthrough that unleashed productivity growth of historic proportions, with all the benefits of the productivity increase going to workers, and none going to businesses or government. This seems highly unlikely.