The United States did not choose to abandon manufacturing 40-50 years ago; rather, countries that decided to expand their share of global manufacturing exported those imbalances primarily to the US through trade surpluses, forcing the US into deficit and deindustrialization.

Pettis is old enough to remember many purported solutions to economic problems that didn't work; while AI might be different, betting everything on AI solving imbalances is risky.

People confuse two different debt crises: (a) financial crises from external debt or default risk (not China's problem because China has all domestic debt in its own currency), and (b) crises from misallocated investment, where debt represents investments that earned low returns and create wealth destruction requiring large transfers to service; the US in the 1930s and Japan after 1991 both had domestic currency debt with no external debt but suffered severely from the second type of crisis.

Bilateral tariffs in theory cannot work because imbalances only matter at the systemic level; they could only work in practice if every country imposed bilateral tariffs on China simultaneously, which is not happening and appears unlikely.

By April-May 2024, China's massive investment in electric vehicles, solar panels, and batteries created so much excess capacity (called 'involution') that companies were forced to sell products at prices below their variable costs, something microeconomic theory says cannot happen in equilibrium, because banks would not finance inventory of unsaleable goods.

China has a unique third option if it could get consumption to surge dramatically: rebalance without GDP slowdown, which is theoretically possible but would require major transfers that could be 'disruptive either politically or or economically' and may require redistributing assets from SOEs to households through holding companies that give shares to households.

It is extremely difficult for countries with historically low consumption shares to increase consumption because raising the consumption share requires transferring income from businesses to households, but those businesses are globally competitive largely because of subsidies and transfers that favored them; reversing those subsidies causes businesses to collapse and GDP to contract sharply, as happened in the US in the 1930s and Japan in the 1980s-2010s.

Chinese manufacturers are increasingly reluctant to sell in the domestic market because it is impossible to make money there due to deflationary pressures and excess supply; they prefer to export, and when they export, they often cannot make money either but are forced to continue producing to keep workers employed and avoid political problems.

Local governments, seeking to curry favor with Beijing, directed manufacturing investment into hot sectors that Beijing was promoting (electric vehicles, batteries, solar panels), leading to massive overcapacity in these sectors.

China's decision to run massive trade surpluses and invest excess savings abroad (primarily in the US) is not made to accommodate US low savings, but is driven by China's own policies of high savings and rapid production; the Chinese leadership does not wake up and decide to help the US by investing there, but rather follows the pattern of all high-savers placing their capital in deep, liquid Anglophone economies (US, UK, Canada, Australia) with good corporate governance.

Trade surpluses are created by policies that subsidize manufacturing at the expense of household income, forcing households to pay for manufacturing competitiveness; as a result, manufacturing grows faster than GDP and consumption grows more slowly.

China's medium-term growth outlook (next year or two) will be around 4-4.5% rather than 5% (the stated target), but only because China has the debt capacity and willingness to fund non-productive investment to hit whatever target it sets; once debt capacity is exhausted, growth will face a hard constraint; the lower the growth target, the better for China's long-term health, as it slows debt accumulation.

Every country's internal (domestic) imbalance must always be perfectly consistent with its external (trade) imbalance, expressed as: current account surplus equals excess of savings over investment; and conversely, one country's external surplus must be matched by another's deficit.

Joan Robinson warned in the 1930s that persistent trade surpluses are unsustainable; eventually deficit countries will try to regain control of their external accounts, leading to what will be called trade wars and trade contraction, but which are actually inevitable adjustments to correct global imbalances.

China's excess savings is the result of a low consumption share of GDP (which means a low household income share of GDP), because consumption is just negative savings and if China saves the most in the world, it consumes the least; the problem is not that Chinese people won't spend, but that they don't have the income to spend.

Around 2008-2009, China's investment pattern changed fundamentally: before that, debt grew rapidly but debt-to-GDP ratio was stable because most debt funded productive investment (building infrastructure worth more than borrowed); after 2008, debt accelerated while GDP decelerated, which should be impossible if debt funds productive investment, proving that China had run out of productive investment opportunities and was investing in non-productive 'bridges to nowhere'.

Bilateral trade imbalances (e.g., US-China trade deficit) are economically irrelevant; what matters is the systemic level—the global US trade deficit must accommodate the global Chinese trade surplus, and as long as the US deficit grows, it can absorb the growing Chinese surplus regardless of bilateral composition; transshipment (China → Vietnam → US) and income effects explain why bilateral tariffs don't reduce systemic trade deficits.

Wall Street and owners of mobile capital are ferociously opposed to capital inflow taxes because free capital flows benefit billionaires and banks, while being harmful to farmers, workers, manufacturers, and middle-class savers, revealing that capital account liberalization is a policy of wealth concentration rather than general prosperity.

Europe is in a panic because if the US and other traditional deficit countries reduce their deficits and surplus countries won't rebalance, Europe must become the new deficit country absorbing all surplus production; Europe should unilaterally control its external accounts like China has done, but the lack of geopolitical will to do this is driving a sense of crisis.

Chinese consumption as a share of GDP was normal in the 1980s, declined to among the lowest in the world by 2000, and collapsed to historically unprecedented levels by 2011 when China was cleaning up its banking system; since 2011 it has risen only 2-3 percentage points, and consumption would need to increase by 10-15 percentage points for China to be at a normal consumption level.