Geoeconomic Tensions: USA and Allies Confront Beijing's Global Imbalances

Rising Geoeconomic Tensions: Washington and Global Challenges

The summer break is over, and Washington is once again resorting to the "sticks" in its arsenal of economic statecraft, from escalating tariffs with Canada to secondary economic sanctions against countries continuing to trade with Iran.

Geoeconomic tensions seem set to intensify as central bankers meet in the shadow of the Tetons and G20 finance ministers prepare to gather near the Blue Ridge Mountains at the end of the month. One of the biggest challenges on the agenda will not be resolved by tariffs or sanctions alone: how to address the global imbalances primarily emanating from China.

Balancing China Without Destabilizing the Global Economy

Resolving China's global imbalances without triggering wider economic destabilization will not be easy. The good news is that the United States, the Group of Seven (G7), and others agree on the overarching goal and are pursuing complementary initiatives across various multilateral platforms. However, success will require the use of the positive elements of the economic statecraft toolkit, the "carrots," alongside tariffs.

Favorable tariffs, export credits, regulatory exemptions, and other tools promise to fuel mutually beneficial economic growth among trading partners. Indeed, bilateral and multilateral trade agreements have proliferated at least as much as punitive tariffs over the past year. These agreements indicate a more constructive path to diversify supply chains and rebalance geoeconomic power.

Derisking Without Destabilizing

How the United States and its partners can derisk from China and how Beijing will react could help shape the geopolitical balance of power in the twenty-first century. Beijing already seems to perceive coordinated efforts to diversify supply chains as a threat to its export-driven economic growth model.

The priority, therefore, must be to align the economic interests of the world's major economies while minimizing the risks of a disorderly unwinding of global imbalances or mutually destructive economic self-help measures. As a premier multilateral forum for geoeconomic issues and one of the few opportunities to bring together US and Chinese leaders, the G20 has an important role to play. Its members must stay focused on strategic priorities that will outlast individual electoral mandates.

Three Mechanisms to Maintain Focus

Three mechanisms can help policymakers maintain this focus.

First: Distinguish Structural Differences from Trade Wars

Not every trade conflict is a trade war. The tariff conflict between the United States and Canada is a bilateral trade war. Multilateral structures such as the United States-Mexico-Canada Agreement and G20 discussions cannot defuse this situation. Structural differences in economic policy with China, on the other hand, are structural and influence markets and trading partners across the global economy.

The state-sponsored growth model of China is incompatible with the current foundations of the global economy. China does not share the G7's commitment to healthy competition among pure private-sector actors. In particular, decades of industrial policy have contributed to overcapacity and export dependence, pushing Chinese companies to seek growth in global markets while domestic demand fails to keep pace.

These structural differences help explain why so many policymakers around the world agree with the Trump administration that the Bretton Woods system is no longer fit for purpose. They also explain the growing willingness of the G7 to take equity stakes in critical mineral companies.

Describing the Chinese challenge as a trade war unnecessarily escalates geostrategic tensions and creates the false impression that trade policy tools such as tariffs, export restrictions, or trade financing can provide a quick fix. Failure to deliver "quick wins" in this context risks undermining the broader goal of rebalancing the global economy.

Second: Leverage Multilateral Frameworks

The United States and its partners should use multilateral frameworks such as the G7, G20, and regional trade agreements to coordinate efforts to diversify supply chains and reduce dependence on China. This includes promoting investment in critical technologies and infrastructure, as well as supporting the development of alternative supply chains in other regions.

For example, the United States could work with its allies in Europe and Asia to develop a "critical minerals alliance" that would promote investment in mining, processing, and recycling of critical minerals outside of China. This would not only reduce dependence on China but also create new opportunities for economic growth and job creation.

Third: Invest in Resilient Supply Chains

The United States and its partners should invest in building more resilient supply chains that are less vulnerable to disruptions and shocks. This includes diversifying sources of supply, developing alternative transportation routes, and promoting regional cooperation and integration.

For example, the United States could work with its allies in the Indo-Pacific region to develop a "resilient supply chain initiative" that would promote investment in critical infrastructure, such as ports, railways, and roads, as well as support the development of regional value chains.

This would not only reduce dependence on China but also create new opportunities for economic growth and job creation in the region.