CityReads | Two Centuries of Trade Imbalance

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2025-10-17

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Two Centuries of Trade Imbalance

How to understand the new global trade war launched by the United States in 2025？

Nievas, G., Piketty, T. Unequal Exchange and North-South Relations: Evidence from Global Trade Flows and the World Balance of Payments 1800-2025, World Inequality Lab Working Paper 2025/11

Piketty, T. (2025, July 15). Two centuries of unequal exchanges. Le blog de Thomas Piketty. https://www.lemonde.fr/blog/piketty/2025/07/15/200-years-of-unequal-exchanges/

Piketty, T. (2025, October 7). Rethinking world trade. Le blog de Thomas Piketty. https://www.lemonde.fr/blog/piketty/2025/10/07/rethinking-world-trade/

How to understand the new global trade war launched by the United States in 2025？

The World Inequality Lab recently released a historical research report titled “Unequal Exchange and North-South Relations: Evidence from Global Trade Flows and the World Balance of Payments, 1800–2025.” The report systematically compares the global trade imbalances that emerged during two major historical periods—1880–1914 and 1990–2025—in order to shed light on the trade war of today.

One of the report’s authors, the French economist Thomas Piketty, published two consecutive blog posts, “Two Centuries of Unequal Exchanges” and “Rethinking World Trade,” in which he summarized the report’s key findings and argued that Europe should impose tariffs in response to the trade war initiated by Donald Trump.

The Importance of International Trade to the World Economy

The share of international trade in the world economy has never been as high as it is today. In 1800, total global exports accounted for about 7% of world GDP; by 1914, the figure had risen to 15%, dropped to 12% in 1970, and is projected to reach 30% in 2025.

Between 1800 and 2025, world exports experienced several major fluctuations: a collapse during the Great Depression of the 1930s, a sharp rise in the 1970s triggered by the oil price shock, and a sustained boom in manufactured exports between the 1990s and 2000s driven by emerging economies such as China. Since the 2008 financial crisis, however, global export volumes have plateaued, stabilizing at the highest level in history—around 30% of world GDP.

Of this total, primary commodities (agricultural, mining, and fossil fuels) account for 7%, manufactured goods for 16%, and services (including tourism, transport, consulting, etc.) for 7%.

From a historical perspective, trade in services has remained relatively limited: about 2% of world GDP in 1800, 2% in 1914, and 3% in 1970. Yet in recent decades it has grown significantly and is projected to reach 7% of GDP by 2025.

East Asia’s Trade Surplus Has Historical Precedents

Between 1960 and 2025, East Asia has exhibited a trade pattern remarkably similar to that of Europe in the late 19th and early 20th centuries—a significant trade surplus in manufactured goods accompanied by a substantial deficit in primary commodities.

From 1960 to 1990, East Asia’s manufacturing surplus was driven primarily by Japan; after 1990–2000, China took the lead. Between 2000 and 2025, the region’s manufacturing surplus has reached about 2%–2.5% of global GDP, a level comparable to Europe’s surplus during 1860–1914.

The key difference, however, lies in the fact that East Asia’s deficit in primary commodities has been smaller than Europe’s. As a result, in recent decades East Asia has maintained an overall trade surplus without relying on any hidden items in the balance of payments to achieve a current account surplus.

In both Europe’s manufacturing powers of 1800–1914 and East Asia’s industrial economies of 1970–2025, a similar structure emerges: a trade surplus in manufactured goods coexisting with a trade deficit in primary commodities. Yet Europe’s scale was much greater. Between 1800 and 1914, Europe’s cumulative manufacturing trade surplus amounted to 267% of its 1914 GDP, while its cumulative primary commodity deficit reached 408%. By contrast, for East Asia between 1970 and 2025, the corresponding figures were 144% and 92%.

The American Trade Deficit Also Has Historical Precedents

From 1900 to 1960, the United States and the broader North America/Oceania region maintained a modest manufacturing trade surplus—less than 0.5% of global GDP—paling in comparison to Europe’s in the past or East Asia’s today. A crucial distinction, however, is that this U.S.-led region was exceptionally rich in primary resources and thus never recorded a trade deficit in primary commodities—a sharp contrast with Europe and East Asia.

Between 1990 and 2025, the United States has run an average annual trade deficit (goods and services combined) equivalent to 3–4% of its GDP. Its surplus in services has been far too small to offset its massive deficit in manufactured goods. This fact seems almost incredible: how can a dominant global power sustain such persistent trade deficits?

In reality, the American trade deficit is not without precedent. In the 19th and early 20th centuries, Europe—led by Britain—was the world’s industrial powerhouse. While it enjoyed a manufacturing surplus from exports of goods like British textiles, these surpluses were far smaller than its deficits in primary commodities. From 1800 to 1914, Europe as a whole ran a persistent trade deficit. Between 1860 and 1914, its primary commodity deficit amounted to 3.5–4% of global GDP annually, while its manufacturing surplus averaged only 2–2.5%. The inflow of raw materials such as cotton, timber, and sugar from the rest of the world—often without adequate compensation—far outweighed its industrial and shipping revenues. During 1880–1914, the average annual trade deficit of Britain, France, and Germany was roughly on par with that of the United States between 1990 and 2025.

The difference, however, lies in Europe’s colonial empire. Its overseas territories generated enormous annual revenues—equivalent to about 10% of Britain’s GDP and over 5% of France’s. These flows easily offset trade deficits and even allowed continued accumulation of overseas assets.

The initial accumulation of European overseas wealth in the 19th and 20th centuries stemmed largely from colonial plunder. These transfers took two main forms: one-off indemnities (such as the massive slave-debt France imposed on Haiti in 1825, or the reparations Britain forced on China after the 1842 Opium War), and the permanent transfer of tax revenues from colonies to metropoles (as seen in British India and the Dutch East Indies from 1800 to the 1930s–40s). This model enabled Europe to begin amassing overseas wealth and to enjoy growing streams of income from abroad. By the late 19th and early 20th centuries, these returns had reached staggering levels—enough not only to cover Europe’s large trade deficits (3–4% of GDP between 1880 and 1914, similar to America’s 1990–2025 level) but also to fuel continued global wealth accumulation.

Between 1970 and 2025, however, even though the United States has earned substantial “excess returns” thanks to its financial hegemony, these have been insufficient to offset its trade deficits. U.S. overseas assets have never generated enough income to balance its external accounts, leading to unprecedented levels of foreign debt. A dominant military power may soon find itself paying massive long-term interest to the rest of the world—something without historical precedent. This is the source of anxiety among Trumpists and the root of their drive to extract wealth from other nations, even by force if necessary.

One argument offered to justify such extortion is that the United States provides global public goods—namely, a stable currency and a sound financial system. Consequently, other countries have accumulated dollar-denominated assets—public debt and equities—which have inflated the dollar’s value and deepened America’s trade deficit. In truth, the dollar has already yielded the U.S. returns far exceeding what would be justified. Still, this argument merits reflection, as it points toward remedies very different from those proposed by Trumpists.

In recent decades, the massive surpluses of oil-producing countries have mainly resulted from their success in tripling oil prices in the 1970s, while the rest of the world continued consuming fossil fuels without regard for the future. The industrial surpluses of China, Japan, and Germany partly stem from low wages and a tendency to hoard wealth abroad—choices motivated by the fragility of the international financial system and the absence of a secure global reserve asset.

In short, Piketty argues that the notion of spontaneously balanced and harmonious free trade does not stand up to scrutiny. Since 1800, the global economy has been marked by deep and persistent imbalances, with dominant powers repeatedly exploiting their position to impose favorable trade terms at the expense of poorer nations.

Confronted with Trump’s narrow nationalism and unpredictable trade wars, Piketty, speaking from a European perspective, contends that Europe should abandon blind free-trade orthodoxy and adopt tariffs. He offers two reasons for doing so.

First, international freight accounts for 7% of global emissions. The costs of these emissions—natural disasters, economic disruption, and more—are estimated at around €1,000 per ton, not even counting welfare losses and non-economic damages. On this basis, a global average tariff of roughly 15% would be needed to offset the warming impact of trade flows, varying by product type.

Second, there is the issue of social, fiscal, and environmental dumping: some countries impose laxer regulations, allowing their producers to undercut competitors through lower costs. In the long run, if the United States refuses to change course, Europe and China will have no choice but to impose significant sanctions.

CityCharts

Over the past two decades, China’s patent applications have grown rapidly. In 2010, the number of patent applications filed in China surpassed that of the United States for the first time, and by 2021 it had reached more than 1.4 million—accounting for over half of all applications worldwide. In contrast, the number of patent applications in the United States has shown little growth in recent years, while Japan’s patent filings have been declining since 2000.

https://ourworldindata.org/data-insights/china-is-the-largest-contributor-to-global-patent-applications-substantially-ahead-of-other-countries

CityQuotes

“An individual who is unable to distinguish between trivial and significant forms of knowledge, or cheap transient emotions and deep mature feelings, will soon get a head and a heart that look like the inside of an unemptied vacuum cleaner. If the machine doesn't blow a fuse, it will only work at about one quarter of its capacity, and usually with unbearable screeching noises.”- Barrington Moore, Moral aspects of economic growth, and other essays