The New Logic of Global Risks

Current account balances were long regarded as a technical outcome of the international division of labor. This view has become too narrow. China can leverage its position in industrial supply chains and with critical raw materials as a bargaining chip. The United States controls a key sales market, the dominant financial system, and the most important reserve currency. Europe, in turn, possesses a large single market and regulatory power, but is simultaneously dependent on Chinese intermediate goods, American technology, and global capital flows. Economic interdependence is turning into geopolitical vulnerability, according to the publication "Global Imbalances as a Source of Power", released by Assenagon Asset Management.

The initial analysis distills this shift into a concise formula: Global imbalances are no longer merely a consequence of the division of labor but are increasingly a factor of power. It points to current account balances, the interdependence of China and the U.S., Europe's strategic dilemma, and the consequences of a new mercantilism for capital markets and investors. The thesis is convincing—provided it is clarified. After all, a current account surplus is not in itself a weapon, and a deficit is not automatically a sign of weakness. Power arises only through the combination of balances with market size, financial infrastructure, technological advantage, supply chain concentration, and the government's capacity to act.

Table 01: Four Key Metrics That Measure the New Economy of Power [Sources: IMF Article IV Reports 2026, IMF COFER, Eurostat. Some figures are preliminary or estimated]

The Return of Global Imbalances

The debate is intensifying as global current account imbalances are on the rise again. According to calculations by the International Monetary Fund, global balances widened by about 0.6 percentage points of world GDP in 2024. This marks, at least for the time being, a reversal of the long-term decline that began after the global financial crisis. This figure reflects differing patterns of savings and investment, weak domestic demand in surplus countries, high public deficits in the U.S., and an industrial policy that increasingly organizes production along geopolitical boundaries.

Fig. 01: Current account balances of selected countries [Source: Assenagon Asset Management S.A. (2026): Global Imbalances as a Factor of Power, Perspectives No. 40, based on World Bank figures, as of July 14, 2026]

At the same time, the tools of trade policy have changed. Tariffs have returned, subsidies are tied to local production, export controls cover raw materials and technologies, and investments are screened against security criteria. Modern mercantilism does not merely pursue the classic goal of promoting exports and limiting imports. It seeks to bring entire value chains, data spaces, payment channels, and technological standards under political control.

Nevertheless, there is no sign of complete deglobalization. Empirical studies by the WTO have so far found no evidence of widespread regionalization of world trade. Rather, what is evident is selective fragmentation: decoupling is occurring in strategic sectors and in relations between politically distant states, while trade continues in many other areas. It is precisely this selectivity that increases complexity. Companies do not need to anticipate the end of global trade, but they do need to prepare for abrupt interventions at individual, particularly critical junctures.

Current Account: Balance Equivalence Rather Than Moral Judgment

Put simply, the current account captures trade in goods and services as well as cross-border income and current transfers. In economic terms, its balance corresponds to the difference between national savings and investment. If a country consistently saves more than it invests domestically, a surplus arises, resulting in a capital export. If a country invests or consumes more than it saves, it requires capital inflows and runs a deficit.

Globally, surpluses and deficits—apart from statistical differences—must balance each other out. One country's surplus presupposes another's deficit. This is why the widespread notion that all countries could simultaneously achieve trade surpluses is misleading. Equally problematic is the moral interpretation: A surplus can be a sign of high competitiveness, but also of weak domestic demand and insufficient investment. A deficit can indicate excessive consumption, but it can also point to attractive investment opportunities, secure institutions, and a deep capital market.

For geopolitical power, therefore, the sign alone is not decisive. What matters is which real-economy and financial structures underlie the balance. A creditor may be dependent on its debtor if it needs the debtor's market for its exports. A country with a deficit can be powerful if its currency and financial markets are virtually irreplaceable for the rest of the world. It is precisely this interdependence that shapes the relationship between China and the United States.

China: Industrial Strength with Built-in Dependency

China's source of power lies primarily on the supply side. The country possesses vast industrial capacity, dense supplier networks, and strong positions in strategic technologies and commodity supply chains. The IMF estimates China's current account surplus for 2025 at 3.3 percent of GDP. It cites robust exports, low inflation relative to its trading partners, a real currency depreciation, and persistently weak domestic private demand as the causes. The surplus is thus both a strength and a symptom: China produces more than domestic demand can absorb.

This geopolitical leverage is particularly evident when it comes to critical raw materials. In April 2025, China introduced export restrictions on seven rare earth elements and magnets made from them. According to Eurostat, the European Union sourced 46.8 percent of its imported rare earth elements from China in 2025. Dependency arises not only in mining but, above all, in processing, refining, magnets, and other intermediate products. A licensing requirement or delayed approval can therefore impact supply chains, even though the direct market value of the raw materials is comparatively low.

But this leverage also comes at a cost. China's surplus model relies on foreign demand. If the U.S. and Europe close off their markets, Beijing will have to tap into new markets, boost private consumption, or reduce capacity. Export controls also accelerate the search for alternative suppliers, recycling, stockpiling, and domestic processing. Power derived from scarcity can therefore be significant in the short term but self-destructive in the long term if it makes substitution economically attractive.

Added to this is the financial trade-off: Those who consistently generate current account surpluses export capital. China's savings must be invested abroad, often in liquid markets and safe assets. This limits the notion of a one-sided creditor advantage. The exporter needs the buyer, and the investor needs a reliable debtor or investment destination.

U.S.: The Deficit as a Privilege—and as a Vulnerability

The United States stands on the other side of the global balance sheet. The IMF estimates the U.S. current account deficit in 2025 at around 3.7 percent of GDP. Viewed conventionally, this would be a sign of insufficient savings, high dependence on imports, and dwindling industrial capacity. This assessment captures part of the reality but underestimates the structural power of the United States.

The United States offers one of the world's largest consumer markets, the deepest capital market, and the central infrastructure of the international financial system. According to IMF data, the U.S. dollar accounted for 57.13 percent of reported global foreign exchange reserves in the first quarter of 2026. Companies and governments require dollar-denominated financing; U.S. securities serve as liquid investments; and a significant portion of international payments involves U.S. institutions or U.S. law. This enables the U.S. to use market access, sanctions, export controls, and financing terms as foreign policy instruments.

In this system, the deficit is not merely a weakness but also the flip side of global demand for the dollar. Surplus countries must find a place for their savings; the U.S. market can offer volumes, liquidity, and legal certainty that other financial centers have not yet been able to provide on the same scale. This explains why the debtor does not automatically hold the weaker negotiating position.

However, privilege does not mean immunity. High public deficits, a strongly negative net foreign position, and the loss of industrial capacity generate economic and political costs. The IMF warns that an abrupt shift in the preferences of international investors could trigger a disorderly external adjustment. Furthermore, tariffs make intermediate goods and consumer goods more expensive, while retaliatory measures hurt exports. The power of the U.S. market remains significant, but its use can gradually undermine the system's attractiveness.

Europe Between Market Liberalization and Self-Protection

Europe finds itself in an intermediate position. Germany and several other EU member states have built up large current account surpluses over decades. The model was based on a competitive industrial sector, open markets, affordable intermediate goods, and the ability to invest savings globally. These conditions are now eroding simultaneously: China has gone from being a customer to a competitor, the U.S. is increasingly linking market access to local production, and strategic intermediate goods are becoming the subject of political disputes.

A surplus therefore does not automatically confer power on Europe. Unlike the U.S., the EU does not have a fully integrated capital market, nor does it have a unified fiscal and security policy. Unlike China, it controls only a few global industrial bottlenecks. Europe's strength lies in its large single market, regulatory standards, technical expertise, high levels of private savings, and a major international currency. However, these resources will remain fragmented as long as member states pursue different strategies in industrial policy, energy, defense, and capital market integration.

The strategic dilemma is real: Open markets increase prosperity and competition. However, if they are kept open unilaterally while other economic regions subsidize production, impose export controls, or politically safeguard overcapacity, there is a risk of losing industrial substance. Widespread protectionism would nevertheless be the wrong answer. It imposes high costs on consumers and downstream companies, weakens productivity, and provokes retaliation. What is needed is a targeted policy of economic security: diversification of critical supply chains, stockpiling, joint procurement, faster approvals, European capital market integration, and reciprocal market access.

The New Mercantilism: Resilience Comes at a Price

The new mercantilism is changing the economic objective function. For decades, the dominant question was where a good could be produced most efficiently. Today, a second question has emerged: Under what political conditions can supply be secured even in the event of a conflict? To achieve this, companies and governments are accepting redundancy, higher inventory levels, parallel suppliers, and regional production capacities. These measures reduce the risk of disruption but increase operating costs.

Tariffs act like a tax on imports. Subsidies strain public budgets and can trigger misallocations of capital. Mandates for local production duplicate capacity and reduce economies of scale. Export controls create shortages, increase volatility, and encourage retaliatory measures. Economically, this results in a security premium: societies pay for reduced dependence with higher prices, additional capital requirements, and, in some cases, lower productivity.

For capital markets, this means greater uncertainty regarding margins, inflation, and long-term interest rates. If governments spend more on a sustained basis, production becomes more expensive, and supply chains become less efficient, inflation risks and term premiums may rise. At the same time, disparities among companies are increasing. The winners are not necessarily the largest corporations, but rather those that possess regional production options, pricing power, alternative suppliers, and access to government-prioritized investment programs.

Critical Finding: Balances Are Indicators, Not Weapons

The concept of current account balances as a factor of power is analytically productive, but must not be misunderstood as a causal relationship. The balance reflects a macroeconomic position; it does not, on its own, explain whether and how a state can exert pressure. Geopolitical leverage arises only when four conditions are met: a relevant bottleneck, low short-term substitutability, institutional control over the bottleneck, and the ability to bear the costs of an escalation.

These conditions make power relational and changeable. An exporting country that restricts supplies can dominate in the short term but generate new competition in the long term. A large import market can set conditions but must accept higher prices and less choice. A reserve currency confers financial power but remains dependent on trust in institutions, legal certainty, and market liquidity. The current account balance is therefore more of a warning light than the engine of power politics.

What Investors and Companies Should Take Away From This

In a fragmented world, traditional diversification by asset class is no longer sufficient. Two stock indices may formally cover different countries yet still depend on the same Chinese intermediate goods, the same U.S. cloud provider, or the same dollar-denominated financing. Geopolitical concentration often lies beneath the visible corporate structure—in suppliers, sales markets, patents, logistics routes, and payment infrastructure.

For corporate analysis, therefore, questions that used to fall more within the realm of operational procurement are now becoming important: Where are critical production stages located? Which revenues depend on a single market? How quickly can production be scaled up locally? Which export licenses, sanctions, or subsidies influence the business model? In which currency is financing conducted, and how robust is access to liquidity? Companies with multiple sourcing options, regional production platforms, and pricing power possess greater geopolitical option value.

Risks are also shifting at the asset class level. For equities, the importance of margin resilience and the political quality of a company's location is increasing. For bonds, higher government spending, trade barriers, and lower efficiency can increase inflation and duration risks. Currencies of deficit countries without reserve currency status are particularly vulnerable if they rely on volatile capital inflows. While commodities and strategic intermediate goods offer scarcity premiums, they also carry high regulatory, substitution, and technology risks.

A simplistic strategy along the lines of "buy surplus countries, avoid deficit countries" would therefore not be scientifically sound. A large surplus can result from weak demand and a lack of investment. A deficit can go hand in hand with productivity growth, innovation, and an attractive capital market. What matters most are the quality, financial sustainability, and political resilience of the underlying structures.

Conclusion and Outlook

Global imbalances have become more political. China leverages industrial capacity and commodity supply chains, while the U.S. leverages its market, the dollar, and its financial infrastructure. Both are adversaries yet simultaneously dependent on one another: China needs demand and investment destinations, while the U.S. needs goods, capital inflows, and confidence in the dollar zone. Europe stands in the middle—economically powerful, but institutionally unable to act effectively on all strategic issues.

New mercantilism is therefore neither a mere return to the 19th century nor the end of globalization. It is a reorganization of the division of labor subject to security considerations. It makes supply chains more robust but more expensive; it creates political leverage but also causes self-inflicted damage; and it widens the disparities between companies, industries, and currency areas.

The crucial question is not who has the largest surplus or the largest deficit. What matters is who controls indispensable services, can offer credible alternatives, and can bear the economic costs of a disruption for longer. For Europe, this does not imply a call for self-sufficiency, but rather for controlled openness: open markets where competition functions—and targeted safeguards where concentration leads to strategic vulnerability to blackmail.

Bibliography and Further Reading:

• Assenagon Asset Management S.A. (2026): Global Imbalances as a Source of Power, Perspectives No. 40, Download 
• Eurostat (2026): EU trade in rare earth elements increased in 2025
• European Parliament Research Service (2025): China's rare-earth export restrictions 
• International Monetary Fund (2025): External Sector Report 2025: Global Imbalances in a Shifting World 
• International Monetary Fund (2026): IMF Executive Board Concludes 2025 Article IV Consultation with China
• International Monetary Fund (2026): IMF Executive Board Concludes 2026 Article IV Consultation with the United States
• International Monetary Fund (2026): Currency Composition of Official Foreign Exchange Reserves, First Quarter 2026
• Office of the United States Trade Representative (2025/2026): Presidential Tariff Actions
• World Trade Organization (2024): Is the Global Economy Fragmenting?