Trade conflict and coercion, protectionism and industrial policy, and broad definitions of national security are now increasingly familiar features as we think about the future of the fragmenting global order. For most people, this marks a sea-change from the last eight decades of neoliberal consensus on international trade, investment and finance. Yet the resurgence of this way of thinking reminds us that nations have periodically managed international commercial relations like this in the past, often at great cost to the welfare of citizens, and, worse, to global stability. The return of mercantilism, in other words, with its emphasis on nationalism, zero-sum outcomes, trade imbalances, and industrial policies, is the spectre haunting the global order. It is not surprising, moreover, that China’s $20 trillion economy is central to this phenomenon.

Whenever mercantilism is the topic, Adam Smith is never far away. For this vehement proponent of free trade, comparative advantage, efficiency, and market discipline, mercantilism was heresy. He was mindful of its negative outcomes, such as the pursuit of self-interest, monopolies, and wealth concentration, and argued in his well-known book, The Wealth of Nations, for the superiority of a system defined by national and individual liberty over mercantilism. He saw the emphasis of mercantilism on the acquisition of gold and silver, and the associated suppression of imports and promotion of exports, as incompatible with the accumulation of wealth for citizens. He also believed it favoured special or vested interests, and led to bad economic outcomes at home as well as destructive zero-sum relations with other nations.

Gold and silver are anachronisms today, compared with the 18th century, and the use of protectionism to nurture infant industries and industrial and economic development has been commonplace for a long time. Britain, the United States and Germany were certainly no strangers to these practices in the past. It is also arguable that, more recently, countries such as Japan, Germany and South Korea, several oil states, and smaller countries like Singapore and Switzerland have also indulged in some mercantilist policies to realise and sustain high export surpluses. Yet, the brazen pursuit of large external balance of payments surpluses, huge foreign exchange reserves, industrial dominance, and self-reliance as a route to national greatness, is remarkable in the 21st century and firmly associated with China.

Over the last several months, it has sometimes been hard to decipher China’s footprint in the cracking of the global order, largely because so much focus has been on Donald Trump, whose mercurial and volatile tariff policies have eclipsed both the trade measures enacted in his first term and those pursued by Joe Biden, who extended American protectionism to include wide-ranging export controls and a renaissance in America’s own industrial policies in law.

There is no question that the US has crossed a Rubicon with its tariff strategies this year, aimed at friends and foes alike, but in the US-China relationship, it is important not to overlook the belated and now cumulative response by the US to the mercantilist path that China has been marching down since the mid-2000s. It was around this time that the party-state gave the utmost priority to unprecedented state-run industrial policies as part of its stated ambition to dominate what it calls the fourth industrial revolution.

This too is not new. Trade war, or ‘shangzhan’, was a feature also during the latter years of the Qing Dynasty (1644-1912) and the early years of the Republic. It had its roots in earlier times when the merchant class sought to align agricultural and defensive capacities, but by the 19th century and after – and perhaps not least as a response to the imperial carve up of China and the imposition of ‘unequal treaties’ – there was a clear emphasis on state support for commercial development. One of the leading advocates for a mercantilist political economy was one Zheng Guanying (1842-1922), who argued for state involvement in the revival of the domestic tea and silk industries, domestic cultivation of opium, subsidies for modern textile factories, and import substitution.

Versions of Zheng’s framing of trade as a mercantile tool and objective of states, rather than as an Adam Smith-type vehicle for mutual enrichment and the pursuit of comparative advantage, continued to permeate Chinese thinking on this topic from Mao onwards. It is ironic, therefore, that Xi Jinping likes to champion China’s interest in the stability of the global order, and its commitment to the defence of free trade and the globalised supply chains.

At the 12th and largest ever meeting of heads of state of the Shanghai Cooperation Organisation in Tianjin this week, at which both Russia and India were represented, Xi said ‘We should continue to dismantle walls, not erect them; we should seek integration, not decoupling. We should advance high-quality Belt and Road cooperation, and push for a universally beneficial and inclusive economic globalisation’.

This has become a part of his global pitch. In 2017 at Davos, he ‘wowed’ the crowd on this topic as Donald Trump started his first term. Earlier this year, just before Trump’s liberation day tariff announcements, Xi told global business leaders in the Great Hall of the People in Beijing that the world had to stand together in the face of  ‘some countries’ that were weaponising trade and forcing companies to take sides and make choices that go against economic principles.

Xi’s words and actions are not aligned though. China was happy to take the outstretched arm of the US and others to join the World Trade Organisation in 2001, and benefitted enormously. The WTO, however, was not adequately equipped or empowered to deal with or discipline China, whose trade and industrial policy idiosyncrasies were tolerated for far too long. The long march, as we might say, of industrial policies embraced from the mid-2000s onwards included an array of initiatives spanning a special status for state enterprises, subsidies, direct grants and lending, below-market borrowing, state-directed credit, and technology transfer and procurement policies, all of which sustained China’s status as a ‘non-market economy’, notwithstanding understandings that these policies would not persist.

In fact, China has always believed that, while it could exploit some features that come with more open markets, international co-ordination and the mutual benefits of reciprocal trade and commerce, its principal interests and focus should be on the mercantilist harnessing of trade and trade policy – the other side of the coin of industrial policy – in order to strengthen its military, industrial, financial, and technological power.

For Xi Jinping, this is key to winning the fourth industrial revolution. According to the Communist Party’s narrative, China missed out on the first two centred on mechanisation and electrification largely because of China’s century of humiliation at the hands of foreigners. The information revolution was at least a more competitive and inclusive endeavour  but China’s leaders believe that the future, and with it wealth and power, will be determined by who wins the disruptive technological revolution in areas such as artificial intelligence, big data, quantum information, and biotechnology.

Abroad, China has strong interests in developing economic, commercial and financial networks in Asia and among the member countries of the Belt and Road Initiative and the BRICS+ group of countries. Yet its trade surpluses with both Africa and Latin America, for example, underline the chasm in Xi Jinping’s rhetoric between an open and liberal trading order and the realities of modern day mercantilism. China’s preference for bilateral relations in the context of umbrella-type institutional structures, in which China is the unquestioned leader, reflects broader aims beyond commerce. These broader aims resonate with the mercantilist model, access to resources, and exposure to export markets. In this framing, global economics is a zero-sum process, economic and national interests are identical, and strategic assets, such as rare earths or supply chains are chokepoints to be used as leverage. Geopolitics, in other words, trumps free trade.

Consider four manifestations of China’s mercantilism. First, the State Administration for Foreign Exchange reported recently that China’s balance of payments surplus in the first half of 2025 amounted to just over $300 billion, or about 3 per cent of GDP for the period, but the actual surplus may have been half as much again or more. Allowing for the underreporting of the goods surplus and of net investment income, the surplus might have been closer to $500 billion, or roughly $1 trillion for the whole year, equivalent to over 5 per cent of GDP. This would be the highest ever, bar the period 2005-09, just before the financial crisis. The surge in Chinese exports – amounting to a rise of over 25 per cent since 2022, compared with import levels that have remained stagnant – is indicative of the country’s reliance on foreign trade to compensate for other weaknesses in the economy, notably real estate and consumption, but also of how over-production of a wide range of goods at home spills over into exits abroad.

This arises quite specifically because China faces big problems in effecting a transition from an economy that was over-reliant on real estate and infrastructure to a more consumer- and service-oriented society. Real estate – which, broadly defined, accounts still for about 20-22 per cent of GDP, down from about a third in 2021 – and the low share of consumption in GDP are not random events that are easily fixed by policy tweaks. In fact, the government has insisted for over a year that it intends to address both problems.

However, these systemic issues cannot really be resolved without major reforms to redistribute economic wealth, and therefore, power to private firms and households, promoting greater competition and economic freedoms. To do that, the party would also have to take on board the redistribution of political power, and that is a bridge too far for the party. It seems unlikely therefore that Xi’s China can make such a far-reaching change from a mercantilist to a different type model.

Second, the higher surplus estimates are much more in keeping with another feature of mercantilism, namely the surge in China’s foreign exchange reserves. These are generally viewed as a resource with which to ride out economic emergencies or a sudden rise in imports, but many in China tend to see the reserves as a bellwether of economic strength and success. The local financial crisis in 2015-16 led to a precipitous $1 trillion decline in China’s reserves but since then they have hovered at just over $3 trillion. Yet the actual reserves may be closer to $6 trillion, with the difference representing an under-reporting of assets on the balance sheets of the five major state banks. It is quite likely that the People’s Bank of China is in effect hiding these assets off its own balance sheet.

Third, China’s exchange rate is quite closely managed by the People’s Bank, and there is a strong political resistance to both allowing a freely floating exchange rate and opening up capital markets to outward investment by Chinese residents. By most economic yardsticks, the exchange rate’s value is not grossly misaligned, but it is probably being held at levels against the US dollar which are about 20 per cent lower than they might otherwise be in a free market. It suits the government to sustain this degree of undervaluation as this also helps to boost exports while domestic sources of demand in the economy face considerable headwinds.

Fourth, China’s industrial policy is central to all policy-making, and anchors the so-called China Dream, which Xi first articulated in 2012 and according to which he has pledged the revival of China as an economic and military power, based around the centrality of the party, and his own role in leading it. Economic and trade policies and the accrual of currency reserves are joined by a broader strategy, based around a state-directed drive to make asymmetric economic gains at the expense of competitors and adversaries, and emphasise the role of state enterprises. This places a huge burden on industrial policy.

Chinese industrial policy has shifted focus and goals over time. A sector-driven approach was adopted in the decade to 2015, with newer strategic emerging industries earmarked for gains in market share. A more conscious decision to master the new technological revolution, and challenge the US, was embraced after 2016, in which China would become a manufacturing superpower based on the Innovation Driven Development Strategy and on the Made in China 2025 programme. Since 2020, a national strategy of self-reliance and of ‘cleansing’ its supply chains, especially of American and other foreign producers and components, has also occupied pole position.

The record on industrial policy so far is mixed. It is certainly not only about China’s unquestioned success in electric vehicles, batteries, and solar and wind sector manufacturing and in the accomplishments of a few private firms, like Deepseek. There have also been many examples of waste, corruption, and losses, and several examples – including notably semiconductors – where large scale financial backing has succeeded in ramping up production but not necessarily in moving the catch-up dial to compete with American and other western suppliers.

Nevertheless, with China spending perhaps upwards of 2 per cent of GDP annually on industrial policy – a large multiple of any other OECD country – we should be under no illusion that the government will be prepared to shift towards other domestic priority needs, or succeed in all its ventures. Indeed, the echo of Japan in and since the 1980s resonates in this regard: here was a mercantilist nation, committed to and successful in industrial policy with a considerable inventory of household or brand names,  large exports and foreign reserves. In the end, though, its much envied and prominent manufacturing, trading and banking firms were unable to hold back the tide of macroeconomic troubles and imbalances that had been allowed to accumulate over many years.  It’s quite possible that China is the encore, but this time also a commercial rival and a geopolitical adversary.

In the meantime, China’s mercantilism has changed from being a slow-burning fuse to an accelerant, as many nations have come under political pressure to act against Chinese exports.

To most people, trade surpluses, foreign exchange reserves, public procurement, and subsidies are abstract concepts that are hardly visible. However, they can recognise and integrate much more easily China’s success in new industries, such as electric vehicles, solar power, batteries, as well as in old ones including steel and shipbuilding. From a standing start a decade ago, China’s share of global EV sales has surged to over 50 per cent. It accounts for half of global shipping tonnage built annually, 60 per cent of wind turbines manufactured, 80 per cent of solar panels, and is the biggest exporter of steel in the world. It also has a chokehold, for now at least,  on the processing of rare earth metals and magnets, increasingly in demand for advanced manufacturing and defence purposes. With capacity usage generally quite low in China, not least because of the huge policy focus on production and supply, large or rising proportions of these outputs are being exported at low prices.

For many other nations, China’s surge in global manufacturing and in exports has fuelled concerns about their own dependency on China-centric supply-chains, their lack of resilience, and weaknesses in domestic economic and technology security, and in their defence and industrial capacities. The US tariff response may not make too much sense to them either.

The effective US tariff, for example, if fully implemented, is now a bit over 18 per cent, its highest level since 1933. The IMF reports that, globally, new restrictive trade measures and domestic subsidies that distort trade are running at around 2000 a year, a large multiple of the 100-150 recorded during 2009-2017. The EU has also raised relatively punitive tariffs on Chinese EVs and batteries.

Whether or not Xi Jinping and Donald Trump manage to reach a trade deal to purchase more of one another’s products for a while, both countries will remain locked in the struggle to gain advantage in trade and investment. The EU and other nations will have to take up positions, even if through gritted teeth, as they align with fragmented trade blocs, centred around both major powers. Countries in the China-leaning bloc account for about a half of the globe’s population, but nations in the US-leaning bloc account for the bulk of GDP, trade, consumption, assets, and wealth.

There is though a lot of churn going on, as countries and firms manoeuvre to take advantage of new and faded business opportunities arising from tariffs and other forms of protectionism. Trade diversion or so-called ‘trans-shipment’ of goods from China is becoming more common. In effect, exports from China may end up in the US, but now in ways that bypass or minimise tariffs, via other countries such as Mexico, Vietnam, India and Thailand. Several countries have also agreed with the US to practices that would police or restrain indirect Chinese exports. The UK’s trade agreement with the US was notable for the provision that the UK would ensure that Chinese steel exports did not reach the US via production in the UK.

An interesting glitch has emerged in what is often portrayed as China’s privileged status among emerging and developing countries. China’s trade relations have become more equivocal or even worse in the last year or two across a swathe of emerging and middle income countries. Mexico, for example, has raised high trade barriers on a range of imports from China, partly to help strengthen its US ties. Turkey imposed tariffs on Chinese EVs. Indonesia acted on cheap Chinese imports to protect local industries in labour intensive, low-value firms, while leaving untouched higher-value goods that Indonesia does not yet produce. Brazil has acted against Chinese steel and TVs to underpin local industrialisation programmes. Other nations including South Africa, Vietnam and Thailand imposed measures against Chinese e-commerce firms at the low end of the consumer goods shipments spectrum.

The pushback against China by emerging countries, even though China is such an important trade partner for many of them, is likely to persist. It shows rising international concern caused by China’s economic model, subsidies, overcapacity, and surging exports, and fears that nations harbour about either specific threats in key sectors, or more generally about premature deindustrialisation because of the flows of low-priced exports from the People’s Republic.

Overall, it is hard to see how the fracturing of global commerce and the yielding to mercantilism can be stopped.

Just over 80 years ago, a generation that had suffered the consequences of a fractured global economic and political order in the 1930s and then the Second World War, set up important institutions at Bretton Woods in 1944 so as to prevent the kind of commercial conflict that has now once again erupted. Yet, how is such a pinnacle of international collaboration to re-occur, when the world’s two major powers are adversaries? China wants to game the system, and the US has – for now at least – decided to replace the commitment to rules and alliances with transactional relations based on favour and patronage.

It seems doubtful that the rest of the world, including the EU bloc, will be able to carry on with the old economic order without the active involvement of the world’s biggest exporter and importer, and the heft it brings to negotiations. With the contemporary focus on expanded ideas of national and technological security, as well as evolving ideas about state intervention, and strategic economic autonomy, a more fragmented and binary global order seems ever more likely. We will have to hope that such an arrangement, even if less efficient and more prone to shocks, will at least not serve as the basis for conflict beyond commerce.