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There is broad consensus in both Europe and the U.S. that the Chinese government threatens the open trading system. Yet while there is plenty of room to criticize its specific policies, China is no longer the biggest contributor to global imbalances. By some measures, it’s not even in the top 10. Instead, Europe is now the single greatest source of instability for the rest of the world.

From one perspective, China has been in a trade war for decades—and winning handily. Beijing has long imposed relatively high tariffs on motor vehicles and parts, for example, as part of its successful effort to discourage imports and encourage foreign producers to build cars and trucks in China. In addition to stifling dissent, China’s censorship regime also protects domestic internet and media companies from foreign competition. Whether or not China’s capital controls help promote financial stability, they have also functioned as barriers to entry for U.S. and European asset managers, banks, insurers, and payments processors.

Perhaps the most effective protectionist measure at the Chinese government’s disposal is the pervasive informal influence of the Communist Party. Decisions on imports of everything from airplanes to high-speed rail equipment to telecom infrastructure are invariably made by companies either directly or indirectly controlled by the government. Commercial considerations are often secondary to promoting domestic industries. The practical result is that foreign companies are often shut out of China’s market if local companies are able to provide a comparable good or service.

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Even when foreign producers have something to sell that the Chinese cannot make themselves, they are often prevented from doing so without promising to transfer technology to local “partners.” If they refuse to give up their know-how willingly, the Chinese government frequently steals what is needed. Invariably, new “indigenous” Chinese companies will emerge offering similar products at lower prices, often thanks to heavy government subsidies. In addition to dominating the domestic market, these companies can benefit from favorable loans offered by Chinese state-backed banks to customers in foreign markets.

These practices are harmful, but they are neither unique nor the true source of trade tension between China and the rich world. Many countries besides China, most notably in Europe, regulate their internet and media industries in ways that favor domestic companies at the expense of foreign, particularly American, competitors. The British stole technology from the Dutch in the 17th and 18th centuries, and Americans stole British technology in the 18th and 19th centuries. Chinese intellectual property theft may even benefit American consumers if economists and technologists are correct that U.S. patent law is so strict that it prevents competition and innovation.

The real problem was that people in China produced far more than Chinese consumers could afford. At the peak in 2008, China’s excess output was worth 0.7% of the entire world’s production. China’s abundant demand for capital equipment and raw materials wasn’t nearly enough to offset its enormous manufacturing surplus.

The resulting glut displaced production in the rest of the world, especially the U.S., but also in other manufacturing powers, such as Germany and Japan. In America, consumers tried to compensate for the reduction in income by borrowing, which temporarily helped absorb China’s excess production.

The financial crisis removed that source of demand, and Chinese officials have responded by boosting domestic spending on investment. At the same time, commodity imports have continued to rise, as richer Chinese consumers increased their spending on gasoline, meat, and dairy products. Loosened restrictions on outbound travel have also increased tourism spending, although the official numbers vastly overstate the magnitude of the change. The net effect is that China’s excess production has shrunk to just 0.1% of global output—about where it was in 1999-2001.

The reduction in China’s external imbalance has been dwarfed by the emergence of a new glut emanating from Europe. Measured in dollars, Italy’s excess production in 2018 was larger than China’s. Excess output from the 19 members of the euro area is now worth about 0.6% of world production—a half-percentage point higher than in 2007.

Add in Denmark, Switzerland, and Sweden, which have broadly similar policies, and Europe’s total surplus has been bigger than China’s ever was since 2013. (China’s neighbors, meanwhile, have maintained their large collective surplus.)

The sustained increase in Europe’s external surplus has little to do with “competitiveness” or “reforms.” Instead, it is a function of the region’s battered domestic economies: Consumption and investment fell, which depressed imports, while exports rose in line with global demand. Domestic spending in the crisis countries—excluding Ireland, which has had its data distorted by the tax avoidance of multinational corporations—is still about 7% lower now than before 2008. Unemployment and poverty are higher.

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This arrangement isn’t good for anyone. It is obviously bad for people in Europe forced to endure lower living standards, even as workers and factories remain idle. But it is also bad for Americans, who have once again been forced to absorb a glut of manufactured goods at the expense of domestic production, and for major emerging market countries, such as Argentina, Brazil, and Turkey, which borrowed too much to finance excess spending and have since been pushed into crises.

The good news is that Europeans have the power to fix their problems, both for their benefit and for the rest of the world’s. Higher spending at home would help a continent still mired in depression while also raising demand for imports from struggling producers elsewhere.

China’s economic model may be problematic, but it is currently causing far less damage.

Write to Matthew C. Klein at matthew.klein@barrons.com