“When President Trump meets his counterparts at next week's G-7 summit in France, one of his favorite topics will be on the agenda: the massive U.S. trade deficit.
More precisely, the French hosts want to talk about global imbalances, meaning the U.S.' current-account deficit (a broader measure of the trade deficit which includes goods, services and investment income) and the corresponding surpluses of China and, to a lesser degree, the European Union and Japan.
Deficits and surpluses are of course common and normal. "It is excessive imbalances that we are concerned about," Kristalina Georgieva, managing director of the International Monetary Fund, said at a panel discussion I moderated in April.
And they are starting to look excessive. The IMF calculates that deficits plus surpluses (one country's deficit is another's surplus) reached 3.7% of global gross domestic product last year after falling steadily from around the global financial crisis. Until the early 2000s, they fluctuated between 1% and 3%.
This is worrisome. Current-account deficits played a part in the crises that swept Latin America in the 1980s, east and southeast Asia in the 1990s, the U.S. in 2007-09 and the eurozone from 2009 on.
Because a deficit must be financed by an inflow of capital (e.g. borrowing from banks, or sales of stocks and bonds), widening deficits may be a sign of a debt or investment bubble fed by foreign funds. The U.S. housing bubble, for instance, was financed by foreign money indirectly finding its way into mortgage-backed securities.
Today's imbalances look different. While annual deficits are narrower than 15 years ago, they are more persistent and more entrenched in national behavior.
Take the U.S., whose current-account deficit of $1.1 trillion is by far the largest single imbalance. Ask Trump what the cause is, and he'll blame unfair trading practices by other countries. His solution: tariffs.
But the IMF, in a study earlier this year, says tariffs are a form of "microeconomic" industrial policy whose impact on the current account is minimal because of offsetting movements in investment, consumption, saving or exchange rates. Last year, tariffs did reduce some imports, but because the AI boom sucked in foreign-made tech equipment, the current-account deficit narrowed only slightly.
The bigger contributor to the U.S. current-account deficit is its budget deficit, which sustains excessive U.S. spending and inadequate saving. The IMF estimates a budget deficit of 2% of GDP increases the current-account deficit by 0.5% of GDP.
And the U.S. is not solely responsible for its own deficit. It is enabled by others' surpluses. They include Germany, whose problem is chronic underinvestment, and especially China whose surplus is the world's largest. By exporting so much, China effectively forces its trading partners to run deficits.
China, like Trump, gives priority to manufacturing. But unlike tariffs, China's industrial policy does help its trade balance because it is macroeconomic, not microeconomic, the IMF's analysis shows. For example, China uses foreign exchange intervention and capital controls to keep its currency cheap. It also subsidizes investment through taxes on households and a skimpy safety net, boosting saving. All of this helps exports while depressing consumption and imports.
French President Emmanuel Macron would love for some sort of coordinated solution to these imbalances to emerge from his chairmanship of the G-7. Without coordination, "these imbalances risk unwinding in a disorderly manner," he said Thursday.
The solution looks obvious: the U.S. should slash its budget deficit and China should reform its financial and fiscal system.
Another solution could be modeled on the Plaza Accord of 1985 under which the G-5 agreed to let the dollar depreciate sharply against the West German mark and Japanese yen. Imbalances narrowed sharply in following years.
Today the dollar is overvalued by many measures while China's yuan, according to Joseph Gagnon of the Peterson Institute for International Economics, is at least 15% undervalued. Ending "deep currency undervaluations is the one policy change that would directly bring balance to global trade," Brad Setser and Shahin Vallee, former economic advisers to the U.S. and French governments, respectively, recently wrote.
None of these solutions is about to happen. The U.S. blames its problems on others, especially China. China sees no need to change policies it thinks are working. The IMF, the one body charged with disciplining imbalances, has no means to do so.
So if coordinated action by governments can't correct these imbalances, will it take a crisis? There's no good template. The Latin America and Asian financial crises originated with fixed exchange rates that encouraged banks to lend across borders. Currencies then devalued, precipitating broader banking crises. Similar dynamics brought on the euro crisis, though the euro didn't collapse. The U.S. housing bubble was largely financed through private debt.
Exchange rates mostly float now. In a recent paper, Kristin Forbes, an economist at Massachusetts Institute of Technology, and three co-authors noted the U.S. has financed a lot its deficit lately by selling stocks to foreigners: $736 billion last year, a record.
The good news, according to Forbes, is that a plunge in stocks driven, for example, by disappointment in AI would effectively write down the IOUs the U.S. issued to foreigners to finance its deficits. It could also lower the dollar, further correcting those deficits. The bad news is the losses inflicted on foreign investors could spill over to bond and currency markets.
Economists look back fondly at the 1985 Plaza Accord as economic coordination at its best. But it's worth remembering that inflationary forces originating with that accord helped cause the 1987 stock market crash.” [1]
1. U.S. News -- Capital Account: Trade Imbalances Pose Global Threat. Ip, Greg. Wall Street Journal, Eastern edition; New York, N.Y.. 12 June 2026: A2.
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