![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!PWed!,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1655eb08-4451-4895-a862-cf9be2ef48f4_958x1154.png\")
<\/a><\/p>\nSource: CEPR<\/a><\/p>\n The world economy is interconnected by trillion-dollar flows of goods, services and money. Overall, what matters most for the scale of global economic activity and for individual businesses is the overall scale of international business, so-called \u201cgross flows\u201d. But macroeconomists tend to focus on the net flows of imports and exports (inflows minus outflows) because they impact the overall balance of aggregate demand. Exports add to demand, imports divert domestic demand to foreign producers. Net imbalances on current account are matched by net accumulation (or dis-accumulation) of financial or property claims on foreign economies, or by foreigners on a national economy. That flux of assets and liabilities across borders can become a source of pressure in its own right. <\/p>\n When you subtract inflows and outflows of goods and services (measured in monetary terms) and payments for property owned abroad, you end up with the current account balance. The trade balance i.e. the net balance of goods traded across borders, is the most commonly cited component of this balance. A country with a current account deficit must, on balance, be a foreign borrower. A country with a current account surplus is, whether it wants to or not, accumulating claims on foreign economies in the form of currency, government bonds or other investments. Financial flows trigger growth and contraction in credit that in turn unleashes \u201creal\u201d economic processes by way of aggregate demand.<\/p>\n Standard economic theory tends to promise that imbalances correct themselves. Trade surpluses should lead, in a world of floating exchange rates, to currency appreciation and a shift in the balance of imports and exports and visa versa. When we view the last decades of modern economic history, the striking thing is that imbalances are not just large but persistent. Countries do not shift back and forth across the deficit-surplus line. Instead, the US and a cluster of other countries, notably the UK, have remained in deficit for decades. And, on the other side, Europe, Japan, the petro-economies and China have for decades run large and persistent surpluses. The colored bars in the graphs above, remain remarkably constant over time. <\/p>\n Consequently, the worried talk about global imbalances is not new, either. In the 2000s there were more or less ineffectual efforts by the IMF to address the issue. The shock of 2008 somewhat reduced the scale of overall imbalances, but the question has not gone away. Nor, according to the IMF\u2019s data up to 2024 is it much worse today than at previous points in recent history. One might even wonder why in 2026 the kerfuffle is so intense. As Beatrice Weder di Mauro and Jeromin Zettelmeyer ask in the introduction to a volume published by the CEPR<\/a>: \u201cWhy care, why now, and what can be done?\u201d<\/p>\n Asking these questions is useful, amongst other things, because it moves us from the realm of macroeconomic accounting and analysis to that of history. The striking thing about the imbalances debate of 2026 is the way in which, within the unchanging \u201cbottles\u201d of the macroeconomic accounts, old wine is being mixed with some radically novel and explosive ingredients. <\/p>\n One long-standing reason to be worried about global imbalances is the concern that they will trigger protectionism. As Karl Polanyi was amongst the first to diagnose in his Great Transformation pubished in 1944, successful efforts to globalize markets are likely, without appropriate political and social \u201cembedding\u201d, to produce political backlash. Entrenched interests are likely to react against large flows of foreign goods, money or workers, to defend the status quo, or in Polanyian terms to insist that more is at stake than merely commodified claims on labour power, land or other resources. From the point of view of managers of the \u201cglobal system\u201d such a backlash is a worry – call this the precautionary concern for global imbalances. <\/p>\n In reaction to the current imbalances, and most notably China\u2019s export surge, there have been a variety of counter measures adopted around the world. But after Trump\u2019s utterly unprecedented trade policy rampage in 2025, worrying about global imbalances as a potential trigger for future protectionism is akin to making a labored argument for locking the stable door after the horse has not just bolted but smashed its way through the stable wall. <\/p>\n Of course, Trump\u2019s rampage in 2025 is not unconnected to America\u2019s trade deficit. But his campaign is motivated by arguments that have little to do with sophisticated balance of payments analysis. Nor was there a powerful populist backlash underway in America in 2025 loudly clamoring for \u201cLiberation Day\u201d. There is a strange disconnect between Trump\u2019s tariff demands and any concrete pressures arising from America\u2019s political economy. One of the oddities of Trump\u2019s trade measures is that China has ended up with a more modest tariff level than many others. <\/p>\n Of course, Trump\u2019s America is not the only protectionist actor, but as Richard Baldwin in his recent book on World War Trade<\/a> points out, there are plenty of reasons for the rest of the world to push back. Given Trump\u2019s delirium one might even imagine that other trading nations might be less likely, in future, to unleash their own smaller scale trade skirmishes. In the mean time to discuss the problems of the trading order as though we were still anxiously waiting for the barbarians, amounts to escapism. The barbarians are in the house!<\/p>\n Of course, the potential for future trade policy conflict is not the only reason to worry about global imbalances. Persistent trade deficits lead to the accumulation of large financial liabilities, matched by reserves on the other side. The US, the main deficit country finds itself shifting more and more deeply into a position of large net debtor to the world<\/a>. <\/p>\n Source: BEA <\/a><\/p>\n At close to $ 30 trillion, US net liabilities to the rest of the world are closing in on US GDP. This is a dramatic figure. But talk of a sudden collapse in the dollar order is exaggerated. As Brad Setser points out in a truly excellent episode of the Odd Lots podcast, there are few signs of a general flight from the dollar or dollar assets. <\/p>\n<\/p>\n As has been true for many decades, the attraction of US financial assets continues to lead to a rich valuation of the dollar. There seems little reason, on the face of it, to worry about foreign claims on the US private sector. As Setser points out, compared to official currency reserves that are insensitive to yield, the standard global equity portfolio is heavily overweight US equities. Whatever their views of the US government, foreign investors do not want to miss out on the outsized returns offered by US mega caps. <\/p>\n For some, the continuing accumulation of US sovereign liabilities is a worry. It is true that the US Treasury borrows at rates that are higher than for some rich-country sovereigns. But if that is your concern, why start with the balance of payments? If you want to reduce America\u2019s fiscal overhang, issue less debt. In the current moment it is not just American trade policy that is shocking. Never in American history has the country run such a large budget deficit at a time of relatively full employment. <\/p>\n Given low unemployment, the deficits that have been piled up since the mid 2010s are historically anomaly. And to be clear, what is out of line here is not the level of spending, what is anomalous is the atrophying of the American tax take. This is the result of an entrenched Congressional impasse for which the Republicans are principally responsible. <\/p>\n Source: Peterson<\/a><\/p>\n Of course causation does not run only one way from the fiscal deficit to the current account deficit. There are also complicated macroeconomic feedback loops running the other way, from the trade deficit, by way of its impact on aggregate demand, to the fiscal balance. But, to reiterate, if you are mainly worried about an upsurge of protectionism, or the risks of America\u2019s foreign liabilities, then your main focus should not be on \u201cglobal imbalances\u201d. Your main focus should be on the manifest disintegration of coherent political decision-making in Washington D.C.. To engage in conventional macroeconomic policy debate when the barbarians are inside the house is, in the best case, a form of escapism. In the worst case it provides the barbarians with excuses for their vandalism. <\/p>\n But America\u2019s political crisis is not the only historic shock that finds expression in global imbalances today. On the surplus side, the situation of China, Taiwan and South Korea isanomalous as well. <\/p>\n The boom in exports from Taiwan and South Korea does not get enough attention. It is driven by AI data center demand for chips. One of the most interesting things to come out of the current round of macroeconomic analysis have been studies highlighting the dramatic impact of the AI boom on world trade. Data center demand, centered on the US, is large enough to visibly shift global trade patterns. And that effect is most visible in the relatively modest-sizes economies that are home to Samsung and TSMC. <\/p>\n The chip-surpluses are gigantic, but China is something else again. China\u2019s export surge is more broad-based and confirms a drum beat of global complaints about Chinese trade and industrial policy. Puzzlingly, the sudden surge in China\u2019s exports is less visible in the IMF\u2019s global balance of payments data than one would expect. There is some rise, visible in the data for Chinese trade. But nothing like the drama of current reporting. <\/p>\n This is in part a matter of sectoral stories versus overall data. But there is also, seemingly, something wrong with the underlying data. The most minimal interpretation is that this has to do with systematic overcounting of exports and undercounting of imports, plus complicated shifts in the treatment of complex cross border manufacturing operations. These cause production to be counted as services in China and as goods imports in recipient countries. The stronger interpretation favored by the redoubtable Brad Setser is that the data systematically understate the level of Chinese trade surplus. <\/p>\n Brad Setser@Brad_Setser<\/p>\n Good question from @adam_tooze <\/p>\n Not sure the IMF – which used the lagged and under reported Chinese 2024 current account data — made the best case. <\/p>\n Think the real answer is China’s manufacturing surplus is actually huge v history (would be bigger in real terms)<\/p>\n 1\/<\/p>\n Adam Tooze @adam_tooze<\/p>\n Hi @Brad_Setser one of the questions I have is simply why the alarm at this moment? I know the industry-level data can look dramatic. But looking at the macro picture one might be tempted to say that the imbalance are broadly what they have been for a two decades.<\/p>\n 2:38 PM \u00b7 Apr 8, 2026 \u00b7 64.1K Views<\/p>\n 2 Replies \u00b7 26 Reposts \u00b7 123 Likes<\/p>\n <\/a><\/p>\n The underlying thesis here (a la Michael Pettis) is that Beijing has caught itself in a policy trap. To hit growth targets despite the recession in real estate and infrastructure, Beijing needs to maintain export demand. To do so Beijing continues to manipulate the valuation of the RMB. To keep this under the radar, it disguises its reserve accumulation. Surpluses are underreported and reserve accumulation is shuffled off into the balance sheets of China\u2019s para-state banks. <\/p>\n If one accepts the Setser critique of the data and puts it together with the critique of China\u2019s industrial policy and \u201cexcess capacity\u201d, \u201cglut\u201d etc then we have the basic elements of the China shock 2.0 story. The IMF, which as a multilateral body is loath to accept such a contentious narrative, has long insisted on the old religion that sectoral policies like industrial policy could not shift the macro balance. In recent reports<\/a>, the IMFtoo has given ground. So there is now something like a consensus that we are dealing with a new \u201cChina shock\u201d.<\/p>\n But, again, pause to consider, the historical specifics. <\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/p>\n<\/p>\n