Chartbook 442: Global imbalances - A new cocktail in old bottles: World Economy April 2026:
As the World Bank and IMF convened for their “twin meetings” in Washington DC in April 2026, the talk of macroeconomists around the world was of “global imbalances”.
Source: CEPR
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 “gross flows”. 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.
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 “real” economic processes by way of aggregate demand.
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.
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’s 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: “Why care, why now, and what can be done?”
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 “bottles” of the macroeconomic accounts, old wine is being mixed with some radically novel and explosive ingredients.
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 “embedding”, 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 “global system” such a backlash is a worry - call this the precautionary concern for global imbalances.
In reaction to the current imbalances, and most notably China’s export surge, there have been a variety of counter measures adopted around the world. But after Trump’s 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.
Of course, Trump’s rampage in 2025 is not unconnected to America’s 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 “Liberation Day”. There is a strange disconnect between Trump’s tariff demands and any concrete pressures arising from America’s political economy. One of the oddities of Trump’s trade measures is that China has ended up with a more modest tariff level than many others.
Of course, Trump’s America is not the only protectionist actor, but as Richard Baldwin in his recent book on World War Trade points out, there are plenty of reasons for the rest of the world to push back. Given Trump’s 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!
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.
Source: BEA
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.
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.
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’s 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.
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.
Source: Peterson
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’s foreign liabilities, then your main focus should not be on “global imbalances”. 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.
But America’s 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.
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.
The chip-surpluses are gigantic, but China is something else again. China’s 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’s exports is less visible in the IMF’s 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.
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.
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’s para-state banks.
If one accepts the Setser critique of the data and puts it together with the critique of China’s industrial policy and “excess capacity”, “glut” 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, the IMFtoo has given ground. So there is now something like a consensus that we are dealing with a new “China shock”.
But, again, pause to consider, the historical specifics.
The first China shock of the 2000s is easily exaggerated in its impact on the US. Twenty years later the US is certainly not in the crosshairs of the second China shock. This time the principal “victim” of a surge in affordable, high quality imports from China is Europe, not the US. It adds to the ghostly nature of the current debate, that it is a trans-Atlantic conversation, carried on largely by French economists and American liberals warning of China’s impact on the EU. It helped that France had he Presidency of the G7 and could put imbalances on the agenda. Given the insanity of US trade policy and the impasse of Congress, there is little prospect of constructive action in Washington, so the frontline shifts to Europe, where some kind of protective tariff or negotiated market sharing deal can be advocated for in a reasonable fashion. It is, you might say, rational, post-neoliberal policy by proxy.
The 4th Paris Report by the Centre for Economic Policy Research is a case in point. In its introduction cited above, the editors of the CEPR report take a capacious viewing place both China shock 1.0 and 2.0 on a longer term trajectory and making two key points.
First, competitive pressure in industrial manufacturing, which is the central concern of the China shock discourse, must be viewed against the backdrop of longer-term trends. The decline in the relative share of industrial employment in affluent societies is neither an anomaly nor regrettable.
Secondly, the rise of China is a long term trend to which the West must adjust. Going beyond the CEPR report one might remark that one of the truly puzzling aspects of convergence ideology of the 1990s is that it assumed that a unit of the size of China would simply “bolt on” to the world as the West knew it. If history was not actually over, there was at least “only one” developmental path and China would join it, rather than redefining it. In the 2000s the first China shock could still be viewed as “catching up”. The second China shock is more significant because China is in fact redefining the boundaries of the possible in many sectors.
The CEPR’s coolness on the China question is a welcome corrective. And it seems churlish to want even more. But needs must. The CEPR is sensible in insisting that the decline of industrial employment in the West and the rise of China are indeed long-term trends. But it is insufficiently dialectical in refusing to recognize that the “China shock 2.0” really is a shock. China’s gear shift from the broad-based urbanization- and infrastructure-driven model of growth (which by the 2010s was already excessive but at least moderated the current account surplus) to one focused on industrial policy truly does deliver a new kind of global shock. Many countries have tried to manage such structural shifts, but none on the scale and with the dynamism that China is doing.
The development of Chinese industrial policy since 2015 is not like anything we have seen before. The pace at which China’s productive system can mobilize resources is unprecedented. China’s astonishing $1.2 trillion trade surplus may be made up in substantial part of a lot of predictable and in some sense “inevitable” trade flows. But that giant aggregate also contains a series of sectoral stories that are simply unlike anything we have ever seen before, the electrotech revolution and the surge in Chinese motor vehicle exports are perhaps the most important and politically sensitive. With regard to questions like the global green energy transition this is utterly transformative.
Within the seemingly familiar narrative of global imbalances - a discourse which in its current form goes back to the 2000s - and amidst the well rehearsed trench warfare of contending macroeconomic perspectives, are playing out four truly radical forces defining the mid 2020s moment:
Trump’s trade policy rampage.
The new and extraordinary incontinence of US fiscal policy.
The AI boom, which has taken on global economic scale.
The gear-shift in Chinese economic policy.
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According to the CBO’s latest baseline, federal revenue in 2026 is projected at about 17.5% of GDP, slightly above the 50-year average of 17.3%, so it would be too simplistic to say that America’s tax-raising capacity is simply collapsing. But the same CBO report also shows that federal spending will reach 23.3% of GDP in 2026, with the deficit at 5.8% of GDP, rising further to 6.7% by 2036. Meanwhile, corporate tax revenue is expected to remain stuck at only around 1.2% to 1.3% of GDP over the long run, below the 50-year average of 1.7%.
In other words, the problem in the United States is not that the government can no longer collect taxes at all. It is that the fiscal structure is becoming increasingly mismatched with its spending commitments, interest burden, and political promises.
The United States is not facing a simple loss of tax capacity in the ordinary sense. What it is facing is a deeper fiscal-political mismatch. On the one hand, it remains close to full employment. On the other, it continues to run deficits of a size that, in a standard textbook framework, would look more typical of a recession. At the same time, it lacks a fiscal consensus capable of turning those deficits into long-term national development.
So on this point, I strongly agree with Tooze: the American political decision-making system has lost its coordinating capacity. And that is precisely the most structural risk facing the United States today. The problem is not that America lacks money, technology, or capital markets. The problem is that it is becoming increasingly difficult for the country to place trade policy, taxation, industrial policy, fiscal policy, monetary policy, alliance management, and security strategy into one coherent and sustainable national framework.
Washington is relying more and more on one-off, fragmented, politically high-visibility instruments, while lacking a long-term, stable, and internally coordinated system of governance. Several core parts of the state machinery are now working at cross-purposes. Trade policy seeks to protect manufacturing, while fiscal policy continues to widen the deficit. Monetary policy tries to contain inflation, while tariffs and geopolitical shocks keep pushing costs upward. Capital markets reward technology giants and financial assets, while the political narrative calls for reindustrialization and middle-class renewal.
The result is that the United States still appears very strong, but this strength looks increasingly like a surface-level strength, sustained by elevated asset prices, high-tech profits, and the centrality of the dollar, rather than the strength of a strategically coordinated state with a clear and unified direction.
What makes China Shock 2.0 more painful for Europe is not simply that Chinese manufacturing is pressing harder. It is that Europe lacks a state-capacity framework capable of rapidly integrating defense, reconstruction, and reindustrialization into a single coordinated response. Tooze is right to note that Europe will be under pressure. But the real question is not whether Europe will be hit by Chinese goods. It is whether Europe still has the capacity to turn that shock into an opportunity for internal reorganization.
The deeper problem is that Europe does not possess the same degree of elasticity that the United States still retains in energy costs, capital-market depth, fiscal coordination, industrial financing, technology commercialization, and unified strategic execution. In other words, the issue is not just external pressure from China. It is that Europe lacks something closer to an American-style national capacity framework, one able to connect protection, rebuilding, and reindustrialization at speed and at scale. At the root of this lies Europe’s fragmented upper-level political governance structure, which is increasingly unable to meet the demands of economic development.