US Treasury Secretary Scott Bessent and G7 finance ministers recently called on the International Monetary Fund to bear down on ‘global imbalances’. To old-timers who experienced raging debates about GIs two decades ago, the calls were a blast from the past.
Yet, today’s debate differs. While the US and China remain at its heart, their contributions have morphed and the US must shoulder greater responsibility (Figure 1).
Figure 1. Global imbalances debate has shifted
Current accounts as a share of GDP: China, Germany, US
Source: IMF World Economic Outlook
Back to…
GIs surged onto the international financial agenda ahead of the 2008 financial crisis after China’s World Trade Organization entry. The country’s current account surplus soared to 10% of gross domestic product amid massive foreign exchange intervention perpetuating large renminbi undervaluation.
The IMF made the obvious point that surpluses were mirrored in corresponding deficits. Noting that the US was the chief counterpart for China’s surplus, the Fund maintained action was needed by both. China needed to allow currency flexibility and the US to reduce its fiscal deficit. To this end, the IMF launched multilateral consultations.
US authorities did not view US deficits and Chinese surpluses symmetrically. Even if the US’s pre-crisis fiscal policy was not ideal, fiscal deficits were under 2% of GDP in 2006-07. That did not match the harmful effects from China’s intervention and currency undervaluation – if not ‘manipulation’ in many eyes.
GIs took centre stage in the early G20 leaders’ summits. Chinese authorities furiously resisted references to GIs in the inaugural November 2008 Washington summit declaration.
At the September 2009 Pittsburgh G20 summit, leaders endorsed a Framework for Strong, Sustainable and Balanced Growth, aimed at reducing GIs in the post-2008 global economy by creating a more sustainable pattern of global demand, less reliant on American consumption. This would be achieved in large part by the US raising national savings (e.g. reducing its fiscal deficits) and China – along with Germany – boosting domestic demand.
Figure 2. US fiscal deficits soared during the pandemic
China’s major stimulus during the financial crisis reduced its current account surpluses. However, massive intervention continued in subsequent years and by 2014, reserves reached $4tn. Germany’s surpluses surged, reflecting stringent balanced budget policies via the ‘Black Zero’ policy. The US reined in its financial crisis-related fiscal deficits, though by 2017 they began expanding anew, soaring during the pandemic (Figure 2).
Tensions still flared in the immediate years after 2008, especially at the November 2010 Seoul summit, when China and Germany resisted US efforts to focus on GI indicators.
In 2015, the renminbi came under massive selling pressure and China sold some $1tn to limit depreciation. Germany’s massive surpluses continued unabated, increasingly garnering the world’s ire.
Overall, GI debates quietened.
The future…
Today’s GIs are in some ways similar and in others fundamentally different to the past.
China’s nominal current account surplus remains humongous, even if much lower as a percentage of GDP than two decades ago. Further, extensive work by China analysts, including Brad Setser at the Council on Foreign Relations, shows that China’s surpluses are understated. The renminbi remains woefully undervalued, having picked up considerable competitiveness in recent years (Figure 3). Unlike the past, this undervaluation has not reflected intervention so much as large-scale capital outflow pressures.
China’s contribution to GIs today is more closely associated with its broken growth model. Official growth targets exceed the economy’s sustainable growth. High savings dampen consumption, allowing state-owned commercial banks to funnel credit to state-owned enterprises, layered on top of many other forms of industrial policy support. With growth trending down due to China’s massive headwinds – including demographics, housing turmoil, excess leverage, low confidence – excess investment sustains high production that cannot be absorbed at home. Overcapacity spills abroad due to insufficient domestic demand.
In short, while Chinese currency developments and surpluses remain issues, far greater focus is warranted now on China’s growth model and the authorities’ longtime cautiousness or unwillingness to deploy policy levers to make fundamental changes to boost domestic consumption and services.
Figure 3. Renminbi remains undervalued
Source: Bank for International Settlements
German household and enterprise savings have historically been high and were reinforced by the Black Zero policy, supporting massive current account surpluses. But attention is now fading on Germany’s contributions to GIs despite a still hefty current account surplus. Germany suspended its debt brake amid the pandemic. The government under new Chancellor Freidrich Merz has announced a fiscal U-turn, promising to bolster infrastructure and defence spending. Germany’s now broken export-led growth model relied heavily on autos, but car firms are increasingly challenged by Chinese electric vehicle exports. Low global growth, compounded by President Donald Trump’s tariffs, further harm export prospects.
The US contribution to global imbalances is also different, and more alarming. US current account deficits are rising anew, nearing a whopping 4% of GDP, despite the US shift from a large oil importer to a net energy exporter.
A strong dollar, foreign export orientation and currency practices continue to impact US external deficits. But what has changed noticeably is US fiscal policy and its contribution to dissaving and the current account deficit. The Congressional Budget Office predicts US fiscal deficits will average around 6% of GDP per annum over the next decade. Trump’s ‘big beautiful bill’, if passed, will add considerably to debt and deficits. America’s rising net international investment deficit – some 85% of GDP – looms as an increasing risk as current account deficits accumulate, particularly if US earnings abroad don’t continue to well outpace lower returns on foreign US earnings.
If the US wishes to reduce its current account deficit, the best course would be to pursue fiscal consolidation.
In short, US fiscal deficits are a bigger factor in contributing to GIs than in the past. While the G7’s renewed attention on GIs has legitimately focused on Chinese policies, the US role merits commensurate scrutiny.
Mark Sobel is US Chair of OMFIF.
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