- Global current-account deficits plus surpluses reached 3.7% of world GDP last year — approaching levels that preceded the Asian financial crisis, the US housing bubble, and the eurozone debt crisis — and will top the agenda at next week’s G7 summit in France.
- The US current-account deficit of $1.1 trillion is the world’s largest single imbalance; the IMF says tariffs do little to fix it — the bigger driver is America’s own budget deficit, which sustains excessive spending and insufficient saving.
- China’s surplus is the world’s largest, sustained by currency undervaluation (yuan estimated 15%+ undervalued), capital controls, household taxes, and a minimal safety net that suppresses domestic consumption and keeps exports hyper-competitive.
- A Plaza Accord-style currency realignment is the economist consensus fix, but is politically near-impossible without China at the table — and the IMF has no enforcement mechanism over the world’s two largest economies.
What Happened?
The IMF calculates that global current-account imbalances — the combined total of deficits and surpluses across all countries — reached 3.7% of world GDP last year, up from a multi-decade low and approaching levels that historically preceded major financial crises. The G7 summit in France’s Evian next week will put “global imbalances” formally on the agenda, at the initiative of French President Macron, who has warned that without coordination they “risk unwinding in a disorderly manner.” The US carries the world’s largest deficit at $1.1 trillion. China runs the world’s largest surplus. Germany and Japan are chronic surplus nations. WSJ chief economics commentator Greg Ip offers the clearest-eyed assessment of why this matters — and why it likely won’t be fixed.
Why It Matters?
Excessive current-account imbalances have a consistent historical track record of ending badly. The Latin American debt crises of the 1980s, the Asian financial crises of the late 1990s, the US housing bubble of 2007–09, and the eurozone debt crisis all featured large deficits financed by foreign capital inflows that eventually stopped or reversed sharply. Today’s imbalances are structurally different — they’re driven less by fixed exchange rates and private bank lending and more by persistent national policy choices — but the underlying fragility is similar. The US is now financing its deficit partly by selling equities to foreigners at record rates ($736 billion last year), meaning a significant AI-driven stock correction could simultaneously correct the deficit by destroying the foreign-held IOUs while potentially destabilizing bond and currency markets globally. Trump’s tariff approach, the IMF says, is largely ineffective — a microeconomic tool that gets offset by exchange rate and spending adjustments. The real culprits are America’s own budget deficit and China’s macroeconomic suppression of domestic consumption.
What’s Next?
The G7 summit provides a diplomatic forum but not a solution. China isn’t a member, and both China and the US have strong incentives to maintain policies that produce their respective imbalances. A new Plaza Accord — coordinated currency realignment — would require China to let the yuan appreciate by at least 15% and the US to cut its budget deficit substantially. Neither is politically feasible in the near term. The IMF can surveil and warn but cannot compel. In the absence of coordination, the question becomes whether imbalances correct gradually through market forces or disruptively through a crisis. The 1985 Plaza Accord is remembered as a success, but it worth noting — as Ip does — that the inflationary aftershocks from that realignment contributed to the 1987 stock market crash. History suggests the resolution of large imbalances is rarely painless.
Source: The Wall Street Journal
