Project Syndicate - The Root of Today’s Global Imbalances - May 18, 2026 - Lee Jong-Wha

Project  Syndicate

The Root of Today’s Global Imbalances

May 18, 2026

Lee Jong-Wha

Today’s global imbalances are driven primarily by domestic saving-investment dynamics and the interaction between geopolitical rivalry, technological competition, and capital flows. Only by taking coordinated action to manage the associated risks can the world prevent today’s tensions from erupting in another global economic crisis.

SEOUL—Global imbalances are again dominating international economic debates, and with good reason. Large and persistent imbalances often end badly, whether in abrupt capital-flow reversals, exchange-rate volatility, geopolitical conflict, or, as in 2008, financial crisis. And with the United States now running significant current-account deficits, and China having returned to substantial surpluses, fears that the world is headed toward another reckoning are mounting.

US President Donald Trump gesturing while speaking about the conflict in Iran during a press briefing in the James S. Brady Press Briefing Room at the White House in Washington, DC, on April 6, 2026.

Politics

To be sure, today’s imbalances are smaller than those that preceded the 2008 global financial crisis. Last year, the US current-account deficit approached 3.6% of GDP, compared to its pre-2008 peak of 6%, and China’s surplus was 3.7% of GDP, compared to over 9% before the crisis. But the gaps are widening—and, unlike in the mid-2000s, this is happening against a backdrop of heightened uncertainty about economic security, supply chains, reserve currencies, strategic competition, and financial stability.

These imbalances have contributed to a resurgence of protectionism, particularly in the US, with President Donald Trump using America’s trade deficits to justify sweeping tariffs. European leaders, for their part, have sharply criticized Chinese industrial overcapacity in electric vehicles, batteries, and solar panels. Because “China Shock 2.0” is concentrated in these higher-end sectors (which also include semiconductors and robotics), rather than low-cost consumer goods, it is putting pressure on advanced-economy producers and impeding industrial-upgrading efforts across the developing world.

But today’s persistent imbalances are not just a trade issue. As recent analyses by the International Monetary Fund, the G7, and the Bank of England show, they are driven primarily by domestic saving and investment dynamics.

In the US, the core problem is fiscal dissaving. While the US runs large budget deficits and racks up external liabilities, it continues to attract a huge volume of foreign capital. This partly reflects enduring demand for dollar assets—an upshot of the dollar’s reserve-currency status. America’s technological leadership has further made the US financial assets all the more appealing to foreign investors.

As a result, the US has been able to sustain external deficits for far longer than most countries, contributing to growing financial vulnerabilities that extend well beyond the US. Global investors are heavily exposed to dollar assets and US equities and bonds, and their investment portfolios are highly concentrated in a narrow set of assets, particularly AI-related equities. A sharp correction in US markets would thus reverberate rapidly across the global economy.

China’s surplus reflects the opposite dynamic: weak domestic demand relative to productive capacity. The causes include the property-sector downturn, high precautionary household saving in the face of an incomplete social safety net, and demographic pressures. While industrial policy has reinforced these trends, it cannot fully explain China’s surplus.

This distinction matters because it alters the policy implications. If industrial subsidies and trade barriers were the main problem, tariffs might offer a solution. But if the underlying issue is a structural imbalance between savings and investment, the impact of trade measures will be limited. In fact, recent IMF research shows that exchange-rate movements and supply-chain adaptation offset much of the tariffs’ long-run effect on current-account balances.

Ultimately, global imbalances are domestic problems requiring domestic solutions. The US must gradually reduce its fiscal deficits and boost financial resilience, and China must increase domestic consumption by strengthening its social safety net, supporting household income, allowing gradual real exchange-rate appreciation, and facilitating greater two-way capital flows. Reining in support for manufacturing and expanding high-value services would also support China’s shift toward consumption-led growth.

These adjustments are in both countries’ interest. Debt-financed consumption and rising external liabilities are no more reliable a long-term growth strategy than dependence on external demand.

While the prescription is fundamentally domestic, international coordination is also essential. After all, a disorderly adjustment could lead to financial instability, exchange-rate volatility, and sudden stops in capital flows, which would hit emerging economies hard.

The central challenge today is thus not simply to reduce trade imbalances. It is to manage the financial vulnerabilities created by massive and concentrated global capital flows—vulnerabilities that are exacerbated by rising leverage in non-bank financial institutions, concentrated portfolio positions, bubbly valuations for US technology equities, and mounting pressures in sovereign-bond markets.

To this end, the US and China should correct their respective domestic imbalances gradually and responsibly. But other major powers and international institutions must also do their part. The IMF, the Bank for International Settlements, and the Financial Stability Board should strengthen surveillance of cross-border capital flows, leverage, and liquidity mismatches, while enhancing macroprudential coordination, stress testing, and crisis-prevention mechanisms. While grand macroeconomic bargains like the Plaza Accord of the 1980s are unrealistic at a time of geopolitical fragmentation, the G7 and G20 can also make a difference by promoting transparency, dialogue, and coordination.

While today’s imbalances are linked to trade, they are driven primarily by domestic saving-investment dynamics and the interaction between geopolitical rivalry, technological competition, and concentrated global capital flows. Only by recognizing this and taking coordinated action to manage the associated risks can the world prevent today’s tensions from erupting in another global economic crisis.

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Lee Jong-Wha

Lee Jong-Wha

Writing for PS since 2012

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Lee Jong-Wha, Professor of Economics at Korea University, is a former chief economist at the Asian Development Bank and a former senior adviser for international economic affairs to the president of South Korea.