I have previously argued that the US-China trade imbalance could not be resolved principally through tariffs: both countries needed to address the domestic policies underlying it. Recent developments reinforce that argument and show why the problem is increasingly global.
US gross national debt has crossed $40 trillion for the first time. Meanwhile, long-term yields have surged to their highest in nearly two decades, prompting the Treasury to increase buybacks of long-dated bonds. These can improve market liquidity but can’t resolve the underlying fiscal problem.
Across the Pacific, China presents almost a mirror image. Its trade surpluses are exceptionally large, reflecting formidable export competitiveness but also continuing weakness in domestic demand.
These developments are connected, although not as simply as bilateral trade statistics suggest. Global imbalances ultimately reflect differences between national saving and investment. The US spends and invests more than it saves, absorbing capital from abroad. China saves more than its domestic economy absorbs and relies substantially on external markets. But this does not mean China’s surplus is inherently harmful or that it mechanically causes America’s deficit.
China’s export success partly reflects genuine gains in productivity, technology and competitiveness, while cheaper Chinese manufactured goods and green technologies benefit consumers elsewhere. The concern is, therefore, not simply that China exports too much. It is why an economy of China’s size continues to depend so heavily on external demand.
China’s export strength co-exists with weak household consumption and a prolonged property-market adjustment. Its surplus consequently reflects not only competitiveness, but an underlying saving-investment imbalance. The appropriate objective is not to make China less competitive, but to enable more Chinese production to be absorbed by its own households.
That distinction matters. If China’s surplus principally reflected unfair bilateral practices, tariffs might provide a straightforward remedy. But if high saving and insufficient domestic absorption are central, trade restrictions may simply redirect trade and production through third countries rather than eliminate the underlying surplus.
Recent events underline the problem. US-Canada trade talks have collapsed with Washington imposing 50% tariffs on roughly $20 billion of Canadian goods. Canada announced dollar-for-dollar retaliation. The immediate dispute is not about China, but its significance is wider: tariff wars are spreading even among deeply integrated economies, rather than resolving the macroeconomic causes of external imbalances.
The US side deserves equal attention. Its $40 trillion debt is not in itself a measure of its external imbalance. But persistent fiscal deficits reduce national savings and contribute to the current-account deficit. The US has financed this easily because the dollar dominates international finance and its financial markets attract global savings. That privilege is considerable, but not unlimited.
Recent Treasury-market turbulence is, therefore, significant. Larger buybacks may support bond-market liquidity for particular maturities, but they do not change the fiscal arithmetic producing the debt. The distinction between managing the debt market’s liquidity and restoring fiscal sustainability is becoming increasingly important.
This raises an uncomfortable question: if China’s trade surplus represents a global imbalance that requires adjustment, why should America’s fiscal deficit and dependence on foreign savings be treated differently? The problems are not identical. But adjustment cannot reasonably be demanded only of the surplus economy.
China needs stronger consumption, better social protection and a restructuring of property and local-government finances. America needs the opposite adjustment: higher national saving, which call for credible medium-term fiscal consolidation. Tariffs may change the origin of imports but cannot eliminate an external deficit rooted partly in inadequate national saving.
The re-direction of Chinese trade towards third markets further shows why bilateral balances provide an incomplete picture.
The proliferation of trade disputes, therefore, strengthens the case for treating global imbalances as a multilateral macroeconomic problem, and not a collection of bilateral trade disputes.
The International Monetary Fund (IMF) is much better equipped to demand adjustment from countries that run out of financing than to secure preventive adjustment among the world’s largest economies. Yet, today’s imbalances arise precisely from the interaction of their policies.
The IMF should, therefore, revive multilateral consultations among the world’s principal surplus, deficit and reserve-currency economies. This would not replace trade negotiations. The Fund’s responsibility should be to assess whether fiscal policies, saving and investment, domestic demand, exchange rates and capital flows are consistent with global growth and financial stability.
Tariffs can reshape trade but can’t rebalance the world economy. China must consume more; the US needs to save more; other surplus economies should spur domestic demand. The IMF ought to bring them together before an adjustment is imposed through protectionism or financial markets.
The author is a distinguished fellow at the Centre for Social and Economic Progress (CSEP) and a former member of the 15th Finance Commission