Introduction

As globalization has deepened, trade imbalances have not only grown but have become entrenched. Imbalances themselves are not inherently problematic; rather, the danger lies in their persistence. In a well-functioning system, exchange rates adjust to restore balance over the cycle. When that mechanism is obstructed, imbalances harden and generate financial and political risk. An example is the US-China trade conflict, which takes place within a broader context of structural disequilibrium driven by fixed or managed exchange rates, industrial policy, and major global shocks, including China’s accession to the World Trade Organization (WTO) and the creation of the Euro.

From 2009⁠–⁠2018, eight countries out of 98 analyzed in this study generated 80% of global current account deficits. Four “Anglo-Saxon” economies – the United States, United Kingdom, Australia, and Canada – accounted for 64% of deficits while representing only 31% of global gross domestic product (GDP).

On the surplus side, six countries – Germany, China, Japan, the Netherlands, Switzerland, and South Korea – accounted for 66% of cumulative surpluses, despite having far smaller combined GDP weight. The asymmetry underscores our core assumption: trade outcomes are being shaped less by comparative advantage than by exchange rate regimes and policy choices.

Deficit and surplus countries

The United States alone accounted for US$4.2 trillion in cumulative deficits, or 43% of the global total, despite representing 26% of global GDP. The United Kingdom followed with US$1.1 trillion, or 11% of the total, even though it accounts for just 4% of global GDP.

A key observation is that these deficit countries generally have freely floating exchange rates and light-touch industrial policy. In theory, this should facilitate adjustment. In practice, adjustment is undermined by counterpart countries whose exchange rates do not float freely.

Germany emerges as the single largest surplus country, accumulating US$2.6 trillion, or 21% of total global surpluses, despite having an economy one-third the size of China’s. China followed with US$2 trillion, or 16%.

All six major surplus countries share two characteristics: exchange rate regimes that are not fully market-determined, and a tradition of active industrial policy. Germany and the Netherlands benefit from the Euro, which prevents national-level appreciation, while Japan, Switzerland, South Korea, and China have intervened directly to resist currency strength.

Little tendency towards balance

The data shows little evidence of convergence. Only 16 countries recorded an average current account position within ±1% of GDP over the decade. By contrast, two-thirds of countries ran average imbalances exceeding 3% of GDP, with a mean deviation from balance of 6.7%.

Longer-term data reinforces this point: China last ran a deficit in 1993; the United States last ran a surplus in 1991; Japan has not run a deficit since 1996. Imbalances persist regardless of the business cycle.

There are modest signs of narrowing imbalances after 2012, with the average deviation from balance falling from a peak of 7.7% to 4.6% in 2017 before rising again in 2018. However, much of this improvement reflects lower oil prices rather than structural adjustment.

When weighted by GDP, the picture looks slightly better, but even then, imbalances remain significantly larger than before the Euro’s creation and China’s WTO entry.

Improvements have come at the cost of slower growth

Recent rebalancing efforts have been inefficient. Deficit reduction has often occurred through demand compression rather than productivity-enhancing adjustment. Countries have moved toward balance not by exporting more, but by importing less due to weak growth and high unemployment. This is a sub-optimal outcome, one that is particularly evident in the Euro area.

Greece illustrates the human cost of fixed exchange rates. Its current account deficit fell from an average of 12% of GDP (2006-2010) to only 1.7% (2014-2018), yet unemployment surged from around 8% to an average of 22%. Despite this contraction, Greece failed to achieve a surplus, demonstrating how slowly real exchange rates adjust when nominal rates are fixed. Greece has arguably operated with the ‘wrong’ real effective exchange rate for two decades.

Impacts of the imbalances

Large deficits require ongoing capital inflows, increasing the risk of sudden stops and financial crises. History shows that balance-of-payments crises frequently trigger banking failures and lost output, erasing the gains from trade.

Persistent trade imbalances have also fueled protectionism. From the perspective of deficit countries with freely floating currencies, the global system appears decidedly uneven. Trump’s tariffs can be seen as a political response to a structurally flawed system rather than an aberration.

Key takeaways and recommendations

Restoring credibility to the multilateral trading system requires rebalancing mechanisms to function. Nominal exchange rate flexibility is essential to prevent persistent imbalances, reduce financial instability, and defuse geopolitical tensions. Without it, the global trading system risks continued fragmentation, rising protectionism, and declining public support – outcomes that threaten both growth and global cooperation.

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