SEOUL ¨C 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.
To be sure, today¡¯s imbalances are smaller than those that preceded the 2008 global financial crisis. Last year, the U.S. current-account deficit approached 3.6% of gross domestic product, 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 ¡ª 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 U.S., 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.
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