G-7's China Trade Surplus Focus Misses Real Global Imbalance Solutions
Global economic imbalances have returned to the G-7 discussion table. Leaders from the world's wealthiest nations are once again pointing fingers at China's substantial trade surplus. However, this narrow focus fails to address the core issues driving these imbalances.
Economist Barry Eichengreen presents a compelling case that domestic policy choices in both the United States and China hold the real keys to resolution.
The Numbers Behind Today's Global Imbalances
Current economic data reveals significant imbalances between the world's two largest economies. The International Monetary Fund reports America's current-account deficit for 2025 stands at approximately 4.6% of GDP. This represents a slight decrease from its 2006 peak of 6.2%.
Meanwhile, China's surplus has declined to 3.3% of GDP from 10% in 2006. These figures alone might suggest improvement, but they tell only part of the story.
China's share of global GDP has tripled since 2006 when measured at current prices. This measurement matters significantly for internationally traded goods. When we multiply China's current surplus by three to gauge its true global economic impact, we essentially return to the 2006 surplus ratio.
Together, the United States and China account for 40% of global economic output. Their combined imbalances today approach levels similar to those seen in 2006, just two years before the global financial crisis erupted.
Misdiagnosing the Real Problems
Eichengreen emphasizes that global imbalances did not cause the 2008 financial crisis. The real culprits were reckless risk-taking, inadequate transparency, and lax financial regulation. Today, similar financial stability risks have emerged in multiple areas.
Private credit markets suffer from transparency issues once again. Cryptocurrency markets operate with inadequate regulation. Bank supervision in the United States has loosened, influenced by ideology and banking lobby power.
These current risks neither cause nor result from global imbalances. They represent separate challenges requiring distinct policy responses.
The Investment Connection
Only one area shows a clear link between global imbalances and economic stability risks: investments in data centers and semiconductors. These investments drove 80% of the increase in US final private domestic demand during the first half of 2025.
The US current-account deficit essentially represents the excess of investment over saving. If investment decreased, the deficit would shrink accordingly, assuming other factors remained constant. However, reduced investment would also mean slower US growth, creating negative consequences for both America and the global economy.
This situation recalls the Lawson Doctrine, named after former British Chancellor Nigel Lawson. He argued that current-account deficits prove benign when they reflect high investment rather than low saving. Later understanding revealed that investment-driven deficits only benefit economies when investments remain productive.
Today, serious questions surround the returns on artificial intelligence investments. Energy-hungry data centers utilize chips that burn out or become obsolete within two to three years. Technology companies employ special-purpose financial vehicles to borrow money, then slice and repackage resulting obligations for institutional investors. This practice troubles observers who remember similar financial engineering preceding the 2008 crisis.
Domestic Solutions for Global Problems
Eichengreen argues that solutions must originate within national borders rather than through international finger-pointing. The United States can address public-sector dissaving by raising taxes and closing tax loopholes. It can tighten financial regulations that currently encourage technology companies to make questionable investments.
China, for its part, can stimulate domestic consumption by strengthening its social safety net. This approach would free up precautionary savings that currently suppress consumer spending.
The International Monetary Fund has delivered these policy recommendations repeatedly. The crucial question remains whether political leaders will implement them. As Shakespeare noted centuries ago, "The fault, dear Brutus, is not in our stars, but in ourselves."
Global economic stability requires looking beyond convenient scapegoats like China's trade surplus. Real progress demands honest assessment and difficult policy changes within each nation's domestic economic framework.
