There’s certainly no economic reason why every national economy should expect to have a balance between its exports and imports. But it’s also true that sustained and large trade imbalances have sometimes been a forerunner of economic problems, and often been a forerunner of political problems. It’s also true that global trade imbalances have been higher in the last 15 years or so than in the pre-2000 period.
Here’s a snapshot of global trade balances over time from a recent IMF report, “Understanding Global Imbalances” (April 6, 2026). The not-easy-to-read bars in the figure show trade surpluses and deficits for large economies and also for other advanced economies (AE) and emerging market and developing economies (EMDE). For present purposes, one key takeaway is that the dark blue US bar represents a large part of the global trade deficits while the red China bar represents a large part of global trade surpluses (especially in the decade from about 2000-2010).
Of course, a trade deficit for one country is always necessarily reflected in a trade surplus for some other country. So the IMF adds the total of all trade surpluses and trade deficits to get its “overall balance” dark black line. The letters along the black line refer to various economic events: specifically, (a) Collapse of Bretton Woods System (1971); (b) Dollar Crisis (1977); (c) Plaza Accord (1985); (d) Louvre Accord (1987); (e) Asian Crisis (1997); (f) China WTO accession (2001); (g) GFC (2007); (h) COVID-19 Pandemic (2020). The second key takeaway here is that overall trade imbalances have been drifting up over time. From the mid-1970s up to the mid-1990s the overall balance line was typically about 2-3% of global GDP. After about 2000, the imbalance rises to above 4% of global GDP, following China’s joining the World Trade Organization. After the global financial crisis (GFC) of 2007-08, the global trade imbalance comes back down a bit, but has remained above its pre-2000 levels.
The overall IMF take goes like this: “While current account surpluses and deficits can be appropriate when they reflect economic fundamentals and desirable policies, the buildup and persistence of large imbalances raise concerns when they are driven by policy distortions and unwind in a disorderly manner. The expansion of industrial policies and the rise in trade restrictions—often motivated by imbalances themselves—has intensified the debate on the causes and consequences of global imbalances, despite limited analytical and empirical clarity on how both policies affect the current account.”
However, for those who would like a deeper dive, I recommend the 17 essays collected in Paris Report 4: The New Global Imbalances, and edited by Hélène Rey, Beatrice Weder di Mauro, and Jeromin Zettelmeyer (Centre for Economic Policy Research, 2026). Here, I’ll just emphasize some thoughts from the introductory lead essay by di Mauro and Zettelmeyer:
In sum, global current account imbalances reflect domestic saving–investment gaps.
They can support growth when financed sustainably and directed toward productive
uses, but they become risky when large, persistent, and tied to rising leverage or asset
bubbles. What matters for these risks is not bilateral trade balances but the underlying
macroeconomic conditions. Durable adjustment therefore requires domestic policy
changes, not trade measures alone.
dfjas
The authors emphasize that episodes of trade imbalances sometimes end badly, but sometimes not. For example, in the 19th and early 20th century, the US economy typically ran trade deficits, while Britain and other European countries were running trade surpluses. But one basic insight about trade imbalances is that a trade deficit means a net inflow of foreign investment, while a trade surplus means a net outflow. During this time, as the author write:
At the time, Britain and other European economies ran sustained current account surpluses, while capital flowed to the United States and other ‘new world’ economies – Canada, Australia, and Argentina. These capital inflows largely financed productivity-enhancing infrastructure, including railways and ports, which expanded export capacity and
supported debt servicing.
On the other side, trade deficits in Mexico, Argentina and across Latin America in the 1970s reflected large net inflows of foreign capital, where did not finance productivity-enhancing investments, and thus were not repayable when they came due. The buildup of unsteady credit in the US economy before the economic meltdown of 2007-09 was in part financed by inflows of foreign capital for the very large US trade deficits of that time.
So at present, is the US trade deficit good or bad? On one side, the US economy is investing a lot in AI and all the supporting technologies, like computing power and electricity. Overall, this is likely to be productivity-enhancing. On the other side, the long and consistent stream of US trade deficits means that have been continual inflows of foreign investment into the US economy. If you add up all the foreign investments that US firms and individuals have abroad, and compare it to all the US investments that foreign parties have in the US economy, the “the United States’ net international investment position (NIIP) reached about 90% of US GDP, or 24% of world GDP, by end-2024.”
As one looks more closely at the situation, there are some yellow flags waving. For example, it used to be that the US economy could pay low interest rates when borrowing (for example, when governments or central banks in other countries purchased US Treasury bonds), and then US investors putting money abroad would instead tend to buy higher-return and riskier investments. From an overall macro point of view, the US economy was borrowing cheap and investing for a higher return.
But this pattern is shifting. Instead of foreign governments buying US Treasury bonds, it’s becoming more common for non-government foreign investors to put money into the US stock market and other investments. As a rsult, a share of the future gains from US productivity-enhancing investment will be flowing to these foreign investors. Also, these non-government foreign investors are likely to be more willing to sell and flee if returns on these riskier US investments take a turn for the worse. Thus, even though the annual trade imbalances aren’t far from historical norms (as shown in the figure above), the accumulated effect of those imbalances raises some cause for concern.
How might the world economy reduce concerns about this situation? As the authors explain:
The ideal adjustment would involve the main systemic economies – at least the United States, China, and Europe – rebalancing simultaneously and in a coordinated manner. Such an approach would reduce the risk that adjustment in one economy simply shifts imbalances elsewhere or triggers destabilising spillovers. In simple terms, the required policy mix is well known. The United States would raise national saving, primarily through credible fiscal consolidation, thereby reducing its reliance on external financing. China would lower excess saving by rebalancing toward household consumption – strengthening social safety nets, boosting disposable income, and shifting away from investment- and export-led growth. Europe, for its part, would increase investment, particularly in infrastructure, defence, and the green transition, thereby absorbing more domestic and global savings. …
Ultimately, the choice is between gradual, policy-led adjustment and disorderly correction under stress. Addressing domestic distortions that give rise to external imbalances is in each country’s own interest. In a world of high leverage and weakened trust, imbalances are unlikely to unwind smoothly. They are more likely to correct through financial stress, protectionist escalation, or both. The costs of such an outcome – lower growth, fragmented trade, and impaired financial stability – would be substantial and widely shared.
For those who might be interested in digging further into these issues, here’s the Table of Contents of the book:
