It is IMF Spring Meetings Week, which means that the world's economic policymakers descend on Washington, D.C. to talk about what on earth is going on in the global economy. Finance ministers, chief economists, and of course journalists like myself, have gathered to discuss shocks, imbalances, and the economic outlook. And there is a lot to discuss, from the huge global energy shock to slower-moving pressures and, of course, the tensions between the world's biggest beasts. This week, I'm going to ask, how will the energy shock affect global trade imbalances? This is The Economics Show. I'm joined this week in Washington, D.C. by Brad Setzer, the Whitney Shepardson Senior Fellow at the Council on Foreign Relations. In my book, How to Win a Trade War, I described him as a sort of economic Sherlock Holmes, detecting problems in the macroeconomic data. And I thought this week would be a great time to catch up with him and discuss global trade imbalances. Brad, hello. Hello. Thanks for having me on. It's been a long time ago. Well, it's great to have you on. Okay, first of all, I want to set the scene, right? So let's talk global imbalances. On a scale of 1 to 10, how upset is the average economic policy wonk at these meetings about global economic imbalances? Probably like in a seven or eight. I think what has significantly changed compared to five years ago or 10 years ago is that there's just a lot more concern about Asia's surplus coming from Europe. There's been a longstanding concern in the United States. The U.S.'s long run, a pretty big trade deficit has now gotten bigger. But over the past five years, you see a really large increase in Asia's surplus and some negative spillovers to Europe. And then you also see, and this is much more focused on the Chinese side of the imbalance, a sense that some emerging economies feel that if they don't have natural resources, they don't have an export market, that China just is competing with them, not moving out of middle-range production, but also not buying their goods. So you do see a rather widespread set of concerns. Okay, so that's the average economic policy wonk. What about you personally? I mean, I have to be the 10 on social media, highlighting how imbalances are getting bigger. But as of today, the aggregate imbalance is still a little bit smaller than it was before the global financial crisis. So I would say my individual alarm has one notch higher to go. The U.S. deficit in particular is 4% of GDP. If it's above 5, then I think I would be in the full-scale alarm. I think with respect to China, I am in full-scale alarm. Over the past five years, China has roughly gotten 6 percentage points contribution from net exports to its growth, which is enormous. for a big economy. Over the past two years, it's gotten one and a half percentage points contribution to its growth from net exports. So exports in excess of imports. And broadly speaking, over the past five, six years, Chinese import volumes for goods have been close to flat. So you have the second biggest economy exporting much faster than global trade is growing, two or three times faster, and at the same time, essentially having no import growth. And as a result, its economy is expanding on the back of this increase in exports, but it's generating epically large trade surpluses. Such a big surplus that I would argue that China fudges its data to report a smaller surplus when it goes from the customs data to the balance of payments data, which you can take as a sign of just how big the underlying surplus is. Since the pandemic, the Chinese custom surplus is up $800 billion. We're now at a $1.2 trillion custom surplus over a percentage point of GDP. The surplus in manufacturers, China imports commodities, exports manufacturers, is now two percentage points of GDP. That is bigger than the combined manufacturing surplus of Germany and Japan back in the 1980s. So on these kinds of measures, we're in unprecedented territory. What's your take on why the surplus is a problem for China, right? It's quite obvious that other competing countries would be upset if China was destroying their manufacturing industries. But what about from the Chinese perspective? Part of the argument for why it might be a problem for China is that it does leave China's economy exposed to shocks from the rest of the world. If you think back to 2007 and 2008, China had a more or less a recession in 2008, not because something misfired in China's economy, but because the U.S. housing crisis turned into a financial crisis and U.S. demand collapsed. And in that collapse of demand, imports fell and China's exports fell and China entered into a downturn. So there's a set of risks that just comes from relying on other people to keep your economy humming. There's a second set of risks. When you're running these surpluses, you're accumulating financial assets on the world. Investing those financial assets in ways that don't lose you money is not without its challenges. And, you know, I think at various points in time, the Chinese have expressed concern about having too much money to invest and being kind of compelled, given some of the constraints they face, to buy assets that had more risks than they imagined. So, for example, in the global financial crisis, going into the global financial crisis, China's central bank had as many agency bonds, the bonds of Freddie and Fannie, U.S. institutions that package mortgage bonds and guarantee them. Now, those were thought to be relatively safe. But, you know, hey, when the housing bubble burst, Freddie and Fannie didn't look all that financially sound, and the Chinese became very concerned that, like, half their reserves were in mortgages backed by two insolvent institutions, and their ability to get their money back hinged on whether the U.S. government was going to come in and bail out Freddie and Fannie, which we did. But, you know, that's illustrative of the risk. You're putting a lot of money around the world economy. You can take losses. So there's the pressure that comes from having to invest and kind of the embarrassment, if you're China, if you're a strategic rival of the United States, of financing the U.S. fiscal deficit when the U.S. is building weapons designed to contain China. That's sort of an awkward look. So there are two you haven't mentioned, right? So one is that China is essentially exporting a huge amount of stuff to the rest of the world, and that represents a missed opportunity for higher consumption for Chinese citizens. The other is, I suppose, reflective of the conversation within China among senior policymakers now, right, where they think the huge surplus is a symptom of a problem within the economy of Nei Tuan, involution, running forward to stand still. You know, you've got weak domestic demand and companies competing so fiercely that no one's making a profit. Prices are falling. And that's kind of fueling this huge surge in exports. There is no doubt that the unbalanced external Chinese economy is a function of an unbalanced internal economy. So, I mean, in some sense, the optimistic argument around a discussion of global imbalances is that the core ask of the rest of the world to China is that China live a bit better, that China consume more of what it produces, that China let its currency go up in value and allow Chinese citizens to travel the world with more purchasing power to buy more of the world goods It not a China has to retrench It's a China has the opportunity to spend more domestically. Its households can live better, and its economy can be based then on selling stuff and services to people in China. Okay, I want to return to the meetings, right, the IMS Spring meetings. It feels like, as you say, the wonks are at a seven or an eight in terms of their concern about this issue. And that does feel like a shift, right? I feel like that number has grown. Do you think that reflects changing facts on the ground or a kind of greater openness to recognizing this kind of thing as a problem? Fundamentally, it's been driven by facts on the ground. I would like to say it was people like me beating the drum. But look, the IMF a year and a half ago, close to two years ago now, right after the pandemic put out a report, the external sector report, that more or less said imbalances had receded after the pandemic. The world was normalizing and more or less were not a problem. So that was a forecast. It became abundantly clear over the past two years that that forecast was wrong. Imbalances were clearly expanding. China's trade surplus was growing quite rapidly. It grew 300-ish billion-ish in 2024, another 300 billion in 2025. And all these numbers understate the magnitude of the increase because all this incredible internal competition is pulling down export prices. So export prices are collapsing, yet your dollar value, things are growing. So export volumes just go crazy. China was in 2020 basically not a net exporter of cars or vehicles. It imported a million cars or vehicles. It exported a million vehicles. Now it's exporting eight, nine, growing quite fast, and it's importing half a million. So that's in one sector an enormous swing. China goes from being a modest net importer in dollar value to being by far the world's largest net exporter of autos. And you see this in sector after sector after sector. So when you have facts, China's exports are objectively growing fast. When you see those exports growing fast in sectors that are very central to particularly the European economy, to the Japanese economy, to the Thai economy, And then when you see really fast growth in exports and no growth in imports, that kind of drives concern. Okay, well, I want to return to what policymakers can do about all of this in a little bit. But first of all, I want to ask you about the interaction of the biggest global shock going on right now and these imbalances, right? So we've obviously got this huge energy shock. Mechanically, what's that going to do to these global imbalances? Well, mechanically, it will be a mix of reducing imbalances and reallocating. The way I take to think about the flow implications of an oil shock, how does a change in the price of oil reallocate who has dollars around the world? There are, broadly speaking now, two big regions of the world economy that are net oil importers. Asia imports about 30 million barrels a day from outside of Asia. Europe imports about 12, a little over 40 in combined imports. $10 shock, every $10, means they are paying $150 billion more for their oil to the oil exporting regions. Now, in a normal oil shock, say when Libya goes offline, or for example, when Russia was facing sanctions in 2022, most of that increase would go to the Gulf GCC countries. They are the biggest oil exporters. 20 million barrels a day comes out of the Gulf basically to Asia. Asia gives its surplus over to the GCC countries, which then get a bigger surplus. That won't quite play out this time because the GCC is the source of the shock. And GCC oil, at least most estimates say 10 million of barrels or 10% of global supply is trapped in the Gulf. Can't find an alternative path out. So the GCC countries are not going to be the recipient of this transfer. It's going to go a little bit to Saudi Arabia because Saudi Arabia has the east-west pipeline and can get some oil out. But it's going to go to all the world's other oil exporters, Kazakhstan, Tajikistan, Norway, Russia, almost all of South America is actually a net oil exporter. And then North America, U.S. and Canada collectively are a 5 million barrel a day oil exporter. So you're going to see in general a fall in the Asian surplus, a modest fall in the European surplus, some reduction in existing deficits in oil economies that now run deficits, Colombia, Saudi Arabia, no doubt a few others. And then a modest increase in some surpluses. But it's not going to be the just everything that was in the Asia surplus now shows up in the Emirates and Qatar and Kuwait because they just can't get their oil out. It's going to be much more dissipated. And, you know, it should reduce the U.S. deficit just a bit because we're that petroleum exporter. So surplus countries have less surplus, Deficit countries have less deficit. The interesting thing to me is that the Asian surplus is now so enormous. If oil goes from 70 to 100, you're looking at a swing of, I don't know, 400 billion. So the bulk of the surplus actually stays in Asia. So there will be some impacts. And if you get way above 100 over a long period of time, the Asian surplus will temporarily disappear and it will show up in various oil exporting regions. But it takes a shockingly big change in price for the global surplus not to be concentrated in Asia just because the Asian surplus right now is so big and so dominant. There's sort of just one really big surplus in the global economy. Okay, so I suppose the question is, suppose the increase in oil prices reduces the surpluses of the Asian countries. At the beginning, you said you were sort of 7, 8 in private on imbalances, maybe a 10 on social media. How do those numbers change if the higher oil prices essentially change some of those headline numbers? You know, it doesn't change it that much because I don't think this particular oil shock is likely to be permanent. There is still plenty of oil, and one would assume a year from now there will be a new political agreement that leads the GCC oil to more or less flow. It's a transitory reduction rather than a permanent reduction. I have trouble thinking of a sustained shock that is big enough to materially change the magnitude of the Asian surplus or even to change the dynamics. Going into the shock, just looking at first quarter, China's imports were up, but China's exports were growing like gangbusters again. 15% Q1 over Q1 nominal export growth, bigger in volume terms. Global trade generally is growing at like 5%. So China is once again just enormously outperforming global trade. That won't show up in the headline trade surplus when chip prices are going up and China imports a lot of chips and oil prices are going up and China imports a lot of oil But the transfer of real production concentration of real production in China is continuing And so in that sense, the underlying imbalance continues to get worse. It just may not manifest itself in the headline dollar figures. Okay, let's go to a break. But when we get back, I want to ask what policymakers should be doing about all of this. we are back from the break okay so thinking about these big imbalances the standard advice from the assembled wonks is that these are domestic problems right you know the u.s has this big deficit the government needs to rein in its spending stop borrowing so much the chinese have a deficit of internal demand they need to spend more or support consumption make people feel more confident. And part of that is that there isn't really anything that you can do at the border. Tariffs, they might affect the trade deficit, but not in a consistent way. And so if you try to impose border measures, you're just really creating a lot of chaos. What is your take on that? Well, I have a modest, hetero-orthodox view on the tariffs, which is, I actually don't think it's that out of consensus. It's simply that a tariff is a tax, and if you do a big enough tariff and you don't put enough exclusions and exemptions in it, it functions like a tax on consumption, and therefore it would work a bit like the fiscal tightening that everybody thinks would help bring the U.S. fiscal deficit down. So if we did an across-the-board 20% tariff with minimal exemptions and exclusions, that should generate 2% of GDP and revenue, ballpark. And if that was not spent, I would say that would reduce the trade deficit. Now, that is not how I would recommend reducing the trade deficit. But you can think of measures at the border that would be more effective than the hodgepodge of tariffs that have been put in place. And so just to be clear, this isn't a specific tariff on China. This is a tariff on everyone. This is a tariff on everyone. The problem with tariffing China is that it is super easy for China to send parts to Southeast Asia or Taiwan or Mexico, and then the final assembly is done in Mexico or Southeast Asia and not subject to a tariff. So you reallocate trade. You don't change the trade balance. This is not targeted at China. That's one of the problems with it. It is basically just saying the U.S. is spending too much and spending too much on imports. We're going to tax imports, and we are going to use that to reduce our budget deficit. We are going to live less well, And we're not going to target at China. We're going to reduce our imports from everyone, including China. That is kind of a brute force effort to reduce the trade deficit. The obvious steps or the conventional ones, which the U.S. could do on its own, is steps to rein in the budget deficit. Totally makes sense. We do have a 6% of GDP budget deficit, which is bigger than the current account deficit. If you want to do something more targeted, and this is one of my preferred policy solutions, there's an element of our trade deficit that's a little bit fake. We import $100 billion, now more, of pharmaceuticals from Ireland. Those pharmaceuticals cost $10 billion to produce in Ireland. They register at $100 billion and then the companies book their profit in Ireland. They're American companies. So American companies, for tax reasons, are basically incentivized to produce drugs for the U.S. market in Ireland in order to cut their tax rate in half. That inflates our trade deficit, and it inflates the offshore earnings of U.S. companies. That underlying incentive to offshore in the tax code strikes me as something that should be eliminated. It's counterproductive. It's counterproductive for generating revenue. It goes against fairness. Companies that game the tax system with offshore production pay a lower tax rate than companies that produce in the United States. and it does impact the trade balance. Give me a magnitude. How much would that matter? For the pharmaceutical side, I think it's about $200 billion. There are other parts of the aggregate which would probably give you something similar. Okay, so ding the tax planners, but that presumably doesn't do much to the China issue. Look, China's currency has been a long-standing issue. China's currency is a policy variable. And sometimes I think people at the IMF forget that. They think of it as a function of domestic macroeconomic conditions and where China's central bank has set rates because that is how open economy macro teaches you exchange rates are formed. In China, there's an imperfect translation between domestic policy settings and the exchange rate. China has capital controls. They have an added degree of freedom, and they quite clearly can move the yuan up or down and sustain that movement by having the state banks buy and sell foreign exchange. There's classic economic papers from the 1970s that show that nominal exchange rate moves do lead to real exchange rate moves over a pretty long period of time. And we've actually seen that with China. So I do think China, which heavily manages this currency, which has been really intervening, after China kind of looked Donald J. Trump in the face, took his punch, took the 145% tariffs, and it was still standing. And the U.S. basically had to back down because if we were doing 145% tariffs, all the retailers were unwilling in June and July to place orders for Christmas goods. All the people who used Chinese components in their industrial production processes were in real trouble. So the U.S., I think, just had to back down because the tariff was too high. And then, you know, throw in the rare earth export controls, and the U.S. really walked things back. And during this peak tariff war, contrary to the expectation of the financial market, China did not really devalue the yuan. and when it became clear that the U.S. was walking back, that Chinese exports were still growing, and the Chinese surplus was still going to expand, you really start to see strong pressure on the Chinese currency to appreciate. There are a couple of months in late 2025 and again in January when Chinese state banks and China intervenes now through its state banks, you now see huge growth in the foreign assets of the state banks in periods of time when you would normally expect central bank intervention. They just put it on the balance sheet of the state banks. So you got $100 billion a month in intervention, $1.2 trillion a year. That is a gigantic sum. And so, you know, we are in a world once again where there is a policy tool that is not purely domestic. It has domestic consequences, but it is a separate policy tool, which is under the control of China, which most directly impacts the imbalance. Stronger currency means your exports are more expensive. You export less. Stronger currency means other countries' goods are cheaper. You import more. It gets rid of this sense that we can't compete with Chinese EVs because they're so cheap. Well, they're cheap for a lot of reasons, but one reason is, take the IMF numbers that you want as 20% undervalued. I think that if you had the correct number, or just use the trade balance, then that goes up to 30. So 20 to 30% undervalued, that would change a lot of things. And then I also think some of the other parts of Asia, which have incredibly weak currencies, the Korean won is at crisis levels, 1500. The Taiwan dollar, weaker than it was in the 1990s when Taiwan was not at the leading edge of the most advanced technical industry in the entire world. TSMC was not even, and they were a struggling second-tier chip manufacturer. Now they are the monopoly producer of the world most sophisticated chips Taiwan has ascended to the top of the technological frontier yet over that period of time their currency has depreciated and they going to run a 20 of GDP current account surplus this year. Korea, Taiwan, Japan, I think all of them, in a world where the yuan is appreciating, their currencies will appreciate, and that'll just generate a little better distribution of, well, create better incentives in the first instance for where production should be globally and ultimately will lead to a more balanced system of production where Asia's producing, Europe's producing, North America's producing, and there's still some space for the emerging economies. Okay, so what is your message to other countries, say Europe? Because from the U.S. perspective, we've got this meeting coming up between Trump and Xi. I don't think currency is going to be a big part of that. More likely there's going to be some kind of managed trade agreement where everyone agrees what products they're okay buying. The Europeans are not there yet, right? They're not having big summits with Xi to kind of manage trade in the same way. What do you think they should be trying to do? Well, Europe in some sense is actually on the front line of the second China shock. I mean, Europe was one of the parts of the global economy that had specialized in automotive production and it specialized in machinery production. It was a more manufacturing intensive part of the global economy than the United States. And so it has clearly borne the brunt of this export wave coming out of China, the transformation of China from an auto importer in dollar terms, certainly an importer of German luxury cars to being a massive exporter of autos. has really had a profound impact on German industry. China's gotten 5, 6 percentage points of growth from net exports over the past 5, 6 years. Net exports have subtracted 4 to 5% from German growth. So there's been a very direct hit. Chinese export outperformance, growing two times faster than global trade, has been matched by European export underperformance. Europe's exports were below zero, no growth, and now they are growing so much slower than global trade. because China is taking up all that space in a lot of key sectors, chemicals, you name it. Europe, though, has to be able to figure out what it is willing to do to convince China to change course. President Macron has made imbalances the focus of his G7 summit. He certainly wants President Xi to attend. I don't know if President Xi will attend. And I think the French thesis is this will be the opportunity for China to show that it is willing to address this concern in a cooperative manner. And if it is not willing to act in a cooperative manner, then Europe will have no choice but to become more protectionist. Now, for being more protectionist doesn't solve all of Europe's problems because Europe's an exporter and it doesn't address third-party market competition. But that's one view. Start off with diplomacy and then basically put in place walls like the United States. That is a reasonable vision, but Europe has always struggled to come up with an effective wall, effective leverage, largely because Europe is, as we all know, a collection of member states and member states have different interests. The Germans, despite being hit the hardest by the China shock, haven't quite decided whether they care more about the Mittelstand, the companies that make things in Germany, or German multinationals like VW, who have enormous business in China and generally don't want anything that would complicate their business in China, and often are thinking about, well, we can make more money if we make our EVs for Europe and China. and so they don't want a schism. Germany hasn't been able to sort out which side of its corporate community it's going to back. And the Swedes have historically been very open to China. Ericsson, despite winning, which is telecommunication equipment, wins from the restrictions on Huawei, but it never wants to give up its share of its business in China. So you have natural divisions in Europe that end up complicating agreement around a response. And then finally, Europe just has not decided whether or not it is willing to tear up its WTO commitments and say, with respect to China, we are not going to abide by the WTO. Everything basically Trump too has done is out of scope for the WTO. The US is not living up to its WTO commitments. Most obviously, our tariffs are way higher than our binding tariffs, and we are not non-discriminatory. We don't apply the same tariff to every member of the WTO. I think eventually an effective set of tariffs will have to be outside of Europe's tariff bindings, higher and discriminatory towards China, and also find a way to address embedded Chinese content in the rerouting. All this would be much easier, to be clear, if there was a joint U.S.-European-Japanese-Korean approach and the tariff was going to just be on surrounding the G7 plus and they would have a common tariff towards China. And that would, I think, you know, give China something that would make China think again about whether it is better off with its current policy mix or whether it should accept a stronger currency and make up for the loss of growth with more efforts to support its own domestic economy more. There's a set of things that China could do that would support the consumption side of its economy, maybe in the face of sort of a unified front. A broad set of countries say, you're too big to be getting one and a half percentage points of growth from net exports, particularly when that means all of us are losing growth. The Chinese expansion of the past five, six years has not been balanced in the sense that exports have gone up and imports have gone up. It is exports way up, imports nothing. So everyone else is losing demand to China. It's not like we get some of your demand and you get some of our demand. We specialize in what we do well. You specialize in what you do well, gains from trade. This is the gains from trade is you get our stuff, but we don't take your stuff. There are still gains from trade in most models from that, but it's a different kind of trading relationship. So I do think, you know, if the Europeans could put a serious negotiating position, if they could agree to one and then push it towards China, and then ideally if the U.S. joined in, maybe that would prompt Xi to reconsider his general approach. Maybe. Maybe. I mean, look, China's a big country. China doesn't think it's doing that much wrong. China thinks it's succeeded. China loves technological catch-up. and President Xi has consistently said, well, if I send out checks to consumers, I don't get anything back. If I tell the state banks to lend, I get a factory, I get a road, I get something. Now, I think that's a misconception. If you give a check to the consumer, the consumer will spend. That spending will support investment that will allow the economy to meet the consumer's demands. But that doesn't tend to be how President Xi himself seems to think about these issues. Well, maybe he will listen to this podcast and change his mind. I would hope so. Brad, thank you so much for joining me. Well, Samaya, thanks so much for inviting me. I've been hoping to get this invitation for a long time, and it's a huge honor. That is all for this week. You have been listening to The Economics Show with Samaya Keynes. If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen. This episode was produced by Misha Frankel Duval and Sonia Hudson, with original music and sound design from Breen Turner. I'm Sumaya Keynes. Thanks for listening.
