Barry Eichengreen explains why, after 20 years, major economies' external deficits and surpluses are again a focus of attention

On January 1, France assumed the presidency of the G7, the hoary club of advanced economies. Under its presidency, the focus of the group’s agenda will be global imbalances – the current-account surpluses and deficits of China, the United States, and other countries. Shades of 2006, when global imbalances were last a major concern.

This agenda makes sense politically. If President Donald Trump and European leaders agree on anything anymore, it may be that China’s surpluses are a problem. The focus on global imbalances also deflects attention from France’s fiscal problems and allows President Emmanuel Macron to project leadership on the global stage.

Economically, the case remains to be made. To be sure, US and Chinese imbalances are large. The International Monetary Fund puts America’s current-account deficit for 2025 at around 4.6% of GDP, down slightly from its 2006 peak of 6.2%. China’s surplus is down to 3.3% of GDP from 10% in 2006. But China’s share of global GDP has tripled since then (at current prices, which are what matter for internationally traded goods). Multiply China’s surplus by three, as is appropriate for gauging its impact on the world economy, and you get the 2006 surplus ratio.

So, if we focus on the two economies that together account for 40% of global GDP, imbalances are nearly as large as they were in 2006, when they anticipated the global financial crisis two years later.

But reckless risk taking, inadequate transparency, and lax financial regulation, not global imbalances, lay at the root of that crisis. Today, risks to financial stability abound once again – in private credit, crypto, circular financial flows related to data-center and semiconductor investments, and looser bank supervision in the US.

And yet these risks are neither causes nor consequences of global imbalances. In private credit, the problem is again a lack of transparency. In crypto, it is inadequate regulation. In bank supervision, it is ideology and the power of the banking lobby.

Only when it comes to investment in data centers and chips can one draw a link between global imbalances and risks to economic and financial stability. Such investment was responsible for fully 80% of the increase in US final private domestic demand in the first half of 2025. The US current-account deficit is the excess of investment over saving. So, if investment were less, the US current-account deficit would be less, other things being equal. Of course, US growth would also be less, which would not be positive for America or the world. Be careful what you wish for.

This situation is also a reminder of the Lawson Doctrine, named after Nigel Lawson, the second chancellor of the exchequer under British Prime Minister Margaret Thatcher. Lawson held that current-account deficits are benign if they reflect high investment rather than low saving. We learned subsequently that investment-driven deficits are benign only if investments are productive.

Fast-forward to today’s doubts about the returns on investments in AI, specifically in energy-hungry data centers using chips that burn out or become obsolete after two or three years. Watching tech companies use special-purpose financial vehicles to borrow, slice and dice the resulting obligations, and sell them to institutional investors will trouble those whose memories stretch back 20 years.

In China’s case, the problem is not that investment is too low – quite the contrary – but that savings are too high. Chinese officials acknowledge the need to boost consumption – and have been acknowledging for 15 years, since making it a major national goal in the 12th Five-Year Plan (2011-15). Acknowledgement and action are different matters.

Excessive corporate savings devoted to low-return investments and household savings plowed mindlessly into real estate create financial problems, as close observers of China’s local government financial vehicles and property companies will attest. But China has the financial wherewithal to address these issues. And China remains sufficiently insular financially that any such problems are unlikely to spill over to the rest of the world.

So why worry about China’s trade surplus? Start with its uneven incidence across countries and regions, as we learned from the first “China Shock,” the export surge preceding the global financial crisis. As we also learned, such concentrated effects threaten a populist backlash against globalisation and multilateralism.

The problem is apt to be even more pernicious now than it was a generation ago. Because the US market is increasingly closed to China, other regions, starting with Europe, will feel the brunt of China’s exports. And there are already other threats to multilateralism, notably US-China geostrategic rivalry and US-European tensions, on which the resulting backlash will now be superimposed.

The solutions lie at home. The US can address public-sector dissaving by raising taxes and closing tax loopholes. It can tighten financial regulations that encourage tech companies to throw good money after bad. China can stimulate consumption by strengthening its social safety net, which would free up precautionary savings.

The IMF has sent these messages. The question is whether they will be received. As Shakespeare put it, “The fault, dear Brutus, is not in our stars, but in ourselves.”

Barry Eichengreen, Professor of Economics at the University of California, Berkeley, is the author, most recently, of In Defense of Public Debt (Oxford University Press, 2021). Project Syndicate, (c) 2025, published here with permission.