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Trade wonks are living it up at their very own policy Coachella this week, as the IMF and World Bank hold their spring meetings in Washington DC. And once again they’re excited about global trade imbalances.
Not so long ago, trade-watchers were optimistic that these were fading. The IMF itself put out a report entitled Imbalances Receding in mid-2024. So how does that report look now?
Well, not great, according to CFR senior fellow Brad Setser. He went on the FT’s Economics Show podcast this week and told Soumaya Keynes:
After the pandemic, the [IMF forecast that the] world was normalising, and [that imbalances,] more or less were not a problem . . . it became abundantly clear over the past two years that that forecast was wrong.
In fact, the world’s most important trade imbalance — namely, China’s enormous export surplus — has only widened in recent years. Imports over the last five years have been more or less flat, but trade volumes are soaring. As Setser points out:
China’s trade surplus . . . grew, 300-ish billion-ish in 2024, another 300 billion in 2025. And all these numbers understate the magnitude of the increase because . . . incredible internal competition is pulling down export prices. So export prices are collapsing, yet your dollar value of things is growing.
China has flooded its trading partners’ with high-volume exports before. But this time, it’s not low-value items and it’s not mainly America bearing the brunt. Instead, industries concentrated in Europe — cars, chemicals, perhaps even planes — are under threat. This is what economists have termed the China Shock 2.0, and the FT is running a whole series on it right now.
However, western policymakers looking to avoid standing up to China may have been handed a deus ex machina: the Iranian energy shock. China is a net energy importer, so a higher oil price should all things being equal reduce Chinese trade surpluses. Will it?
According to Setser: yes. But not by very much.
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.
In other words, China’s surplus is just too big even for a shock of this magnitude to dent it. And even if top-line figures suggest change, that may not be the case:
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 . . . the underlying imbalance continues to get worse. It just may not manifest itself in the headline dollar figures.
Can Europe do anything to stymie the “one big surplus” hollowing out its industrial economy? Does China make too much money for its own good? And how could the US lean on its pharma and tech giants to massage its own trade deficit?
These and more questions answered in Soumaya’s interview with Setser. You can listen to the full interview here, or read a transcript here. As always, we welcome your comments below
