U.S. more a large driver of global trade deficits, IMF reports

Fiscal policy will widen deficits in coming years, says annual assessment of imbalances

The U.S. remained by far the largest driver of global current account imbalances in 2017, running the world’s largest deficit and adopting policies— mainly a shift toward much larger fiscal deficits—that are likely to increase its imbalances in coming years.

The U.S. ran a $466 billion (U.S.) current account deficit, meaning the nation imports far more than it exports. The U.S. has become an increasingly large driver of global deficits, accounting for 43% of all global deficits last year, up from 39% in 2016, according to the International Monetary Fund’s annual assessment of the state of global imbalances.

Washington’s move toward major deficit spending will move the U.S. trade deficit “fur- ther from the level justified by medium term fundamentals and desirable policies,” the IMF said.

The report highlights the leading role that the U.S. plays in global imbalances, at a time that the Trump administration has made reduction of the trade deficit one of its stated goals.

Yet while the administration has communicated it wants to bring down trade deficits, it has been ramping up budget deficits. The Trump administration said last week that it expects annual budget deficits to rise nearly $100 billion more than previously forecast for each of the next three years, pushing the government’s budget deficit above $1trillion starting next year. Such a quick swing to additional deficit spending is expected to increase U.S. reliance on imports, also leading to a widening of the current account deficit.

The IMF said large and sustained imbalances pose risk to the stability of the global economy. “In the near term, these trends risk aggravating trade tensions,” the IMF said, and sustained imbalances can eventually lead to “sharp and disruptive currency and asset price adjustments.”

The IMF report highlights that global imbalances have been reconfigured in recent years, and the imbalances today look much different than those that prevailed prior to the global financial crisis and in its immediate aftermath.

Since roughly 2013, a new configuration has taken shape. First, globally, surpluses and deficits never returned to their levels of a decade ago. Today, the sum of imbalances is slight- ly above 3% of global gross domestic product; prior to the financial crisis they were nearly 6% of global GDP.

In the post-2013 configuration, the surpluses and deficits have been increasingly concentrated in the largest advanced economies. In 2017, 75% of surpluses were in advanced economies, up from 56% as recently as 2014, and 63% of deficits were in advanced economies, up from 58%.

Major drivers of past imbalances, especially China and oilexporting nations, have narrowed their surpluses.

China’s current account surplus stood at $165 billion in 2017, down from $202 billion in 2016 and $304 billion in 2015. As a share of its economy, China’s current account surplus has plunged from almost10% in 2007 to 1.4% in 2017.

China has tackled its surpluses in recent years by welcoming more imports and investment and allowing its currency to appreciate. Under President Donald Trump, the Treasury Department has pressured the IMF to do more to address global imbalances. Treasury Secretary Steven Mnuchin in April urged the IMF to “speak out more forcefully” and do more to force countries with “large and persistent external surpluses to carry their share of the adjustment.”

With China largely having tackled its surplus, the focus of that pressure shifts to the European Union (especially Germany) as well as Japan. The countries run the two largest surpluses now, with Germany’s surplus at about $296 billion and Japan’s at $196 billion.