On August 31 local time, the G20 Finance Ministers and Central Bank Governors Meeting was held in the United States. Prior to the meeting, US Treasury Secretary Yellen said in an interview that the world "cannot accept" China having a trade surplus of $1.2 trillion, and stated that she would urge G20 members to re-examine trade conditions with China. In response, China explicitly stated that it has never deliberately pursued a trade surplus and adheres to high-level openness to the outside world, providing new opportunities for various countries, including the US, with its large market.
In recent years, the US has consistently pointed to China as the culprit behind global trade imbalances, ignoring the deep-seated structural causes underlying international payments. However, it should also be recognized that economic imbalances have become a reality that major economies face in common. The IMF's "2026 External Sector Report" released in July shows that global current account imbalances further expanded in 2025. As the US imposes tariffs and compresses its trade deficit, other major economies are also taking measures such as industrial policies to reduce their own risks. Ultimately, who will bear the cost of rebalancing the global economy?
Carnegie International Peace Foundation senior researcher Michael Pettis recently published an article in Foreign Affairs, analyzing how global trade imbalances are formed and why different economies often bear different costs, using the six major trade imbalances of the past century as a clue. In Pettis' view, the current economic imbalance is likely to be adjusted increasingly among the US, China, and Europe: the US aims to reduce its deficit, China needs to cope with the pressure brought by the tightening of external markets, and Europe may face more intense industrial competition as trade flows change. If the US continues to reduce its absorption of global goods and Europe further strengthens its trade defenses, the current trade friction mainly between China and the US may extend to China and Europe in the future.
It is worth noting that Pettis attributes more of the adjustment pressure to China, with limited discussion of US domestic factors, and his judgment is clearly influenced by an American policy perspective. However, his analysis of the century-long history of trade imbalances still provides a perspective for observing the potential risks in the industrial competition between China, the US, and Europe, as well as the global rebalancing.
The long-standing trade imbalances in the current global economy are fundamentally unsustainable. China, Germany, and a few other economies have long maintained trade surpluses, while the US has absorbed a significant portion of these surpluses by maintaining the world's largest trade deficit. This situation will eventually have to change. For a developed and capital-rich economy like the US, long-term persistent trade deficits can only lead to two outcomes: either rising unemployment or increasing debt, both of which are difficult to sustain.
In theory, major surplus and deficit economies can reach an agreement on a coordinated adjustment plan: surplus countries expand domestic demand, while deficit countries gradually reduce their reliance on debt-driven consumption. This way, global trade imbalances can be gradually narrowed without causing a significant decline in global aggregate demand. This should be the most reasonable solution.
However, due to fundamental disagreements among major economies over the causes of trade imbalances, such coordination is difficult to achieve. China believes that imbalances stem from excessive consumption and fiscal deficits in the US; the US attributes them to industrial, trade, and exchange rate policies in other countries; and Europe has yet to form a unified and clear judgment.
Global current account imbalances have recurred, with China and some European economies long accumulating surpluses, a pattern the IMF expects to continue over the next few years. Source: Financial Times, data from IMF.
Thus, the solutions proposed by various parties are contradictory. China hopes that countries with trade deficits will increase their savings rates, while being unwilling to change their existing growth model; the US hopes that countries with trade surpluses will reduce their trade surpluses by distributing more income to the household sector; European leaders continue to advocate for multilateral cooperation and a rules-based trade system. It appears that the possibility of coordination among parties is extremely limited. As economic commentator Martin Wolf wrote in the Financial Times earlier this year, if the hope of taking action in advance is already slim, then the "second-best option is to prepare for a crisis."
Historical experience suggests that such large trade imbalances almost always end in pain, and the costs of adjustment will not be evenly distributed. A country that faces high debt and low productivity is more likely to bear the main costs of trade adjustment; meanwhile, economic and political strength may also give a country enough policy tools to shift the burden of adjustment to other economies.
Among the three main economic powers today, China is relatively more vulnerable to shocks; the US has the ability to reduce its risk exposure; and Europe has considerable potential, but it remains to be seen whether it can be translated into policy action. The measures taken by all three to protect themselves are unlikely to reduce the risk of a crisis or decrease its overall cost. The question is: who will bear the heaviest losses when a crisis occurs.
History always repeats itself
Over the past century, large-scale, persistent trade imbalances have recurred periodically—and almost never with benign outcomes.
The 1920s were a case in point. At the time, US productivity increased rapidly, but wages did not grow in tandem, resulting in production expansion far outpacing consumption growth, and the US formed a huge trade surplus. In contrast, Europe suffered a trade deficit. After the end of World War I, many European countries borrowed heavily from abroad to rebuild their war-torn economies. Germany was particularly prominent, relying on large-scale foreign debt to support domestic economic growth and needing to borrow to pay war reparations. Meanwhile, US domestic debt also rose rapidly, with a large portion being used to support consumption and asset speculation.
As this imbalance persisted, the US continued to expand its manufacturing sector, squeezing out European industry, and trade protectionism pressures intensified. In 1927, France devalued its currency; in 1931, the UK abandoned the gold standard, and Germany began to restrict imports and ration foreign exchange in the same year. Even the US, which had a trade surplus, was not immune. As manufacturers and farmers complained that weak demand was threatening domestic production and employment, the US passed the Smoot-Hawley Tariff Act in 1930, sharply increasing import tariffs.
This imbalance ultimately led to a global trade collapse during the Great Depression of the early to mid-1930s. Almost all major economies were hit by the contraction in trade, but the costs borne by each country differed. Countries with massive trade deficits, such as the United Kingdom, actually recovered more quickly and suffered relatively lighter financial shocks than the United States, which bore a disproportionately high cost of adjustment. US exports declined faster than imports, domestic investment collapsed sharply, banks failed in succession, and the number of corporate and personal bankruptcies surged.
What followed was a rare exception to the next major and sustained trade imbalance: the imbalance eventually dissipated without triggering severe economic turmoil. In the 1950s and 1960s, the United States again ran large trade surpluses, while Europe and Japan incurred corresponding trade deficits. Similar to the 1920s, these deficits provided financing for post-war economic reconstruction, with large amounts of resources flowing into infrastructure and manufacturing.
However, unlike the present, governments at the time exercised strict controls over capital flows, and the foreign capital introduced was mainly used for investments that could generate sufficient returns in the future to pay off related debts. Since these investments had high production efficiency and economic returns, the debt-to-GDP ratio did not rise significantly. Meanwhile, trade protectionist pressures were also relatively limited at the time, mainly because Europe and Japan urgently needed to import goods, while the US actively encouraged economic reconstruction in these regions. It was under these unusual conditions that global trade imbalances gradually dissipated, without any country bearing particularly heavy adjustment costs.
This was followed by four rounds of trade imbalances, each of which ultimately came at a great cost to the countries involved.
One such instance occurred in Latin America in the 1970s, when consecutive oil shocks led to a surge in international oil prices from around $2 per barrel in the early 1970s to approximately $30 per barrel by the end of the decade, resulting in massive "petrodollar" surpluses for Middle Eastern oil-exporting countries and other Organization of the Petroleum Exporting Countries (OPEC) members. A large amount of funds were deposited into major international banks, which, in search of new loan clients, extended massive loans to Latin America and other developing economies. The sustained capital inflows ultimately led to an appreciation of these countries' exchange rates, overvaluing their currencies and creating substantial trade deficits.
By the early 1980s, rising global interest rates made these countries' debts difficult to sustain. Ultimately, the debt crisis forced trade imbalances to be corrected, but the vast majority of the adjustment costs were borne by the deficit countries: economic recession, inflation, fiscal austerity, and growth losses that lasted for decades.
The next round of imbalances formed in the late 1970s to 1980s, during which Japan's productivity growth consistently outpaced wage growth, resulting in a massive trade surplus. A similar situation occurred in Germany, whose manufacturing industry's international competitiveness continued to strengthen. In contrast, the UK and the US consistently ran trade deficits, thereby absorbing the surpluses of Japan and Germany.
The situation in Japan is particularly notable. In the 1980s, Japan's domestic debt saw astonishing growth, with massive investments pouring into various projects, but the returns ultimately realized were far lower than initially expected. Trade protectionism pressures continued to rise, culminating in the 1985 Plaza Accord. Under this agreement, the world's major economies agreed to drive up the value of the yen and the German mark against the US dollar to reduce trade imbalances. However, what actually resolved this round of imbalances was not the Plaza Accord itself, but Japan's fall into economic stagnation in the 1990s. Japan then experienced a plunge in asset prices, prolonged deflation, and years of economic stagnation. In contrast, Germany's situation is difficult to compare directly with Japan's, as the reunification of East and West Germany in 1990 occurred at the same time and fundamentally changed the German economy.
The Asian financial crisis of the 1990s bears some resemblance to the trade imbalances in Latin America in the 1970s. In the early 1990s, a large influx of foreign capital flowed into a number of East Asian economies, resulting in massive trade deficits; corresponding to this were trade surpluses in Japan, European countries, and increasingly, China. Despite the rapid increase in both domestic and foreign debt in these East Asian economies, trade protectionism pressures were limited at the time.
Even so, when investor confidence collapsed in 1997, the adjustment was swift and brutal. A currency plunge, banking crisis, and severe economic downturn hit East Asia's deficit economies in succession, while surplus countries bore relatively limited costs.
The last round occurred between approximately 2002 and 2008. After Germany implemented labor market reforms, wage growth was suppressed relative to productivity growth, thereby driving a sharp increase in savings and gradually accumulating a massive trade surplus. Germany exported increasingly to Greece, Portugal, Spain, and other eurozone economies, which in turn accumulated trade deficits and relied on rapidly increasing debt to finance these deficits.
This imbalance, formed within the euro zone where most member states use a common currency, left countries unable to protect their domestic industries by setting trade barriers or rely on exchange rate adjustments. The 2008 global financial crisis triggered the euro zone crisis, with deficit countries subsequently experiencing sovereign debt crises, rising unemployment, fiscal austerity, and long-term economic stagnation. Ultimately, it was through these heavy economic costs that the original trade imbalance was gradually resolved.
Who bears the cost?
These historical experiences indicate that whether in a surplus or deficit economy, once trade imbalances coincide with rapid debt growth and increased financial fragility, risks will significantly rise. If a surplus country can use its high savings for productive investments at home or abroad, then even if the imbalance persists for many years, it may not necessarily lead to severe economic turmoil. On the other hand, if its excess savings are used for inefficient domestic investments, or flow to its trade partners, driving high consumption, asset bubbles, or long-term fiscal deficits among locals, the entire system will become increasingly fragile.
Generally speaking, trade protectionism is not the root cause of trade conflicts, but rather a symptom that emerges after long-term trade imbalances fail to be corrected. However, once countries adopt protectionist policies, they can influence where adjustments ultimately occur and who ultimately bears the costs.
The ultimate bearing of adjustment costs on surplus or deficit economies also depends on which side is more capable of using trade, financial, or exchange rate policies to force the other to make adjustments. When a deficit country has weaker political power, is unable to rely on its own capabilities to continue financing itself, is unable to maintain its currency's exchange rate, or is unable to restrict capital and trade flows without triggering a financial crisis, the adjustment costs are often borne more by the deficit country. This was the case for Latin America in the early 1980s, many East Asian economies in 1997, and Southern European countries after 2008.
During the 1997 Asian financial crisis, protesters in Bangkok demonstrated against the deteriorating economy and rising unemployment. In the wake of the crisis, the Thai baht depreciated sharply and capital fled the country, plunging Thailand and several other East Asian economies into severe recession. Source: AFP
On the other hand, if a country with a trade deficit has sufficient economic and political strength to restrict imports, limit capital inflows, drive down the value of its currency, or take other measures to prevent a surplus country from continuing to export excess savings, then the surplus country will face greater risks. The United States in the early 1930s and Japan after the 1990s are examples of this. Their trading partners used policy interventions to suppress imports and expand exports, thereby narrowing their own trade deficits and forcing the US and Japan's growth models, which relied on trade surpluses, to gradually unravel: investment shrank significantly, and exports, corporate profits, and asset prices also declined.
For governments of various countries today, these historical experiences have left two main lessons.
When trade imbalances eventually enter an adjustment phase, the economies with the most severe debt growth that has not been accompanied by a corresponding increase in production capacity will face the greatest risks.
Second, the parties involved in trade imbalances can indeed take measures to pass on adjustment costs to other countries, but whether they can succeed largely depends on their economic strength and whether they have the capability to truly exert this strength.
The impending crisis
The current global trade imbalance is exceptionally large, so the upcoming adjustments are likely to be relatively difficult. China may bear certain impacts. The ratio of China's debt to GDP is rising rapidly, with a considerable portion of the debt being used for investment, but the economic returns from these investments are not yet apparent. Meanwhile, if other countries adopt trade protection measures or external demand weakens, it may further increase the pressure on China's economy.
The US is no longer willing to bear long-term and large-scale trade deficits. As the world's largest economy and the primary source of global demand, the US has sufficient economic strength to narrow its trade deficits and stop acting as the "last consumer" of the world. At the same time, US trade policy is highly concentrated in the executive branch. Based on relatively broad statutory authority, the president can take measures such as imposing tariffs, restricting investment, and implementing export controls, so Washington also has the political capability to exert this economic strength.
If the US expands its domestic manufacturing capacity through industrial policies on the one hand, and more importantly, strengthens control over trade and capital flows through tariffs and other restrictive measures on the other, then it will be difficult for China and other major surplus economies to maintain their existing surpluses by relying on the corresponding trade deficits with the US. At that time, they will either have to go through the pain of domestic production to reduce their surpluses, or they must find new importing countries, which are still willing and able to absorb these surpluses.
On September 1, US Treasury Secretary Beschen spoke during the G20 Finance Ministers and Central Bank Governors Meeting in Asheville, North Carolina, where global trade imbalances became a focal point of the meeting. Source: Reuters.
The euro zone is currently the world's third-largest economy and the second-largest source of global demand, so Europe is not lacking in economic strength. What is truly uncertain is whether Europe has sufficient political capability to translate this economic strength into policy actions, given the reality of a dispersed decision-making mechanism and member states' often divergent interests.
If the US can reduce its trade deficit while increasing its share of global manufacturing, and China is unwilling to see its surplus shrink by a corresponding extent, then a politically divided Europe may likely have to bear a larger trade deficit without having much of a choice. The cost may include deindustrialization, rising debt, and slowing economic growth, a process that may have already begun.
Once major economies stop thinking about how to minimize the global cost of adjustment and instead focus on minimizing their own risks, the opportunity to resolve global trade imbalances in a relatively mild way will have passed. China appears determined to maintain its trade surplus for as long as possible, while Washington is equally determined to reduce its own deficit.
If Europe can form the political capability to take similar actions, the burden of adjustment will increasingly fall on surplus economies, forcing them to rely more on domestic demand rather than exports to support growth. On the other hand, if Europe fails to do so, it will absorb an increasing share of global trade surpluses. As a result, the trade conflicts that are currently mainly between China and the US may evolve into conflicts between China and Europe in the future - with the core of the dispute being which side can avoid bearing the heavier adjustment costs in the future.
History has made clear that trade imbalances are eventually corrected, one way or another. What remains genuinely uncertain is how much damage that adjustment will inflict—and who ultimately bears the cost.
A Great Rebalancing Is Coming: Who Will Bear the Costs of a Global Trade Adjustment, was published on August 28, 2026, in Foreign Affairs magazine, with some content edited.