The trade imbalances that have come to characterize the global economy are fundamentally untenable. China, Germany, and a handful of other economies run large, persistent trade surpluses, while the United States absorbs much of these surpluses by running the world’s largest trade deficit. Sooner or later, something must give. For an advanced, capital-rich economy such as that of the United States, an enduring trade deficit will bring with it either rising unemployment or rising debt, neither of which is sustainable.

In theory, the major surplus and deficit economies could agree on a coordinated adjustment in which surplus countries would expand domestic demand and deficit countries would gradually reduce their dependence on debt-fueled consumption, allowing the imbalances to shrink without a sharp contraction in global demand. That would be the sensible solution.

But because the major players disagree about the causes of the imbalances, they are unlikely to come to such a solution. China attributes them to excessive U.S. consumption and fiscal deficits; the United States blames foreign industrial, trade, and currency policies; and Europe has yet to settle on a coherent diagnosis. As a result, they all have proposed remedies that are at odds with one another. Beijing wants deficit countries to save more and prefers not to change China’s growth model. Washington wants surplus countries to reduce their surpluses by redistributing income to the household sector. European leaders continue to advocate for multilateral cooperation and rules-based trade. This makes the chances of a coordinated response slim. And as the economic analyst Martin Wolf wrote in the Financial Times earlier this year, if there is little prospect of preemptive action, “the second-best option is to prepare for a crisis.”

Individual economies are now doing just that. History shows that trade imbalances of this scale almost always end painfully—and that the pain of the adjustment is not distributed evenly. High levels of debt combined with low productivity makes a country more likely to bear the burden of a trade adjustment, but economic and political power can also give it the tools to pass the burden off to others. Among the three main economic players today, China is the most vulnerable, the United States has the most capacity to reduce its exposure, and Europe possesses latent power but a dubious ability to use it. None of their maneuvers to protect themselves are likely to reduce the risk or overall cost of a crisis. The question is only who will feel the brunt of the losses when it arrives.

HISTORY REPEATS ITSELF

Large, persistent trade imbalances have cropped up periodically over the past century, and they are rarely benign. One such episode occurred during the 1920s, when a surge in American productivity was not accompanied by rising wages. Production soared past consumption, and the United States ran enormous trade surpluses. Europe ran the corresponding deficits, as many countries borrowed heavily abroad to rebuild economies devastated by war. Germany in particular borrowed extensively to finance both domestic growth and its reparations payments. American domestic debt also rose rapidly, much of it to fund consumption and asset speculation.

As the imbalances persisted and U.S. manufacturing expanded at the expense of European manufacturing, protectionist pressures intensified. France devalued its currency in 1927, the United Kingdom abandoned the gold standard in 1931, and the same year Germany imposed import restrictions and rationed access to foreign currency. Even the United States, whose manufacturers and farmers complained that weak demand was threatening domestic production and employment, passed the Smoot-Hawley Tariff Act in 1930.

The adjustment came in the form of a collapse in global trade during the Great Depression of the early and mid-1930s. Nearly every major economy suffered from the contraction, but they did not suffer equally. Those with large deficits, such as the United Kingdom, recovered more quickly and suffered less severe........

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