SEOUL – Global imbalances are again dominating international economic debates and with good reason. Large and persistent imbalances often end badly, whether in abrupt capital-flow reversals, exchange-rate volatility, geopolitical conflict or, as in 2008, financial crisis. And with the United States now running significant current-account deficits and China having returned to substantial surpluses, fears that the world is headed toward another reckoning are mounting.

To be sure, today’s imbalances are smaller than those that preceded the 2008 global financial crisis. Last year, the U.S. current-account deficit approached 3.6% of gross domestic product, compared to its pre-2008 peak of 6%, and China’s surplus was 3.7% of GDP, compared to over 9% before the crisis. But the gaps are widening — and, unlike in the mid-2000s, this is happening against a backdrop of heightened uncertainty about economic security, supply chains, reserve currencies, strategic competition and financial stability.

These imbalances have contributed to a resurgence of protectionism, particularly in the U.S., with President Donald Trump using America’s trade deficits to justify sweeping tariffs. European leaders, for their part, have sharply criticized Chinese industrial overcapacity in electric vehicles, batteries and solar panels. Because “China Shock 2.0” is concentrated in these higher-end sectors (which also include semiconductors and robotics), rather than low-cost consumer goods, it is putting pressure on........

© The Japan Times