This article first appeared in Forum, The Edge Malaysia Weekly on April 13, 2026 - April 19, 2026

Just in the past week, both the G7 group of rich nations and the International Monetary Fund (IMF) have issued warnings that global imbalances are likely to worsen and cause difficulties for the global economy. Global imbalances refer to the large and persistent surpluses some countries such as China, Germany, the oil-rich countries and several Asian countries including Singapore run against the large deficits that economies such as the US and the UK run.

There is increased concern because these imbalances are poised to soar to levels that could prompt deficit countries to impose protectionist and other trade restrictions to force surplus countries to bring down their surpluses. The trade war we are currently enduring could well worsen. The imbalances also reflect structural weaknesses in both surplus and deficit countries that need to be resolved for everyone’s benefit.

Rectifying these imbalances is urgent because, if anything, the G7 and IMF might be underestimating how large these imbalances could be because they do not sufficiently consider factors such as how state-directed technology policies are now a significant factor in boosting export competitiveness, and thus in expanding trade surpluses of successful exporting nations.

Without a resolution, we could see yet another rash of protectionist measures, which is the last thing we need now. Further protectionism will cause losses for the global economy as a whole and certainly damage our trade-oriented region.

However, there is a template for how these bad outcomes could be avoided and that is the 1985 Plaza Accord, which helped to resolve frictions among the big economies that arose from the proliferation then of global imbalances. An accord similar to the Plaza one seems unlikely today. But we are likely to see some exporting countries such as China undertaking measures to address the growing resentment against their export prowess. In some cases, these responses could create some benefits to Southeast Asia in surprising ways.

The starting point for any discussion on external imbalances is the savings-investment gap. Economic theory shows that if a country invests more than it saves, then, by definition, it will have a current account deficit. This is because the gap in funding can only be filled by external sources that means a net inflow on the capital account of the overall balance of payments. But since the overall balance of payments comprises a current account and a capital account, a net inflow or a surplus on the capital account axiomatically means that there is a current account deficit. Similarly, if a country saves more than it invests, then it will have a current account surplus.

The G7 memo essentially argues that each of the three major economic blocs — the US, China and Europe — has structural economic problems that feed off each other and so amplify the external account imbalances.

First, the US has been a chronic under-saver: The US suffers from a large fiscal deficit as well as a rather low household savings rate. The budget deficit is running at around 6%-7% of gross domestic product (GDP). General government debt sits at around 120% of GDP and is projected to reach 140% by 2031. Interest payments already exceed 3% of GDP. All these metrics are at levels that far exceed any benchmark for sustainable public finances. For households, the latest data show their savings rate at around 4%-4.5%, lower than the average in the 2000-2019 period of 5.2%, itself a rather low rate. Consequently, even with US companies having a high savings rate, the share of national savings in GDP tends to be low compared with other countries.

On the other hand, the US has extraordinary companies that are great innovators and which thus invest on a massive scale. These factors produce a high rate of return on investment, which is one reason why America’s investment share of GDP tends to exceed the national savings rate. This combination of low national savings and robust domestic investment produces a funding gap that is filled by net capital inflows from abroad.

For most countries, large deficits eventually lead to the local currency weakening, enabling that country to improve its export competitiveness and so rectify the deficit. But the US dollar’s reserve currency status and the attractiveness of US equities suck in huge amounts of foreign capital which prevents the US dollar from weakening and raising export prowess. The deficit is thus compounded and the external imbalance is reinforced rather than corrected.

Second, and in sharp contrast to the US, China’s consumption spending has an unusually low share of its economy.

Diverse policies in China conspire to produce weak consumer spending and a high savings rate. Banks are allowed to pay low interest rates to depositors, depressing their incomes. A relatively sparse social safety net forces common folk to save feverishly for their old age and medical care. A restrictive system of managing rural migrant workers in the cities depresses their wages and so limits their consumption capacity. State enterprises do not need to pay large dividends to the state, meaning very high retained profits which boost corporate savings — at the cost of lower fiscal revenues which could have been used to fund higher pension or medical benefits to consumers.

Moreover, because households had allocated so much of their savings to real estate, the recent crash in real estate has destroyed savings. Households have to step up their savings to rebuild their wealth.

The real estate crisis also reduced investment. Thus, even though China still has a high investment rate, the savings rate is much higher. That leads to a large current account surplus.

Finally, the European Union (EU) runs a surplus of savings over investment. Europe tends to have a higher savings rate than the US. But excessive regulation, high energy costs, institutional fragmentation, limited capital markets integration and the absence of a credible EU-wide safe asset have combined to suppress investment relative to savings. Consequently, its savings tend to flow outward, principally to the US, rather than into productive investment in Europe.

There are several reasons why global imbalances are likely to worsen in the coming few years.

First, the Middle East crisis is likely to further boost China’s export competitiveness and so amplify its already large current account surplus. While energy costs have risen for everyone, China is better able to shield its manufacturers from higher costs because it enjoys some buffers others lack — most notably its high reliance on coal and renewables, state-controlled energy pricing and access to sanctioned, discounted Russian oil as an alternative to the disrupted Gulf supply. Thus, the cost-competitiveness gap, already in China’s favour after years of falling prices, is set to widen due to this asymmetric exposure to higher energy prices.

Second, the US savings position will deteriorate as a result of the Iran war. The Pentagon is requesting an additional US$200 billion in military spending for the current fiscal year, compared with the original defence budget of US$1 trillion. For next year, it is seeking US$1.5 trillion. Given the way American politics plays out, there is little chance that the increased defence burden will be funded by tax increases. President Donald Trump’s hopes that high tariff revenues would help pay for his expansionary budget have been shattered by the Supreme Court’s invalidation of many of his tariffs. In essence, therefore, the US fiscal deficit is going to worsen and result in a higher current account deficit.

The third factor is the combination of aggressive technology development strategies with a ferociously competitive ecosystem, a combination which produces globally competitive exporters and which only China appears to have mastered well. This is something that conventional economic thinking has not studied well — but which is becoming more important. China’s far-sighted technology strategy, backed by a panoply of aggressive industrial policies, will expand the categories of goods that China is competitive in. The country is seeing impressive advances in fields as diverse as pharmaceuticals, robotics, carbon capture and storage, battery energy storage systems and even in nuclear reactors. Moreover, Chinese manufacturing companies fight it out in a highly competitive local market, but one where extraordinary economies of scale and scope allow them to cut costs and improve quality quickly. In the coming few years, China’s gains exporting automobiles, solar panels and batteries will be nothing compared to the advances it will make in many more areas.

But the result of this unprecedented gain in export competitiveness will be a sharp increase in its trade surpluses. China’s higher surpluses and the dislocations that will cause to domestic competitors in importing countries will generate even more frictions between China and its export markets. It won’t be just the US, Europe and Japan that will be complaining, even China’s friends in the Global South will be angered.

In the mid-1980s, growing external imbalances led to acrimonious trade relationships among the US, Germany and Japan. In 1985, these countries came together with other developed nations to conclude what became known as the Plaza Accords, under which Germany and Japan agreed to allow their currencies to appreciate sharply in order to reduce their surpluses and help the US cut its deficit. As a result, the currencies of countries competing with Japan such as South Korea and Taiwan also strengthened. That spurred companies in those economies to seek out lower-cost production centres producing a boom in foreign direct investment for Thailand, Malaysia and Indonesia which transformed those economies.

There is very little likelihood of a grand bargain like this, given the poor relationships among today’s big economic powers — the US, China, EU and Japan. Thus, we see the imbalances expanding and producing a strong protectionist backlash, with China the likely main target.

China will have to respond in order to protect its export markets and also to ensure continued good relations with the countries it trades with. We think that the measures China might take will largely benefit Southeast Asia.

First, China will probably allow a modest appreciation of its yuan so as to relieve some of the competitive pressures on regional exporters.

Second, China may nudge some of its companies to agree to voluntary export controls in the way Japanese electronics exporters did for the US market in the late 1980s.

Third, Chinese companies will step up what they are already doing, which is to expand manufacturing production in the markets they are currently exporting to. The resulting increase in foreign direct investment will be popular with Southeast Asian policymakers, helping to create jobs and expand manufacturing competence. However, higher Chinese investment may not be enough. Chinese companies will also have to do something they are not doing enough currently, which is to be more willing to transfer technology and to also develop an ecosystem of local component and service providers. Currently, there are complaints that Chinese companies still source their more valuable intermediate input from China and thus do little to develop indigenous manufacturing capacity in countries they invest in. In some cases, Chinese companies import large numbers of Chinese skilled and semi-skilled workers rather than employ and train local ones. For example, remittances from Indonesia to China have soared, a reflection of the large numbers of well-paid Chinese that have come to work in Indonesia’s rapidly growing nickel industry where the bulk of the investment is from China.

Fourth, another way China could appease regional sentiments is to offer a new and expanded version of its Belt and Road Initiative (BRI). The BRI is popular because it helps to build infrastructure and thus enhances production capacity and, ultimately, export competitiveness. As a region of great strategic importance to China, it would make sense for China to deploy a large share of BRI funds to this region.

In short, as the war in the Middle East hopefully winds down, the trade war could well resume because global imbalances will come back to create more trade frictions, much of it directed at China. If China is pro-active in addressing this problem, Southeast Asia may well see some benefits.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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