Introduction
The International Monetary Fund (IMF) was established to facilitate balanced international trade growth, promoting high employment and real income levels adjusted for inflation. However, as globalization faces its greatest threat since World War II and external economic imbalances are on the rise, the IMF appears to be a missing soldier in action. Instead of actively reducing external imbalances, the IMF seems to be focusing on issues beyond its competencies, such as climate change and gender equality.
The Real Causes of Global Economic Imbalances
Contrary to President Donald Trump’s beliefs, current global economic imbalances are not due to import tariffs or currency manipulation but rather inadequate macroeconomic policies in both deficit and surplus countries.
- Deficit countries pursue monetary and fiscal policies that encourage excessive spending on consumption and investment over production.
- Surplus countries implement macroeconomic policies that discourage spending on consumption and investment relative to production.
- According to John Maynard Keynes, deficit countries have national savings below investment, while surplus countries have national savings above investment.
Under this lens, it’s clear why, despite higher import tariffs during the first Trump administration, the U.S. external current account deficit increased by about 35% (from $480,000 million to $647,000 million) between 2016 and 2020.
- The Trump administration’s trade policies, including tariffs on Chinese imports and steel/aluminum, were accompanied by the Tax Cuts and Jobs Act (TCJA) of 2017, which reduced domestic savings by increasing the budget deficit and boosted investment via lower corporate tax rates.
This perspective also explains why China and Germany have consistently reported large trade surpluses in recent years. China’s high savings rate is due to the lack of a comprehensive social security system, while Germany maintained a “debt brake” that limited public spending and ensured high public saving rates.
The IMF’s Role and Responsibility
By 2025, with a concerning 6% of GDP budget deficit, the Trump administration proposes another significant tax cut that will further increase it. These changes could add over $5 trillion to the budget deficit over the next decade, likely widening the U.S. external trade deficit for the same reasons observed during the first Trump administration.
The IMF should not only warn about the potential global economic consequences if Trump’s tax cuts are approved but also design a plan to resolve current global imbalances without triggering a global recession.
- Recommendations could include how the U.S. can restore public financial order, how China can boost household consumption via improved social security systems, and how Germany can stimulate European investment through substantial public spending increases.
During the 2010 European sovereign debt crisis, the IMF played a constructive role in designing and supervising economic programs that helped eurozone member countries restore internal and external economic balance. Now, more than ever, is the time for the IMF to perform a similar role in effective multilateral economic oversight.
Globalization is at risk of unraveling, and one of its main institutions seems absent when it’s needed the most.
About the Author
Desmond Lachman, a research fellow at the American Enterprise Institute, was deputy director of the IMF’s Policy Development and Review Department and head of emerging market strategy at Salomon Smith Barney.
Copyright: Project Syndicate, 1995 – 2025
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