The Real Problem With Global Trade

Key Points:

• French President Emmanuel Macron has highlighted rising global trade imbalances at the G-7 summit, but leaders are likely to avoid addressing the undervaluation of Asian currencies, particularly China’s renminbi, which is a major driver of these imbalances.
• China’s currency depreciation since 2021, combined with state subsidies and capital controls, has significantly boosted its export surplus, while neighboring Asian countries have also kept their currencies weak to remain competitive, exacerbating global trade imbalances.
• Despite recognition of these issues, the G-7 and IMF have refrained from pushing for currency appreciation or coordinated exchange rate policies, instead focusing on minimal communiqués and reports without concrete demands on China or Asia.
• Historical precedent shows that coordinated currency adjustments can reduce trade imbalances, but current international economic policy neglects this tool, risking further growth in unsustainable trade surpluses and deficits.
• The G-7 faces a critical choice: pressure China to allow its currency to appreciate or impose new trade restrictions, but so far political expediency has prevented meaningful action on currency undervaluation and broader economic policy coordination.