The world economy is again struggling with an old problem. Some countries save more than they invest or consume. Others spend more than they produce. These current account gaps narrowed for several years after the 2008 financial crisis. They are now widening again.
China’s surplus has grown. The United States runs a large deficit. Emerging markets, including India, are exposed to the spillovers. The political response in major economies has been predictable: tariffs, industrial subsidies, trade restrictions and calls for economic self-reliance. These tools may serve domestic politics. They will not correct global imbalances.
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Global imbalances have domestic roots
A country’s trade position is not determined mainly at the border. It reflects the balance between domestic savings and investment. Tariffs can alter bilateral flows. They cannot easily change how households, firms and governments save or spend.
China’s surplus is linked to weak domestic demand and high household savings. The property downturn damaged confidence. Households responded by saving more. Firms continued to produce. The excess had to go somewhere. Much of it went into exports.
The American deficit has the opposite source. US consumers and the federal government have continued to spend beyond domestic output. The result is not merely a trade problem. It is a macroeconomic one.
This distinction matters. A bilateral trade deficit can be shifted from one country to another. A national saving-investment gap cannot be eliminated by changing customs duties.
Tariffs cannot solve global imbalances
The case for tariffs rests on a simple claim: imports are too high because foreign producers have unfair access to domestic markets. The remedy, therefore, is to tax imports.
That logic is incomplete. A tariff may reduce imports from one country. Consumers and firms may then import from another. If trading partners retaliate, exports also suffer. The overall current account balance changes little because the underlying saving-investment balance is still intact.
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Permanent tariffs are especially weak instruments against structural imbalances. They raise costs, distort supply chains and invite retaliation. They do not make households save less in surplus countries. They do not make deficit governments borrow less.
This is why the return of tariff politics is troubling. It mistakes the visible symptom for the underlying condition.
Industrial subsidies carry their own risks
Industrial subsidies are no more reliable. They are now defended as tools of strategic autonomy, green transition and manufacturing revival. Some of these goals may be legitimate. But subsidies do not automatically reduce trade imbalances.
If subsidies raise productivity across the economy, they can raise incomes and import demand. A country may become richer and still run a larger deficit. If subsidies misallocate capital, suppress efficiency and keep excess capacity alive, they can widen surpluses by pushing more output into foreign markets.
This is the uncomfortable reading of China’s manufacturing surplus. Heavy state support may not always signal strength. It may also reflect weak domestic absorption and distorted investment.
The policies that do move external balances are broader and more intrusive: exchange-rate management, capital controls and directed credit. China used such instruments in the early 2000s. But these are not surgical trade fixes. They reshape the whole economy.
India faces the spillovers
India’s position is more constrained. It is neither the main source of global imbalances nor insulated from them. Its current account, capital flows, exchange rate and inflation outlook are affected by decisions taken in Washington, Beijing and Brussels.
India has kept selective controls on capital flows. That has helped reduce exposure to volatile short-term money and preserved some monetary policy autonomy. After the Ukraine shock, the Reserve Bank of India had more room to respond to domestic inflation instead of simply tracking the US Federal Reserve.
Yet the same policy space is never permanent. Foreign exchange reserves that look comfortable in calm markets can appear inadequate when the rupee weakens and global capital turns risk-averse. What counts as prudence changes with the cycle.
The larger risk is that inward-looking policies in major economies worsen external conditions for emerging markets. Deficit pressures can shift to countries that did not create the shock. India may manage its macroeconomy well and still face the consequences of policy errors elsewhere.
Global governance is weaker
The obvious solution is macroeconomic correction. The United States must reduce fiscal excess. China must stimulate household consumption. Europe must rebuild investment and productivity. These are familiar prescriptions. Their weakness lies in politics, not economics.
The Plaza Accord of 1985 showed that coordinated correction is possible when major powers accept a shared problem. That world has faded. Multilateral institutions have less authority. Large economies prefer unilateral tools. Industrial policy has returned. Trade policy is increasingly shaped by security concerns.
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The decision-making map has also changed. Technology corporations negotiate directly with governments over investment, data and regulation. Cities and regions have economic influence that older global institutions do not fully capture. National policy is no longer made only within the institutional architecture assumed by post-war global governance.
This makes correction harder. The analytical case for rebalancing may be strong. The political machinery to deliver it is weak.
Global imbalances need macroeconomic correction
The lesson is austere. Global imbalances cannot be fixed by tariffs, subsidies or slogans about self-reliance. They arise from domestic savings, investment, fiscal policy and consumption patterns. They require macroeconomic correction.
For India, the answer is not fatalism. It must maintain credible fiscal policy, prudent external financing, flexible inflation management and adequate foreign exchange buffers. These are necessary defences. They are not immunity.
When large economies generate shocks, smaller economies absorb them. That is the unfair arithmetic of the global economy. The most important imbalance today may not be between surplus and deficit countries. It may be between what the world economy needs and what its major powers are willing to do.
This article is based on a discussion organised by the EGROW Foundation featuring Dr Mansa Patnam (IMF), with comments from Professor Ashima Goyal and Dr Satish Chandra Mishra (Artha Shastra Institute, Bali).