Key Takeaways
- China's booming trade surplus has much further to rise and will increasingly take sales away from producers in the rest of the world, especially in the advanced economies of Europe and Asia.
- Already heightened trade tensions are likely to intensify even if global growth remains strong.
- The US deficit remains stable or shrinks modestly if the boom in artificial intelligence (AI) investment in the US continues.
- If the AI boom collapses, the US deficit could shrink sharply, triggering a global slowdown that could plunge the world into trade conflict on a scale not seen since the 1930s, as countries pursue beggar-thy-neighbor policies to defend their own producers at the expense of others.
Body
Global current account imbalances widened in the past two years, led by growing surpluses in China and deficits in the United States. Most forecasters expect imbalances to stabilize or even narrow in 2026 and 2027. Bayoumi and Gagnon disagree with these projections, concluding that China's surplus will grow considerably, putting downward pressure on surpluses in Europe and the rest of Asia. The global economy may be on the cusp of a second, more intense China shock, with profound geopolitical and economic consequences.
