The nature of imperialism is the unequal exchange of value, not a savings-consumption imbalance.
Michael Roberts is an Economist in the City of London and a prolific blogger
Cross-posted from Michael Robert’s Blog
Photo licensed under the Creative Commons Attribution-Share Alike 4.0 International license.
Global imbalances are back on the agenda of the economic powers that be. What are these ‘global imbalances’? First, there is the imbalance in global trade, namely some countries run significantly large surpluses in goods and services exports over imports; while other countries run sizeable deficits on trade. The global current account imbalance is the aggregate difference, currently 2% of world GDP a year.
Since 2018, the sum of current account surpluses and deficits has increased by roughly 25% and 35% respectively, now reaching their highest levels since 2012. China, Europe and the US (G3) drove the widening in current account balances in 2024, with the US and China continuing the divergence in 2025.
Second, those countries with large and persistent trade and income surpluses then recycle these into investments abroad, both in purchases of factories, companies etc and also in buying the stocks and bonds of other countries. In so doing, these surplus countries become major creditors in foreign assets, while the deficit countries become major debtors. These imbalances can be measured by the net foreign investment position of countries. China, the EU countries, the oil exporters and Japan are the main creditors and the main debtors are the US, along with the UK and the smaller economies of the Global South.
Net international investment position (% of global GDP)
And of course, we are talking about the US here. The debtor position of the US has worsened significantly since the end of the COVID pandemic slump.
Increasingly, the US has relied on foreigners buying more US companies and stocks (‘the kindness of strangers’), who are currently attracted by the AI boom. The reaction of the Trump administration to the high US trade deficit has been to impose tariffs and other measures to ‘protect’ American industry and reduce imports. The US has also imposed measures to ban Chinese investments into the US. But Trump’s measures have only led to a slowdown in world trade and foreign investment that reduces global economic growth.
So the international financial institutions are worried and are calling for global action to reduce the imbalances. The IMF etc recognise that trade and investment imbalances will exist, but their economists claim that the problem is only when they become ‘excessive’ “Not all imbalances are the same – it is excessive imbalances that should concern us.” Kristalina Georgieva, IMF chief. The IMF estimates that over the past 10 years, on average, around one-half of imbalances have been ‘excessive’. But the increase in excess imbalances in 2024 was the largest in a decade, with major economies – China, the US and the euro area – driving the increase.
But what is ‘excessive’? The IMF economists have attempted to measure this. They claim that “persistent excess imbalances are driven primarily by domestic macroeconomic factors.”These factors include “demographics, levels of development, and whether a country has large resource endowments such as oil.” This does not take us very far in an explanation of excessive imbalances. In the graph below, the IMF actually shows that the main factor is ‘other fundamentals’. These include “output per worker, expected GDP growth, and the International Country Risk Guide.” In other words, what makes a country excessively in surplus or in deficit are its relative levels of productivity and economic growth compared to its trading partners.
The Bank of England economists recently made a critique of the IMF ‘excessive imbalance’ model. “IMF modelling finds it hard to explain what causes excess imbalances. For example, the US excess fiscal deficit accounts for only around 1/3 of its excess current account deficit. And euro-area excess fiscal tightness and weak private credit accounts for about half of its excess surplus. For China, identified domestic policy distortions do not help explain China’s excess surplus.”
As the BoE put it, “the IMF’s External Balance Assessment exercise could be missing important structural trends.” The IMF model shows that policy measures ie tariffs, devaluation of the currency, subsidies for industry or low welfare spending “can only explain some, but not much, of the gap between actual and norm.” So what can explain the rest of the gap?”
The Boe wants to argue that imbalances are caused by ‘industrial policy’ i.e subsidies for industry, capital controls on investment, regulations on imports – all measures that China is accused of adopting the most: “industrial policy has no long run effects on productivity or output composition; however, if productivity growth is endogenous and sector-specific, industrial policy can have persistent effects.” However, even here, the BoE takes a step back. “While, for example, China, Japan and South Korea tend to use industrial policy intensively and run large current account surpluses, other surplus countries, such as the Nordics for example, make relatively little use of it. This suggests that IP is not the primary driver of current account balances.”
So trade and investment imbalances are not primarily caused by ‘bad economic policies’ but by structural factors. What are these? The key missing contribution in the IMF’s list of components of imbalnaces is cost competitiveness. Classical Ricardian trade theory predicts that trade among countries will balance in the long run if currency exchange rates adjust to do so. A country in deficit will see its currency fall relative to countries in surplus and then their exports will get cheaper and so end the trade deficit. So there should be a set of exchange rates that will balance all trade among countries.
This is David Ricardo’s theory of comparative advantage. But it has always been demonstrably untrue. Under capitalism, with open markets, more efficient economies will take trade share from the less efficient. So trade and capital imbalances do not tend towards equilibrium and balance over time. Moreover, causation runs from trade imbalances to capital account imbalances, contrary to the Ricardian model where the trade balance should adjust to bring the capital account into balance. So widening trade imbalances cause widening creditor and debtor imbalances.
Trade is primarily determined by the real cost of production, i.e. absolute cost advantages. What really decides is the productivity level and growth in an economy and the cost of labour compared to others. Trade would only be balanced if all trading partners were equally competitive in cost terms. But in the world of capitalist competition and trade that does not happen.Therefore global competition among unequally competitive trading partners engenders persistent global imbalances.
Global imbalances in trade and investment are really a symptom of the imbalances of capitalism’s uneven and combined development. Contrary to the views of the mainstream, capitalism cannot expand in a harmonious and even development across the globe. On the contrary, capitalism is a system ridden with contradictions generated by the law of value and the profit motive. One of those contradictions is the law of uneven development under capitalism – some competing national economies do better than others. And when the going gets tough, the stronger start to eat the weaker. Imbalances grow.
For the IMF, and for Keynesians, there is apparently a ‘sustainable’ level of surplus or deficit which is determined by the ‘right balance’ between aggregate savings and investment in an economy. In their book, Keynesians Klein and Pettis argue that “the excess savings of Germany and several other smaller European countries (such as the Netherlands)” is the cause of Europe persistent surpluses”. But any proper analysis of the Euro imbalances will find that it was not a result of Germany needing to export its ‘excess savings’, but the result of Germany’s more superior technology and productivity, enabling it to expand exports throughout the EU at the expense of its other weaker member states. There is a transfer of value and surplus value from the weaker capitalist economies to the stronger. Indeed, that is precisely the nature of imperialism: the unequal exchange of value, not a savings-consumption imbalance.
If global imbalances are becoming a threat to economic growth and risk triggering financial crises, what to do? The IMF, G7, OECD etc call for China to rein in its exports and manufacturing investment and instead increase household consumption. On the other side, the US should not apply tariffs, but impose severe fiscal austerity to reduce spending on imports.
This is a hopeless policy solution for two reasons. First, China’s surplus is not due to too much saving that needs to be reduced – on the contrary, it is due to massive investment in manufacturing and technology sectors. Indeed, China has moved decisively up the value chain, capturing market share from other export-oriented economies, most notably Germany and the rest of the euro-zone, but also Japan and Korea. As a result, the latter’s surpluses have diminished compared to the mid-2000s.
The US deficit is not due to excessive government spending, but to the inability of US industry to compete in world goods markets (although it still holds dominance in services and finance).
Second, In China’s case, helping to reduce global imbalances and reduce the US deficit would require a shift away from high savings and investment towards household consumption. Why should they do this to help the US? Indeed, it is wrong to place the burden of the adjustment on the surplus country. Deficit countries should ‘adjust’ by investing more in productive sectors and so lowering costs.
Moreover, a coordinated global adjustment is highly unlikely given the current geopolitical climate. So when the Keynesians call for a revival of ‘multilateralism’ and global cooperation, they are denying the reality of the 2020s. The Keynesian left have attempted to revive the long forgotten idea of Keynes made in 1941 that governments should establish an international ‘clearing house’ for countries where any trade surpluses or deficits are converted into credits and debits measured in a unit of international currency – named a ‘bancor’. The essential feature of Keynes’ plan was that creditor countries would not be allowed to hold onto the money from their outstanding trade surpluses, or charge punitive rates of interest for lending them out; rather these surpluses would be automatically available as cheap overdraft facilities to debtors through the mechanism of the ICU. Again, it would be China or Europe that would pay to get the US out of its deficit and liabilities.
How did the recent OECD annual meeting conclude on the chances of such international cooperation? “We’re really where we were before the meeting, which is nowhere,” said the head of the World Trade Organisation (WTO). The utopian idea of Bancor was vetoed in 1941; and if raised again by Keynesians now, it will suffer the same fate.
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