Global Imbalances

Global imbalance refers to the significant gap in current account surpluses and deficits amongst major countries. Between mid-1990s and mid-2000s, global imbalance moved from moderate to historically unprecedented levels. Particularly, the U.S. ran up its current account deficit from under $200 billion in 1995 to $800 billion in 2006, prior to the outbreak of the subprime mortgage crisis. At the same time, China and other Asian countries as well as oil exporters in the Middle East ran up record current account surpluses. The unprecedented nature of these numbers invited concern about whether global imbalances pose a significant risk to global economy. As shown in Figure 1, the global imbalance in the 2000s was more significant relative to previous global imbalances. The U.S. current account deficits have been mainly fueled by China, Japan, other Asian economies, and Germany’s export-led growth. However, as the world oil production approaches the peak, the pattern of global imbalances is likely to change dramatically. The center of global trade surpluses is likely to shift away from East Asia and towards the main oil exporters. In summary, global imbalance is a systematic result of global economic activities, and the large global imbalance is detrimental for both surplus and deficit countries. As the current account imbalance has reached an unprecedented level and the world economy becomes more globalized, the global imbalance will become a more importance issue.