There is this kind of political theater which occurs every few years in Washington, Brussels and Beijing, in which trade deficits are waved around as evidence of betrayal, tariffs are proclaimed in the grandest of ceremonies, and the issue becomes an ever-larger problem while everyone's paying attention to the show. There's one such performance going on now. But numbers, unlike rhetoric, aren't kind.

Looking back to 2026, the global economy is facing a host of trade imbalances that have not only survived the years of tariff wars and industrial policy fights they are getting worse. China's trade surplus has continued to swell throughout 2025, to a record level of $1.2 trillion for the year, despite China's own trade officials' attempts to explain the unbalanced trade and pointing at the United States as the culprit. Conversely, the U.S. had a goods and services deficit of $901.5 billion in 2025, and its goods deficit alone surpassed $1.24 trillion. The current account deficit is approximately $1.2 trillion (or about 4% of GDP) for America. These are not the numbers of a problem that is being solved. These are the figures of a crisis in structure which have been dealt with by press releases.

But what is especially concerning about 2026 is that the consensus among serious economists at the IMF, the WTO, the Peterson Institute, Capital Economics and CEPR is that the “solution” being implemented to correct these imbalances is the wrong one. Tariffs, the policy tool of choice for almost all significant economies in the last eight years, is not a solution to a savings, spending and investment problem.

Tariffs have no direct impact on the domestic saving and investment balance and so can not permanently affect the trade balance. The U.S. last experienced a trade surplus in 1975, and since then has had a trade deficit every year. This isn't a political observation. It is a simple accounting equation. US investments have been 21.7% of GDP, whereas National Saving has averaged only 19.1% of GDP since 1976. The current account deficit is virtually unchanged at a 2.6% deficit. Beyond this divide are underlying structural facts: a federal government that has maintained high and chronic budget deficits (currently at -3.6% of GDP in 2024) and historically low rates of household saving, indicating a growth model that is driven by consumption, which leaves little room for financial surpluses.

Tariffs can be used to redirect deficits. They are not able to kill them. The imposition of tariffs might lead to a decrease in bilateral trade with one country, but it will result in an increase in bilateral trade with other countries (like pushing on one part of a balloon, only for another part to bulge out). The fact is, exactly this is what happened. The U.S. trade deficit with China has been reduced dramatically: U.S. imports from China have declined from $536 billion in 2022 to $308 billion in 2025. However the overall US trade deficit moved to other Asian economies. From 2018 to 2025, the United States trade deficit with Taiwan alone has grown by 865 percent. The biggest bilateral deficits were with Taiwan ($21.1 billion), Mexico ($16.8 billion), Vietnam ($16.5 billion) and China ($13.1 billion) in March 2026. There was no reduction in the deficit. It relocated.

The issue with this story is that the main problem is China, and China is the most difficult to solve. From 12% of all export volumes in 2018, when tariffs were first introduced during the first Trump administration, China now accounts for about 18% of all export volumes. Exporters in China have, for the most part, weathered tariffs, trade barriers and a sustained economic cold war from the diplomatic community. With the United States wall closed, Chinese goods will find other doors. The surplus was picked up by the EU, Southeast Asia, Latin America, Africa anywhere the market was still open.

Economists at the Peterson Institute for International Economics say this is no short-term trend. 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. With global growth likely to remain robust, and with trade tensions rising, they are likely to further increase. Their analysis suggests a second and more severe China shock and it is not in the future. It's already in several industries.

The manufacturing surplus of China is currently about $2 trillion, or the equivalent of the Italian economy. That overcapacity goes to the countries that are open, particularly with the United States behind tariffs. The biggest open market remaining is the European Union. The repercussions for European industry are dire. Germany, Italy, Spain, and France have about 70%, 60%, 40%, and 36% of their national manufacturing output at risk from unusually strong Chinese competition, respectively. Germany's traditionally strong automobile industry, which has been Europe's leading industrial producer for decades, is losing more workers than even during the pandemic. From 2020 to 2025, the market share of German brands within China dropped by about one third. In the meantime, German export products to China have decreased by 23% since 2022, driven primarily by a 66% decrease in the export of cars over the same period.

The WTO's director has pointed out that the world simply cannot absorb the overall trade surplus from China, which is "not sustainable. But the forces that would be needed to bring about such a correction a substantial revaluation of the renminbi, a large increase in domestic Chinese spending, with a focus on families not factories are still not politically palatable in Beijing. China's surplus has been related to sluggish domestic demand and high household savings. The property crash undermined the confidence of the house-holders, who reacted by saving more; the companies continued to produce, and the surplus had to be stored somewhere. A considerable amount of it was exported.

The IMF has been extremely forthright with its recent evaluations. The Fund's analysis suggests that current account surpluses or deficits are not necessarily permanent phenomena and that they stem from the fundamental balance between national saving and investment, which is primarily influenced by fiscal policy, domestic demand, and overall macroeconomic policy. Tariffs, frequently sold as short-term cures, would not be likely to bring about lasting improvements unless they were short-term or were accompanied by steps designed to increase public savings. In the meantime, individual countries can't rebalance the world. Coordinate adjustments in both surplus and deficit economies are needed to achieve meaningful progress. Of course such coordination is a chimera, as it is in the current geopolitical environment.

The impacts of the ongoing lack of action go far beyond the top-line figures. Growth in world output is expected to decelerate to 2.7% in 2026, which remains below the 3.2% pre-pandemic average. The environment for trade and investment is becoming more challenging. Global trade also proved to be strong in 2025, as early deliveries under policy uncertainty and tariff hikes, combined with strong services exports, boosted performance and growth is expected to decelerate in 2026 as some of the temporary factors diminish. WTO's trade growth projection for 2026 has already been revised to 0.5%, which is a near-stop from the post-pandemic recovery rate.

The numbers are even harsher in the case of developing economies. Global growth is expected to continue at subdued levels around 2.6% in 2026 and growth in developing economies (excluding China) is expected to decelerate to around 4.2%. Fertilizer price and climate shocks still pose a challenge to food security. There have been approximately 18,000 new discriminatory trade measures added since 2020. Every new barrier makes compliance more expensive, gives an advantage to larger exporters, and adds to the continuing fragmentation of a global trade system that was never fair, but at least was more open.

The one that haunts serious analysts is not the one that's happening manageable tensions, redirected trade flows, slow growth. Here's what could happen if the AI investment frenzy quietly fueling America's deficit tolerance starts to wane. In the event of an AI slump, the United States could drastically reduce its deficit, which could cause the world to slow down, and potentially sink into a new round of trade wars, as nations try to protect their own producers at the cost of others, not unlike the 1930s. That's the tail risk no one has prepared for, as everyone's busy battling the one they're already in.

What this moment really requires is a policy approach that makes one think, “Uh, that doesn't sound political.” What the U.S. needs is fiscal consolidation, not as a virtue in itself, but as a means to reduce the savings-investment deficit that drives the trade deficit. China should not be promoting exports, but real demand growth. Europe must have industrial policy, and not just declarations of tariffs. Import tariffs are not useful to balance imbalances. Micro industrial policy has an unreliable effect, but macro level industrial policy can be used to keep the current account surplus while limiting consumption. The instruments that do the job the ones that took political courage at home are spending discipline in Washington, growth of household income in Beijing, and structural reform in Brussels.

None of this is occurring on a large enough scale. Instead, the world has become accustomed to a cycle in which each country complains about trade practices in other countries as a reflection of its own structural weakness; as tariffs change, bilateral flows improve; and overall imbalance increases, yet no one says a thing. The balloon metaphor is working out well: push one way, and the air pushes another way.

Overall, the Trump tariffs now translate into an average of $1,500 per U.S. household in 2026, or the largest U.S. tax increase as a share of GDP since 1993. That represents a pretty significant expense on American consumers and, as the data reveals, no significant decrease in the overall trade deficit. The shortfall with China was reduced. The deficit with Taiwan also increased by 865%. The current account gap remained at 4% of GDP. In politics as in economics, the numbers don't lie, even if the political arguments do.

The world economy has a structural, macroeconomic and political problem of trade imbalance. Can't be tariffed away. It is impossible to proclaim it away. It's not something that will fix itself. There is now a small window of opportunity for coordinated action to make serious corrections, and not just because the tools are not ready, but because at this moment, the will to make them is not.