Those countries with large trade deficits follow monetary and fiscal policies that induce them to spend more on consumption and investment than they produce. Conversely, those running large trade surpluses have macroeconomic policies that induce them to spend less on consumption and investment than they produce. Or, as John Maynard Keynes taught us, deficit countries are those where national savings fall short of investment, and surplus countries are those where national savings exceed investment.
According to the International Monetary Fund’s Articles of Agreement, the Fund’s main purpose is to facilitate the balanced growth of international trade and thereby promote high levels of employment and real (inflation-adjusted) income. Yet with globalisation facing its greatest threat in the postwar period, and with global external economic imbalances set to rise, the IMF seems to be missing in action. Instead of pursuing an active role in reducing external imbalances, it is focusing on issues that lie beyond its remit, such as climate change and gender equality.
Why hasn’t the IMF called attention to the principal reason for today’s global external imbalances? Contrary to what US President Donald Trump seems to think, these imbalances result not from import tariffs or exchange-rate manipulation, but rather from inappropriate macroeconomic policies maintained by deficit and surplus countries alike.
