Global imbalances are again dominating international economic debates, and with good reason. Large and persistent imbalances often end badly, whether in abrupt capital-flow reversals, exchange-rate volatility, geopolitical conflict, or, as in 2008, financial crisis. And with the United States now running significant current-account deficits, and China having returned to substantial surpluses, fears that the world is headed towards another reckoning are mounting.
To be sure, today's imbalances are smaller than those that preceded the 2008 global financial crisis. Last year, the US current-account deficit approached 3.6% of GDP, compared to its pre-2008 peak of 6%, and China's surplus was 3.7% of GDP, compared to over 9% before the crisis. But the gaps are widening -- and, unlike in the mid-2000s, this is happening against a backdrop of heightened uncertainty about economic security, supply chains, reserve currencies, strategic competition, and financial stability.
