IMF warns tariffs aren't the answer to global imbalances

CTV News

22-07-2025

WASHINGTON — Global current account balances widened sharply in 2024, reversing a narrowing under way since the global financial crisis of 2008-2009, the International Monetary Fund said on Tuesday, warning that tariffs were not the answer.
In its annual External Sector Report, which assesses imbalances in the 30 largest economies, the IMF noted that external surpluses or deficits were not necessarily a problem, but could cause risks if they became excessive.
It said prolonged domestic imbalances, continued fiscal policy uncertainty, and escalating trade tensions could deteriorate global risk sentiment and elevate financial stress, hurting both debtor and creditor nations.
The report took aim at U.S. President Donald Trump's imposition of higher import tariffs against nearly every trading partner, which his administration says is aimed at increasing revenues and righting longstanding trade deficits.
'A further escalation of the trade war would have significant macroeconomic effects,' it said, noting that higher tariffs would reduce global demand in the short term and add to inflationary pressures through rising import prices.
Rising geopolitical tensions could also trigger shifts in the international monetary system (IMS), which in turn could undermine financial stability, it said.
This year's report, based on 2024 data, showed the widening of global current account balances was due largely to increased excess balances in the world's three largest economies - the United States, China and the euro area.
The deficit in the United States widened by US$228 billion to US$1.13 trillion or one per cent of global gross domestic product (GDP), while China's surplus increased by US$161 billion to US$424 billion and the euro surpluses expanded by US$198 billion to US$461 billion.
Domestic solutions
In an accompanying blog, IMF chief economist Pierre-Olivier Gourinchas said excessive surpluses or deficits stemmed from domestic distortions, such as overly loose fiscal policy in deficit countries and insufficient safety nets that caused excessive precautionary savings in surplus countries.
Changes aimed these domestic drivers - not tariffs - were needed, he said. That meant China should focus on boosting consumption, Europe should spend more on infrastructure and the U.S. needed to reduce large public deficits and rein in fiscal spending, he said.
The report was based on data collected before approval of a massive tax cut and spending bill, which the Congressional Budget Office on Monday said would add US$3.4 trillion to the U.S. deficit over 10 years, causing further pressure.
'Public deficits in the United States remain excessively large and the recent broad depreciation of the Chinese yuan - together with the U.S. dollar - runs the risk of widening current account surpluses in China,' he wrote.
Rising tariffs had little impact on global imbalances, Gourinchas said since they tended to reduce both investment and savings in the tariffing country, leaving current account balances little changed.
'Softening' U.S. role as world banker
Uncertainty about tariffs could also undermine consumer and business confidence, increase financial market volatility and lead to persistent appreciations of the U.S. dollar, the IMF report said. However, it noted the dollar had depreciated eight per cent since January, its largest half-year decline since 1973.
It acknowledged the continued dominance of the U.S. dollar, but said growing geoeconomic fragmentation could pose risks in the future, and recent weaker demand for U.S. Treasuries could reflect concerns about the U.S. fiscal trajectory.
Increased use of China's yuan in international trade and finance, a 'softening in the United States' role as world banker and insurer' and the emergence of alternative payment systems and private digital assets could eventually lead to changes in the use of international currencies.
'While the risks of serious dislocation in the IMS remain moderate, rapid and sizable increases in global imbalances can generate significant negative cross-border spillovers,' Gourinchas wrote in the blog.
'A major risk for the global economy is that countries will instead respond to rising imbalances by further raising trade barriers, leading to increased geoeconomic fragmentation. And while the impact on global imbalances will remain limited, the harm to the global economy will be long-lasting.'
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Reporting by Andrea Shalal; Editing by Sam Holmes