ASIA’S SURPLUSES AND THE CURRENCY QUESTION China’s export boom has undercut Europe’s surplus – Europe’s customs surplus disappears if the impact of US companies avoiding US tax by producing and export- ing from Ireland is netted out. But thanks to strong demand for chips, Korea and Taiwan are posting record trade surpluses. Taiwan’s current account surplus reached an astonishing 20% of its gross domestic product in the fourth quarter of 2025. The world’s biggest surpluses are thus concentrated in Asia, in countries whose currencies have weakened against the dollar over the last five years, even as their trade surpluses soared. Or rather, their trade surpluses soared in part because of their weak currencies. It is easy to make any solution to imbalances seem impossible without fun- damental changes in China’s domestic political model and America’s budget trajectory. But history has shown that trade responds to currency moves, so the most straightforward way to reduce trade imbal- ances would be an appreciation of the currently weak currencies of Asia’s big surplus countries. Most have long managed their curren- cies. China and Taiwan are clearly putting their thumb on the market’s scale to hold their currencies down. Chinese state banks have increasingly been buying US dollars – with monthly purchases reaching $100 billion before the Strait of Hormuz shock. Taiwan changed the regulation of its large life insurance firms to encourage them to increase their open foreign exchange position and reduce their hedging (creat- ing a bid of dollars), and discouraging the Taiwan Semiconductor Manufacturing Company from bringing its export windfall home. Korea and Japan, with large foreign exchange reserves and sovereign pension funds that do not generally hedge their for- eign exposure, equally have tools to act directly in the foreign exchange market – and both would like their currencies to strengthen, particularly if it means no loss of competitiveness relative to China. POLICY CONSTRAINTS AND THE LIMITS OF COORDINATION The International Monetary Fund under- stands reserve accumulation, but not China’s unique tools – notably the use of entrusted loans to move foreign currency off the People’s Bank of China’s balance sheet and its requirement that state banks intervene to assure the stability of the foreign exchange market, even if that risks
“The IMF’s call for structural reforms to China’s growth model and for fiscal restraint in the United States are directionally correct but it remains reluctant to call on China to let its currency move”
creating a currency mismatch on their bal- ance sheet. The IMF’s call for structural reforms to China’s growth model and for fiscal restraint in the United States are directionally correct, but it remains reluc- tant to call on China to let its currency move – which would require China to accept sluggish growth or change its model; and might create market pressure for the US to adjust its budget. France has thus clearly succeeded at drawing new attention to the world’s widening payments imbalances (masked by China’s changes to its balance of pay- ments methodology in 2022) and at getting the IMF to focus as much on imbalances as on its old bugbear of fragmentation. But it is not yet clear if there will be any concrete deliverables from the Évian Summit. Chinese president Xi Jinping will not attend. The Europeans have not figured out how to do currency diplomacy after the cre- ation of the euro. And the Americans do not seem interested. Trump is convinced, incorrectly, that the fall in the US bilateral deficit with China means that the problem has been solved. He should look at China’s massive global surplus instead. More over, he is focused on maintaining the trade truce through the two planned US-China state visits, and his treasury secretary Scott Bessent seems to want to avoid throwing any currency punches. The result is an impasse. China does not seem ready to negotiate away its growth model or change its currency policy. It seems confident that the world needs Chinese supply, including its rare earths, so much that the world will not erect barriers that slow its exports. It thus seems easier to let a weak currency propel export growth than take real action to propel domestic consumer demand. The G7 is happy to com- plain about imbalances but not yet willing to consider acting jointly to erect barri- ers to Chinese (and East Asian) exports if trade does not become more balanced. The odds are that nothing much will change this year, except that an already unbal- anced world economy will become more so. Stresses are apparent; but nothing quite seems ready to break.
// BRAD W SETSER Brad W Setser is the Whitney Shepardson senior fellow at the Council on Foreign Relations. Previously, he served as a senior adviser to the United States Trade Representative and as deputy assistant secretary for international economic analysis in the US Treasury. He is the author of Sovereign Wealth and Sovereign Power and co-author, with Nouriel Roubini, of Bailouts and Bail-ins: Responding to Financial Crises in Emerging Economies. He regularly blogs at Follow the Money about global trade and capital flows, financial vulnerability analysis, and sovereign debt restructuring.
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