Global imbalances are back at the centre of the policy agenda. After narrowing in the aftermath of the Global Financial Crisis, current account surpluses and deficits have widened again since the pandemic, driven in large part by developments in the world’s two largest economies (IMF 2026, Weder di Mauro and Zettelmeyer 2026). At the same time, in recent years, many governments have turned decisively toward industrial policy and trade restrictions in pursuit of both economic and non-economic objectives. 

A growing body of work has begun to explore whether industrial policy and import tariffs can shape global imbalances. While these contributions offer insights into sectoral shifts and strategic risks, the debate is incomplete without returning to a core macroeconomic identity: the current account equals saving minus investment. In a recent paper (Gourinchas et al. 2026), we apply the standard saving-investment framework to clarify when, and through which channels, industrial policies and tariffs can meaningfully affect global imbalances. This perspective helps reconcile findings in the literature and sheds light on why some tools that at first glance appear powerful are often weaker in practice. That said, we also highlight a set of ‘macro’ (i.e. economy-wide) industrial policies that can drive a sustained increase in national saving, and therefore in the current account.

Global imbalances are determined by saving and investment decisions

At a basic level, a country’s current account equals the difference between national saving and domestic investment. This identity is not merely an accounting result; it reflects the fact that current accounts are determined by forward-looking behaviour that drives decisions to save or invest. Persistent surpluses or deficits arise when households, firms, or governments choose to save more (less) or invest less (more) today in response to current and expected future conditions.

This intertemporal perspective has long guided macroeconomic analysis of global imbalances. Fiscal policy, demographics, credit booms, asset price cycles, and growth expectations naturally fit into this framework. Many of these factors lead to appropriate and beneficial current account surpluses or deficits to meet different cyclical and structural factors across countries. Take the example of a fast-growing Region A with lots of productive investment opportunities but a low preference for saving, and a more frugal and slower-growing Region B (Figure 1). With integrated financial markets, capital will flow from region B to region A until real interest rates are equated in both economies, resulting in a current account surplus in Region B and a deficit in Region A. 

Figure 1 Saving-Investment diagram of the current account 

By contrast, many discussions of industrial policy and trade focus on competitiveness, relative prices, or sectoral reallocation – channels that do not necessarily affect aggregate saving or investment. This distinction turns out to be crucial for understanding the external effects of industrial policy and tariffs.

Micro versus macro industrial policy

Industrial policies differ in scope and intent. In common definitions, industrial policies are micro in nature: sector-specific subsidies, tax credits, or other preferential treatment aimed at expanding particular industries or activities. Others are macro in scale, affecting the economy-wide allocation of resources through financial repression, reserve accumulation, or the suppression of domestic demand. Our analysis shows that this distinction matters for the effect of these policies on the current account.

Micro industrial policy may well lower the current account when successful 

Standard sectoral industrial policies, which we label ‘micro’ industrial policies, such as subsidies targeting specific manufacturing or high-tech sectors or firms, do not mechanically raise a country’s current account. If these policies are expected to permanently increase aggregate productivity, consumption and investment should rise by even more than income in the near term, leaving the current account balance lower, not higher.

Paradoxically, this suggests industrial policies can raise external surpluses only when they fail or have short-lived effects. For example, when they reallocate resources toward favoured sectors without improving economy-wide productivity. In that case, income gains are muted, and desired saving can rise relative to investment. The current account improves, but not for desirable reasons.

This logic helps explain why the empirical relationship between sectoral industrial policy and current accounts often appears weak or unstable (IMF 2026).

‘Macro’ industrial policy can increase the current account, but at a cost

By contrast, ‘macro’ industrial policies – which operate by influencing economy-wide saving with the objective of stimulating competitiveness – have the potential to generate sizeable external surpluses. But to do so, these policies must suppress domestic consumption, constrain household credit, force savings, or channel resources abroad, while preventing cross border financial arbitrage. Doing so alters intertemporal choices directly. In short, when governments engineer high aggregate saving, whether for precautionary, strategic, or distributional reasons, the external surplus becomes the counterpart of that forced saving.

These policies have implications for the surplus country’s real exchange rate. Larger and persistent surpluses must be accompanied by a depreciated real exchange rate. This is an equilibrium outcome: if the nominal exchange rate is not allowed to adjust, the pressure will be on relative prices. This also implies that the right set of policies to rebalance the economy start with removing the macro industrial policy distortions, helping the economy to reflate on its own, not adjusting the nominal exchange rate.

Macro and micro industrial policy can be complementary

When paired with macro industrial policies, micro industrial policies can also amplify imbalances. Consider the case of a country that sets output targets in the manufacturing sector, possibly at the expense of short-term profitability. This requires a reallocation of factors of production – workers and capital – from the non-traded sector of the economy. Macro industrial policies that repress domestic consumption, for example by keeping excessively weak social safety nets, restricting corporate profits distribution or constraining credit availability, coupled with controls on capital flows, will help reduce demand for non-traded goods and services, keeping the economy persistently unbalanced. If strong enough, these macro industrial policy policies can increase saving by more than investment, lowering domestic real interest rates and leading to an increase in the current account balance (Figure 2).

Figure 2 Model-based impact of ‘micro’ industrial policy to increase output in the tradable sector, combined with ‘macro’ industrial policy that forces higher saving

Why tariffs are a weak tool for rebalancing

Tariffs are often presented as tools to reduce trade deficits, protect domestic industries, and counteract foreign industrial policy. However, from an intertemporal perspective, permanent tariffs should not be expected to have a significant effect on current accounts. Saving behaviour is little changed when the higher tariff-induced price today is expected to persist, as consumers will see little reason to delay purchases. More broadly, the impact of tariffs on the trade balance will depend on how the exchange rate will adjust – and the induced effect of the exchange rate on the country’s net external position via valuation effects (Itskhoki and Mukhin 2025). Where the net external position is small or not very sensitive to the exchange rate, markets will clear via an offsetting real exchange rate appreciation that leaves the trade balance largely unchanged. 

This insight helps explain why even large increases in trade barriers need not deliver the intended external adjustment. There are two important exceptions, however. If tariffs are expected to be temporary, delayed purchases in anticipation of lower prices in the future will typically increase aggregate saving and the current account balance. In addition, tariffs generate revenues for the government. These can be used to pay down debt, increasing national saving and the current account. 

Connecting the dots: A unified view

Several recent papers have made important contributions to this debate. Our framework attempts to generalize across a variety of cases, providing a unified view that clarifies when industrial policy and tariffs do – and do not – raise current account balances.

Import tariffs are ineffective at correcting imbalances – a finding that the recent Paris Report has also emphasised (Rey et al. 2026). Macro-level industrial policy can drive current account surplus at the cost of suppressing consumption, while micro industrial policy alone has unreliable effects. Other work, such as Cesa-Bianchi et al. (2026), show a case where growth-enhancing industrial policy can expand surpluses when desired saving is constrained to rise with income and domestic assets are in short supply, extending the analysis in Caballero et al. (2008).

Furthermore, the debate over rising global imbalances is incomplete without considering other more ‘traditional’ explanations, including substantial fiscal deficits in the US (Obstfeld 2026), and the effects of the real estate slowdown on consumption in China (Gourinchas et al. 2024, IMF 2025). While these factors do not explain all the widening of global imbalances, they have had material effects on aggregate saving and investment in both economies (Figure 3).

Figure 3 Saving and investment developments in China and the US

Policy implications

Policies that ‘work’ to successfully increase current account balances often do so by suppressing domestic consumption – either by design (macro industrial policy) or through unintended effects (for example, distortions from micro industrial policy that lower economy-wide growth). The welfare costs could be significant. This trade-off is unavoidable and should be confronted explicitly.

Tariffs are poorly suited to rebalancing. Without accompanying changes in fiscal or saving behaviour, they risk fragmenting trade and generating inefficient distortions while leaving external balances largely untouched. Tackling domestic imbalances, such as excessive fiscal deficits or weak domestic demand, offers more tangible routes to correcting external imbalances. Doing so in a synchronised fashion would of course be optimal. But doing nothing is not an option. Even if this proves a bridge too far, each country still faces the need to correct its own domestic growth imbalances without any delay. 

As global imbalances widen once again amid geopolitical tensions and policy experimentation, clarity about mechanisms matters. Without the proper diagnosis, there is no hope to implement the right policies. A saving and investment centred perspective does not resolve all debates, but it helps identify policies that can plausibly move the needle, and which are likely to disappoint.

Authors’ note: The views expressed are those of the authors and do not necessarily represent the views of the institutions at which they work.

References

Caballero, R J, E Farhi, and P-O Gourinchas (2008), “An equilibrium model of “global imbalances” and low interest rates”, American Economic Review 98(1): 358-393.

Cesa-Bianchi, A, A Ferrero, L Fornaro, and M Wolf (2026), “Industrial policies, global imbalances, and technological hegemony,” VoxEU.org, 27 March. 

Gourinchas, P-O, G Kindberg-Hanlon, M Patnam, L Rotunno, and M Ruta (2026), “Global Imbalances, Industrial Policy and Tariffs”, IMF Working Paper No. 26/67.

Gourinchas, P-O, C Pazarbasioglu, K Srinivasan, and R Valdes (2024), “Trade Balances in China and the US are Largely Driven by Domestic Macro Forces”, IMF Blog. 

IMF (2025), External Sector Report: Global Imbalances in a Shifting World.

IMF (2026), “Understanding Global Imbalances”. 

Itskhoki, O and D Mukhin (2025), “Tariffs, global imbalances, and the dollar”, VoxEU.org, 7 November. 

Rey, H, B Weder Di Mauro, and J Zettelmeyer (2026), The New Global Imbalances, Paris Report 4, CEPR Press. 

Obstfeld, M (2026), “Global imbalances redux”, CEPR Policy Insight 149. 

Weder di Mauro, B and J Zettelmeyer (2026), “Why global imbalances matter again – and what to do about them,” VoxEU.org, 13 April.