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Donald Trump recently undertook a grand tour of Asia for the first time since his inauguration. His first stop was Malaysia, where he attended the ASEAN Summit and finalised trade deals negotiated over the summer as well as agreements concerning rare earths.

Mixing genres in the way only he can, Trump also orchestrated the signing of a “peace deal” between Cambodia and Thailand. Tensions between the two countries had flared again in July against a backdrop of political discord and border conflict, with clashes on the ground leaving at least 43 dead and displacing more than 300,000 people. Moreover, all three countries involved (Cambodia, Thailand and Malaysia, which had been acting as a mediator) had seen sudden progress in their trade talks with the United States thanks to the conflict: following an initial ceasefire concluded under US sponsorship, “reciprocal tariffs” on imports into the US from those countries had fallen to 19%. 

Helping Trump reaffirm his stance as “President of Peace”, Cambodia event went as far as confirming its support for the US President to be awarded the Nobel Peace Prize.

The necessity of the deal

For these South Asian countries, which have built their growth models on participation in foreign trade, striking a deal with the US – one of their main customers – was vital. That’s undoubtedly why they agreed to events being staged as they were, and to terms that are not particularly favourable to them, to maintain access to the US market. 

Although ASEAN¹ is, in theory, a platform that serves to coordinate its members’ positions in the context of trade talks, the last few months have shown that, when dealing with the US, the alliance’s member countries have acted individually and, on the face of it, without consulting each other. As soon as any one member reached a deal, it was therefore vital that the others do likewise and ensure that overall tariff conditions were equivalent. The ASEAN nations all participate in broadly similar value chains and compete with one another in some markets (notably textiles and electronics). 

On 2 April, Asia found itself bearing the brunt of the wave of tariffs announced by the US administration. This was not surprising: the “formula”² used was designed to penalise those countries that showed large surpluses (in goods) with the US. And seven of the US’s ten largest bilateral trade deficits are with Asian countries. 

Among these countries are: some of the US’s foremost partners and allies (South Korea, Japan, Taiwan), though that does not mean they have been spared tariffs; China, of course; and the ASEAN countries, whose exports to the US have risen rapidly since 2018 as companies have adopting a strategy of diversification to escape the first round of US import tariffs on Chinese goods. 

As well as being a top-tier trading partner, the US is also the number one foreign investor in the ASEAN countries (with $74.7 billion in foreign direct investment in 2023, the most recent year for which data is available), far ahead of China ($17.5 billion). More than 6,000 US companies have a presence in the region, supporting over 600,000 direct jobs. 

The countries of South Asia – particularly Vietnam, Thailand and Malaysia – have thus become transshipment and re-export hubs for Chinese products, though they have also succeeded in capturing a portion of certain value chains. This phenomenon has gathered pace since the beginning of this year, with total imports into the US from ASEAN countries exceeding those from China as a share of total imports (14.6% and 9.4% respectively). 

The issue is that these countries remain reliant on foreign companies, which monopolise the export sector: in Vietnam, 70% of exporting companies are foreign-owned. This means that in the least capital-intensive sectors (i.e. those in which assets are amortised more quickly) where price competitiveness is paramount, multinationals are able to adapt their strategies to the prevailing tariff environment. Since no one can afford to let a neighbouring competitor country negotiate a better tariff; it was vital that a deal be done. 

Trump then stopped off in South Korea, where he also had a very busy schedule: he attended the APEC (Asia-Pacific Economic Cooperation) summit, inked a new trade deal with South Korean President Lee Jae Myung and, in particular, met with Xi Jinping for the first time since June 2019. Here again, a deal was announced, though its precise content remains to be clarified. 

What do these deals entail?

Unsurprisingly, these deals focus first and foremost on lowering so-called reciprocal tariffs: with the exception of Singapore, which runs a trade deficit with the US, ASEAN countries have secured tariffs of either 19% or 20%. The US’s South Korean and Japanese “allies” have fared slightly better, with tariffs of 15%. In particular, they have secured lower import tariffs (15%) on automotive goods, which are otherwise subject to a global US tariff of 25%, for which the US is their largest export market by far (accounting for 35% of Japan’s and nearly 50% of South Korea’s automotive exports).

In exchange, the signatory countries have committed to abide by the US’s various priorities: importing more US goods, having domestic companies invest in the US and cooperating in strategic areas (naval, defence, rare earths). 

South Korea: as well as preferential tariffs in the automotive sector, exemptions have been provided for in the timber, aerospace and pharmaceutical sectors. In return, South Korea has agreed to expand access to its market and step up its imports of liquefied natural gas (LNG). 

South Korea has also committed to invest $350 billion in the US, consisting of $200 billion in cash and $150 billion in shipbuilding cooperation, including construction of nuclear submarines. This cooperation is crucial: the US needs South Korean expertise and production capacity to revive its shipbuilding industry, especially if it wants to increase its hydrocarbon exports (South Korean shipbuilders specialise in building tankers). 

Malaysia has agreed to grant preferential access to American industrial and agricultural products. The US import tariff on Malaysian goods is 19% but numerous exceptions are in place for products the US considers “essential” such as pharmaceuticals, semiconductors, palm oil and rubber. Malaysia has also committed to increase its US imports (hydrocarbons and aerospace) and invest $70 billion in the US over the next ten years. 

Above all, the deal includes a cooperation clause covering rare minerals. Malaysia, which currently accounts for 13% of global exports of rare earths and has reserves valued at over $200 billion, has agreed not to place any restrictions on exports to US firms to ensure they have access to stable and secure supplies. 

Thailand has agreed to remove import tariffs on around 99% of US products entering its market and to remove non-tariff barriers in sectors of strategic importance to the US (notably automotive, pharmaceuticals and meat). It also plans to increase imports of US energy supplies, agricultural products and aircraft by a total of $27 billion. A Memorandum of Understanding on the supply of rare earths has also been made public, confirming that the US has negotiated a priority right to invest in this sector in Thailand. In exchange, the US is set to provide technical assistance to help the industry develop. 

Vietnam has committed to offer preferential access to its market, notably in the automotive sector, by recognising US safety and emissions standards, as well as to its public procurement market (particularly in relation to medical devices). Unlike deals with other countries, the US-Vietnam deal does not appear to specify mandatory volumes of US imports, despite the fact that Vietnam has one of the highest bilateral surpluses with the US (over $100 billion). 

However, Vietnam is in the firing line for the “rule of origin” the US wants to put in place targeting Chinese goods transiting through other countries, which would be tariffed at a rate of 40%. It remains to be seen whether a deal between China and the US would amend this clause.

As we have seen, then, these countries have agreed to pay a heavy price to retain access to the US market, though questions remain as to just how the US intends to force foreign firms to invest on US soil or increase their imports of US goods. The example of the US-China Phase One deal shows that signing this kind of treaty is not an end in itself: imports of US goods into China have never reached the levels negotiated under this deal. 

The case of China

To say that the meeting between Donald Trump and Xi Jinping was highly anticipated would be an understatement. It had been delayed several times, with misgivings initially appearing to come from the American side. However, the balance of power tipped after tensions escalated in April and May, and above all after China went on the offensive over rare earths. Xi Jinping appeared determined to wait for a credible deal to be negotiated before agreeing to a photo of a handshake with Trump “sealing the deal”. 

After several rounds of talks, Xi Jinping announced that the two leaders had “reached consensus on solutions to problems”. The US will cut import tariffs on fentanyl from 20% to 10%. Meanwhile, China has committed to resume exports of rare earths and imports of soya.

The deal thus signals a lull, though provides no real answers to US-China tensions. The rare earths deal will be renegotiated annually and, in any case, what would happen if either China or the US were to reverse course? With the WHO reduced to an empty shell, nations find themselves defenceless against a partner that might call into question or fail to abide by its obligations. For Donald Trump, import tariffs are simply a negotiating tool in a race to keep the US at the top of the global tree and outpace its rivals, starting with China. 

While this deal will, in the short term, restore some much-needed visibility to economic agents, in no way does it mean the US-China clash is over. This is clearly reflected in the conclusions of China’s Fourth Plenum, held in Beijing last week: China is more than ever preparing itself for self-sufficiency and strategic autonomy. In this world of rivalry, the current détente can only be short-lived.

1. ASEAN’s member countries are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Timor Leste and Vietnam.
2.  “Reciprocal” import tariffs were calculated by dividing the trade balance with a given country by the amount of goods imported from that country.

Against a backdrop of global growth that has been surprisingly resilient, Western European economies are showing resilience, albeit at varying rates. The economies at the core of the Eurozone, particularly Germany, are showing sluggish growth at best, while the Iberian economies are being buoyed by strong private consumption and investment, the latter supported by funds from the European Recovery and Resilience Plan. In the United Kingdom, growth was the strongest among the G7 countries in the first half of the year, but with modest growth in private consumption and a decline in investment. The pace of growth has slowed significantly since the pandemic, and the UK economy has yet to return to its trend GDP level or growth rate. In contrast, the Eurozone has now recovered the growth lost during the Covid shock and its growth rate has returned to its (low) pre-pandemic potential.

This pace is ensured by the dynamism of labour supply, which is still meeting demand despite the slowdown in the cycle. The resilience of employment is essential to maintaining this narrative of cautious optimism. However, the latter is also supported in the Euro area by a more favourable economic policy stance and by the recovery in the credit cycle, which is fuelling the revival of investment. In the United Kingdom, on the contrary, persistently high inflation is forcing the central bank to halt its easing process, even as fiscal policy becomes more restrictive and the unemployment rate is expected to rise.

The risks to our scenario of accelerating growth in the Euro area and a moderate slowdown in the United Kingdom are skewed to the downside. Although the EU and the UK have benefited from the most favourable terms among the new tariffs imposed by the United States on its trading partners, these remain punitive and uncertainty about future relations with the United States remains, with the confrontation with the Trump administration being hybrid and multifaceted, and potentially spreading to other fronts (FDI, digital services, financial stability, defence). Furthermore, the risk of Chinese trade flows being diverted from the American continent to Europe is emerging as the main deflationary threat to the continent.

Euro area – A resilience stress test so far successful

Despite sluggish consumption and a more unfavourable external environment, the Euro area recovery is continuing. Investment is expected to be the driving force behind the acceleration in growth, supported by European funds, defence spending and German public spending.

Paola MONPERRUS-VERONI – Euro area Manager

France – Political instability takes hold, activity holds up

Growth surprised to the upside in the second quarter of 2025 and activity is expected to continue to grow moderately in the second half of the year. Despite the possible wait-and-see effects generated by uncertainty on the behaviour of private agents, activity is expected to accelerate on an annual basis in 2026. The trend will be driven by the impacts of German government measures and the increase in EU defence spending, as well as by an acceleration in private consumption and the resumption of business investment domestically.

Marianne PICARD – France Economist

Italy – An illusion of resilience

In an uncertain international environment, the Italian economy is struggling to regain momentum. Growth forecasts for 2025 have been revised downwards, reflecting the growing impact of US tariffs on exports. Despite ongoing difficulties in the industrial sector, investment remains surprisingly robust in 2025. Consumption remains the weak link, hamperedby a less dynamic labour market and purchasing power that is still under pressure. For 2026, we expect a slight acceleration in growth, which will benefit, among other things, from the fiscal spillovers of the German Plan, whose knock-on effects will gradually support Italian economic activity.

Sofia TOZY – Italy, Scandinavian countries Economist

Spain – Growth refuses to slow down

Rising wage costs, inflation contained by margin compression, and the gradual moderation of public investment define Spain's new economic framework. Domestic demand remains the primary driver of activity, supported by the resilience of private consumption and the dynamism of residential and productive investment, whilst public consumption maintains a moderate growth profile. External demand, weakened by the slowdown in global trade and the softening of goods exports, will limit its contribution to GDP, despite the persistent strength of services. The Spanish economy is thus entering a phase of growth more in line with its potential, characterised by a gradual normalisation of expansion rates.

Ticiano BRUNELLO – Spain, Portugal, Greece Economist

United Kingdom – More fiscal pain to come

After a relatively strong first half of the year, the British economy is losing momentum. Household consumption growth is weak, and its fundamentals will be less favourable in the future. Households will need to rely more on their savings to maintain spending. The labour market is deteriorating and is therefore less conducive to wage increases. The government is expected to announce further tax increases in the Autumn Budget. The context remains inflationary, and the BoE is concerned about rising household inflation expectations. Future rate cuts may have to wait.

Slavena NAZAROVA – United Kingdom, United States Economist

Donald Trump is obsessed with the US trade deficit, which he blames on what he sees as unfair competition from surplus countries – such as China and Germany – at the expense of American interests. In his logic, protectionism and tariff barriers are a necessary and, as he sees it, effective lever for rebalancing bilateral trade. However, the trade war launched by Trump during his first term highlighted the limitations of this approach. Contrary to expectations, the trade deficit has not narrowed; if anything, it has widened. While tariffs may temporarily slow imports, they do not address the root of the problem, namely the structural domestic savings deficit. In other words, the United States is living beyond its means and must rely on foreign savings to maintain its standard of living.

The twin deficits – budget and external – have so far been financed without difficulty thanks to foreign investors’ sustained appetite for dollar-denominated assets. As issuer of the main global reserve currency – the dollar – and provider of risk-free assets – Treasuries – the US plays a central role in the international monetary system. This dominant position helps support global demand for dollar-denominated reserve assets, enabling the US to borrow from overseas investors on preferential terms. This is what’s known as the “exorbitant privilege” enjoyed by the US by virtue of its own currency being the international reserve currency.

However, this recycling of global savings in US markets hinges on the confidence placed in dollar-denominated assets. This confidence is sensitive to shared emotional dynamics: it can fluctuate with the perceptions and beliefs that influence investor behaviour. That means episodes of fear or doubt – linked to political instability, the risk of a budget crisis or a loss of US institutional credibility – could weaken this confidence, prompting investors to shun US assets or demand higher risk premiums and thus endangering the US’s ability to borrow more cheaply in international markets.

To illustrate this point, reactions to the tariff announcements on “Liberation Day” offered a glimpse of what might happen if confidence in the dollar were to erode. Traditionally, dollar-denominated assets serve as a safe haven at times of uncertainty, causing the dollar to strengthen and interest rates to fall. This time around, the opposite happened: the dollar declined and bond markets tightened, signalling the beginnings of investor panic. This growing distrust of dollar assets is a warning sign, made all the more worrying by the unpredictability of Trump’s actions and policies, which are hardly conducive to a lasting climate of confidence. In this connection, it’s worth remembering that around one third of market-tradeable US debt is held by foreign investors, which means any change in sentiment could have major repercussions.

Investors are concerned by Trump’s repeated attacks on the Fed’s independence. Subjecting monetary policy to that kind of pressure is liable to compromise its credibility, particularly if it results in artificially low interest rates out of step with prevailing economic conditions. Mounting inflationary pressures could then cause expectations to become unanchored, prompting investors to demand a higher inflation premium to make up for the erosion in the real value of their bond portfolios. 

Similarly, the weak dollar policy advocated by Trump – under the influence of his economic adviser Stephen Miran, now a member of the Fed’s Board of Governors – could undermine the dollar’s credibility as the international monetary system’s base currency. His proposed Mar-a-Lago Accord, inspired by the Plaza and Louvre Accords of the 1980s, aims to orchestrate a dollar depreciation while putting pressure on official creditors to invest in zero-coupon 100-year Treasuries. The possibility of this kind of disguised restructuring of debt risks compromising the attractiveness of dollar-denominated assets.

By dint of being pressured by the world’s leading financial power through policies of intimidation and even extortion, the US’s creditors could prove less inclined to cheaply finance American budgetary largesse. Rising risk premiums could jeopardise the sustainability of the debt trajectory, forcing the authorities to make unpopular political choices. Moreover, while the idea that there is no credible alternative to the dollar remains valid today, from a longer-term perspective it is more of a belief than a historical certainty: key currencies are not immortal. In any event, Donald Trump would do well to meditate on the commonsense principle that it’s always best to stay on good terms with one’s banker.

In an international environment that is still as anxiety-provoking as ever, uncertainties remain, numerous and multifaceted. Nevertheless, hoping that those emanating from US economic policy will calm down (and that at least tariffs will stabilise), the scenario is staying the course. It is characterised by a slowdown without recession in the US, followed by an acceleration in 2026, a continued recovery in the Eurozone thanks to investment support and, while China in the grip of ‘involution’ is seeing its growth performance erode, an ‘emerging universe’ that continues to show unprecedented resilience.

In the US, the first half of the year was turbulent in terms of both sentiment and growth: after having been lulled by the successes promised by the ‘US exception’ and the privileges offered by the status of the USD, investors expressed their disaffection at the end of the sensational ‘Liberation Day’.  From an economic point of view, in anticipation of aggressive tariffs, imports jumped in Q1, before falling sharply: they weighed on growth before providing support. After falling by 0.6% in Q1 (annualised quarterly variation), GDP grew by 3.8% in Q2.

And yet, the broad outlines of our US scenario, based on the foreseeable timetable of the Trump administration's radical economic decisions, have not changed: a slowdown this year (aggressive tariff increases, anti-immigration policy, inflation), then a slight rebound next year (support provided by the One Big Beautiful Bill Act, deregulation). Our scenario thus assumes average annual growth of 1.7% in 2025, down significantly from 2.8% in 2024, before an acceleration to 2% in 2026. The current deceleration is accompanied by a weakening of the labour market. While the pace of job creation is slowing, layoffs remain moderate, as are the upward pressures on the unemployment rate. The latter could reach a peak of around 4.5% by the end of the year.

Despite the still limited adjustment in the labour market, attention has recently focused on the growing vulnerability of employment, to the point of overshadowing concerns about inflation. However, tariffs, at their maximum impact point, would add nearly 80bp to the increase in prices over one year. The impulse would be largely temporary but could drive headline and core inflation towards 3.2% by the end of 2025. Inflation would still significantly exceed the 2% target at the end of 2026: our forecasts place core and headline inflation at around 2.9% and 2.7% respectively. It is therefore bold to assume that the Fed will neglect the inflation component of its mandate in favour of the employment component alone.

In the Eurozone, despite the reluctance of consumption and a more unfavourable external environment, the recovery continues. Echoing US behaviour, sustained growth (2.4% in annualised quarterly variation), fuelled by a rebound in exports in Q1, was followed by a sharp cooling, which nevertheless left growth in positive territory (0.4%) and offered a comfortable carryover. Even if the repercussions of tariffs (ultimately less aggressive than feared) continue to weigh slightly on Q3, progress already achieved now allows us to expect GDP growth of 1.3% in 2025, the pace of which should be maintained in 2026.

Past resilience is related to domestic demand: it has weakened but is at a slightly higher pace than its long-term trend, and investment, in particular, has weathered uncertainty well. As for the scenario of maintaining growth at its potential pace, it is based, above all, on investment, driven by European funds, defence spending and the German recovery plan. In contrast, the impact of the Turnberry trade agreement, concluded this summer between the EU and the US, would be marginally negative, subtracting 0.1ppt from growth in 2026 compared to our previous scenario.

In a context that should have clearly weakened them, the economies of the ‘emerging bloc’ continue to hold up well. They are benefiting from the disaffection with the USD, which is easing pressure on their currencies and interest rates (local and USD), from disinflation and from the good performance of their labour markets. Their growth could thus approach an average of 3.9% in 2025 and 2026: a good performance that should not lead one to underestimate (or even to forget) the fragilities. These economies remain exposed to a potential market shock, they face a downward trend in their average growth and will have to adapt to a new competitive environment while dealing with the Chinese trajectory: the risks linked to the phenomenon of ‘involution’ go beyond China alone and fuel the fear of deflation exported to Asia.

In China, the persistent weakness in consumption, the prolonged correction in the real estate market and overcapacity in various sectors (steel, electric vehicles, solar or electronics) continue to fuel deflationary pressures, particularly visible on producer prices, which could fall by 2.6% in 2025. This phenomenon, called ‘involution’, is now officially ‘denounced’ by the authorities, who want to curb excessive price competition and tackle overcapacity. The first impact of the ‘anti-involution campaign’ was to reduce the fall in producer prices, without any major stimulus effect on demand. Even if support measures are being stepped up, many of them are structural reforms and their positive impact on inflation will not be felt immediately. Inflation is expected to remain almost non-existent at 0.1% in 2025, before rising to 0.6% in 2026. Due to the increase in US tariffs, the persistent weakness of domestic demand and despite various shock absorbers (reorientation of Chinese exports, resilience of global demand, support provided by the policy mix), growth is expected to continue to slow from 5% in 2024 to 4.8% in 2025 and 4.4% in 2026.

On the monetary policy side, this is not the time for relaxation. In the US, the resilience of inflation is likely to disillusion the proponents of rapid and massive monetary easing. In the Eurozone, inflation towards target and the recovery, albeit modest, argue in favour of a status quo, followed by tightening, albeit still a long way off. Anxious to avoid second-round effects, the BoE could postpone its next rate cut. As for Japan, while moving away, rate hikes remain on the agenda.

Specifically, in the US, our scenario is for a further cut before the end of the year, lowering the upper bound of the Fed Funds rate range to 4%, at which point the Fed is expected to pause throughout 2026. This scenario is quite far from that of the market (which anticipates 110bp b of cuts by the end of 2026) and considers, in particular, that the checks and balances seem sufficient to allow the Fed to resist the pressure of the Trump administration. As for the ECB, in June it lowered its deposit and refinancing rates to 2% and 2.15% respectively, levels at which it is expected to maintain them before raising them slightly, when the economic improvement poses a risk of inflationary pressures. This increase would only take place after the recovery is over, and therefore not before the end of 2026 at the earliest.

Interest rates are expected to come under moderate upward pressure. In the US, the possible resurgence of inflationary concerns and disappointed hopes of massive monetary easing could result in a modest rise in interest rates coupled with a flattening of the curve. Encouraged by European growth that is more resilient than expected, then supported by fiscal expansion in Germany, this movement is expected to spread to the Eurozone.

In our US scenario, the yield on 2Y Treasury bonds, which has room to rise, is expected to reach 3.70% by the end of 2025. Also at the end of 2025, the 10Y yield on US Treasuries would be at 4.30%, but the 30Y rate (4.85%) would struggle to cross the ‘psychological threshold’ of 5%, thanks to demand from pension funds. The German 10Y yield (Bund) is expected to reach 2.80%. The revamping of the hierarchy between Eurozone sovereigns would continue with a spread against the Bund of 50bpfor Spain, on the one hand, and 75bp for France and Italy, on the other.

Finally, weighed down by a wave of disenchantment in the wake of the sensational ‘Liberation Day’, as well as by certainly exaggerated expectations of monetary easing, the USD suffered. While capital inflows to the US have not dried up and the easing is likely to be less than expected, the USD could ‘smile again’. However, patience is needed before the EUR depreciates: our scenario assumes that the EUR against the USD would be close to recent highs at the end of 2025 (1.17), before falling in 2026 (towards 1.10 at the end of the year).

Growing global imbalances now pose a risk to global economic and financial stability. These imbalances are reflected in persistent divergences between countries’ current account balances, with large deficits in the United States but surpluses in China and Europe. Although they point to divergences in trade balances, these imbalances act like a mirror, mainly reflecting structural disparities between savings and investment levels. The global accumulation of these imbalances exposes the financial system to the risk of a crisis in the event of a sudden reversal, as has happened in the past. 

Before the 2008 crisis, global excess savings – often referred to as a savings glut – contributed to an across-the-board decline in interest rates. This environment encouraged undue risk-taking as well as the excessive accumulation of debt, driven by a wave of unbridled financial innovation intended to push back the traditional limits of borrowing. This mechanism fuelled huge real estate and credit bubbles, which were notably at the heart of the subprime crisis. The roots of the eurozone sovereign debt crisis also lay in imbalances within the zone, with southern European countries building up large external deficits financed by excess savings in northern European countries looking for lucrative investments. This model, built on growing imbalances, fell apart when these capital flows came to a sudden stop amid a climate of increased distrust towards heavily indebted countries, Greece being a case in point. 

It is thus critically important to identify the specific causes of each country’s external imbalances so they can be addressed with minimal disruption.

From this perspective, Donald Trump, long preoccupied – not to say obsessed – with the US trade deficit, appropriately diagnosed it as an anomaly to be corrected. However, he is mistaken about the remedies: protectionism and tariff barriers will do nothing to resolve the US savings deficit that is behind the country’s trade imbalance. There is simply no denying it: Americans are living beyond their means. Consumers are overspending while the government deficit deepens. This combination of low private savings and high public dissaving leads to a structural savings deficit whereby the country is unable to fund its investments, thus chronically fuelling its external deficit. Rebalancing the external accounts means reducing the public deficit – a direction diametrically opposed to the one taken by Trump with his One Big Beautiful Bill Act and its huge tax cuts. Any deepening of the public deficit will worsen external imbalances and thus entail greater reliance on foreign savings. 

On the other side of the looking-glass, China has a large current account surplus as a result of its export-led economic model, supported by structurally high private savings. In the short term, with consumer spending weakened by the real estate crisis, Chinese growth continues to depend on external demand. Looking further ahead, putting the model on a balanced and sustainable footing will require boosting domestic consumption, supported by an increase in social safety nets and public services, so as to reduce the need for precautionary savings. This shift to a more self-sustaining and independent growth model should help shrink external imbalances and reduce excess savings to be invested in foreign markets. 

The eurozone is the other major region with persistent external surpluses, mainly driven by Germany’s large trade surpluses. While private savings are plentiful and budget deficits are generally under control (except in France), the eurozone is mainly afflicted by a lack of investment and innovation, making it vulnerable in the face of Chinese and US strategic ambitions. If it is to stay in the race for power and regain its strategic autonomy, Europe must invest heavily not only in the defence and energy sectors but also in digital infrastructure, cutting-edge technologies and the industries of the future. In this regard, Germany’s unprecedently large stimulus plan could kick-start a rebalancing by putting domestic savings to work in investments targeted at reinventing its economic model. At the European level, beyond the idea of mutualising future debt, the creation of a savings and investment union appears essential if the European Union is to finance collective investment efforts from its own funds rather than seeing its capital flood into US markets.

This interplay between savings surpluses and deficits appears to offer a logical or coherent explanation for the persistence of global imbalances. Donald Trump would nevertheless be well advised to be very careful how he handles the United States’ creditors, who, faced with his threats of intimidation and extortion, could decide to prioritise rebalancing their internal finances over continuing to fund US debt. That kind of financing freeze would force the US to make painful adjustments, not without risks to global financial stability.