The European Union, Japan, Switzerland and many other countries have been wise to respond to US President Donald Trump’s “reciprocal” trade initiative in a measured fashion. The US administration is clearly improvising as it navigates its way iteratively through multiple considerations, not least the prospect that a global trade war could tip the US and other economies into recession and financial markets into a tailspin.
The truth is that the world economy’s current disequilibrium is everybody’s business, and the 90-day pause in execution of most of the proposed tariff increases provides an opportunity to fashion a more cooperative, and thus effective, solution to the crisis.
Yes, the colossal size and stubborn persistence of the external imbalances of particularly (but not only) the US and China are largely home-made phenomena—that is, an American fiscal deficit in excess of 6% of GDP at full employment, and a Chinese rate of final consumption expenditure relative to GDP that remains about 56%, or well below both that of other industrializing economies (71% in India, for example, 72% in Malaysia, and 82% in Brazil) and the global average (76%).
But the problem runs deeper in both a structural and historical sense. More than 50 years since the world abandoned fixed exchange rates, it is clear that the system is not sufficiently self-regulating. Not infrequently, large current account imbalances and currency misalignments have arisen and persisted, affecting rich and poor countries alike. John Maynard Keynes’ concerns during preparations for the 1944 Bretton Woods conference about the asymmetrical burden of adjustment borne by deficit countries continue to echo across the ages.
And by now, it should be abundantly clear to the world that there is a durable bipartisan consensus in the US that the country no longer enjoys the enormous advantage in economic size and technological leadership which led it to take a generally non-reciprocal, foreign-policy-first, and short-term-shareholder-return-first approach to trade policy in the latter half of the 20th century. Meanwhile market-based growth and development, or capitalism, has evolved into many shades of “mixed economy” that are not well addressed by multilateral trade rules.
The EU and other major economies should accept the premise motivating the Trump administration’s actions—namely that the world economy and many of its principal norms and institutions require recalibration and reconstitution—and suggest a more effective and less risky way forward. The US and Chinese governments must know that by staking out hardline positions, they are playing a game of “chicken” with the world economy and, by extension, their own. Europe is well positioned to broker a positive off-ramp that draws upon historical precedent, notably the last two successful exercises in macroeconomic cooperation: the Plaza and Louvre Accords of the 1980s, and the coordinated stimulus measures agreed in the 2009 G20 London Summit.
However, to be fully effective this time, such a “G3” US-Europe-China accord must be a truly grand bargain, firing on all of the cylinders of international economic cooperation. It will need to include major initiatives in fiscal, monetary, development, and trade policy in order to yield demonstrable net benefits for each of the main protagonists as well as the international community as a whole. It must embrace a much higher degree of ambition in all of these domains than has been displayed in decades, arguably since the Bretton Woods conference itself.
Fiscal policy: China would need to agree in concrete terms to implement reforms sufficient to raise domestic consumption as a proportion of GDP to a level commensurate with its share of responsibility for maintaining the global economy’s momentum and stability—for example, by 10 percentage points of GDP over the next decade. At the same time, Germany and the rest of Europe would need to commit to not offsetting the fiscal impact of their reflationary defense-related spending increases (an estimated additional 1% of GDP over the next few years). And, the US would need to agree on a target for the orderly reduction of its fiscal deficit to a more sustainable and cyclically appropriate level, for example from the current 6%+ to about 2.5% of GDP over the next 4 years, not far below the 3% of GDP target which Secretary of the Treasury Bessent has advocated.
Monetary policy: All three partners should signal a contingent willingness to undertake coordinated intervention in foreign exchange markets to support a limited and orderly (for example, 10% to 15%) depreciation of the dollar to levels more consistent with the progressive and symmetrical adjustment of global economic imbalances—reinforcing the expected effects of the fiscal policy measures outlined above, if required. In addition, they should ask the IMF to calculate and publish independently (not subject to prior Board approval) estimates of exchange rate reference ranges on a semi-annual basis that it deems consistent with this immediate objective—and the larger, ongoing one of avoiding large and persistent global economic imbalances.
Development policy: With respect to promoting global growth and development more widely, the three parties should agree to support full and accelerated implementation of the “Better, Bolder and Bigger” MDB reforms outlined by the 2023 recommendations of the G20’s independent expert group created for this purpose. This would triple annual sustainable lending levels to $390 billion per year by 2030 for the benefit of poor countries, which tend to have vast labor underutilization and thus substantial additional potential to grow and add momentum to the world economy (and US exports). Similarly, the parties to the accord should declare their support for regular issuances of Special Drawing Rights (SDR) by the IMF—or the SDR equivalent of $500 billion every four or five years—combined with modifications in the rules governing their accounting and use for the following specific and limited purposes: Developing country debt relief and restructuring; acute climate change mitigation and adaptation priorities such as accelerated coal plant retirement and replacement and methane abatement; and pandemic prevention and response.
Trade policy: The three preceding components of this global accord would make possible the wider “balance of concessions”—that is, a positive-sum game political outcome—that was missing in the Doha Round and continues to frustrate attempts to update the WTO’s norms and dispute-settlement system. The carrot of a large and sustained increase in development financing, as outlined above, and the stick of potential unilateral adjustments in US tariffs, could help create the conditions necessary for a constructive, negotiated reset of the institution and multilateral trade system. A one-time negotiated rebalancing of tariff schedules combined with a modernization of rules and procedures to take better account of the changing nature of trade and industrial policy, as well as corresponding reform of the dispute settlement system, paired with a big, sustained push on development and climate finance and refocusing of trade preferences on low-income countries, might provide the political basis for a new modus operandi for the WTO. To enhance the prospects of success for all of this, the US should express a willingness as part of the overall accord to discuss its tariff rebalancing objectives vis-à-vis the countries with which it has the most legitimate concerns (based on their actual practices rather than bilateral balances) on a best-efforts and time-limited basis, employing the procedures authorized by the organization’s charter for this purpose.
In sum, such a four-part international economic accord would be far more likely to spur a major and enduring adjustment of global economic imbalances than the blunt and risky instrument the US administration has deployed. It would be a tonic for both global growth and climate action, each of which clearly needs a shot in the arm—judging from the latest, deteriorating projections. Particularly if financial market volatility and fears of a recession persist as a result of the trade policy shock and related uncertainty, the US administration may begin looking for a way out that would still enable it to claim partial credit for having revived global and US economic growth prospects, as well as for having modernized international economic institutions. Having already agreed to undertake its fiscal piece of the bargain, Europe is well positioned to chart this course and place the world economy on a firmer foundation, for the benefit of all nations for years to come.
Richard Samans is a Senior Fellow at the Geneva Graduate Institute of International and Development Studies, Nonresident Senior Fellow of The Brookings Institution and Special Advisor to the United Nations Economist Network. He served previously as Director of the Research Department and G20/G7 Sherpa of the ILO, a Managing Director of the World Economic Forum and Special Assistant to the President for International Economic Policy and NSC Senior Director for International Economic Affairs in the second Clinton-Gore Administration. He is the author of Human-Centred Economics: The Living Standards of Nations, selected by the Financial Times as one of the best books of 2024 on Economics. The views expressed here are the author’s alone and drawn in large part from a recent Brookings Institution publication.
The article was first published on World Economic Forum Website. A version of this piece was originally published by the Brookings Institution.
Today’s Headlines
