Why the G-7 Must Address Undervalued Currencies to Fix Global Trade Imbalances

French President Emmanuel Macron urged G-7 leaders meeting in Évian, France, starting June 15, to recognize rising global trade imbalances as a systemic economic problem. While Macron pushed for this recognition, G-7 leaders are likely to overlook the undervaluation of Asian currencies, particularly China’s renminbi, which contributes to these imbalances.

The G-7 finance ministers recently agreed to a minimal communiqué. This document highlights a “common interest” in reducing persistent trade imbalances but does not press for changes to China’s exchange rate policy.

According to the provided text, this reluctance to address currency diplomacy creates a policy blind spot. This gap risks a failure in economic coordination while trade imbalances continue to grow.

Why is China’s currency value causing trade tensions?

China’s overall trade surplus has tripled since 2018. This growth follows a 2021 property bubble collapse that weakened the renminbi, helping Beijing pivot toward export-led growth.

A lower currency value makes Chinese goods cheaper for foreign buyers and foreign imports more expensive within China. State banks and other institutions now hold the currency down to give exporters an artificial edge in foreign markets.

The IMF suggests a 15 percent depreciation could increase China’s net exports by 2 to 2.5 percentage points of its GDP. In reality, a three percentage point rise has been observed over the last two years.

Did You Know? Asia’s trade surplus has reached $1.5 trillion, which is a larger share of world GDP than at any point since 1945.

How are other Asian economies impacting the “China shock”?

The “second China shock” is hitting Europe’s automotive, chemical, steel, and machine-tool industries. To keep their own manufacturing sectors employed, China’s neighbors have also kept their currencies weak.

China now ships high-tech intermediate goods to neighboring countries for final assembly to sidestep U.S. tariffs. This strategy has pushed several other Asian currencies to historic lows against the dollar.

The Korean won is currently as weak as it was during the 2008 financial crisis despite record trade surpluses. Taiwan’s dollar has seen a five percent depreciation, and the Japanese yen is at its lowest inflation-adjusted level since the early 1970s.

Expert Insight: Samantha Carter notes that the current disconnect between recognizing trade imbalances and ignoring currency undervaluation creates a strategic vulnerability. By avoiding macroeconomic coordination, G-7 nations may be failing to address the root cause of the industrial pressure facing European and American manufacturers.

What historical precedents exist for currency coordination?

Past economic frameworks relied on the link between currencies and trade balances. The Bretton Woods system was built on the principle of fixed but adjustable exchange rates.

In 1985, representatives from France, Japan, the U.K., the U.S., and West Germany met at the Plaza Hotel in New York. They agreed to coordinated intervention to weaken the dollar, which successfully reduced the U.S. trade deficit.

Currency moves also drove the 2008 crisis. Between 2002 and 2005, the renminbi was linked to a depreciating dollar, pushing China’s surplus to roughly 10 percent of its GDP.

What may happen next with G-7 and China relations?

The G-7 may continue to avoid commitments to exchange rate policy to steer clear of discussing European policy architecture or U.S. fiscal policy. The U.S. Treasury, under Secretary Scott Bessent, appears to have moved away from an agenda of simultaneous surplus and deficit reduction.

Beijing likely views current communiqués promising “constructive strategic stability” as a sign that Washington will not demand major policy changes. The U.S. is currently celebrating a surge in AI-related capital goods imports, which could push the U.S. trade deficit higher.

A possible next step could be a direct ultimatum. The G-7 and its partners may eventually offer Beijing a choice: allow the renminbi to appreciate or face new, coordinated trade restrictions and tariffs.

Frequently Asked Questions

What is the “second China shock”?
It refers to the rising trade imbalances that specifically threaten Europe’s machine-tool, steel, chemical, and automotive industries.

How did China sidestep U.S. tariffs?
Instead of shipping finished products directly to the U.S., China ships intermediate high-tech components to neighboring countries for final assembly.

What is the IMF’s current stance on currency imbalances?
The IMF has proposed a policy package to reduce imbalances but has avoided calling for the appreciation of Asian currencies, arguing that exchange rate moves are offset by domestic price changes.

Do you believe coordinated currency appreciation is the only way to balance global trade?