Global Imbalances, Industrial Policy and Tariffs

IMF Working Papers, April 6, 2026

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Authors: Pierre-Olivier Gourinchas, Gene Kindberg-Hanlon, Manasa Patnam, Lorenzo Rotunno, Michele Ruta
Published: April 6, 2026
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781475563931.001

Global imbalances are defined as the distribution of countries’ current account balances, identically equal to the difference between two forward-looking aggregate variables: national savings and domestic investment.
Traditional views: industrial and trade policies have not been considered important drivers of aggregate savings or investment, and therefore of current account balances—because most industrial policies are small in scope, and permanent tariffs have no intertemporal effect in the textbook model due to an offsetting appreciation of the real exchange rate.
Recent context: rapidly growing use of both industrial and trade policies calls for reassessment of their role in shaping current account balances.

Industrial policy (IP) is divided into two types:
- “micro IP”: traditional sector-specific policies via subsidies or other targeted instruments.
- “macro IP”: broader policies aiming to promote industrial development and competitiveness through aggregate instruments such as financial repression, foreign reserve accumulation, or capital controls.
The paper presents a framework to analyze how both micro IP and macro IP influence aggregate savings, investment, and therefore current account balances.

Micro IP:
- Tends to increase external balances if it fails to raise aggregate productivity.
Macro IP:
- Can, under some conditions, boost the current account and thereby force adjustment in other countries.
- Often comes at the cost of suppressed domestic consumption and possibly reduced domestic welfare.
Tariffs:
- Confirmed as a weak tool to improve current account balances in the framework analyzed.
Traditional macroeconomic drivers:
- Fiscal policy, demographics, and credit cycles remain critical drivers of global imbalances, especially for the US and China.

Use of macro IP can improve current account positions but policymakers should weigh the potential domestic costs in consumption and welfare.
Reliance on tariffs is unlikely to meaningfully correct current account imbalances.
Policy responses to global imbalances should prioritize traditional macroeconomic tools—fiscal adjustments, demographic considerations, and managing credit cycles—given their continued central role, notably for the US and China.