Tariff war is because of economic imbalances between countries: Report

The recent surge in trade wars impacting global economy is due to the trade imbalances between countries, according to a report by SBI Funds Management.

The report noted that tensions between the United States and China are due to deeper-rooted problems of global economic imbalances. China invests much more than it consumes, while the US consumes far more than it invests, leading to a sharp imbalance in global trade flows.

It stated "The tariff issue highlights the deeper economic imbalance between the U.S. and China".


As per the data quoted in the report, China's investment stands at 42 per cent of its GDP, while household consumption is only 40 per cent.

In contrast, the US invests only 22 per cent of its GDP but has a very high household consumption rate of 68 per cent.

India falls somewhere in between, with investment at 33 per cent of GDP and household consumption at 62 per cent.

This imbalance has created a massive trade gap between the two countries, which in turn has supported the trade wars between countries to reduce their trade deficits.

The US runs an annual goods trade deficit of around USD 1,202 billion, while China enjoys almost equal surplus of USD 992 billion. India runs a trade deficit of USD 275 billion.

The US also has a negative current account balance of -3.2 per cent of GDP, while China maintains a surplus of 1.4 per cent.

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In terms of savings, the US saves 18 per cent of its GDP, compared to 43 per cent in China and 33 per cent in India. This pattern shows that the US underinvests and overspends, while China over-saves and overinvests.

Due to this imbalance, the US has become the world's largest absorber of surplus goods, resulting in rising levels of external debt, which now stands at USD 27.6 trillion. In comparison, China's external debt is only USD 2.4 trillion and India's is USD 0.7 trillion.

The SBI Funds Management report highlighted that the US administration is looking to fix this imbalance impacting their economy. Measures such as tariffs are being used, and though any increase in tariffs is expected to be gradual through 2025, the report says the US could still use other legal tools to enforce trade measures.

The Trump administration has also pushed for reducing America's dependence on China for manufactured goods and has raised serious concerns about the long-term sustainability of its debt levels.

On the other hand, China is taking steps to reduce its reliance on the US, including reforms in cross-border payment systems and commodity exchanges.

According to the report, this is not just a short-term conflict but a fundamental shift in the global economic order that may continue to evolve over the coming years.