In a recent interview, Chrystia Freeland -- former Canadian trade minister and finance minister, and currently a candidate for leader of the Liberal Party -- made the following argument involving a connection between global macro imbalances and the U.S. fiscal deficit (starts at around 11:20 of the video):
Scott Bessent is an incredibly sophisticated global economic thinker. He is a man who has a very well worked out view of the global macro, not just environment, but the global macro system. And he is someone who spent his career thinking about moments when that system changes. In fact, you could say that his investing strategy has been, figure out where the imbalances are and invest there. Figure out where the changes are going to be and invest there. And I do believe that it's right to point to there being global macro imbalances, which are a problem for the whole world, but particularly the US. The fact is, the global economy today is run based on the US consumer. It is run based on incredibly strong US domestic demand, and what that is requiring is that you guys run just like eye popping fiscal deficits, which at a certain point surely are going to become unsustainable. In the meantime, China has been running, notwithstanding frequent protestations this is going to change, an economic system that is based on selling stuff to the world and not having strong domestic demand and China, over and over again promises and fails to have strong domestic demand in China. I think it is entirely possible that the historic role that Scott Bessent has signed up for is to be the guy who rights those global financial and trade imbalances, a kind of Plaza Accords for our time. And Canada can be a valuable and intelligent partner for the US in the effort to rebalance the global economy. We're chairing the G7 this year. We get it and that is where I see too kind of quite new and important wins for Team Trump that Canada can offer, so continental security, national and economic, help you guys with this great and essential project of rebalancing the global economy.
(emphasis added)
This reminds me of the Michael Pettis view of global imbalances, which I think is mostly wrong. One key aspect of the issue is U.S. fiscal deficits, where Pettis has said: "The rising US fiscal deficit, in other words, is not a freely-chosen policy. Until the US reverses income inequality and stops allowing massive capital foreign inflows into the US, debt must continue to rise to prevent the alternative of rising unemployment." Freeland seems to hold a similar view, suggesting above that U.S. fiscal deficits are driven by global imbalances. But that's just not correct. In fact, U.S. fiscal policy is based almost solely on internal decision-making. Our fiscal deficit is high because U.S. politicians choose to spend more than they take in through revenue. These fiscal decisions are not influenced much at all by external factors and "maintaining global demand" is not a consideration.
One effect of these large fiscal deficits is that overall U.S. consumption is increased, which, of course, is likely to contribute to a higher trade deficit. Thus, to the extent there is a cause and effect relationship between the two deficits, the causation arrow actually runs the other way: A larger fiscal deficit can lead to a larger trade deficit. Following that logic, if we wanted to reduce U.S. trade deficits, reining in fiscal deficits could be helpful. Bessent has said some things that suggest he would try to tackle these fiscal deficits: "The United States also needs to tackle its own contribution to global imbalances by reducing its unprecedented budget deficits. Given that federal spending is both anomalously high and inefficient, whereas tax revenues are consistent with historical levels, spending cuts are the appropriate mechanism." However, people often say these things and it ends up being more difficult than they expect, and we'll have to see where the Trump administration's tax and spending levels end up in practice.
On the other side of the equation, I also don't expect big changes in Chinese consumer demand. From what (little) I know of the issue, this seems like a very difficult thing to move. (You could probably make some progress on Chinese subsidies/SOEs, though, with the right approach).
Freeland also mentions the Plaza Accords, which involved a coordinated effort to reduce the value of the dollar. But I also have a hard time imagining the Trump administration supporting a weakening of the dollar, given, among other things, the impact it would have on prices for U.S. consumers.
All in all, I don't see any of this going anywhere in the near future. But who knows! There is, I think it's fair to say, a lot of uncertainty about where things are heading in U.S. policy at the moment.