SBI Funds Management Report Highlights Economic Imbalances Fueling Trade Wars Between US and China

The recent escalation of trade wars affecting the global economy is primarily attributed to trade imbalances between nations, according to a report from SBI Funds Management. The report suggests that the tensions between the United States and China stem from underlying issues related to global economic disparities.

The report highlights that China's investment significantly surpasses its consumption, while the United States consumes considerably more than it invests. This disparity has led to a substantial imbalance in global trade flows. The tariff disputes, in particular, underscore the deeper economic imbalances between the two countries.

Data cited in the report reveals that China's investment accounts for 42% of its GDP, while household consumption is only 40%. Conversely, the United States invests just 22% of its GDP but has a high household consumption rate of 68%. India falls between these extremes, with investment at 33% of GDP and household consumption at 62%.

This imbalance has created a significant trade gap between the United States and China, contributing to the trade wars as countries seek to reduce their trade deficits. The United States faces an annual goods trade deficit of approximately USD 1,202 billion, while China enjoys a surplus of nearly USD 992 billion. India experiences a trade deficit of USD 275 billion.

The United States also has a negative current account balance of -3.2% of GDP, while China maintains a surplus of 1.4%. In terms of savings, the United States saves 18% of its GDP, compared to 43% in China and 33% in India. This pattern indicates that the United States underinvests and overspends, while China over saves and over invests.

As a result of this imbalance, the United States has become the world's largest consumer of surplus goods, leading to rising levels of external debt, which now stands at USD 27.6 trillion. In comparison, China's external debt is USD 2.4 trillion, and India's is USD 0.7 trillion.

The SBI Funds Management report indicates that the US administration is seeking to address this imbalance, which is impacting their economy. Measures such as tariffs are being employed, and while any tariff increases are expected to be gradual through 2025, the report suggests the US may utilize other legal tools to enforce trade measures.

The report also notes that the Trump administration has been advocating for reducing America's reliance on China for manufactured goods and has expressed concerns about the long-term sustainability of its debt levels.

Meanwhile, China is taking steps to decrease its dependence on the United States, including reforms in cross-border payment systems and commodity exchanges. The report concludes that this situation represents not just a short-term conflict but a fundamental shift in the global economic order that may continue to evolve in the coming years.