China's Record Trade Surplus and the G7's Response to Global Imbalances: South Korea's Strategic Choices

Executive Summary

Executive Summary

With China's trade surplus reaching a record high of $735 billion, the global trade order is at a critical juncture of structural realignment. This is not merely a cyclical phenomenon but the result of decades of overlapping structural factors, including state-led economic models, chronic domestic demand shortfalls, and an undervalued Renminbi. The G7, through the institutional language of 'global imbalances,' 'economic security,' and 'supply chain resilience' at the 2026 Evian Summit, is systematically transforming pressure on China from mere diplomatic rhetoric into medium- to long-term policy tools. The most likely scenario (probability 55-60%) is a 'managed imbalance' where structural tensions between the US and China persist long-term without escalating into full-scale conflict. South Korea's optimal response is not to make a strategic bet on either the US or China, but to adopt a triangular balancing strategy: maintaining strategic selective engagement with China while proactively participating in the US-EU-led supply chain realignment and diversifying exports to the Global South. Particularly in areas directly linked to technological security, such as semiconductors, batteries, and critical raw materials, South Korea should gradually reduce its dependence on China. Simultaneously, it should pragmatically maintain supply chain linkages with China in less sensitive sectors, thereby maximizing economic benefits amidst structural uncertainty through a flexible portfolio strategy.

Step 1: Issue Situation Analysis

China's Record Trade Surplus and the G7's Discussion on Global Imbalances

Issue Situation Analysis

1. Background and Course of the Issue

China's trade surplus is not a short-term phenomenon but a product of structural imbalances accumulated over decades. Since its reform and opening-up, China adopted an export-led growth model centered on manufacturing, emerging as a key hub in global supply chains. The US and Europe once actively supported China's accession to the WTO, urging market liberalization, tariff reductions, increased foreign investment, and stronger intellectual property protection. However, as Chinese companies rapidly improved their competitiveness and industrial upgrading progressed, Western countries found themselves facing new threats of deindustrialization, supply chain vulnerability, and technological dependence [2].

Following the 2008 global financial crisis, China implemented massive stimulus packages that rapidly expanded its manufacturing capacity, leading to structural overcapacity issues. This was particularly evident in green industries such as solar panels, electric vehicles, and batteries, where China's production capacity expanded to levels far exceeding global demand. In response, Huang Yiping, Director of the Institute of National Development at Peking University and an advisor to the People's Bank of China, argued that "the fundamental reason for the deepening trade imbalance is that countries around the world have failed to adapt to the changes in the global economic structure," suggesting that China's overcapacity could actually play a positive role in supporting the global energy transition [1].

The G7's strategic perception of China began to shift around 2017. Initially focused on single issues like human rights in Hong Kong, discussions on China within the G7 gradually expanded to the broader concept of a 'systemic challenge,' and the issue of peace and stability in the Taiwan Strait was officially incorporated into the Indo-Pacific security framework [3]. This shift was not merely rhetorical but reflected a policy change recognizing China as a systemic threat to the economic security and technological order of industrial democracies.

2. Current Situation (Latest Trends)

As of 2026, China's trade surplus has reached a record high of $735 billion, also hitting a historical peak as a percentage of global GDP. The International Monetary Fund (IMF) has warned that these external imbalances and their ripple effects are creating negative externalities for trading partners [11]. The EU-China trade deficit has widened to over $1 billion euros (approximately $1.13 billion) per day, prompting discussions among EU member states about implementing stricter regulations on Chinese companies [9].

The G7 Summit held in Evian, France, in June 2026 addressed these imbalance issues as a core agenda item. French President Macron raised the issue of 'global imbalances' as a key G7 agenda item, and German Chancellor Merz unusually and strongly criticized China for 'flooding' overseas markets with state subsidies and utilizing an artificially undervalued Renminbi [11]. Christine Lagarde, President of the European Central Bank (ECB), identified the undervalued Renminbi as a key factor in global imbalances at an event in Brussels, emphasizing the need for G7-level discussions [5].

However, China was not directly mentioned in the summit's final communiqué. This was not because the G7 ignored the issue but rather a result of coordinating the agenda through institutional language such as 'global imbalances,' 'supply chain resilience,' 'critical minerals,' and 'economic security,' allowing for consensus among member states [7]. Indeed, the G7 Trade Ministers' Joint Statement, released in May 2026, explicitly criticized non-market policies and practices, persistent market distortions, global structural overcapacity, and economic coercion, defining China's economic model as a systemic challenge to industrial democracies [3][16].

Trade tensions between the US and China persist. The Trump administration imposed high tariffs averaging 75% on China through the so-called 'Liberation Day' tariffs in April 2025, although negotiations resumed thereafter [16]. Beijing, while imposing new sanctions on US companies, has also expressed a dual stance of pursuing tariff reductions and 'win-win' cooperation [12]. The US trade deficit in goods reached its highest level in over a year at $105.8 billion as of May 2025, indicating that structural imbalances remain unresolved [8].

3. Key Actors and Their Positions and Interests

Chinamaintains that its trade surplus is a legitimate outcome of its competitiveness, driven by corporate efficiency and innovation. The Chinese government argues that efficient, innovative, and globally competitive companies should not be labeled as perpetrators of unfair trade [2]. Concurrently, while denying allegations of currency manipulation, Beijing continues its strategic moves to reduce dollar dependence, such as the People's Bank of China Governor announcing a new blueprint for Renminbi internationalization [13]. However, China's de-dollarization strategy faces structural limitations due to the gap between financial infrastructure development and actual demand creation [13]. Externally, China employs a strategy of parallel cooperation and confrontation, using a dual approach of offering a $300 billion proposal to the US while maintaining sanctions on American companies [12].

United Statesunder the Trump administration, is pursuing a strategy of pressure on China by combining high tariffs with industrial policy. According to analyses by the Peterson Institute for International Economics (PIIE), the US's reciprocal trade agreement structure is designed to accelerate decoupling from China. However, the US itself faces structural issues with its widening trade deficit [8], which limits its moral leadership in resolving global imbalances. Furthermore, President Trump's unpredictable actions weaken cooperation within the G7 [4].

European Union (EU)is shifting towards a tougher stance in response to the deepening trade imbalance with China, but faces structural limitations in establishing a unified China policy due to differing interests among member states [7]. The EU is caught in a dilemma, unwilling to engage in a trade war with China yet unable to ignore its eroding competitiveness. Some have proposed a Renminbi appreciation negotiation similar to the 1985 Plaza Accord, but skepticism about its feasibility is widespread [4]. ECB President Lagarde is attempting to elevate currency issues to the core of the trade imbalance discussion by formally proposing the undervalued Renminbi as a G7 agenda item [5].

G7 as a wholeis adopting a strategy of avoiding overt confrontation targeting China directly, while gradually refining critical language regarding China's economic model at working-level meetings, such as trade ministers' conferences [3][16]. This represents a pragmatic approach to finding the greatest common denominator amidst a lack of full consensus on China policy among G7 members.

4. Summary of Key Issues

The first key issue is the narrative competition surrounding the diagnosis of the causes of trade imbalances. The West points to China's state subsidies, non-market practices, and undervalued Renminbi as primary causes, while China deflects responsibility onto the failure of Western economies to adapt to structural changes in the global economy [1][2]. This narrative competition is not merely an academic debate but a political struggle determining who secures moral legitimacy in the future restructuring of international trade norms.

The second issue is the undervaluation of the Renminbi and currency manipulation. Western leaders, including ECB President Lagarde, argue that the undervalued Renminbi artificially boosts the price competitiveness of Chinese exports, a claim China denies [5]. This issue is linked to the possibility of a recurrence of the Plaza Accord, but the consensus is that such a multilateral agreement is highly unlikely in the current geopolitical environment [4].

The third issue is the lack of unity in the G7's strategy towards China. While the G7 shares common concerns about China's economic practices, it struggles to formulate a consistent response strategy due to differing levels of economic dependence on China and geopolitical interests among member states [7]. In particular, the Trump administration's unilateral actions serve as a key factor weakening G7 cooperation [4].

The fourth issue is the choice between a decoupling strategy versus an engagement strategy. The US is pursuing accelerated decoupling through tariffs and export controls, while the EU seeks structural rebalancing through a 'grand bargain' without triggering a trade war [10]. This strategic divergence will be a key determinant of the direction and pace of future global supply chain restructuring.

The fifth issue is the opacity of China's asset holdings. As pointed out by the Council on Foreign Relations (CFR), the lack of transparency regarding the actual scale and management of China's external assets accumulated through its massive trade surplus poses a significant risk to global financial stability. This issue extends beyond mere trade imbalances and is directly linked to vulnerabilities in global financial governance [6].

Step 2: In-depth Issue Analysis

China's Record Trade Surplus and the G7's Discussion on Global Imbalances

In-depth Issue Analysis: Analysis of Root Causes, Structural Context, and Historical Precedents

1. Analysis of Root Causes

China's record trade surplus is the result of complex structural factors overlapping over decades, not a single cause. At its core lies China's unique state-led economic model. The Chinese government has systematically enhanced the price competitiveness of its manufacturing sector through large-scale subsidies for strategic industries, policy financing via state-owned banks at low-interest rates, and artificial suppression of costs related to land, energy, and environment. These non-market policy tools have enabled Chinese companies to supply products at below-cost prices in global markets, thereby causing structural distortions that erode the industrial base of trading partners [7].

A second root cause is the chronic shortfall in domestic demand and low consumption structure within China. The Chinese economy has maintained a skewed structure with a significantly lower household consumption ratio to GDP compared to advanced economies, while the investment ratio remains excessively high. This mechanism causes produced goods to be insufficiently absorbed domestically and instead channeled into exports. The massive stimulus packages implemented by China after the 2008 global financial crisis exacerbated this problem. The enormous fiscal input led to a rapid expansion of manufacturing capacity, and with domestic demand unable to absorb this, structural overcapacity became entrenched across strategic industries such as solar panels, electric vehicles, batteries, and steel [1].

A third factor is the issue of the Renminbi's exchange rate. As pointed out by ECB President Lagarde, the undervaluation of the Renminbi acts as a key variable artificially enhancing the price competitiveness of Chinese exports [5]. While Chinese authorities officially deny currency manipulation, the mechanism of managing the Renminbi's value through capital account controls and foreign exchange market interventions effectively contributes to maintaining export competitiveness, according to the consensus analysis of Western economists. German Chancellor Merz's unusually strong criticism of the undervalued Renminbi at the G7 Summit reflects this perception [11].

Conversely, China's perspective fundamentally differs. Professor Huang Yiping of Peking University counters that attributing the trade imbalance solely to China is unfair, arguing that the core issue lies in the failure of countries worldwide to adapt to changes in the global economic structure [1]. From this viewpoint, the deindustrialization of the US and Europe is presented not as a result of China's unfair competition but as a consequence of their own domestic restructuring failures and over-reliance on the service sector. Thus, the interpretation of the causes of trade imbalances itself has emerged as a core issue between the US and China, and between China and the G7, complicating the path to solutions [2].

2. Structural Context

Political Structure

The G7's strategy towards China has undergone a qualitative shift over the past decade, moving from 'value declarations' to 'policy tools.' Prior to 2017, G7 discussions on China focused on individual issues such as human rights in Hong Kong and the South China Sea. Subsequently, a comprehensive framework emerged, defining China as a 'systemic challenge' [3]. A notable aspect of the 2026 Evian G7 Summit is that while China appears to have 'disappeared' from official documents, the G7 is actually advancing its agenda more broadly through institutional language such as 'global imbalances,' 'supply chain resilience,' 'critical minerals,' and 'economic security' [7]. This represents a strategic choice to manage differing levels of policy intensity towards China within the G7 while building a practical response foundation.

However, clear divisions also exist within the G7. The unpredictable actions of US President Trump and his America First trade policies are hindering the formation of a united G7 front against China [4]. European countries, while sharing concerns about China, are cautious about aligning with the US's unilateral tariff policies. Consequently, the G7 is opting for an indirect pressure strategy through institutional language rather than direct confrontation with China, which imposes fundamental limitations on the effectiveness of a unified G7 response [7].

Economic Structure

From an economic perspective, the structural complexity of this issue stems from China's dual position as a key trading partner and a competitor to G7 nations. Even as the EU's trade deficit with China exceeds one billion euros per day [9], European companies remain deeply reliant on access to the Chinese market and the supply of intermediate goods from China. This interdependence raises the cost of assertive economic policies toward China, thereby constraining policymakers' room for maneuver. In the U.S. case, the trade deficit in goods reached $105.8 billion as of May 2026, its highest level in over a year [8], further intensifying protectionist pressures within the country.

China's pursuit of de-dollarization is also a significant driver of structural economic change. The People's Bank of China has unveiled a new blueprint for internationalizing the renminbi, promoting offshore renminbi trading pilot programs and expanding currency swap lines between central banks [13]. However, this strategy faces structural limitations. Creating financial instruments is one thing; generating global demand for them is another. China's capital account controls and a lack of confidence in its rule of law fundamentally impede the renminbi's rise as a global reserve currency to rival the dollar [13].

Security Structure

From a security standpoint, trade imbalances are inextricably linked to the competition for technological supremacy and supply chain security. The G7 trade ministers' communiqué explicitly criticized non-market policies and practices, persistent market distortions, global structural overcapacity, economic coercion, and risks associated with critical minerals [7], reflecting a trend of 'securitizing the economy' by redefining economic issues in security terms. The official inclusion of the stability of the Taiwan Strait as a core element of the Indo-Pacific security framework in the G7 communiqué is a significant signal that discussions on economic imbalances are being integrated with geopolitical security competition [3][16].

The weakening of the U.S. industrial base is also a key variable in the security structure. Decades of offshoring manufacturing have severely eroded the U.S. industrial production capacity, making it strategically vulnerable in scenarios like a Taiwan contingency [15]. This implies that U.S. reshoring policies and pressure on allies to realign supply chains are not merely economic protectionism but part of a broader security strategy.

3. Historical Precedents and Comparative Cases

The Plaza Accord of 1985

The most frequently cited historical precedent in current discussions of global trade imbalances is the Plaza Accord of 1985. At that time, the finance ministers of the G5 nations (the United States, Japan, West Germany, France, and the United Kingdom) agreed at the Plaza Hotel in New York to artificially devalue the U.S. dollar, which served as a key tool to address the U.S. trade deficit with Japan. Some European leaders advocate for a similar 'new Plaza Accord' targeting China today [4]. However, this comparison overlooks several fundamental differences. In 1985, Japan, as an ally under the U.S. nuclear umbrella, had a political incentive to accept U.S. pressure, whereas China, as a major power in strategic competition with the U.S., is highly unlikely to yield to similar pressure. Furthermore, Japan's subsequent 'lost three decades' historically demonstrated that currency appreciation is not a panacea for trade imbalances. In this context, the notion of a new Plaza Accord targeting China is widely considered unrealistic [4].

The Smoot-Hawley Tariff Act of the 1930s and the Protectionism Paradox

The U.S. reciprocal tariff policy evokes parallels with the Smoot-Hawley Tariff Act of 1930. At that time, the U.S. imposed broad import tariffs ostensibly to protect domestic industries, which triggered retaliatory tariffs from trading partners, leading to a sharp contraction in global trade and exacerbating the Great Depression. The current U.S. tariff policy toward China, particularly the imposition of tariffs on 'Liberation Day' in April 2025 and China's retaliatory measures, carries the risk of a similar vicious cycle [16]. However, the current situation differs from the 1930s in that the supply chain interdependence between the two countries is much deeper, and the financial system is more interconnected, making the cost of full decoupling prohibitively high for both sides.

U.S.-Japan Trade Friction in the 1970s-1980s

The history of U.S.-Japan trade friction also provides important reference points for understanding current U.S.-China tensions. At that time, the U.S. criticized Japanese exports of automobiles, semiconductors, and steel for encroaching on American industries, employing various measures such as voluntary export restraints (VERs), anti-dumping duties, and pressure for market opening. Despite the geopolitical constraints of Japan being an ally, this conflict persisted for decades without a complete resolution. The current U.S.-China conflict, unfolding within a strategic competitive relationship rather than an alliance, has a much narrower scope for negotiation, making it structurally more difficult to resolve [2].

China's WTO Accession and the 'China Shock'

China's accession to the WTO in 2001 sent unprecedented shockwaves through the global trade order. So-called 'China Shock' studies have empirically demonstrated that the surge in imports from China led to massive job losses in U.S. manufacturing regions, leaving long-term scars on local economies. While Western countries expected China's integration into the WTO to incorporate it into the rules-based trading system [2], it actually resulted in China maintaining its state-led economic model while exploiting loopholes in WTO rules. This experience now forms the backdrop for the G7's designation of China as an 'institutional challenge' and its search for a new normative framework [3][7].

4. Key Variables in Issue Development

The key variables that will determine the future trajectory of this issue can be identified across four main dimensions.

First, the progress of U.S.-China negotiations. China expresses its willingness to continue tariff reduction negotiations with the U.S. while simultaneously employing a dual strategy of imposing new sanctions on U.S. companies [12]. In this 'complex game' structure where cooperation and confrontation proceed simultaneously, the key variable is whether substantive progress will be made in negotiations or if a stalemate, termed 'strategic stability,' will persist [17]. The analysis suggesting that U.S. reciprocal tariff policies are structurally accelerating decoupling from China indicates a potential for prolonged managed competition rather than a fundamental resolution through negotiation.

Second, the G7's capacity for coordinated response toward China. Whether the G7 can take effective joint action against China's non-market practices depends on coordinating the interests among member states [4][7]. The U.S.'s tendency toward unilateralism, the varying degrees of economic dependence on China among European nations, and the unpredictability of the Trump administration weaken the cohesion of a united G7 front. The crucial question is whether the G7 can translate the institutional language of 'global imbalances' into tangible policy instruments.

Third, China's will and capacity for domestic demand transition. Whether China can genuinely pursue a structural shift from an export-led growth model to a domestic demand-centric model is the fundamental key to resolving trade imbalances. However, this is widely considered difficult to achieve in the short term due to complex internal barriers such as resistance from vested industrial interests, pressure on local governments to achieve GDP growth, and deficiencies in the social safety net. Just as China's pursuit of de-dollarization faces structural limitations [13], a fundamental shift in its economic model also presents a significant gap between declaration and execution.

Fourth, the Taiwan risk and geopolitical shock variables. Escalating military tensions or an actual conflict in the Taiwan Strait could shift the current discussion on trade imbalances to an entirely different dimension [15][16]. In this scenario, economic decoupling would become a forced reality rather than a voluntary choice, and global supply chain realignment would occur in a rapid and costly manner. This scenario poses the most severe shock to middle-power countries, including South Korea.