As the Group of Seven meets in Évian, France, beginning June 15, French President Emmanuel Macron has pushed to bring about a broad recognition that rising trade imbalances are a global economic problem. But G-7 leaders will nevertheless likely ignore one of the most important sources of those imbalances: the undervaluation of the currencies of Asia’s large economies, especially China’s.

This is unfortunate. There is a growing consensus that Asia’s trade surplus has grown too big. But without discussion of currency undervaluation, there is little chance that the G-7 can mount a meaningful effort to change the policies that have given rise to these imbalances. In 2021, when China’s property bubble collapsed, it weakened the renminbi, which helped Beijing’s pivot to export-led growth. The currency’s reduced value made Chinese goods cheaper for foreign buyers, and foreign goods more expensive in China. Weak growth in demand, a falling currency and widespread industrial subsidies have led China’s overall trade surplus to triple since 2018. Moreover, Chinese state banks and other state institutions are now giving China’s exporters an artificial edge in foreign markets by holding China’s currency down.

U.S. President Donald Trump’s tariffs were meant to slow China’s export juggernaut. But it has not worked out that way. Rather than assembling its own parts for shipment direct to the United States, China now ships intermediate goods—often high-tech components—to neighboring countries for final assembly, thus sidestepping tariffs. To keep their own exports competitive and workers in their manufacturing sectors employed, many of China’s neighbors have felt compelled to keep their own currencies weak. Indeed, several other Asian currencies are at historic lows against the dollar.

These rising imbalances in global trade are as much a problem for Europe as for the United States. Europe’s automotive, chemical, steel, and machine-tool industries are on the frontline of this so-called second China shock. This is why Macron has made global trade imbalances a major theme of this year’s G-7. But in Europe, as in the United States, there is still a reluctance to make currency diplomacy integral to the broader trade discussion. This is an intellectual and policy blind spot that risks a failure of economic policy coordination. As long as it persists, trade imbalances will only grow. This situation is unsustainable. The G-7 must present Beijing with a choice: it must allow its currency to appreciate, or it must face new trade restrictions.

Large surpluses and large deficits create financial risks as well as trade tensions. To address these problems, G-7 finance ministers have agreed to a minimal communiqué that does little more than highlight the “common interest” that surplus and deficit economies share in bringing down persistent trade........

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