In 1985, the world's leading economic powers met at New York's Plaza Hotel to deal with a currency so out of whack it was putting the entire global economy at risk.

Today, the world needs another Plaza Accord, this one not to bring down an overvalued dollar but to push up China's undervalued yuan.

China's massive and growing trade surplus threatens to hollow out its trading partners' industrial bases. For years, the rest of the world has pleaded with China to change its economic model to rely more on domestic demand, and less on exports, to no avail.

A currency accord, enforced with tariffs, might be the only way to get China to act. The time may be ripe. Frustration with China is boiling over, especially in Europe. "This Chinese surge now threatens...the very core of Europe's productive system," a French government report said in February. In June, German Chancellor Friedrich Merz called for a new Plaza Accord aimed at China.

A meeting by central bank governors and finance ministers from the top 20 economies starting this weekend in Asheville, N.C., would be a good place to start the conversation.

The scale of the surplus

Two facts aren't in dispute. First, China has a monstrous and growing trade surplus. Goldman Sachs projects it will hit $1.2 trillion this year. It estimates that its surplus on the "current account"-a trade measure encompassing goods, services and investment income-is headed to 1% of global GDP, a share no country has achieved in postwar history.

Second, its currency is deeply undervalued relative to where fundamental determinants such as the trade balance and purchasing power say it should trade: by 19%, according to Goldman, and by 35%, according to Brad Setser, a scholar at the Council on Foreign Relations.

The disagreement is over the link: Did the second cause the first?

In the view of the International Monetary Fund and most orthodox economists, the undervalued yuan isn't the cause of China's current account surplus, but a symptom of the inadequate domestic demand that leads to the surplus.

The current account reflects the difference between how much a nation saves and invests. In the orthodox view, this is rooted in economies' underlying structure. The U.S. runs a current-account deficit because it saves too little. China runs a current account surplus because it saves too much.

The IMF attributes China's excess saving to a range of structural factors, such as an inadequate safety net and a fiscal system that taxes households too heavily and thus depresses their consumption.

More recently, a collapsed property bubble has shriveled investment and further widened the current account surplus. The solution, the IMF says: "Fiscal stimulus should be focused on durably boosting consumption by investing in people" and arresting the property bust.

The alternate view is that China fixes its currency with the explicit aim of boosting exports and suppressing imports.

A cheap yuan lowers Chinese prices abroad and raises foreign prices in China, boosting the surplus. It also shifts "income between consumers of tradable goods and producers of tradable goods," writes Michael Pettis, a China expert affiliated with the Carnegie Endowment for International Peace. By funneling income and investment toward export industries and away from consumers, this depresses consumption and expands the current account surplus.

China's currency has traded in a relatively stable range against the dollar for the past decade. However, as Goldman Sachs economists Kamakshya Trivedi and Hui Shan show in a recent report, goods prices have fallen in China since the pandemic, a result of lockdowns and the property bust, while rising in developed markets because of stimulus and supply-chain disruptions. This means the inflation-adjusted yuan exchange rate has plummeted.

This has increased China's competitiveness. Goldman compared costs experienced by manufacturers in China, such as New Balance in shoes and Tesla in electric vehicles, with their costs elsewhere, and prices of Chinese companies, such as appliance manufacturer Haier, to foreign peers such as Siemens. China's price discount is 32% in electric vehicles, 38% in refrigerators and 53% in shoes. In theory, such gaps should not persist if the yuan is fairly valued.

The solution

Chinese officials pay lip service to boosting consumption while doing little. Chinese leader Xi Jinping disparages support for households as "welfarism." He believes boosting exports while restricting imports makes the world more dependent on China and China less dependent on the world.

Goldman's economists argue that currency revaluation would complement domestic reforms by sustaining growth as the trade surplus shrinks. Yet the undervalued yuan takes the pressure off China to reform because it sustains exports while the rest of the economy is moribund, Setser says.

Under the Plaza Accord, the U.S. and its allies combined joint intervention to push the dollar down against the West German and Japanese currencies with domestic reforms, such as a narrower U.S. budget deficit. It worked: The U.S. trade deficit first widened, then shrank sharply.

West Germany and Japan, though, were close American allies. China isn't, and is in no mood to cooperate. "China will not accept using exchange rates as a pretext for oppression, nor will it return to the old era of great powers coordinating the fate of a few countries," the Global Times, a mouthpiece for the Chinese Communist Party, said in June.

Nor can China's trading partners simply buy up yuan to force it higher, since China tightly controls access to its currency.

Instead, they could impose tariffs, with a promise to dial them back if China revalues. China began a significant yuan revaluation in 2005 under the threat of tariffs in Congress.

The U.S. has already reduced its trade deficit with China with steep tariffs. Europe is warming to the idea. The French report proposed "unprecedented trade protection, equivalent to a general tariff of 30% vis-à-vis China; or a depreciation of the euro of 20% to 30%" against the yuan.

Standing in the way is that President Trump likes tariffs and might not be willing to trade them for currency appreciation. Nor has he shown much interest in deficit reduction. Other countries are divided and reluctant to antagonize China, and aren't disposed to cooperate with Trump after being hit with his tariffs.

Yet if they can get past the politics, the U.S. and its allies would recognize they face a common problem, and that a currency accord, with or without China's cooperation, could be the cleanest, least distorting and most effective solution.