Widening global imbalances in trade and other economic flows pose a growing risk to financial stability that could “sideswipe” countries such as Canada despite their relatively stable policies, Bank of Canada Governor Tiff Macklem warned Monday.

In a speech to the Chambre de commerce France-Canada in Paris, Macklem said that imbalances were growing at a time when the financial system was also evolving and becoming faster and less regulated.

“That leaves us with two clear risks,” he said. “First, large capital inflows into the United States could once again be misallocated — stretching valuations in equities and credit and setting the stage for a painful correction. Second, those flows could reverse suddenly. Either outcome could send stress far beyond U.S. borders.”

The G7 has been studying the topic of imbalances and the potential risks they pose. Macklem’s speech followed a March memo in which G7 economists said that excessive current account deficits and surpluses reflected increasingly unbalanced domestic growth dynamics in China, the European Union and the U.S. China, they said, has chronically low domestic consumption, the EU has persistent weak levels of productivity and the U.S. has fiscal deficits that are too large relative to economic conditions.

The memo noted that balanced growth and reciprocal trade were fundamental to a well-functioning global economy.

In his speech, Macklem noted that trade surpluses and deficits are normal, but if they are not addressed they can become excessive and in turn distort financial flows between countries, exacerbating political tensions and setting the stage for potential shocks.

“Canada is not a contributor to excessive global imbalances, but we are being knocked by increased trade tensions, and we could be sideswiped if financial stability risks crystallize,” he said, according to prepared remarks for the speech. “A better path would be to adjust the system before pressures reach a tipping point.”

Macklem said the first step is for deficit countries and surplus countries to agree on the problem: that global imbalances are rooted in domestic imbalances. China needs to consume more, the U.S. needs to save more and the EU needs to invest more. Addressing domestic imbalances will be beneficial to everyone, and adjustment will be smoother and more durable if it is coordinated.

“The common thread is clear: when adjustment is delayed, imbalances persist, growth is held back and risks build across the global system,” Macklem said.

The Bank of Canada governor listed three ways countries can work together to reduce global imbalances and protect financial stability.

For one, countries like Canada and the EU should deepen trade and investment relationships even as the U.S. pulls back from open trade. An open global system allows capital to grow, supports economic growth and helps economies adjust to changes in supply and demand.

The world can also create more places for global savings to go so the system is more balanced and resilient, which means developing more safe assets and creating payment systems that are safe and efficient for all currencies. Currently, a huge share of global savings are pulled disproportionately to one direction: the U.S.

Finally, countries need to work together to increase transparency in the global financial system. This means better data collection and regular stress testing to see how interconnected everything is. Entities like the International Monetary Fund, the Financial Stability Board and the Bank for International Settlements need to work together to point out risks earlier.

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“We should not let pressures continue to build. And we should not repeat the mistakes of the interwar years. We can still support open trade and investment, deeper ties and stronger cooperation — so that we can adjust earlier and build a more resilient global system,” Macklem said.

“I’ll end with a simple point: resilience is a choice. It doesn’t happen automatically, and it doesn’t come from good intentions. It comes from reinforcing systems so they don’t break in times of stress.”