Thread by @Brad_Setser

. @sdonnan also asked about how my argument that Trump has provided a big stimulus to the world's exporters during the first two years of his Presidency fits with the recent signs of a Chinese slowdown.

That's a hard one, as I suspect we are at inflection point.

(1/x)

https://twitter.com/sdonnan/status/1084260478900232198

China's December trade data should be out soon.

But the basic story is already pretty clear.

(1) Trump's macro policies (& lagged impact the 15/15 CNY move) provided a large stimulus to China up in 17/18;
(2) in q1 2019, the uncertainty created by Trump will dominate.

(2/x)

Let's start with the backward looking data.

The bilateral deficit with China has increased by about $60b in Trump's first 2ys. That's around 0.5 pp of China's GDP.

And there has been no change in the euro area's trade balance with China (no stimulus there ... )

The US and the Chinese data don't completely agree. The US data shows a bigger deficit than the Chinese data shows a surplus. The US number is better b/c it better accounts for exports through HK.

but the choice of data sets doesn't matter much in the last 2ys

(4/x)

The trailing 12m sum is a lagging indicator. It replicates the y.y data at the end of the year so it covers developments over the 24ms. So the December data for China won't change things much. China's exports to the US rose by about $90b between 16 and 18.

(5/x)

The bilateral trade data isn't seasonally adjusted, and China's trade is very seasonal. But the high frequency data suggests a big y/y increase for q3 & q4. Average monthly exports were up about $10b over 2ys (using the November data; which captures the seasonal peak)

(6/x)

a bit of math for scaling purposes - a y/y increase of $5b in 17 and likely in 18 in China's exports works out to $60b a year, or about 0.5 pp of China's GDP in both 17 and 18.

that ignores price, but the US data doesn't show major changes

(7/x)

fred.stlouisfed.org/series/CHNTOT

so the backward looking story is pretty clear. China's slowdown in late 18 would have been much worse in the absence of Trump's stimulus ....

(8/x)

but that creates a problem for China, as the forward looking indicators (and I suspect the December data) point to a major slowdown in US demand for Chinese products in 19, as firms start to adjust their supply chains to try to reduce Trumpian uncertainty

(9/x)

Makes it a perfect time for China to do what it didn't really do in 2009.

its 09 stimulus was focused on investment, and relied heavily on expanding credit.

its 2019 stimulus should focus on consumption, and use the central government's budget

(10/x)

cfr.org/blog/time-chin…

alas, there is little evidence that China is inclined to follow my advice, and to make the provision of social insurance a bigger part of socialism with Chinese characteristics.

all for now

(11/11)

the WSJ has a chart with December numbers for bilateral trade with US. Doesn't change the basic story (as suspected). obviously the rise in the surplus is inflated a bit by the absence of China's typical soybean imports this time of year

wsj.com/articles/china…