Brad Setser Profile picture
Aug 22, 2019 9 tweets 3 min read Read on X
There will be a lot written about financial deglobalization when folks pour over the 2018 data. But it is a mistake to fit last year's financial deglobalization into a Trump trade driven narrative.

It is basically a function of the shift in U.S. tax policy.

(thread)

1/x
The fall in U.S. outward FDI is entirely a function of a fall in U.S. direct investment in the world's tax havens; there was not real change in the pattern of investment in other economies.

(under the old law profits reinvested abroad could defer paying US tax)

2/x
The fall in U.S. FDI "reinvested" abroad in low havens had a host of other effects - firms building up assets in low tax jurisdictions were buying U.S. debt, inflating gross flows in both ways.

(there is actually a good fit in the BoP data here,using flows over last 4qs)

3/x
E.g. a lot of US FDI abroad was in practice the rising "cash" of a Techco (Ireland or Bermuda) sub, and a lot of foreign demand for US debt was coming from the same Techcos (or Pharmacos) offshore subs

4/x
I think I have found this in the BoP - the fall in cumulative FDI in a set of tax havens was mirrored by a fall in the cumulative purchases of U.S. debt of a slightly different set of tax havens

(cumulative flows = proxy for the stock" of offshore claims)

5/x
The match here isn't "pure." The debt holdings line for example includes Russia (which moved its reserves out of the US). But other Europe is the breakdown in the US data alas. & I couldn't include the Caribbean's holdings of U.S. debt b/c that was picking up something else ...
but I don't think it is totally spurious. here is the same plot for the set of EA countries that includes Ireland.

Both US FDI in Ireland & Irish holdings of US debt have gone into reverse (the fall in FDI tho is just a fall in the cash held by the Irish subs of US firms)

6/x
and since so much of this involved or touched a euro area country, it has similar implications for the euro area's balance of payments. FDI into the EA fell (US firms were "reinvesting" less in tax havens) and European demand for US debt fell ...

7/7
p.s. will do a blog on this too, but likely not til after labor day ...

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More from @Brad_Setser

Mar 27
At current exchange rates, Tesla has a strong economic incentive to use China as an export base -- absent trade barriers.

"Teslas cost significantly less to make in Shanghai than elsewhere, a key saving when the company is in a price war with its competitors"

From the NYT

1/
Made in China Tesla's have huge amounts of Chinese content (including Chinese batteries)

"Tesla also created a market for Chinese suppliers, saying recently that 95 percent of components used in the Shanghai factory are locally sourced."

2/
Tesla got the kind of subsidies that are hard to prove to be subsidies in a trade case -- very generous loan terms from state banks (but arranged it seems informally, and perhaps on the same terms as other preferred Shanghai firms?)

3/ Image
Read 6 tweets
Mar 26
. @edwardwhitenz of the FT is on a bit of a roll -- really good reporting on China's auto sector

"Last year, China produced 17.7mn cars with internal combustion engines, a 37 per cent fall from 28.3mn in 2017."

1/x
China still has the capacity to produce ~ 28m ICE cars by the way, give or take. Which means it has a very elastic capacity to meet global demand for ICEs if allowed (lots of that capacity is in JVs who make globally sellable designs)

2/
And at CNY 7.2 China is also the low cost producer of EVs globally (thanks smart industrial policies that gave it a first mover edge + battery and other subsidies + a weak currency) with growing capacity there BYD likely makes more CNY exporting than selling at home

3/
Read 5 tweets
Mar 21
Robin is posting some very good material on EM fx intervention these days.

Especially agree with his observation that for many Asian economies (&Turkey) looking at the disclosed forward book is critical.

1/
A couple of additional observations --

(1) a major reason why official reserve growth has slowed (other than Robin's point that intervention is a function of dollar weakness) is the increased use of state banks and SWFs to warehouse the fx from fx management/ resources

2/ Image
(2) global trends can mask important regional differences. the peak of global reserve growth was immediately prior to the GFC. but for most of EM Asia ex China, the peak was 2010 to 2014 (with another surge in 19-20)

3/ Image
Read 4 tweets
Mar 17
I see that some folks are still trying to infer flows into the US Treasury market by looking at changes in the market value of the stock of foreign holdings of US bonds. That doesn't work -- the US has actual data here, and it showed (surprisingly) strong inflows in 2023

1/ Image
The "Belgian" (Euroclear) adjustment doesn't impact total flows, only the split between China and the rest of the world. The overall data shows an increase in foreign demand for US bonds in q4 (as the market turned)

2/ Image
There was strong foreign demand for Agencies too -- and unlike in 2022, it wasn't primarily from SAFE/ China!

3/ Image
Read 9 tweets
Mar 15
The proxies for Chinese foreign currency intervention in February have been released, and they continue to paint a contradictory picture. The PBOC's balance sheet reserves rose (implying dollar buying), while the broader fx settlement data shows continued sales

1/ Image
Either way, the volume of purchases (for the PBOC balance sheet) or sales (in settlement) is modest relative to the trade balance; there isn't significant pressure (unless something is happening off balance sheet)

2/ Image
One technical indicator -- the change in net foreign asset position of the state banks -- at least had the right sign. The gap between PBOC reserves and the sales in fx settlement implies that the state banks sold. And that is in indeed what the February data shows.

3/ Image
Read 7 tweets
Mar 13
Novo Nordisk:

a) pays income tax at the Danish corporate tax rate -- an effective tax rate of 20% v the 22% headline rate ...
b) pays the bulk of its global income tax in its home country (Denmark)

1/x
Image
Like most US pharma companies, Novo Nordisk actually gets the bulk of its revenue (` 60%) from the US (North America)

2/ Image
But while US pharma companies shift profits out of the US to law jurisdictions, Novo shifts the bulk of its profit back to its (relatively high tax) home market. It paid more in Danish tax over the last 3ys than these four US companies paid in US tax ...

3/ Image
Read 7 tweets

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