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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A quick thread highlighting the (many) puzzle's in China's balance of payments data --
The first, of course, is why did errors (now the statistical discrepancy)/ hot money flows disappear with the property bubble? (my answer is that they didn't really)
1/
A related puzzle: why did hot money outflows (errors) fall off the cliff at the same time as FDI inflows? (my answer is that they didn't really, but it is a puzzle)
2/
A related puzzle -- why did fx inflows (from the current account, portfolio inflows & FDI) disappear from q2 22 to q4 24 and then bounce back so strongly?
A bit of work in progress. The net foreign assets of China's state commercial banks doesn't include the net foreign assets of the policy banks. So I converted net "other" in the BoP into a monthly series, and plotted it against net foreign assets.
Good fit
1/
The gap between the cumulative flows since 2010 in the two series (mostly from 2014 to 2018) implies ~ $1 trillion in net foreign assets in the policy banks, consistent with the work of @AidData
Note this is an upper bound estimate in some ways.
2/
@AidData Throat clearing: net other is defined as net loans, net deposits and net trade credits, and then I added portfolio debt assets b/c the state banks hold a lot of foreign bonds (including all of the bonds makes it an upper bound estimate)
3/
US imports of pharmaceuticals from the world's low tax jurisdictions have more than tripled since the (Pharma) Tax Cuts and (Irish) Jobs Act was passed ...
1/
The US trade deficit in pharmaceuticals has gone from $50b to around $200b (close to 0.7 pp of US GDP)
I liked Trump's term one trade policy a lot better than Trump's current trade policy.
Back then, the bulk of the tariff increase was on goods from China.
Now, not so much
1/
Gearing up for the May trade data release
In April, tariff revenue was around $20b, equally split between China and the rest of the world.
During Trump's first term the increase in monthly tariff revenue (to $5/6b) was essentially from tariffs on China going from $1b to $4b
2/
Tariff revenue from countries other than China, for future reference ...
Taiwan so far has gotten off relatively lightly, largely b/c of the semiconductor exclusion from the reciprocal/ base tariffs (expected future 232 sector)
Foreign demand for US bonds was a bit too strong in 2023 and 2024; it has pushed the dollar up to untenable levels.
But there is a some risk of a real reversal now
2/
Not sure that Trump's comments over the weekend about the future path of US rates (and issuing bills until he installs a compliant Fed chair) will increase global appetite for US bonds
Just a reminder that Saudi Arabia runs a current account deficit these days -- and its break even oil price (for the balance of payments) is around $90 a barrel ...
1/
The latest balance of payments data only runs though q1 -- but the difference between the oil price and Saudi's breakeven implies a much larger deficit in q2 than in the past few quarters
2/
Saudi external asset accumulation over the last 4 quarters has been financed by debt, not out of its oil proceeds