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 ...
• • •
Missing some Tweet in this thread? You can try to
force a refresh
This is I think the key chart -- China added close to $40b to the combined foreign assets of the state banks and the PBOC in June (close to $50b to the state banks, minus $10b at the PBOC). And the only month of sales was April, just after liberation day ...
2/
If one accepts that China now manages its currency through the state banks (which most in market believe now), all the indicators more or less line up -- there has been consistent growth in external fx assets of the state commercial banks and their net foreign assets
One thing that has surprised me is the upward march in long-term JGB yields
The BoJ's reluctance to hike (perhaps it wants a weak yen to help buffer the auto tariffs/ Bessent should raise this when he is in Japan this week) is part of the story. But not the whole story
1/
We know from the Bank of Japan's Financial System Report that the banks gorged on 10 year and over paper during the period of yield curve control, and are now looking to reduce their duration holdings -- so that is part of the story
2/
The banks' holdings of low yielding long-dated JGBs are underwater, so they cannot sell them without taking a hit to their capital ... otherwise they should frankly rotate out of their legacy low yielding books and lock in these yields ...
3/
As the Bloomberg story on Friday about the changing swaps position of the state banks highlighted, the direction of pressure on China's currency has shifted. The state banks added almost $50b to their net foreign asset position in June, likely to help block appreciation!
1/
The increase in the net foreign asset position of the state banks over the last 12ms is now $300 billion -- real money (it has more than offset the reduction in PBOC balance sheet reserves)
2/
In June PBOC balance sheet reserves fell by $10b -- but the state banks added $47b to their net foreign assets ... so a net outflow via the state banks of close $40b ... a decent sum, even if less than the ~ $100b goods and services surplus
There are lots of reasons why China posted a $115 billion (customs) goods surplus in June. Strong exports to Europe is one of them. Another is the rebound in exports to the US (up $10b v May) after the Geneva deal
1/
Exporting through SE Asia to avoid US tariffs is a very real thing (see the story about Chinese firms making furniture in Vietnam in the Journal) but it didn't drive the June data
2/
Stepping back a bit and looking at the trailing 12m sum (so July 2024 to June 2025) and looking at the Chinese data, it is clear that China still runs a big surplus with the US
It is also clear that China's surplus with the emerging world is soaring
Trade war? Tariffs? It isn't in the Chinese trade data.
The seemingly inexorable upward march in China's surplus continues ...
1/
The 5.8% y/y increase in exports understates the strength in China's exports. Not because of export price falls, though those may be in the data as well. Rather because the base last June was close to $310 billion (high) -- the $325 billion in the 2025 data is a jump up
2/
Kind of crazy that China is posting a $115 billion MONTHLY trade surplus even in the face of 40% tariffs on direct trade with the US (20% or 30% plus the 25% 301 tariff on a decent amount of trade)
So President Trump has sent the EU a "letter" proposing a 30% tariff on August 1 -- and a similar letter to Mexico which presumably would only apply to non USMCA trade.
About half of US imports are from the EU and USMCA countries
1/
The Commissions thinks (hopes) this is a negotiating tactic -- and autos are already 25% and I think pharma is still exempt (strange) --
But if it is not a tactic -- or if negotiations break down because, well, the US is insisting on changes to EU policy that the EU cannot give -- these are the kinds of raptures in trade that put the risk of a recession back on the table imo ...
3/