I am among those trying to figure out Trump’s China trade strategy.
Like most I am confused. Trump’s latest escalation was formally a response to China’s latest round of tariffs. But China’s tariffs, in my view, basically confirmed that China has run out of good targets.
1/x
The incremental costs to the U.S. of the trade war right now are essentially coming from Trump’s own tariffs. And I suspect that undermines the United States' leverage.
UBS thinks that China added about $10b in new products to its tariff lists, so its tariffs now cover $100b rather than say $90b of its $150b in imports from the U.S. (based the Chinese number for imports from the U.S.)
3/x
China also raised the tariff rate a bit, but that’s largely irrelevant. China has already proved, tariff or no tariff, it can shut down certain U.S. imports if it wants to.
(Crude supposedly wasn't hit by tariffs last fall ... )
4/x
Remember that in 3 of the 4 largest goods exporting sectors, the market for U.S. exports is essentially China’s state. The state airlines. The state oil and gas companies. And the old state ag and oilseed import monopoly. Gives China some unique tools (like it or not)
5/x
Autos are the exception: they are sold to private buyers. & China did raise its tariffs there – but that cannot have surprised the Trump administration.
China lifted the auto tariffs it imposed last fall to help facilitate the negotiations. They were an obvious target.
6/x
Basically, China had to go back to the sectors it tariffed heavily after the initial U.S. tariffs last summer/ fall – it didn’t come up with any new targets. The incremental impact on (already modest) U.S. goods exports to China will likely be minimal.
6/x
The Trump Administration by contrast has basically doubled its total tariff on China in the last month – going from 25% on $250b ($62b) to 30% on $250b and 15% on $270b ($112b). The just pay it cost of the China tariff has increased to around a half point of U.S. GDP.
7/x
And by definition, if the USTR picked its tariffs rationally, the last round of tariffs will have the highest cost to the U.S. – China is basically the sole supplier (for now) of most of the goods on the final $170b (December) list.
8/x
Of course, with time (as Paul Krugman notes), firms will adjust. But until there is clarity on whether or not the tariffs are permanent, such investments don’t make sense. That’s a big part of the damaging uncertainty.
9/x
The thing is, China likely knows this – the easiest path for Trump give the economy a bit of a boost in an election year is, in a sense, to declare victory in the trade war and come home. (h/t @geoffreygertz)
10/x
@geoffreygertz Reversing the last two rounds of U.S. tariff escalation would likely put about a quarter point of GDP back into consumers’ pockets in an election year ...
11/x
@geoffreygertz Bottom line: President Trump obviously thinks he gains leverage by his willingness to escalate and hit back hard. But that isn’t at all clear to me.
12/x
@geoffreygertz Last note. There are much more advanced ways of estimating the cost of tariffs than the "just pay it" cost. But a lot of them end up converging toward the simple back of the envelope calculation tax hike impact. Offsetting effects and all.
13/13
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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
One of the surprises of the first half of the year was that China held the yuan stable even in the face of significant new US tariffs.
China's q1 BoP data helps explain why -- China was in a quite strong underlying position
1/
in the past few quarters, China's reported current account surplus jumped up to $150b a quarter (it is still understated, I think it is really ~ $200b a quarter) and the state banks have added $50-100b a quarter to their foreign assets.
2/
The balance of payments signal from China's state bank flows (plus PBOC flows) isn't as strongly as in 2020 and 2021, but it has been pretty consistent ...
Not sure the issue will come to a head on July 9th (it is always possible to provide more time for the negotiations) but have long thought that the "232" sectors would be the hardest part of the negotiations with the EU (and other allies)
1/
Pharma frankly should be easy -- as the US trade deficit in pharmaceuticals is made in America, as it stems from a flawed US tax policy. But that isn't how the Trump administration sees it ... and the real negotiations probably cannot start before the US case.
2/
And with autos, the Trump administration's push for a quick deal with the UK set a baseline (10% tariff and tariff rate quota for 2024 export levels) that all the big auto exporters now needs to match ...
3/
It is way too early to write any assessment of the full impact of President Trump's turn toward tariffs as a core tool of US economic policy.
But there is no doubt that immediate impact was ... well ... a much bigger external deficit.
1/
The swing in goods trade tied to tariff front running was bigger than any swing during the pandemic (admittedly, it was very concentrated in pharma and precious metals)
2/
Some of the impact of tariff front running will dissipate with time -- but there are more subtle signs of deterioration in the underlying balance. The investment income balance for example remains in a deficit (a big structural shift that is offsetting the oil swing)
It is now ancient history -- but Turkey experienced a massive carry trade unwind in March and April that led it to burn through over $30 billion in reserves in 6 weeks or so ... and it is worth taking a look at how this registered in Turkey's balance of payments
1/
Unsurprisingly, there was a $8b or so outflow from Turkish lira denominated bonds in April -- an outflow equal to peak inflows. But as big as that was, it doesn't explain the ~ $35b swing in fx reserves
2/
The biggest swing was actually in short-term bank flows (a counterpart to the offshore lira carry trade in London), which fell by $12b in April ($15b in outflows in the last 3ms generates the $60b annualized outflow in the chart)