Ready? Thread on US-China value chain relationship. First, let's talk about gross trade from the US perspective & then we go into the transformation of that relationship & the status of tariffs & stage of production
Gross data: The US is the #1 importer in the world of 2.6trn 👇🏻
Gross data: The US is the #1 importer in the world of 2.6trn 👇🏻
There are several ways to decompose gross trade (imports & exports) but to understand value chain, we need to look at it from stage of production. IMPORTS equal amt of intermediates (goods used for inputs) & consumer goods
US EXPORTS mostly INTERMEDIATES.
Trade deficit = EX < IM
US EXPORTS mostly INTERMEDIATES.
Trade deficit = EX < IM
Before we go on, the difference between exports & imports of the US = CA deficit, which means it imports capital (most EM Asia recycle CA surplus into UST & equities).
Or, the US is the FINAL DESTINATION OF MOST VALUE CHAIN. As in its imports are mostly for DOMESTIC USE so key!
Or, the US is the FINAL DESTINATION OF MOST VALUE CHAIN. As in its imports are mostly for DOMESTIC USE so key!
Obviously this only covers merchandised trade & not services (tariffs on goods). OK, when people talk about the 25% of tariff on 250bn of goods, they are talking about the ITEMS subjected to tariff & calculated using 2018 data.
Details of 250bn = MOST INTERMEDIATE IMPORTS 👈🏻
Details of 250bn = MOST INTERMEDIATE IMPORTS 👈🏻
Then there is the 7.5% on the 120bn - also the same idea. This covers a mix of intermediates + consumer goods but MOSTLY CONSUMER GOODS & hence rate lower.
WSJ wrote a report that shows decline of tariffs it actually is about diff stage of value chain. INTERMEDIATES highest rate
WSJ wrote a report that shows decline of tariffs it actually is about diff stage of value chain. INTERMEDIATES highest rate
Rates LOWER for consumer goods vs intermediates, why?
*US competitiveness in exports = intermediates, esp high-tech, & China is gaining grounds & so tackling that key value chain to protect the bottom line (esp after China 2025)
* Intermediates = hurts producers more vs consumers
*US competitiveness in exports = intermediates, esp high-tech, & China is gaining grounds & so tackling that key value chain to protect the bottom line (esp after China 2025)
* Intermediates = hurts producers more vs consumers
On the latter pt, a 25% tariff on an item = higher costs of imports. So it depends on the elasticity of that item or sensitivity of change of demand to price changes. Most US imports from China are not essentials but mostly discretionary. So what?
Of course if a firm (could be American or not but based in the US) sees costs of inputs rising 25%, then will try to either:
a) pass on to consumers; b) if not, erosion of profit so try to arbitrage that via asking exporters to lower prices or find alternative places to import!
a) pass on to consumers; b) if not, erosion of profit so try to arbitrage that via asking exporters to lower prices or find alternative places to import!
This is why elasticity of demand matters. Notice that most of Chinese exports are manufactured goods. Read that thread I wrote last yr on what a Chinese exporter'd do to project market share: They'd lower price/profit margin & offset some of the tariff👈🏻
OK, now u understand some micro & macro economic dynamics of US trade & US trade-war. Let's cover a few more concepts & now we move beyond the US to include China.
The US & China relationship can only be explained as complementary & STRONG in terms of trade. But an ASYMETRIC ONE
The US & China relationship can only be explained as complementary & STRONG in terms of trade. But an ASYMETRIC ONE
Those charts are on value chain relationship. Before we discuss the bilateral value chain (BVC), we must discuss GROSS. This is what the media talks about -> gross trade.
Facts about US-China merchandise trade : US exports roughly USD120bn & imports about 5 times that from China
Facts about US-China merchandise trade : US exports roughly USD120bn & imports about 5 times that from China
Similar to US relationship w/ the world, we decomposed US bilateral gross relationship w/ China using stage of production (key to discuss value chain).
US exports to China MOSTLY INTERMEDIATES. China exports to the US MOSTLY CONSUMER GOODS & intermediates too.
Chart shows gap!
US exports to China MOSTLY INTERMEDIATES. China exports to the US MOSTLY CONSUMER GOODS & intermediates too.
Chart shows gap!
Having decomposed gross trade into stage of production, want to show u the VALUE CHAIN relationship.
Share of US imports of Chinese intermediates rising. That is good for China & not good for everyone else (e.g. North Asia).
US ability to EXPORT INTERMEDIATES to China DECLINES
Share of US imports of Chinese intermediates rising. That is good for China & not good for everyone else (e.g. North Asia).
US ability to EXPORT INTERMEDIATES to China DECLINES
Remember that the US doesn't mind having this bilateral trade deficit with China in so far as ITS AREAS OF COMPETITIVENESS REMAIN SO (high-tech & export of intermediates).
But not only is it losing it via China it is losing it vis a vis the rest of the WORLD & with KEY ALLIES👇🏻!
But not only is it losing it via China it is losing it vis a vis the rest of the WORLD & with KEY ALLIES👇🏻!
So as the US is losing grounds on areas that it sees as STRATEGIC, it begins to ask questions why. It asks the questions of whether the gospel of free trade (Krugman famously wrote recently he thinks he is wrong regarding globalization) is in ITS STRATEGIC INTEREST, esp re China.
Read my thread on the US position papers & beef w/ China. No need to repeat here. So what you ask?
So here is the pt & irrespective if u think this trade-war is a mistake/NOT:
US keeps tariffs on INTERMEDIATES from China - that's the 25% of 250bn. Consumer goods mostly exempt.
So here is the pt & irrespective if u think this trade-war is a mistake/NOT:
US keeps tariffs on INTERMEDIATES from China - that's the 25% of 250bn. Consumer goods mostly exempt.
As you watch the Democratic debate, remember that this issue is bipartisan. This is the one foreign affair issue that many unite - diff is method.
The question is:
What is the US strategic plan to not just diversify supply chain but also COMPETE w/ China in the decades ahead?
The question is:
What is the US strategic plan to not just diversify supply chain but also COMPETE w/ China in the decades ahead?
