Brad Setser Profile picture
Apr 26, 2023 8 tweets 3 min read Read on X
Despite all the talk about how the world is standing in the way of China's growth, the world (including the US) continues to supply China with one thing it cannot generate domestically -- demand for its manufactures.

China's surplus again topped 10% of its GDP.

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Even with relatively high commodity prices, China's overall trade surplus (in goods) is approaching its pre-global financial crisis peak. As is the surplus in manufacturing.

Even scaled to China's GDP

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And of course in dollars the surplus is WAY bigger than it was prior to the global financial crisis (dollars are an OK proxy for scaling the surplus v the size of its trading partners).

The world still supplies China with a ton of net demand.

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What is striking - at least to me - is how rare it is for China's surplus in manufacturing to shrink. It happened after the global financial crisis & after the '15 commodity crisis + USD/ CNY appreciation. But not after the Trump tariffs/ COVID ... rather the contrary

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Imports of manufactures have also been squeezed out of China's market over time -- I don't know anyone who forecast at the time of China's WTO accession that it would eventually in result in a 5 pp fall in China's manufactured imports v its GDP

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China simply doesn't import many manufactures for its own use (it imports chips for reexport) ...

Net of processing imports, exports are about 14% of GDP and manufactured imports are now under 4% of GDP.

This is true "deglobalization"

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China couldn't run these kinds of surpluses globally without the big US deficit in manufactures -- we don't yet trade with Mars (& I increasingly doubt that Elon is gonna let us start)

China may complain about the chip restrictions, but the US is still helping it grow ...

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But China doesn't just rely on the US to supply it with net demand for its manufactures that it cannot generate internally.

This chart, together with the charts on China's sudden emergence as a net exporter of autos, should prompt a bit of reflection in Europe ...

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More from @Brad_Setser

Apr 1
Martin Wolf seems to think China's recent export surge has reached its natural limits: "investing even more in manufacturing just guarantees ever more excess capacity and thus protection aimed against the inevitable surges of Chinese exports"

nice chart too ;) Image
Wolf confirms that China seems a real upside in Trump's global trade war --

ft.com/content/80ab4a…
Hard to disagree

"what is happening to the US has clear upsides for their own country [China]. It has dawned on just about everybody by now that Trump’s signature is worthless. A man who is trying to demolish the Canadian economy is not going to be a reliable friend to anybody else"
Read 5 tweets
Mar 31
The Saudi balance of payments for q4 is out, and it confirms that Saudi Arabia ran a current account deficit in 2024 -- and (per my estimates), the balance of payments "breakeven" for Saudi Arabia is around $90 a barrel.

1/ Image
One implication, of course, is that the Saudis are on track to run a substantial external deficit in 2025 --

(@Rory_Johnston can improve the estimated breakeven with a better net oil exports number for 2024!)

2/ Image
@Rory_Johnston Spending on imports (broadly defined, includes services) is above where it was back in 2014 -- The various MBS visions didn't come cheap

3/ Image
Read 9 tweets
Mar 31
I haven't loved those trade offs to be honest --

Say a US firm gets access to Korea's local market to sell insurance. It won't employ Americans to run that business ... the firm's global business benefits, but there is little impact on the US economy

1/
The classic example is TPP, where the US would have liberalized the US auto market (the 'TPP" content requirement was lower than the "NAFTA" content requirement) in exchange for stronger protection of offshore pharmaceutical IP

2/
That would have raised the offshore profits of US big pharma (i.e. more production and profit in Singapore) but not generated more direct activity in the US as big pharma never liked manufacturing in the US for global sales (and paying US tax)

3/
Read 4 tweets
Mar 31
One sign of "American exceptionalism" (US equity outperformance + sustained demand for US debt through thick and thin) is that the US has a lot more external liabilities than external assets.

A lot more!

1/ Image
I have focused heavily on the net external debt position precisely because it doesn't hinge heavily on stock market valuations (and the FDI position is a bit problematic as foreign FDI is valued using the US stock market). 2/ Image
Of course valuation still plays a small rose there -- the market value of foreign holdings of US bonds is about $1.5 trillion below the purchase price (using the sum of flows)

3/ Image
Read 13 tweets
Mar 31
I usually focus on non-petrol trade because oil has its own unique dynamics. But if there really is an across the board 20% tariff on all imports, the pre-tariff baseline is imports of 11% of GDP ...

1/ Image
Some simple tariff math. The "just pay it" cost is thus 2.2% of GDP. But actual tax revenue from the tariff will be lower. If the short-term elasticity is 1, imports fall by a little more than 2% of GDP, to around 9 pp of GDP & the direct tax revenue is 1.75 pp of GDP. 2/
That is a big sum, particularly as it is being put in place ahead of any offsetting tax cuts. Moreover as @jnordvig highlighted over the weekend, Trump is taking a real risk by implementing the tariff in a way that maximizes uncertainty ... 3/
Read 11 tweets
Mar 29
The most important fact about China's q4 balance of payments is that the surplus is still way below what it should be -- a $1 trillion in goods surplus, $200-250b deficit in services and positive $3 trillion net investment position should generate a surplus of over $750b ...

1/ Image
But even if the current account surplus is understated, it isn't quite as understated as it was in the first half of 2024 ... the reported surplus, FDI flows and portfolio inflows do imply that Chinese residents should be accumulating about $125b a quarter in foreign assets. 2/ Image
And there has been a resumption in the state bank outflow ... including notable purchases of foreign bonds by the state banks

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Read 9 tweets

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