1/5
The New York Fed finds that "U.S. firms and consumers continue to bear the bulk of the economic burden of the high tariffs imposed in 2025."
libertystreeteconomics.newyorkfed.org/2026/02/who-is… 2/5
That is exactly how it should be. Tariffs are effectively a tax on consumption and a subsidy to production (of tariffed goods). They work by transferring income from households (net importers) to producers of tradable goods.

1/7
My latest piece was written for friends who are EU policymakers or advisors. In it I argue that there is a difference between an inefficient manufacturing sector and a globally uncompetitive manufacturing sector. We shouldn't conflate the two.
engelsbergideas.com/notebook/europ… 2/7
A country's manufacturing sector is not globally uncompetitive because it is inefficient, but rather because its wages are higher relative to productivity than those of its trade partners.

Efficiency is about how effectively an economy uses resources to create value.

1/4
Very interesting and timely paper. The authors find that "industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which...

https://twitter.com/LucaFornaro3/status/2020755500762042543

2/4
in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers."

1/6
According to Greg Ip, in the US economy today, "rewards are going disproportionately toward capital instead of labor. Profits have soared since the pandemic. The result: Capital is triumphant, while the average worker ekes out marginal gains."
wsj.com/economy/jobs/c… 2/6
And as Marriner Eccles, FDR's Fed chairman, explained in the 1930s, this creates a dangerous illusion. The extent of business profits depends almost wholly on the purchasing power of ordinary people, which in turn depends on wages.

1/5
Reuters: "The EU should consider either an unprecedented 30% across-the-board tariff on Chinese goods or a 30% depreciation of the euro against the renminbi to counter a flood of cheap imports, a French government strategy report said on Monday."
reuters.com/world/china/fr… 2/5
I think it's only a question of time before the EU will intervene in its external account to protect its manufacturing sector, just as China has done for decades and the US is increasingly trying to do. It can implement all the reforms that have been proposed to improve...

1/11
SCMP: "China’s potential growth rate could fall to about 2.5 per cent in the coming years unless action is taken, prominent Chinese economist Zhou Tianyong has warned."
sc.mp/itwrt?utm_sour… 2/11
“Without a strong turnaround in total factor productivity and a meaningful expansion in household consumption, it will be difficult for China’s economic growth to reach 4 per cent or higher,” he added.

1/8
Jason Furman: "A weaker dollar may improve the economy’s long-run balance, but it does so by forcing Americans to cut back on spending. That is like telling children to eat more spinach today so they will be healthier in the future."
nytimes.com/2026/02/03/opi… 2/8
Furman is right. Currency appreciation reduces consumption costs in the short term by making imports cheaper, but in a hyperglobalized world, it also undermines domestic manufacturers by making them less competitive against foreign manufacturers.

1/4
Yicai: "China's macro leverage ratio – a measure of total debt relative to nominal GDP – rose by 11.8 percentage points to 302.3 percent in 2025, exceeding the 10.1 point increase recorded in 2024, according to a new research report by CASS.
yicaiglobal.com/news/chinas-de… 2/4
There is a lot of disagreement about the real debt-to-GDP ratio in China, especially given the difficulty of counting hidden debt, along with an "abnormal" rise in payables and receivables that reflects inability to pay debt more than it reflects rising revenues.

1/7
SCMP: "Chinese scholars have called for greater urgency in reducing reliance on US dollar assets, particularly after Washington and its allies froze about US$300 billion in Russian foreign exchange reserves in 2022."
scmp.com/economy/global… 2/7
Although this may be a favorite new topic among academics – and not just Chinese academics - few seem to understand that a country cannot restructure global capital flows without also restructuring global...

1/12
This talk about Europe's ability to wield its holdings of US Treasuries as a political tool is as divorced from reality as the talk about China's ability to wield its holdings of US Treasuries as a political tool.
via @ftft.com/content/7d6436… 2/12
For all the huffing and puffing, Chinese holdings of US assets actually increased. This shouldn't have been a surprise. If you run massive trade surpluses, you have no choice but to acquire foreign assets, and if you won't acquire the alternatives, you must buy US assets.

1/7
EU commissioner for trade Maroš Šefčovič is absolutely right to question the usefulness of the WTO: "If the WTO is to meet today’s challenges, its rules must be fair and deliver balanced, legitimate outcomes. Currently, they do neither."
ft.com/content/2ff1d4… 2/7
The fact that decades of the largest, persistent trade imbalances in history have largely been WTO compliant suggests strongly that the WTO is more about maintaining legal fictions than it is about discouraging the adverse impact of trade intervention on the global economy.

1/6
Reuters: "Chinese leaders have pledged to "significantly" lift household consumption’s share of the economy over the next five years, but have not given a specific target."
reuters.com/world/asia-pac… 2/6
If we assume that Beijing hopes to raise the consumption share of GDP by 3-5 percentage points (roughly a third of what it would need to be a more "normal" low-consuming economy), consumption would have to grow by 1-2 percentage points faster than GDP over the period.

1/7
Good Martin Wolf piece on the global return of mercantilism. What is new about this piece is that it seems part of a growing recognition among global opinion makers that mercantilism and trade war didn't start when deficit economies with...
ft.com/content/cd68b3… 2/7
open external accounts began to implement trade restrictions and otherwise control their external accounts. It started earlier, when economies that controlled their external accounts implemented trade and industrial policies that led to beggar-thy-neighbor trade surpluses.

1/6
Wall Street bankers and owners of movable capital would hate it, but if the rest of the world were to reduce its dependence on the US dollar, this would be good for the US economy, good for US manufacturing, and good for US farmers and workers.
wsj.com/finance/curren… 2/6
The claim that the US benefits from the global use of the dollar is one of those things that people believe even though they can't explain why – except perhaps in terms of sanctions. None of the world's fastest-growing economies (including...
foreignaffairs.com/united-states/…

1/4
Bloomberg: "“Even with strong determination and sufficient resources, transforming China’s economy into one driven by consumption and services will take years,” Goldman said. “With a more reluctant, measured approach, it could take decades.”"
bloomberg.com/news/articles/… 2/4
Goldman is right, of course, unless a debt crisis, or a serious acceleration of trade war, forces a much faster, disruptive adjustment. While the latter might happen, the former is, for now at least, pretty unlikely.

1/10
SCMP: "Kenya has reached a preliminary trade deal with China for duty-free exports of key products including coffee, tea and cut flowers – a major step towards narrowing the East African nation’s long-standing trade gap with Beijing."
via @scmpnewssc.mp/gg0zg?utm_sour… 2/10
This kind of incrementalist thinking is one of the reasons why global trade is so unbalanced and so poorly understood. China does not run a trade surplus with Kenya because of tariffs on coffee, tea and cut flowers.

1/4
Aggregate financing in China, the most widely-used proxy for total debt, ended 2025 at RMB 442.12 trillion, an 8.3% increase over last year's outstanding amount. This is a relatively small increase in total debt compared to earlier years.
english.news.cn/20260115/3e5af… 2/4
But of course nominal GDP growth is also much lower, so the RMB 35.6 trillion increase in aggregate financing in 2025 represents a 12 percentage-point increase in China's debt-to-GDP ratio. This is higher than the 11 percentage-point increases in 2024 and 2023.

1/5
NYT: "The U.S. trade deficit in goods and services shrank to $29.4 billion in October, down from $48.1 billion the prior month. The figure was the lowest monthly trade deficit recorded since June 2009."
nytimes.com/2026/01/08/bus… 2/5
If this persists, it may be the most important factor for those thinking about what is likely to happen in 2026. In a three-month period during which the Chinese trade surplus has surged, the US trade deficit has declined.

1/8
Very interesting CNA article on Beijing's strategic pivot towards upgrading the quality of China's existing housing stock. It turns out that much of its housing stock, including much that was built in recent years, is of unacceptable quality.
channelnewsasia.com/east-asia/chin… 2/8
CNA: "“This strategic pivot to ‘good housing’ is fundamentally about rebalancing the economy – shifting from speculative inventory to quality living,” Lin Han-Shen, China country director at The Asia Group, told CNA. “Restoring household confidence is central".

1/6
People often say that the problem with the global trading system is mainland China, but that's not true. Taiwan, Germany, Japan, South Korea, Switzerland, Singapore and many others have run similar positions. The problem is with the global trading system itself.

https://twitter.com/Brad_Setser/status/2008604975992283284

2/6
As long as countries like the US (and the EU soon?) continue to accommodate global saving imbalances, our current trading system allows for a kind of Kalecki paradox in which individual economies can be rewarded for behavior that undermines growth in the system as a whole.

1/14
Unfortunately I don't subscribe to Krugman's substack, so I cannot comment on the whole article, but I can say that the first few paragraphs lay out the issue very accurately and with commendable simplicity. He certainly understands the main issues.
open.substack.com/pub/paulkrugma… 2/14
He notes: "In the past, China achieved stunning economic growth in part through a combination of very high savings and very high investment. Its savings remain very high, but investment in China is running into diminishing returns in the face of slowing technological...