Adam Wolfe
@adamkwolfe.bsky.social
An economist at Absolute Strategy Research.
Regardless of how the tariffs are being avoided, the main point is that higher tariffs did not result in the US de-coupling from China in any significant way. Another round of higher tariffs is likely to lead to more tariff avoidance, not de-coupling.
December 5, 2024 at 2:30 PM
Regardless of how the tariffs are being avoided, the main point is that higher tariffs did not result in the US de-coupling from China in any significant way. Another round of higher tariffs is likely to lead to more tariff avoidance, not de-coupling.
How might US importers be avoiding tariffs? The de minimis exemption for imports valued at less than $800 is often flagged as the main loophole. But China’s Customs says the total value of those exports to the US was $18 billion in 2023.
December 5, 2024 at 2:30 PM
How might US importers be avoiding tariffs? The de minimis exemption for imports valued at less than $800 is often flagged as the main loophole. But China’s Customs says the total value of those exports to the US was $18 billion in 2023.
For 2023, that would mean that around $160 billion of imports from China did not get recorded by US Customs.
December 5, 2024 at 2:29 PM
For 2023, that would mean that around $160 billion of imports from China did not get recorded by US Customs.
That suggests the US’s imports from China are understated by 20-25% due to tariff avoidance. If so, China’s share of US imports only fell from 21% in 2017 to about 17% over the past year, not the 14% share officially recorded.
December 5, 2024 at 2:29 PM
That suggests the US’s imports from China are understated by 20-25% due to tariff avoidance. If so, China’s share of US imports only fell from 21% in 2017 to about 17% over the past year, not the 14% share officially recorded.
To see where that error lies, I mapped the US and Chinese data to the US’s Section 301 tariffs by HS code. Both countries reported a rise in US demand for Chinese goods not subject to the tariffs. But the US recorded fewer imports of the tariffed goods, while China said its exports were flat.
December 5, 2024 at 2:28 PM
To see where that error lies, I mapped the US and Chinese data to the US’s Section 301 tariffs by HS code. Both countries reported a rise in US demand for Chinese goods not subject to the tariffs. But the US recorded fewer imports of the tariffed goods, while China said its exports were flat.
Bilateral trade data are tricky buggers, and China's VAT rebate rate also increased during the trade war. But China’s exports to the rest of the world (ex-US) still match pretty closely with what the rest of the world reports receiving from China. The error term seems to be on the US side.
December 5, 2024 at 2:26 PM
Bilateral trade data are tricky buggers, and China's VAT rebate rate also increased during the trade war. But China’s exports to the rest of the world (ex-US) still match pretty closely with what the rest of the world reports receiving from China. The error term seems to be on the US side.
Before 2018, the US recorded imports from China worth 15-20% more than China reported sending to the US. Starting in 2018, the gap reversed.
December 5, 2024 at 2:24 PM
Before 2018, the US recorded imports from China worth 15-20% more than China reported sending to the US. Starting in 2018, the gap reversed.
So while China may have some of the symptoms of “Japanification” its economic disease could cured on a sustainable basis through measures to bolster household confidence.
November 29, 2024 at 12:50 PM
So while China may have some of the symptoms of “Japanification” its economic disease could cured on a sustainable basis through measures to bolster household confidence.
The government’s power to achieve that was limited. The best it could do was to increase its borrowing to soak up the household financial balance. But it waited too long to do that.
November 29, 2024 at 12:50 PM
The government’s power to achieve that was limited. The best it could do was to increase its borrowing to soak up the household financial balance. But it waited too long to do that.
In contrast, Japan’s corporate sector couldn’t stop deleveraging until they restored solvency. That would have required the asset bubble re-inflating or a huge increase in sales/profitability.
November 29, 2024 at 12:49 PM
In contrast, Japan’s corporate sector couldn’t stop deleveraging until they restored solvency. That would have required the asset bubble re-inflating or a huge increase in sales/profitability.
But a more optimal solution would see some combination of household gross savings rates declining, housing sales rebounding, and government borrowing increasing. This all seems do-able and arguably has been under way since September.
November 29, 2024 at 12:49 PM
But a more optimal solution would see some combination of household gross savings rates declining, housing sales rebounding, and government borrowing increasing. This all seems do-able and arguably has been under way since September.
And with less money chasing more goods/services, prices are declining. That’s starting to hit household incomes, too. Which would be one way to resolve the problem – higher unemployment would mean less savings.
November 29, 2024 at 12:49 PM
And with less money chasing more goods/services, prices are declining. That’s starting to hit household incomes, too. Which would be one way to resolve the problem – higher unemployment would mean less savings.
So a large share of the household financial surplus is getting stuck in the domestic financial system. Which means that money is not circulating through the economy in the same way it used to.
November 29, 2024 at 12:49 PM
So a large share of the household financial surplus is getting stuck in the domestic financial system. Which means that money is not circulating through the economy in the same way it used to.
The government has been unwilling to increase its net borrowing to absorb the rise in the household sector’s financial balance. And the rest of the world is pushing back too, since absorbing more savings from China would mean ever larger trade deficits.
November 29, 2024 at 12:49 PM
The government has been unwilling to increase its net borrowing to absorb the rise in the household sector’s financial balance. And the rest of the world is pushing back too, since absorbing more savings from China would mean ever larger trade deficits.
There has been a large increase in borrowing from the manufacturing sector (the flipside of the government’s plan to shrink the real estate sector) but even that has started slow as returns on assets start to fall.
November 29, 2024 at 12:48 PM
There has been a large increase in borrowing from the manufacturing sector (the flipside of the government’s plan to shrink the real estate sector) but even that has started slow as returns on assets start to fall.
But the corporate sector isn’t able to absorb that level of savings. Property developers have been deleveraging since 2021. Local government financing vehicles started deleveraging last year.
November 29, 2024 at 12:48 PM
But the corporate sector isn’t able to absorb that level of savings. Property developers have been deleveraging since 2021. Local government financing vehicles started deleveraging last year.
However, the decline in housing sales means that more than 2/3 of household gross savings now has to be intermediated by the financial system into another sector’s investment or consumption.
November 29, 2024 at 12:47 PM
However, the decline in housing sales means that more than 2/3 of household gross savings now has to be intermediated by the financial system into another sector’s investment or consumption.
The money saved and borrowed by households is converted into a demand deposit for the developer, which then gets paid to a contractor or employee, and it circulates through the economy through the normal channels.
November 29, 2024 at 12:47 PM
The money saved and borrowed by households is converted into a demand deposit for the developer, which then gets paid to a contractor or employee, and it circulates through the economy through the normal channels.
Nearly all household investment is really real estate purchases. So mortgages to fund those purchases absorb some savings from other households, and then those savings are used for an economic transaction.
November 29, 2024 at 12:47 PM
Nearly all household investment is really real estate purchases. So mortgages to fund those purchases absorb some savings from other households, and then those savings are used for an economic transaction.
The flow of funds data can explain this, too. China’s gross household savings rate has held fairly steady as a percent of GDP. But household investment used to absorb 2/3 of the savings, and now it’s soaking less than 1/3.
November 29, 2024 at 12:47 PM
The flow of funds data can explain this, too. China’s gross household savings rate has held fairly steady as a percent of GDP. But household investment used to absorb 2/3 of the savings, and now it’s soaking less than 1/3.