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China’s export performance this year has been stronger than expected. After a sharp slump at the beginning of 2020, the country’s exports have posted positive growth—the only major economy’s to do so. However, a closer look at the data reveals that this growth has not been very broad-based, but rather concentrated in areas where China’s export structure was well-positioned to take advantage of the global crisis—namely, production of medical supplies and school-from-home and work-from-home (S/WFH) goods. Once the COVID-19 crisis passes, China’s exports will likely return to their pre-coronavirus growth path, including a gradual loss of market share to other countries.
It may be hard to remember given the pandemic, but trade tensions between the United States and China eased in January 2020 with the inking of the Phase One agreement. Under the deal, China committed to a massive increase in its purchases of U.S. goods and services, with targets set for various types of products. At the time of the pact, the U.S. economy was operating near full capacity, and any increase in U.S. exports stemming from the pact would likely have resulted in only a small boost to growth. The environment is now starkly different, with the U.S. economy operating far below potential. While the promised increase in Chinese purchases seems unlikely to be achieved, any appreciable increase in exports from the agreement is now more likely to deliver a meaningful boost to the economy.
In September 2016, the Bank of Japan (BoJ) changed its policy framework to target the yield on ten-year government bonds at “around zero percent,” close to the prevailing rate at the time. The new framework was announced as a modification of the Bank's earlier policy of rapid monetary base expansion via large-scale asset purchases—a policy that market participants increasingly regarded as unsustainable. While the BoJ announced that the rapid pace of government bond purchases would not change, it turned out that the yield target approach allowed for a dramatic scaling back in purchases. In Japan’s case, the commitment to purchase whatever was needed to keep the ten-year rate near zero has meant that very little in the way of asset purchases have been required.
Mary Amiti, Sang Hoon Kong, and David E. Weinstein
Starting in early 2018, the U.S. government imposed tariffs on over $300 billion of U.S. imports from China, increasing the average tariff rate from 2.7 percent to 17.5 percent. Much of the escalation in tariffs occurred in the second and third quarters of 2019. In response, the Chinese government retaliated, increasing the average tariff applied on U.S. exports from 5.7 percent to 20.4 percent. Our new study finds that the trade war reduced U.S. investment growth by 0.3 percentage points by the end of 2019, and is expected to shave another 1.6 percentage points off of investment growth by the end of 2020. In this post, we review our study of the trade war’s effect on U.S. investment.
Ozge Akinci, Gianluca Benigno, and Albert Queralto
The COVID-19 outbreak has triggered unusually fast outﬂows of dollar funding from emerging market economies (EMEs). These outflows are known as “sudden stop” episodes, and they are typically followed by economic contractions. In this post, we assess the macroeconomic eﬀects of the COVID-induced sudden stop of capital flows to EMEs, using our open-economy DSGE model. Unlike existing frameworks, such as the Federal Reserve Board’s SIGMA model, our model features both domestic and international ﬁnancial constraints, making it well-suited to capture the eﬀects of an outﬂow of dollar funding. The model predicts output losses in EMEs due in part to the adverse eﬀect of local currency depreciation on private-sector balance sheets with dollar debts. The ﬁnancial stresses in EMEs, in turn, spill back to the U.S. economy, through both trade and ﬁnancial channels. The model-predicted output losses are persistent (consistent with previous sudden stop episodes), with financial effects being a significant drag on the recovery. We stress that we are only tracing out the effects of one particular channel (the stop of capital flows and its associated effect on funding costs) and not the totality of COVID-related effects.
Since the outbreak of the COVID-19 pandemic in late January, oil prices have fallen sharply. In this post, we compare recent price declines with those seen in previous oil price collapses, focusing on the drivers of such episodes. In order to do that, we break oil price shocks down into demand and supply components, applying the methodology behind the New York Fed’s weekly Oil Price Dynamics Report.
The COVID-19 pandemic has had a significant impact on trade between the United States and China so far. As workers became sick or were quarantined, factories temporarily closed, disrupting international supply chains. At the same time, the trade relationship between the United States and China has been characterized by rising protectionism and heightened trade policy uncertainty over the last few years. Against this background, this post examines how the recent period of economic disruptions in China has affected U.S. imports and discusses how this episode might impact firms’ supply chains going forward.
Matthew Higgins, Thomas Klitgaard, and Michael Nattinger
Tariffs are a form of taxation. Indeed, before the 1920s, tariffs (or customs duties) were typically the largest source of funding for the U.S. government. Of little interest for decades, tariffs are again becoming relevant, given the substantial increase in the rates charged on imports from China. U.S. businesses and consumers are shielded from the higher tariffs to the extent that Chinese firms lower the dollar prices they charge. U.S. import price data, however, indicate that prices on goods from China have so far not fallen. As a result, U.S. wholesalers, retailers, manufacturers, and consumers are left paying the tax.
Sebastian Heise, Justin R. Pierce, Georg Schaur, and Peter K. Schott
Global trade policy uncertainty has increased significantly, largely because of a changing tariff regime between the United States and China. In this blog post, we argue that trade policy can have a significant effect on firms’ organization of supply chains. When the probability of a trade war rises, firms become less likely to form long-term, just-in-time relationships with foreign suppliers, which may lead to higher costs and welfare losses for consumers. Our research shows that even in the absence of actual tariff changes, an increased likelihood of a trade war can significantly distort U.S. imports.
The imposition of Section 301 tariffs on about half of China’s exports to the United States has coincided with a fall in imports from China and gains for other countries. The U.S.-China trade conflict also appears to be accelerating an ongoing shift in foreign direct investment (FDI) from China to other emerging markets, particularly in Asia. Within the region, Vietnam is often cited as a clear beneficiary of these trends, a rising economy that could displace China, to some extent, in global supply chains. In this note, we examine the data and conclude that Vietnam is indeed gaining market share, but is too small to replace China anytime soon.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
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