Webinar on the Second China Shock and Global Trade

Introduction

• Topic: The Second China Shock
• Presenter: Paul Kouman
• Key Questions:
  • What is the second China shock?
  • How will the new global trade world order emerge?
  • Is globalization compatible with industrial policy?
  • Can the US run a permanent current account deficit?

Background

• First China Shock (2000s):
  • China's export of manufacturing goods impacted US industrial base.
  • China accounts for 29% of world manufacturing but only 13% of consumption.
• Second China Shock:
  • Could be due to China's recession leading to increased exports.
  • Import substitution in China reducing imports.
  • Technological advancements like AI in China challenging the US.

Free Trade and Industrial Policy

• Benefits of Free Trade:
  • Static comparative advantage and dynamic technological transfer.
  • Political economy benefits through reforms.
• Industrial Policy vs. Globalization:
  • Increasing returns to scale and setting industry standards.
  • Potential geopolitical bargaining power.
  • US strategies: Industrial policy (Biden) vs. tariffs (Trump).

US Current Account Deficit

• Argument for permanent deficit due to 'exorbitant privilege'.
• US provides safe assets to foreigners for self-insurance.

Paul Kouman's Presentation

• Shifted focus to new views on trade imbalances.
• New Views on Trade Imbalances:
  • Persistent trade imbalances due to government actions.
  • Associated with Michael Pettis' views.
• Trade Balance History:
  • Historically, large capital flows were normal pre-WWI.
  • Current account deficits/surpluses have varied over time.

US Trade Deficits and Productivity

• US attracted capital due to rapid productivity growth in the 1990s.
• Trade deficits increased as US became attractive for investment.

De-industrialization

• Manufacturing is important for strategic reasons and perceived as providing good jobs.
• Comparison with Germany:
  • Germany's manufacturing sector is larger due to trade surpluses.
  • Germany's economic challenges despite manufacturing strength.

Tariffs and Trade Policy

• Tariffs as a response to trade imbalances debated.
• Historical use of tariffs, like Nixon's policy.
• Potential retaliation and impact on dollar strength.

Increasing Returns to Scale and Industrial Policy

• Increasing returns expand trade gains but raise questions of who benefits.
• Importance of strategic industrial policy.

Globalization and Services

• Potential shift in trade focus from goods to services.
• AI as a substitute for globalization in service outsourcing.

Conclusion

• Re-evaluation of free trade and industrial policies in light of global changes.
• Impact on smaller countries and potential formation of trading blocs.
• Ongoing discussion on the balance between tariffs and subsidies.

Final Thoughts

• Global trade and economics continue to evolve, presenting new challenges and opportunities.
• Importance of strategic thinking and policy adaptation in a dynamic global environment.