Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, February 15, 2024

AI Summary. The Federal Reserve describes the US as on an unsustainable fiscal path, with federal debt up from 70% of GDP after the financial crisis to nearly 100% and spending at 23% of GDP versus 19% before. Heavy tax increases on top earners are estimated to yield under 2% of GDP.

Edward Conard Wall Street Journal
Date Posted:

.@EdwardConard argues that “Americans are wisely alarmed” about the economy with Federal deficits running at 6% of GDP deep in the business cycle. “Without greatly accelerating productivity growth, this is reckless driving.”

.@EdwardConard argues that “Americans are wisely alarmed” about the economy with Federal deficits running at 6% of GDP deep...

Can higher taxes on top earners close the fiscal gap?

Core argument: The U.S. is pumping fiscal stimulus equal to 6% of GDP and a quarter of all government spending into the economy well into the business cycle, on what Federal Reserve Chairman Jerome Powell calls "an unsustainable fiscal path.".

America is on what Federal Reserve Chairman Jerome Powell calls “an unsustainable fiscal path.” Well into the business cycle, we are pumping fiscal stimulus equal to an unprecedented 6% of GDP and a quarter of all government spending into the economy, with no end in sight. Federal debt has risen from 70% of GDP after the financial crisis to nearly 100% today, following $5 trillion of pandemic spending to close what was likely a $1 trillion shortfall. Tax revenues as a share of GDP are projected to remain above their 50-year average, but spending has grown to a historically high 23% of GDP from 19% before the financial crisis. Only half that increase is driven by retiring baby boomers, whose growth is expected to increase spending by another 2% of GDP over 10 years. A political resolution doesn’t seem likely. Retirees have pitted Democrats against Republicans to avoid benefit cuts. Policy makers are unlikely to raise middle-class taxes—they are engineering cuts by expanding the child tax credit. Heavy tax increases on the highest earners are estimated to contribute less than 2% of GDP. Without greatly accelerating productivity growth, this is reckless driving. Americans are wisely alarmed.

Takeaways by Macro Roundup® AI

  1. The U.S. is pumping fiscal stimulus equal to 6% of GDP and a quarter of all government spending into the economy well into the business cycle, on what Federal Reserve Chairman Jerome Powell calls "an unsustainable fiscal path.".
  2. Federal debt has risen from 70% of GDP after the financial crisis to nearly 100% today, following $5 trillion of pandemic spending to close what was likely a $1 trillion shortfall.
  3. Federal spending has grown to 23% of GDP from 19% before the financial crisis, with only half that increase driven by retiring baby boomers, whose growth is expected to add another 2% of GDP over 10 years.

Related Articles:

  • Sea Change — The rising US fiscal deficit is attributed largely to a secular increase in spending — driven by retirement-related outlays and interest expense that are politically difficult to change — rather than to revenue changes. The author argues the resulting growth in Treasury supply will weigh on long-dated interest rates while adding upward pressure on consumer and asset prices.
  • Interest Costs Will Leapfrog Medicare and Defense This Year — The Congressional Budget Office projects net interest payments on federal debt will reach $870bn, or 3.1% of GDP, exceeding spending on national defense ($822bn) and net Medicare ($851bn). That would make interest the second-largest federal budget item after Social Security, up from $223bn in 2015 and $659bn in 2023.
  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.

AI Summary. The Congressional Budget Office projects federal deficits will grow from $1.7tn to $2.6tn and spending from $6.4tn to $10.1tn over a decade, with net interest costs more than doubling from $870bn to $1.6tn. Health care (35%), Social Security (28%), and interest (21%) account for 84% of projected spending growth.

CRFB Staff Committee for a Responsible Federal Budget
Date Posted:

Transfer payments such as health care and retirement spending, and interest costs make up 84% of the projected spending growth over the next decade. @BudgetHawks

What will drive federal spending growth over the next decade?

Core argument: The Congressional Budget Office projects 84% of the increase in nominal federal spending this decade will come from health care (35%, $1.3 trillion), Social Security (28%, $1.0 trillion), and interest (21%, $758 billion), with the remaining 16% split across defense, nondefense discretionary, and other mandatory programs.

Budget deficits are projected to grow from $1.7 trillion in Fiscal Year (FY) 2023 to $2.6 trillion by 2034 according to the Congressional Budget Office’s latest projections. Nominal spending will rise from $6.4 trillion this year to $10.1 trillion by FY 2034. Net interest costs will more than double from $870 billion this year to $1.6 trillion by 2034, after costs nearly doubled between 2020 and 2023. Interest on the debt is the fastest growing part of the budget and will be the second largest government expenditure this year, surpassing both defense and Medicare. Of the projected increase in nominal spending this decade, interest alone will make up 21 percent ($758 billion), Social Security will make up 28 percent ($1.0 trillion), and health care will make up 35 percent ($1.3 trillion). The remaining 16% is split between defense, nondefense discretionary spending, and all other mandatory spending such as the Supplemental Nutrition Assistance Program, Supplemental Security Income, and veterans' benefits.

Takeaways by Macro Roundup® AI

  1. The Congressional Budget Office projects 84% of the increase in nominal federal spending this decade will come from health care (35%, $1.3 trillion), Social Security (28%, $1.0 trillion), and interest (21%, $758 billion), with the remaining 16% split across defense, nondefense discretionary, and other mandatory programs.
  2. Net interest costs are projected to more than double from $870 billion this year to $1.6 trillion by FY 2034, after nearly doubling between 2020 and 2023; interest is the fastest growing part of the budget.
  3. The Congressional Budget Office projects deficits will grow from $1.7 trillion in FY 2023 to $2.6 trillion by 2034 as nominal spending rises from $6.4 trillion to $10.1 trillion, with interest the second largest government expenditure this year, surpassing defense and Medicare.

Related Articles:

  • The Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects the federal budget deficit will grow from $1.6tn to $2.6tn over a decade, rising from 5.6% to 6.1% of gross domestic product. That end-point is well above the 3.7% average of the past 50 years, as outlays are projected to rise faster than revenues over most of the period.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • The Limits of Taxing the Rich — Stabilizing US federal debt at 100% of GDP would require non-interest savings starting at 2% of GDP and rising to 5% of GDP over three decades, assuming no new spending, tax cuts, or crises. Taxing the rich cannot close more than a small fraction of this gap.

AI Summary. Labor productivity, measured as output per hour worked, rose 0.8% quarter over quarter and 2.7% year over year, compared with average paces of 0.3% and 1.3% in the decade before the pandemic. Productivity growth is volatile and can turn negative even outside recessions.

John O'Trakoun Federal Reserve Bank of Richmond
Date Posted:

From 2010-2019 labor productivity growth averaged 1.3%/year. In 2023 labor productivity grew by 2.7% helping to dampen the inflationary impact of strong wage growth. @RichFedResearch

Is labor productivity growth running faster than before the pandemic?

Core argument: Labor productivity, measured as output per hour worked, rose 0.8% quarter over quarter in the fourth quarter and 2.7% year over year.

Labor productivity (measured as output per hour worked) rose 0.8% quarter over quarter in the fourth quarter and is up 2.7% year over year, as seen in Figure 2 below. This growth in productivity has been robust compared to recent history. In the decade before the pandemic (2010-2019), productivity rose at average paces of 0.3% quarter over quarter and 1.3% year over year. Figure 2 also shows that productivity growth is volatile and can swing from positive to negative even in nonrecessionary quarters. Nevertheless, the past three quarters have seen robust productivity growth.

Takeaways by Macro Roundup® AI

  1. Labor productivity, measured as output per hour worked, rose 0.8% quarter over quarter in the fourth quarter and 2.7% year over year.
  2. In the decade before the pandemic, 2010–2019, productivity rose at average paces of 0.3% quarter over quarter and 1.3% year over year, below the fourth quarter's pace.
  3. Productivity growth is volatile and can swing from positive to negative even in nonrecessionary quarters, though the past three quarters have seen robust growth.

Related Articles:

AI Summary. Quarterly growth in the Employment Cost Index has slowed continuously and now runs roughly 1 percentage point faster on an annualized basis than just before the pandemic, while hourly private-sector pay growth has stayed stable. Despite the normalization of job-market churn, both measures of pay gains remain much faster than pre-pandemic.

Matt Klein The Overshoot
Date Posted:

While the quit rate is under the pre-pandemic level, hourly private-sector pay growth remains robust and may be accelerating. This suggests Fed cuts will not be forthcoming. @M_C_Klein

Is pay growth still running faster than before the pandemic?

Core argument: Quarterly growth in the Employment Cost Index has slowed continuously and now runs only about 1 percentage point faster in annualized terms than immediately before the pandemic, with an even narrower gap relative to 2006–2007.

Quarterly growth in the Employment Cost Index (ECI) has been slowing continuously, and is now rising only about 1 percentage point faster (annualized) than immediately before the pandemic. Relative to 2006-2007, the gap is even narrower. On the other side is the remarkably stable growth of hourly private-sector pay over the past 18 months, which if anything has accelerated in recent months. Zooming out, the growth rate in nonmanagerial pay—excluding leisure, hospitality, and retail—has tended to move in line with the Atlanta Fed’s measure of median 12-month changes in hourly pay among continously-employed workers. Despite the normalization of job market churn since the end of 2021, which was supposed to remove much of the upward pressure on wage growth, both measures of pay gains are still much faster than before the pandemic.

Takeaways by Macro Roundup® AI

  1. Quarterly growth in the Employment Cost Index has slowed continuously and now runs only about 1 percentage point faster in annualized terms than immediately before the pandemic, with an even narrower gap relative to 2006–2007.
  2. Growth in hourly private-sector pay has been remarkably stable over the past 18 months and, if anything, has accelerated in recent months, contrasting with the Employment Cost Index slowdown.
  3. Nonmanagerial pay growth excluding leisure, hospitality, and retail has tended to track the Atlanta Fed's measure of median 12-month pay changes among continuously employed workers, and both remain much faster than before the pandemic despite job-market churn normalizing since the end of 2021.

Related Articles:

  • Wages Are Rising Faster than We Thought — Core wage growth is running slightly faster than in the late 1990s and 2005-2007, about 2-3 percentage points faster than before the pandemic. The author argues a steady state near 5% annual wage growth need not be inflationary if workers save more or productivity gains let businesses expand output to meet demand.
  • Is Post-Pandemic Wage Growth Fueling Inflation? — A model forecasts no statistically significant additional wage pressure on prices if year-over-year employment cost growth runs between 3.78% and 4.25%, a range above the Federal Reserve's 2% inflation target plus average productivity growth. Because inflation has outpaced productivity-adjusted wages, wages have room to catch up without adding inflation.
  • The Labor Market Is Primed For a Soft Landing — Elevated wage growth can threaten a strong labor market if it raises inflation concerns and leads the Federal Reserve to hold monetary policy tighter, though productivity growth eases that concern. After wage growth exceeded a sustainable benchmark of productivity growth plus the Federal Reserve's 2% inflation target, rebounding productivity and moderating wage growth have narrowed the gap.

AI Summary. China's producers of wafer-fabrication tools have increased their domestic market share from 4% to an estimated 14%, according to broker Bernstein. Even if Huawei and SMIC reach 5nm chip production, they would remain behind Samsung and TSMC, which have mass-produced 3nm chips.

Economist Staff The Economist
Date Posted:

China’s semiconductor “self-reliance” campaign is gaining steam. Domestic producers of wafer-fabrication tools had a 14% market share in 2023 up from 4% in 2019 according to Bernstein. @TheEconomist

Is China reducing its reliance on foreign chipmaking technology?

Core argument: Chinese producers of wafer-fabrication tools have raised their domestic market share from 4% in 2019 to an estimated 14% last year, according to Bernstein, a broker.

Even if Huawei and SMIC eventually succeed at producing 5nm chips, they will remain well behind Samsung and TSMC, both of which began mass-producing 3nm chips as far back as 2022. Look away from the bleeding edge, however, and China is steadily chipping away at its reliance on foreign semiconductor technology. Huawei, which was burned in 2019 by sanctions that cut off its access to American technology, has been cultivating China’s wider chipmaking ecosystem. The domestic market share of Chinese producers of wafer-fabrication tools has risen from 4% in 2019 to an estimated 14% last year, according to Bernstein, a broker.

Takeaways by Macro Roundup® AI

  1. Chinese producers of wafer-fabrication tools have raised their domestic market share from 4% in 2019 to an estimated 14% last year, according to Bernstein, a broker.
  2. Even if Huawei and SMIC eventually produce 5nm chips, they will remain well behind Samsung and TSMC, which began mass-producing 3nm chips as far back as 2022.
  3. Huawei, cut off from American technology by sanctions in 2019, has been cultivating China's wider chipmaking ecosystem.

Related Articles:

  • Assessing China’s Efforts to Increase Self-Reliance — China's import growth has been notably weaker than export growth over the past five years, and the correlation between GDP growth and import growth has run below that between GDP growth and export growth for about a decade, which could be an early sign of increasing self-reliance. China is reducing reliance on imported inputs while maintaining reliance on foreign demand.
  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.
  • Raimondo Says Commerce Needs More Money to Halt China Chip Drive — The US Commerce Department says its roughly $200m budget is inadequate to enforce semiconductor export controls aimed at limiting China's access to artificial intelligence chips, and has called for greater funding. It has warned that chips redesigned to fall just below existing thresholds will themselves be restricted, arguing national security outweighs chipmakers' short-term revenue.

Friday, February 16, 2024

AI Summary. In US elections from the 1960s to 2000, higher turnout tended to favor Democrats because habitual voters were disproportionately wealthy and well-educated, while occasional voters came from lower socio-economic groups. That gradient has reversed as economically marginalised voters shifted rightward: lower-turnout, graduate-heavy electorates now tend to help Democrats.

John Burn-Murdoch Financial Times
Date Posted:

Higher turnout elections used to favor Democrats; however, in 2016 and 2020 “the more people nudged from abstention to voting, the higher Trump’s vote share.” @jburnmurdoch

Does higher voter turnout now favor the right instead of the left?

Core argument: The US partisan turnout gradient reversed after Donald Trump's 2016 arrival, with graduate-heavy voter pools in lower-turnout elections now favoring Democrats while a larger, more working-class electorate no longer produces a bluer result.

In US elections from the 1960s to 2000, the wealthy and well-educated voters who turned out come rain or shine were natural Republicans. Conversely, the wider the segment of society casting ballots, the more of them from lower socio-economic groups and the bluer the political environment. This age-old pattern has been turned on its head by the political realignment brought by Donald Trump’s arrival in 2016. Before Trump, economically marginalised groups leaned left. Today they lean increasingly rightward. The result is that the partisan turnout gradient has reversed. Now, the graduate-heavy voter pools in lower-turnout elections tend to benefit Democrats, and a larger, more working-class electorate no longer means a bluer one. At the time of Barack Obama’s 2008 and 2012 victories, the typical “marginal abstainer” — someone who came close to voting but stayed home — leaned more Democratic than the average voter. By 2016 this had reversed, and the more people nudged from abstention to voting, the higher Trump’s vote share.

Takeaways by Macro Roundup® AI

  1. The US partisan turnout gradient reversed after Donald Trump's 2016 arrival, with graduate-heavy voter pools in lower-turnout elections now favoring Democrats while a larger, more working-class electorate no longer produces a bluer result.
  2. During Barack Obama's 2008 and 2012 victories, the typical "marginal abstainer" leaned more Democratic than the average voter, but by 2016 that reversed, so nudging more abstainers to vote raised Trump's vote share.
  3. From the 1960s to 2000, wealthy and well-educated Americans who voted reliably were natural Republicans, and broader electorates drawing in lower socio-economic groups produced bluer outcomes.

Related Articles:

  • The Road to A Political Realignment in American Politics — College-educated voters are now more likely to identify as Democrats while those without degrees back Republicans, with educational attainment increasingly correlated with views on abortion, LGBTQ+ rights, and religion's relationship to government. This sorting leaves most states politically uncompetitive, with eight states near the national average in education levels holding 97 electoral votes in play.
  • Consistent Signs of Erosion in Black and Hispanic Support for Biden — Polling shows the Democratic presidential candidate's support among nonwhite voters running well below his prior election standing across racial groups, with leads of 72-11 among Black voters, 47-35 among Hispanic registrants, and 40-39 among other nonwhite voters. About 5% of his former nonwhite voters now back the Republican candidate, including 8% of Hispanic voters.
  • The Shape Of Polarization in America — An index scoring 60,000 U.S. survey respondents from 0 to 100 on more than 50 policy questions finds that those who give the conservative or liberal answer more than 75% of the time backed their side's presidential candidate by margins above 98%. Voters below that consistency threshold shift between candidates on a sliding scale according to their policy views.

AI Summary. Canada's adult male population grew 3.4% over the past year versus 2.9% for women, the widest gap in nearly 50 years of records, as a higher share of male newcomers shifts the gender ratio. Among those aged 25 to 44, men outnumber women by 141,000, against a long-run average of zero.

Randy Thanthong-Knight Bloomberg
Date Posted:

Mass immigration is skewing Canada’s sex ratio; the male population grew 3.4% over the past year and the female population grew 2.9%. The gap is widest in the 25-44 cohort.

Is immigration shifting the gender balance of a country's adult population?

Core argument: Canada's adult male population grew 3.4% over the past year versus 2.9% for women, the widest such gap in nearly 50 years of records, according to an analysis by Bank of Montreal chief economist Doug Porter.

An influx of new immigrants is shifting Canada’s gender ratio, as a higher share of male newcomers helps squeeze the female majority to its smallest margin in decades. The population of adult men grew 3.4% over the past year, while women rose 2.9%, making the spread between the growth of the two groups the widest in nearly 50 years of records, according to an analysis by Doug Porter, chief economist at Bank of Montreal. The gap is even larger in the 25-to-44 age group, in which men have seen a 4.8% jump and women a 3.9% increase. There are 141,000 more men than women in this age bracket as of January, compared with a long-run average difference of zero.

Takeaways by Macro Roundup® AI

  1. Canada's adult male population grew 3.4% over the past year versus 2.9% for women, the widest such gap in nearly 50 years of records, according to an analysis by Bank of Montreal chief economist Doug Porter.
  2. Among Canadians aged 25 to 44, men grew 4.8% and women 3.9%, leaving 141,000 more men than women in that age bracket as of January, against a long-run average difference of zero.
  3. A higher share of male newcomers among immigrants to Canada has helped squeeze the country's female majority to its smallest margin in decades.

Related Articles:

  • Mass Immigration Experiment Gives Canada an Edge in Global Race for Labor — Nearly one in four people in Canada are immigrants, the largest share among the Group of Seven nations. At its current pace of population growth, Canada — the smallest G-7 country by population — would double its residents in about 26 years and exceed Italy, France, the UK and Germany.
  • Canadian Conservatives Have Found A Way To Win Back Young Voters — Canada's Conservative Party has doubled its vote share and moved into the lead, which the author attributes to an explicitly pro-youth platform centered on housebuilding, including proposals to withhold funds from cities that don't build enough housing and reward those that do. Housing affordability ranks as the second most important issue in Canada, behind the broader cost-of-living crisis.
  • Third-Country Effects of U.S. Immigration Policy — U.S. H-1B visa denial rates rose from about 6% to 16%, and the authors estimate a 10 percentage point rise in denials increases Canadian applications by 30%, roughly one Canadian application per four forgone visas. More exposed Canadian firms increased sales and hired about 0.5 native workers per immigrant.

AI Summary. Trade and investment flows between the US and China have declined, with protectionist measures prompting some reshoring alongside rerouting of trade and investment through third countries such as Vietnam and Mexico. The result is a loosening of US-China economic links rather than an end to globalization.

Barry Eichengreen National Council of Applied Economic Research
Date Posted:

The US and China have accepted a deterioration in efficiency in exchange for an improvement in security, reflected in declining FDI flows between the two countries and diversion of supply chains through countries like Vietnam and Mexico. @B_Eichengreen

The US and China have accepted a deterioration in efficiency in exchange for an improvement in security, reflected in...

Are declining US-China trade and investment flows ending globalization?

Core argument: Bilateral U.S.–China trade has slowed relative to global trade, while protectionist measures have produced some reshoring of final production stages alongside rerouting of trade through third countries.

Bilateral trade between the world’s two largest economies has been slowing relative to global trade. Protectionist measures have led to some reshoring of the final stages of production but also to rerouting of trade through third countries. Capital and foreign direct investment flows between the U.S. and China have declined precipitously due to a combination of government controls and political uncertainties. But the fact that total U.S. inward and outward FDI has remained buoyant points to the existence foreign investment diversion to other countries. Likewise, China, even while investing less in the United States, has been ramping up investment in and running growing trade surpluses with countries like Vietnam and Mexico that export significant volumes to the United States, including conceivably goods produced using Chinese parts, components, and technology. In sum, U.S.-China tensions have led to some loosening of economic links between the two countries but not to the end of globalization. The governments in question have accepted this deterioration in efficiency in return for what they hope will be an improvement in national security.

Takeaways by Macro Roundup® AI

  1. Bilateral U.S.–China trade has slowed relative to global trade, while protectionist measures have produced some reshoring of final production stages alongside rerouting of trade through third countries.
  2. Capital and foreign direct investment flows between the U.S. and China have declined precipitously due to government controls and political uncertainties, yet total U.S. inward and outward FDI has remained buoyant, pointing to investment diversion to other countries.
  3. China has ramped up investment in and run growing trade surpluses with countries such as Vietnam and Mexico that export significant volumes to the United States, conceivably including goods made with Chinese parts, components, and technology.

Related Articles:

  • Foreign Direct Investment is Exiting China, New Data Show — Two official Chinese data series—one measuring gross foreign direct investment inflows and one measuring inflows minus outflows—both show foreign direct investment exiting China. The author attributes most of the $113bn gap between the two measures to net sales of direct investment assets by foreign investors.
  • The Global Economy Enters an Era of Upheaval — Bloomberg Economics finds that the global share of new-project foreign direct investment going to countries that declined to condemn Russia's invasion of Ukraine averaged 15%, down from 30% in the decade to 2019, with China and Hong Kong's share falling below 2% from nearly 11%.
  • China Is Quietly Reducing Its Reliance On Foreign Chip Technology — China's producers of wafer-fabrication tools have increased their domestic market share from 4% to an estimated 14%, according to broker Bernstein. Even if Huawei and SMIC reach 5nm chip production, they would remain behind Samsung and TSMC, which have mass-produced 3nm chips.

AI Summary. Using a US government classification of critical sectors, the authors find China's share of US critical-goods imports rose from 6.2% in 2002 to 17.9% in 2017, then fell to 11.1% by 2023. The decline in China's share has been faster for non-critical goods, down about 9 percentage points versus 6.8 for critical goods.

Fernando Leibovici and Jason Dunn Federal Reserve Bank of St. Louis
Date Posted:

The share of US imports directly originating in China is down 7.7pp since 2017 led by a 9pp drop in goods rated “non-critical” by the Dept. of Homeland Security. The “critical goods” share is down by 6.8pp.

Is US import reliance on China falling faster in non-critical sectors?

Core argument: China's share of US critical-goods imports rose from 6.2% in 2002 to 17.9% in 2017, then fell to 11.1% in 2023, a decline of 6.8 percentage points, based on the Cybersecurity and Infrastructure Agency's sector classification.

Figure 2 partitions aggregate US import dependence from China across critical and non-critical sectors, based on a classification by the Department of Homeland Security's Cybersecurity and Infrastructure Agency. Over this period, we find that China has been an important source of imports of non-critical goods, while a more modest yet non-trivial source of critical goods. Moreover, we find that US-China import dependence in critical sectors increased in tandem with aggregate import dependence—from 6.2% of critical goods imports in 2002 to 17.9% in 2017. However, the systematic decline of total US imports from China has been faster in non-critical goods: The import share from China declined by around 9 percentage points for non-critical goods, while among critical goods it declined by 6.8 percentage points—from 17.9% in 2017 to 11.1% in 2023.

Takeaways by Macro Roundup® AI

  1. China's share of US critical-goods imports rose from 6.2% in 2002 to 17.9% in 2017, then fell to 11.1% in 2023, a decline of 6.8 percentage points, based on the Cybersecurity and Infrastructure Agency's sector classification.
  2. The decline in US import dependence on China has been faster in non-critical goods, where China's import share fell by roughly 9 percentage points, versus 6.8 percentage points for critical goods.
  3. China has been an important source of US non-critical goods imports and a more modest yet non-trivial source of critical goods, with critical-sector import dependence rising in tandem with aggregate import dependence.

Related Articles:

  • How America Is Failing To Break Up With China — Research finds that countries with the strongest existing trade ties to China in a given industry have gained the most as direct Chinese exports to the US are redirected, suggesting Chinese supply chains remain central to American imports even in advanced-manufacturing goods officials most want to shield from China.
  • Global Firms Are Eyeing Asian Alternatives to Chinese Manufacturing — Chinese manufacturing wages doubled between 2013 and 2022 to an average of $8.27 an hour, while hourly manufacturing wages in India, Malaysia, the Philippines, Thailand, and Vietnam remain below $3. This alternative Asian supply chain has a combined working-age population of 1.4bn versus China's 980m, and 154m tertiary-educated people aged 25–54 versus China's 145m.
  • Hidden Exposure: Measuring U.S. Supply Chain Reliance — The US buys at least 80% of industrial inputs domestically, so aggregate foreign supply chain exposure is limited, but disruptions occur at the sector level rather than the macro level. Accounting for Chinese inputs embedded in goods bought from other foreign suppliers, US exposure to China is almost 4x larger than it appears at face value.

AI Summary. East Asia and the Pacific account for one-third of global GDP in purchasing-power-parity terms, roughly twice the U.S. share, and Chinese domination of the region would harm U.S. economic interests. U.S. two-way goods trade with its nine largest Asian partners besides China was nearly $940bn, about 60% larger than U.S. goods trade with China.

Andrew Erickson, Gabriel Collins, and Matt Pottinger Foreign Affairs
Date Posted:

A successful Chinese invasion and annexation of Taiwan may drive a strategic realignment in East and Southeast Asia nations representing 1/3 of global GDP (2X the US share), leading to slower US growth. @AndrewSErickson

A successful Chinese invasion and annexation of Taiwan may drive a strategic realignment in East and Southeast Asia nations...

How would Chinese domination of East Asia harm U.S. economic interests?

Core argument: U.S. two-way goods trade with its nine largest Asian partners other than China was nearly $940 billion in 2023, about 60 percent larger than U.S. goods trade with China; in a worst-case scenario the United States could lose access to those volumes.

Chinese attempts to hive off Asia, the world’s largest, most dynamic economic region, would deal a devastating blow to U.S. economic interests. East Asia and the Pacific account for one-third of global GDP in purchasing power parity terms, a share roughly twice that of the United States. The region’s vibrant, open trading networks would likely degenerate into more of a hub-and-spoke system, with China as the hub and subjugated countries at the end of the spokes. In the worst-case scenario, the United States could lose access to trade volumes with its nine largest Asian trade partners other than China. This group’s two-way goods trade with the United States was nearly $940 billion in 2023—about 60 percent larger than the U.S. goods trade with China itself. U.S. investors might also lose out. In Asian countries besides China, particularly in Southeast Asia, the United States is one of the largest sources of invested capital. Americans have plowed untold sums into factories, data centers, and real estate properties throughout the region. Because these and other brick-and-mortar infrastructure are physically immovable, they would be vulnerable to forced changes of ownership under Chinese coercion.

Takeaways by Macro Roundup® AI

  1. U.S. two-way goods trade with its nine largest Asian partners other than China was nearly $940 billion in 2023, about 60 percent larger than U.S. goods trade with China; in a worst-case scenario the United States could lose access to those volumes.
  2. East Asia and the Pacific account for one-third of global GDP in purchasing power parity terms, roughly twice the U.S. share, and Chinese attempts to hive off the region would deal a devastating blow to U.S. economic interests.
  3. Asia's open trading networks would likely degenerate into more of a hub-and-spoke system with China as the hub, while physically immovable U.S.-funded factories, data centers, and real estate across the region would be vulnerable to forced changes of ownership under Chinese coercion.

Related Articles:

  • Xi, Biden and the $10 Trillion Cost of War Over Taiwan — Bloomberg Economics estimates a war over Taiwan would cost around $10tn, roughly 10% of global GDP, based on models of the hit to semiconductor supply, regional shipping, trade sanctions and tariffs, and financial markets. The largest estimated hit comes from missing Taiwanese chips, which would stall production of laptops, tablets, smartphones, and autos.
  • Xi Jinping Says He Is Preparing China for War — China's leadership has emphasized war readiness, announcing a 7.2% increase in the defense budget—which has doubled over the past decade—and plans to reduce dependence on foreign grain imports. China has also opened National Defense Mobilization recruitment offices across the country, while cities in Fujian Province opposite Taiwan build or upgrade air-raid shelters.
  • China’s Age Of Malaise — More than 300,000 Chinese people emigrated in a single year, more than double the pace of a decade earlier, with some traveling overland through a half-dozen countries to reach the US. US authorities at the southern border recorded 17,894 encounters with Chinese migrants over ten months, a thirteenfold increase from the prior year.