Rather than signaling a trend towards deglobalization, the available data hints at a looming “great reallocation” of US supply chain activity. This shift is marked by a decline in direct US sourcing from China, with a corresponding rise in import share from low-wage locations, chiefly Vietnam, and regional trade areas, particularly Mexico. Recent policy efforts may ultimately not succeed in their objective to reduce US dependence on supply chains tied to China. Despite a decrease in US direct reliance on China, there has been an increase in China’s import share in “friendly” nations, including the EU, Mexico, and Vietnam. Chinese firms are stepping up FDI and production facilities in Vietnam and Mexico in critical sectors, albeit from a low base. This suggests that plants in which China is the ultimate owner may continue to play a significant role in US value chains.
- Date Posted:
- August 29, 2023
One way to better understand the impact of BoJ YCC exit on Japanese demand for US Treasuries is to look at how much of the recent increase in US long-term interest rates has happened during Tokyo trading hours. Since the BoJ YCC exit surprise in late July, the move higher in 10s has occurred almost entirely during New York trading hours. This suggests that US rates are not driven higher by Japanese investors during Tokyo trading hours. Hence, BoJ YCC exit doesn’t seem to be the reason long rates have increased over the past month. Instead, likely drivers of US rates over the past month are the US sovereign downgrade, fewer dollars for China to recycle in a falling exports environment, Fed QT, the significant budget deficit, the large stock of T-bills, and the Treasury’s intention to increase coupon auction sizes.