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“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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Sure, the U.S. Can Cut Its Reliance on China. But Is It Worthwhile?

Matthew Klein Barron's

Date Posted:: September 11, 2020
Is Database:: Database

US reliance on Chinese production is relatively modest, with less than 3% of overall domestic demand met by China, according to OECD’s “Trade in Value Added” data.

The U.S. reliance on Chinese production is relatively modest, with less than 3% of overall domestic demand met by China, according to OECD's "Trade in Value Added" data. In higher-value manufacturing sectors like pharmaceuticals, metals, machinery, electronics, and motor vehicles, Chinese production accounts for less than 9% of U.S. demand. This suggests that while decoupling from China is feasible, it may not be economically significant given the limited role Chinese imports play in satisfying U.S. needs. However, achieving this would require significant shifts in supply chains and addressing the nearly $300bn invested by American companies in China over the past three decades. The potential return to pre-2008-style trade imbalances could lead to higher U.S. borrowing and lower employment, complicating the decision to reduce reliance on Chinese imports.

Takeaways by Macro Roundup^® AI

Chinese production meets less than 3% of overall U.S. domestic demand, according to OECD "Trade in Value Added" data, suggesting decoupling is feasible but of limited economic significance.
In higher-value manufacturing sectors including pharmaceuticals, metals, machinery, electronics, and motor vehicles, Chinese production accounts for less than 9% of U.S. demand.
Cutting reliance on China would require major supply-chain shifts and addressing nearly $300bn invested by American companies in China over three decades, while a return to pre-2008-style trade imbalances could raise U.S. borrowing and lower employment.

Matthew Klein, "Sure, the U.S. Can Cut Its Reliance on China. But Is It Worthwhile?,"Barrons, September 11, 2020, https://www.barrons.com/articles/sure-the-u-s-can-cut-its-reliance-on-china-but-is-it-worthwhile-51599854414

He read the same Setser post we did, “….As Brad Setser at the Council on Foreign Relations has noted, the lack of large trade imbalances elsewhere in the world right now means that America’s roughly $1 trillion trade deficit in manufactured goods is effectively funding China’s $1 trillion surplus, which in turn is supporting Chinese companies far above and beyond what they could earn from selling to their domestic market. That “could reinforce the return of pre-2008-style trade imbalances,” Setser warns, which would mean some combination of higher U.S. borrowing and lower U.S. employment. Chinese officials recognize the danger of their continuing dependence on the rest of the world’s consumers, but for various reasons, they haven’t been able to alter their own domestic political economy to change things. If the country that most desperately wants to “decouple” from the U.S. still hasn’t been able to pull it off—despite significant progress in doing so by some measures—it probably means that Americans determined to cut themselves off from China will have a tough slog ahead…..”

Matt Klein on US decoupling from China, it’s achievable (note these numbers are from 2015 so they don’t reflect the current deficits)“…At first glance, the costs of decoupling look modest, for the simple reason that China provides relatively little value to the U.S. economy to begin with. Using the Organization for Economic Cooperation and Development’s “trade in value added” data, less than 3% of U.S. domestic demand is ultimately satisfied by Chinese production. Most Americans’ needs are met by American companies and workers, whether it’s housing, health care, education, food, energy, or entertainment. Even in higher-value manufacturing industries where imports are far more important, such as pharmaceuticals, metals, machinery, electronics, and motor vehicles, Chinese production satisfies less than 9% of Americans’ needs.With enough time—and enough inducements to shift supply chains and offset the losses on the nearly $300 billion of investments that American companies have made in China over the past three decades—a determined push to reduce Chinese imports could therefore be successful…..”

Ed Comment:You can add for the 3% factoid. But when we chose to spend and borrow $2 trillion of risk-averse savings on top of the $1 trillion deficit we are running (rather than taxing), maybe we can’t afford to close the door to cheap offshore risk-averse capital (and resulting trade deficits).

How To Buy A Trade Surplus

Joseph Gagnon and Nishtha Agrawal Peterson Institute For International Economics

Date Posted:: July 29, 2026
Is Database:: Database
Is Important:: Important

Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.

Table 1 presents regression results. The evidence strongly suggests that governments can buy current account surpluses. Raising the fiscal balance by $1 tends to raise the current account by $0.30 [Table 1, first row]. Issuing $1 of domestic currency debt to buy foreign-currency assets (foreign exchange intervention) raises the current account anywhere from $0.20 to $1.00, with a value around $0.50 to $0.60 most plausible [Rows 2 though 5]. NOF is Net Official Flows, and NOS is the stock of net official foreign assets. The most powerful policy, as exemplified by Norway and Singapore, is to run a fiscal surplus and invest the proceeds in foreign-currency assets. In that case, $1 buys a current account surplus of around $0.80 or so. The results are supported by annual panel regressions of current accounts and cross-country stock regressions of cumulated current accounts or stocks of net foreign assets. The estimated effects in the panel regressions may be biased down slightly by incomplete modeling of lagged effects.

Takeaways by Macro Roundup^® AI

Regression results suggest that raising the fiscal balance by $1 tends to raise the current account by about $0.30.
Issuing $1 of domestic currency debt to buy foreign-currency assets is estimated to raise the current account by $0.20 to $1.00, with $0.50 to $0.60 most plausible.
Combining a fiscal surplus with investment of the proceeds in foreign-currency assets, as Norway and Singapore do, is estimated to buy a current account surplus of around $0.80 per $1.

Honey, Who Shrunk the U.S. Income Surplus?

Matthew Higgins and Thomas Klitgaard Liberty Street Economics

Date Posted:: May 19, 2026
Is Database:: Database

The US net international investment position worsened by about $16tn between 2019 and 2025, driven by roughly $5.5tn in net inflows and $10tn in valuation losses, as higher rates hit a larger net liability stock, raising interest rate-sensitivity.

Foreign holdings of U.S. financial assets are immense, with official estimates putting their current market value at $69 trillion. U.S. holdings of foreign assets are also impressive but much smaller, at $41 trillion. The shortfall in U.S. foreign assets relative to foreign liabilities has been mounting for decades. Yet U.S. investment income receipts—in profits, dividends, and interest—comfortably exceeded income payments until recently. Payments on U.S. assets owned by foreign investors represent a servicing burden for the U.S. economy. Profits, dividends, and interest payments that would otherwise accrue to domestic investors instead flow abroad. Given the need to sell U.S. assets to finance ongoing trade deficits, this servicing burden seems likely to mount. The related buildup in the U.S. net liability position in interest-bearing assets will also make the income balance more sensitive to swings in interest rates. This increased sensitivity is already in evidence. At present, with the asset-liability gap at -$15 trillion, a 1 percentage point increase in U.S. and foreign interest rates would subtract $150 billion from the U.S. net income balance. (A 1pp fall in rates would result in a similar improvement.) Only five years ago, a 1 percentage point rise in rates would have subtracted $100 billion.

Takeaways by Macro Roundup^® AI

Official estimates put the current market value of foreign holdings of U.S. financial assets at $69tn, against $41tn of U.S. holdings of foreign assets, a shortfall that has been mounting for decades.
With the U.S. asset-liability gap in interest-bearing assets at -$15tn, a 1 percentage point rise in U.S. and foreign interest rates would subtract $150bn from the U.S. net income balance, compared with $100bn five years ago.
U.S. investment income receipts in profits, dividends, and interest exceeded income payments until recently, and the servicing burden on foreign-owned U.S. assets seems likely to mount given the need to sell U.S. assets to finance ongoing trade deficits.

Don't Blame America's Current Account Deficit On the Dollar

Maurice Obstfeld Peterson Institute for International Economics

Date Posted:: April 14, 2026
Is Database:: Database

Noting the minimal relationship between official liabilities and the CA, Obstfeld argues that the reserve currency role of the dollar is not the cause of the trade deficit. He urges reduction in the US fiscal deficit to increase national saving.

Critics of the dollar's global role have argued that foreign official dollar purchases (labeled US incurrence of official liabilities in the figure) feed one-for-one into US current account deficits. To illustrate the true loose relationship between these two variables, the figure shows both of them over the 2003–25 period, as percentages of GDP. US net incurrence of liabilities to official holders, reported with a minus sign as in standard balance-of-payments methodology, is usually far too small to mirror the US current account deficit. And since roughly 2014, net official financial inflows have fluctuated around zero as the current account deficit has widened. To be sure, the strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, [but] while they imply a smaller current account balance, they do not necessarily imply a negative balance and certainly not a rising negative balance, especially when foreign dollar reserve holdings have been shrinking relative to global economic activity (as figure 1 also implies). The euro is the world's second reserve currency, yet the euro area has a current account surplus. Britain had surpluses up until World War I despite issuing the world's premier global currency and hosting its leading financial center. Reducing the US fiscal deficit materially and sustainably is the most important US policy prerequisite for global current account rebalancing.

Takeaways by Macro Roundup^® AI

US net incurrence of liabilities to official foreign holders over 2003–25, measured as a share of GDP, is usually far too small to mirror the US current account deficit, contradicting claims that official dollar purchases feed one-for-one into it.
Since roughly 2014, US net official financial inflows have fluctuated around zero while the US current account deficit widened, and foreign dollar reserve holdings have been shrinking relative to global economic activity.
The euro area runs a current account surplus despite the euro's status as the world's second reserve currency, and Britain ran surpluses until World War I while issuing the premier global currency and hosting its leading financial center.

Understanding Global Imbalances

IMF Staff International Monetary Fund

Date Posted:: April 7, 2026
Is Database:: Database

As of 2024, the US, China, Germany, and Japan accounted for ~2/3 of total global imbalances (the sum of the absolute value of each economy’s current account deficit and surplus). The US CA deficit is between 0.8 and 1% of world GDP.

Four economies—the US, China, Germany, and Japan—account for roughly two-thirds of global imbalances. The US deficit—equivalent to 4% of GDP as of 2024—has been financed by capital inflows and portfolio investors seeking dollar assets. Germany and Japan’s surpluses have been driven by high saving rates, joined by substantial surpluses in China beginning in the 2000s. Oil-exporting countries’ surpluses fluctuate with commodity prices, creating episodic contributions to global imbalances. In earlier decades, surpluses and deficits were more cyclical: countries moved in and out of surplus depending on business cycles, commodity shocks, and exchange rate movements. While there is no standard definition of persistence, the average duration of a deficit or surplus spell roughly doubled since the 1980s. Persistent surpluses over the past two decades have accumulated into very large net foreign asset positions for economies such as China, Germany, and Japan, with each holding net foreign assets equivalent to 3–3.5% of global GDP in 2024. Similarly, persistent deficits have built up into large net liability positions, most notably in the US where the NIIP stands at about -25% of global GDP in 2024, underscoring the central role of the US position in global balances (Figure 6).

Takeaways by Macro Roundup^® AI

The US, China, Germany, and Japan together account for roughly two-thirds of global imbalances, with the US deficit equal to 4% of GDP in 2024, financed by capital inflows and portfolio investors seeking dollar assets.
The average duration of a deficit or surplus spell roughly doubled since the 1980s, when countries moved in and out of surplus with business cycles, commodity shocks, and exchange rate movements.
China, Germany, and Japan each held net foreign assets equivalent to 3–3.5% of global GDP in 2024, while the US net international investment position stood at about -25% of global GDP.

China’s Cheap Money Is Shaking $9.5 Trillion Global Loan Market

Bloomberg Staff Bloomberg

Date Posted:: March 5, 2026
Is Database:: Database

China’s savings glut and “monetary easing to counter slowing growth” are manifesting themselves in credit expansion overseas, as bankers seek higher yields than they can get at home amidst deflationary pressure.

Chinese banks, flush with low-cost funds, are reshaping parts of the global loan market, underscoring how deflationary pressures in the world’s second-largest economy are increasingly influencing competition with international lenders. Much like US and European manufacturers who have long complained about being undercut by cheaper Chinese rivals, bankers at global institutions now say they’re facing the financial equivalent: being priced out of some of Asia’s most sought-after borrowers as Chinese lenders extend cheaper credit across borders. Enabled by Beijing’s monetary easing to counter slowing growth, Chinese banks are expanding overseas lending amid weakening domestic credit demand. That edge may prove even more significant as the Iran crisis threatens to upend global energy markets, raising the likelihood that major central banks will hold off easing interest rates amid mounting uncertainty.

Takeaways by Macro Roundup^® AI

Chinese banks, flush with low-cost funds from Beijing's monetary easing, are reshaping parts of the $9.5 trillion global loan market by extending cheaper credit across borders.
Bankers at global institutions say they are being priced out of some of Asia's most sought-after borrowers by Chinese lenders, a financial equivalent of the undercutting US and European manufacturers have long complained about.
Weakening domestic credit demand in China is accompanying an expansion of its banks' overseas lending, an edge that may prove more significant if the Iran crisis leads major central banks to hold off easing interest rates.

Tariffs and "International Payments Problems"

Matt Klein The Overshoot

Date Posted:: March 4, 2026
Is Database:: Database

The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3 – reflects valuation gains on US stocks relative to stocks in the rest of the world.

Foreigners are accumulating more financial claims on Americans than Americans are accumulating on foreigners across every single category: FDI, stocks, bonds, physical currency, deposits, and loans. Foreign official investors supposedly have been mild sellers of U.S. assets over the past 12 months, but the standard measure does not include state-affiliated institutions that operate on behalf of foreign governments. Meanwhile, the U.S. net international investment position has swung massively over the past few years, from -20% of U.S. GDP in 2010, to -53% of U.S. GDP on the eve of the pandemic to -89% as of the end of 2025Q3. Almost all of that reflects massive valuation gains on U.S. stocks relative to stock markets in the rest of the world. The good news is that actual U.S. indebtedness has not meaningfully increased, and the methods used to assign market values to FDI in the U.S. and abroad make the situation look more extreme than it is. (U.S. FDI assets in Ireland are overwhelmingly big tech and big pharma, for example, but the market value of those assets is imputed based on the performance of the maker of Kerrygold.) The bad news is that, if the current level of the NIIP is unsustainable, the easiest way for it to revert is for U.S. stock prices to fall dramatically.

Takeaways by Macro Roundup^® AI

The U.S. net international investment position swung from -20% of GDP in 2010 to -53% just before the pandemic and -89% as of 2025Q3, almost all reflecting valuation gains on U.S. stocks relative to foreign stock markets.
Foreigners are accumulating more financial claims on Americans than Americans are on foreigners in every category — FDI, stocks, bonds, physical currency, deposits, and loans — while actual U.S. indebtedness has not meaningfully increased.
Methods for assigning market values to foreign direct investment make the imbalance look more extreme than it is, since U.S. FDI assets in Ireland are overwhelmingly big tech and big pharma yet are valued using the performance of the maker of Kerrygold.

US reliance on Chinese production is relatively modest, with less than 3% of overall domestic demand met by China, according to OECD’s “Trade in Value Added” data.

How much of US demand does Chinese production actually meet?

Takeaways by Macro Roundup® AI

Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.

Can governments buy current account surpluses with fiscal and currency policy?

Takeaways by Macro Roundup® AI

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The US net international investment position worsened by about $16tn between 2019 and 2025, driven by roughly $5.5tn in net inflows and $10tn in valuation losses, as higher rates hit a larger net liability stock, raising interest rate-sensitivity.

How does a growing net liability position affect U.S. investment income?

Takeaways by Macro Roundup® AI

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Noting the minimal relationship between official liabilities and the CA, Obstfeld argues that the reserve currency role of the dollar is not the cause of the trade deficit. He urges reduction in the US fiscal deficit to increase national saving.

Does the dollar's reserve role drive the US current account deficit?

Takeaways by Macro Roundup® AI

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As of 2024, the US, China, Germany, and Japan accounted for ~2/3 of total global imbalances (the sum of the absolute value of each economy’s current account deficit and surplus). The US CA deficit is between 0.8 and 1% of world GDP.

How persistent are global current account imbalances and which economies drive them?

Takeaways by Macro Roundup® AI

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China’s savings glut and “monetary easing to counter slowing growth” are manifesting themselves in credit expansion overseas, as bankers seek higher yields than they can get at home amidst deflationary pressure.

Are Chinese banks undercutting global rivals in cross-border lending?

Takeaways by Macro Roundup® AI

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The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3 – reflects valuation gains on US stocks relative to stocks in the rest of the world.

Does the deteriorating U.S. investment position reflect borrowing or stock valuations?

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