Four years ago, prior to the pandemic, the big story in world trade was the Trump tariffs against China.
Flash forward to today, and while the tariffs are still here, they’re not front and center the way they used to be.
Instead the trade conversation is dominated by talk of semiconductors and fears that the US is falling behind in leading edge technology. China’s booming electric vehicle-export business is putting pressure on incumbent automakers all over the world, particularly in Europe.
And the Biden administration’s Inflation Reduction Act (IRA) is reshaping supply chains for critical battery tech. Meanwhile, Russia’s invasion of Ukraine has reconfigured the world’s energy map, and oil exporting powerhouses like Saudi Arabia have accumulated even more massive surpluses.
“None of that would’ve been on anyone’s radar screens back in 2019,” says Brad Setser, who left his position as a trade advisor to the Biden administration last year, in a new episode of the Odd Lots podcast. On the flipside, he notes “The tariffs didn't drive as big a shift in trade as some expected.”
Indeed, judged on just the aggregate numbers, a lot of the pre-pandemic trends remain in place. US trade deficits remain wide.
China’s trade surplus remains large and growing. The fact that Setser keeps coming back to, however, is that “China is exporting a trillion dollars more than it was before the pandemic. It’s exporting a trillion dollars more than it did when Trump started his trade war.”
Between the income-support measures put in place in North America and Europe — which helped catalyze a boom in the demand for goods — and China’s own choice to prioritize domestic manufacturing capacity over household demand, “there's just all sorts of measures that suggest [the] overall policy response to the pandemic made the world more, not less dependent on Chinese manufacturing.”
The irony, Setser says, is that “we talk about de-globalization, when on most measures China's economy actually re-globalized.”
It’s this environment — one characterized by China’s growing export dominance and the supply chain frailties exposed by the pandemic — that have catalyzed a shift in thinking from policymakers in the West.
“In 2019, it wasn’t widely recognized that Intel was falling behind the leading edge of semiconductor manufacturing technology. And the vulnerabilities that were associated with reliance on TSMC weren’t kind of front and center,” notes Setser, who has now rejoined the Council on Foreign Relations as a senior fellow.
Then the CHIPS Act aimed at boosting America’s own semiconductor capacity was introduced. And with the IRA, the White House decided, as Setser puts it, that “the transition to electric vehicles should not be a transition to Chinese-made electric vehicles … If you’re going to close factories making internal combustion engines, you wanted there to be new factories being built in the United States to make batteries, to make the components of an electric car.”
Meanwhile, the IRA has jolted European governments, who believe the Act’s subsidies to domestic US automakers are in violation of World Trade Organization commitments.
Here too is another irony, according to Setser: China has been building its EV production capacity for years, and is in a great position to make inroads into the European market. Meanwhile, the SUVs and other large cars prioritized by US automakers are unlikely to make much inroad in Europe.
Beyond China’s proven ability to rapidly move up the manufacturing value chain, the war in Ukraine and the oil shock have also driven significant shifts in world trade.
The oil boom has produced a giant windfall in Saudi Arabia, allowing it to do things like back a competitor to and now partner with the PGA Tour. It’s also allowed the Kingdom to dangle gigantic offers for star soccer players — with Saudi now recycling its huge current account surplus into a new type of reserve asset: famous athletes and sports teams.
As Setser sees it, between these expensive sports purchases, air-conditioned stadiums, new cities being built in the desert and the decline in oil prices, the Saudi current account surplus is destined to disappear.
“What it actually means is that Saudi Arabia’s current account surplus isn’t going to last much longer,” Setser says. “Oil in the seventies or eighties, in my calculations, just covers Saudi’s import bill. And expensive soccer players are kind of a luxury good import. And they’re the kind of luxury good import that quickly reduces your current account surplus.”
What that suggests is that “Saudi Arabia, structurally, is either gonna be drawing on its accumulated savings, which it has a lot of, or it needs somehow to orchestrate higher oil prices.”
Shortly after this interview was recorded (on May 31), Saudi Arabia went ahead with a production cut that’s aimed at stabilizing and boosting oil prices.