Must-Read: Brad Setser: The ECB on the Slowdown in Global Trade

Must-Read: Brad Setser: The ECB on the Slowdown in Global Trade:

I have long thought that China was too big an economy for manufacturing exports to account for 35 percent of its GDP…

…especially when that high level of exports relative to GDP corresponded with a large overall surplus. An adjustment that returned China to “normal” thus almost certainly would be accompanied by some form of a slowdown in global trade…. And… China’s post-crisis growth has coincided with fairly steady falls in its imports of manufactures relative to its GDP…. There is plenty of evidence that components once imported are now increasingly made in China (see for example Chapter 1 of this IMF report). Global value chains got compressed…. And imports of manufactured goods for domestic use (measured as the difference between processing imports and all manufactured imports) also seem to be sliding….

The IMF’s analysis in the new WEO chapter on trade points in a similar direction. The Fund argues that the slowdown in global trade stems mostly from a slowdown in investment… [and] China’s imports recently have fallen by a bit faster than can be explained by its model…. A lot of the story on global trade reduces to a China story, both directly, and indirectly though China’s impact on commodities. The ECB’s statistical work maps well to a set of stylized facts about the evolution of China’s trade.