Brad Setser on How World Trade Changed In the Last Three Years

Episode Summary

Executive Summary: The episode revisits global trade with Brad Setser and argues that the post-pandemic world is less about true deglobalization and more about a reshuffling of trade, industrial policy, and geopolitical risk. China remains central to global manufacturing and surpluses, Europe is pressured by Chinese EVs and expensive energy, and sanctions are accelerating shifts away from G7 currencies without creating a clean de-dollarization story.

Main Topics: Post-pandemic trade patterns vs. deglobalization narratives (Priority: 5/5): Setzer says the pandemic disrupted trade and demand, but many core global patterns persisted or intensified: China’s surplus grew, the U.S. deficit widened, and trade interdependence remained high despite political talk of decoupling. U.S.-China industrial policy and strategic supply chains (Priority: 5/5): The discussion contrasts 2019-era tariff politics with today’s industrial policy toolkit: IRA subsidies, CHIPS Act concerns, EV battery supply chains, semiconductor vulnerability, and the national-security framing of trade. China’s domestic-demand problem and surplus-driven economy (Priority: 5/5): Setzer argues China still relies on investment and exports rather than household consumption, partly because of political choices and tax/transfer structure, which keeps pushing the economy toward larger external surpluses. European exposure to Chinese EVs and U.S. energy advantage (Priority: 4/5): Europe is increasingly vulnerable to Chinese EV competition and high energy costs, while the U.S. benefits from cheap gas and domestic industrial capacity, potentially pulling investment across the Atlantic. Surplus countries, sanctions, and the limits of de-dollarization (Priority: 4/5): The show emphasizes that trade and financial flows are shifting away from G7 currencies in response to sanctions, but the trend is better described as de-euroization or movement toward non-G7 settlement than a clean exit from the dollar. China’s local-government debt and weaker investment engines (Priority: 4/5): Local governments carry heavy debt burdens and are squeezed by falling land-sales revenue and weak growth, exposing strains in China’s infrastructure- and property-led investment model. Emerging-market debt restructuring and China’s role (Priority: 3/5): The conversation closes on stalled restructurings for countries like Sri Lanka, Ghana, and Zambia, where Chinese official lenders and bondholders disagree on concessions, slowing IMF-led resolution.

Key Arguments: The world economy did not fully deglobalize after COVID; instead, demand shifted toward goods, China’s exports surged, and supply chains were stressed rather than broken. Tariffs alone did not reduce China’s dependence on trade; broader forces like global goods demand and China’s industrial upgrading mattered more. U.S. policy has moved from tariffs to industrial policy, using EV subsidies and semiconductor controls to shape supply chains and prevent dependence on China. China’s reluctance to support household consumption directly helps explain why it keeps falling back on supply-side stimulus and investment. China’s export capacity has increased so much that the pandemic era actually made the world more dependent on Chinese manufacturing, not less. Europe is more exposed than the U.S. to Chinese EV competition and to high energy costs, making industrial relocation to the U.S. more attractive for some sectors. Sanctions have not produced straightforward de-dollarization; instead, they have pushed trade settlement away from euros and other G7 currencies in selective cases. China’s Belt and Road lending in dollars likely reflects recycling of dollar surpluses and the mechanics of its financial system rather than a deliberate yuan-internationalization strategy. China’s local governments are structurally weaker than the center, with less revenue capacity and more debt, making debt stress persistent even without a central-government crisis. IMF-backed restructurings are stalled because China resists face-value haircuts and disputes the process, delaying relief for distressed borrowers.

Data Points: Time since previous Brad Setzer episode: April 2020 to May 2023 (about 3 years) - Hosts note it had been more than three years since the last appearance. China’s export increase since pre-pandemic: About $1 trillion more - Setzer says China is exporting roughly a trillion dollars more than before the pandemic and before Trump’s trade war. China central government debt: About 25% of GDP - Setzer contrasts low central debt with heavy local-government debt. U.S./France debt level: About 100% of GDP - Used as comparison for central government debt. China local debt plus LGFVs: Above 100% of GDP - Combined local-government and financing vehicle debt is described as exceeding 100% of GDP. Saudi Arabia oil price range covering import bill: Oil in the $70s or $80s - Setzer argues current oil prices roughly cover Saudi imports. Saudi oil windfall: $150 billion - He cites last year’s windfall from oil exports. Gulf countries’ windfall: $300 billion - Setzer says Gulf countries as a group saw roughly this amount. Emerging/frontier economies in debt trouble: Sri Lanka, Ghana, Zambia - Examples of countries needing restructuring and already in default. Chinese reserve behavior: Flat since roughly 2016 - Setzer says China has not significantly added to formal reserves in about seven years. Net foreign assets of state commercial and policy banks: Up by about $1.5 trillion - He argues surplus recycling has shifted into the banking system rather than reserves. Chinese trade surplus vs. pre-pandemic: Way bigger than before the pandemic - General description of the scale of China’s surplus growth.

Pivotal Quotes: "the world economy didn't completely come to a halt in the first few months of the pandemic, but it did sort of stall intentionally" — Brad Setzer: Describing the pandemic shock and policy response at the start of the discussion. "we're debating de-dollarization when the best evidence is of de-Euroization" — Brad Setzer: On sanctions, currency settlement, and why the dollar debate is often misframed. "the pandemic era actually made the world more, not less, dependent on Chinese manufacturing" — Brad Setzer: Summarizing the core irony of post-pandemic trade dynamics.

Implications: Expect more industrial policy, more trade friction, and more geopolitically influenced capital flows. China remains central, Europe looks more vulnerable, and debt restructuring plus sanctions are reshaping settlement systems without fully replacing the dollar.