There are of course costs to a yuan revaluation - which Nageswaran and Srinivas acknowledge. But there are upsides for China too. They note, like I did, that in a world where China imports mainly commodities it’d bring a positive income shock as well. 5/

Deregulation can be helpful, but to my mind, this is where Berlin has to do its own homework. Some ideas: get rid of insurance mandates for competing EU companies, suppress protected professions, create tax incentives to work, not stay at home. The IMF has some suggestions. 7/end

The German environment minister earlier this year confidently claimed Germans would buy German and European cars anyway. Almost 50% of plug-in hybrid sales in Europe are now Chinese. Turns out growing Chinese car quality meeting a 20-30% undervalued exchange rate matters! Who could've known? 7/

The other shocks that have hit the German economy - China shock 2.0, US tariffs, a lack of affordable and reliable homegrown energy - are of a far larger magnitude than EU dereg. The crisis in German car-making alone is a much bigger deal, as the China trade swings dramatically. 3/

Word is spreading that pockets of the European economy are blossoming. Croatia, Netherlands, Poland, Spain, Greece are also growing at a brisk pace. Those countries are in the EU single market - casting doubt on a German narrative that EU regulation is to blame for its woes.

"Europe’s Car Industry Faces Dramatic Crisis, German Lobby Says" But said lobby failed to equip the German EV subsidy with a buy-EU clause - which'd be reciprocal to China. The EU's EV duties also failed to cover hybrids - the results of which are glaring in the chart 1/

Private investeringen in Duitsland hingen historisch samen met de-export groei die nu afkalft. In zekere zin gaat de uitdaging van China nog dieper. 2/

Overigens is er ook een interessante vraag of je het argument “Duitsland moet fors investeren” van Tooze en co (ben ik het met eens uiteraard) kunt scheiden van de China shock. De winsten en waarderingen - en daarmee investeringsruimte - van Europese bedrijven die kampen met China dalen snel. 1/

NRC gaat er ook nog op in. Het is de moeite waard het paper echt goed te lezen. Dan dringt zich ook de vraag op waarom de export van de VS, Zuid-Korea en Zwitserland in 2022–2024 zoveel beter draaide dan die van Duitsland. Let op de specifieke jaren.

Germans new EV subsidy is succeeding to rekindle the market whilst helping to support ....China's, not Germany's own, EV production. Germany failed to equip its new EV subsidy scheme with buy-EU/buy-ally clause a few months ago - a stunning own goal. Oops 1/

Europe can calibrate policy intelligently. Tariffs on finished goods be combined w subsidies for upstream suppliers, to lower input costs - levelling the playing field in the EU, whilst boosting competitiveness elsewhere IMF work on finds that such measures are effective. 19/

But Germany's industrial structure overlaps far more with China's than peers. The '22-24 comparator countries heralded by journos are tricky. Switzerland had a particularly strong period in Pharma. The US/Korea excelled in tech/semiconductors. The UK's competitiveness was affected by Brexit. 11/

In 3rd markets, Kiel's (useful!) benchmark assumes China takes market share from all non-Chinese exporters proportional to their initial market shares But for each product it also implicitly assumes China competes no more directly with Germany than the average economy 10/

German car exports to China have fallen by ~200,000 vehicles, as Chinese car imports collapsed by half from well over one million annually. Meanwhile, German imports of Chinese cars and machinery have surged. Those developments are not part of this exercise. 9/

The paper deliberately studies third markets - a perfectly reasonable research design. But it excludes two key markets for German industry: Germany and China itself. Import substitution in China and Chinese competition in Germany's domestic market—are outside the scope. 8/

If the question is China Shock 2.0, a comparison of 2019-25 or 2019-26 arguably makes more sense. That better captures the period when Chinese export volumes dramatically outperformed world trade while German industry weakened. 7/

Around one-third of Germany's lost exports in third markets are mechanically attributable to rising Chinese competition. In cars, the figure is closer to 40%. That's economically significant -- not evidence that the China shock is a myth. 4/

The authors explicitly acknowledge Germany's exceptional exposure to China's export glut (see screenshot). That's hardly a dismissal of the China shock. Even on its own terms, the paper finds a sizeable China effect. 3/

Reactions to Kiels paper on China Shock 2.0. It's a thoughtful contribution that rightly argues EU trade defence doesn't solve competition in third markets. But contrary to some commentary, I don't think it shows German concerns about Chinese competition are wholly overblown. In-depth thread. 1/

Spanish PM Sanchez has clearly decided Europe needs to accomodate Chinese power. Goldman's modelling, does, however suggests Spain's economy is also being slowed down by China shock 2.0. Overall strong Spanish growth obscuring that pain, and clouding the PMs judgement.

Brad and I do think there is a case for a European section 301 type instrument, as the Economist noted. Safeguards can be brought online quickly - they require diagnosis the disease with the symptom (import surge) without having to do tedious Chinese subsidy investigations. 4/

Great G7 work from the Chancellor to table Chinese currency undervaluation - an issue the US bizarrely is no longer interested in. There was a time - not long ago - when the US Treasury led on this. Germany and France are showing leadership instead.

It’s true Herr Dr Setser and I have not agreed with the Fund’s line on imbalances, nor the second China shock. The IMF is catching up a tad - was high time after wrongly predicting imbalances would narrow for years. Chart from Shahin shows the IMF got mugged by reality.

Rather humbling. Handelsblatt: "A key factor in the Chancellor's change of course was, among other things, a research paper by economists Sander Tordoir and Brad Setser" Pleased Brad and I could contribute to Chancellor Merz's thinking on China Shock 2.0 with analysis and a few policy ideas. 1/

Ouch. Not surprising for those of us who have been paying attention, but a powerful data visual. I don’t think Röpke Eucken nor Dutch Ordoliberal philosophers would approve of a do nothing response to such distortions. (h/t @tbenner.bsky.social )

But most importantly, Europe needs a playbook to manage supply chain retaliatory warfare from China - responding in kind to deter China, and reset the relationship without full escalation. I’d indeed read Tobias Gehrkes work on this - Europe has strong chokepoint cards in Beijing Hold Em, too. 8/

That does not mean a stronger European trade defence is a free lunch. EU leaders clearly need to develop a playbook for how to mange and deter Chinese retaliation. Setser and I made some suggestions. 4/

She brings out the short vs long term trade-offs clearly. The 2000s China shock was primarily a concern about (devastating) local labour market disruptions There was still a plausible view the lost sectors weren’t essential and China was still importing. Today, there more reasons to worry. 3/

“The EU could well conclude that it can’t act (against China) because the short-term costs are too high. In which case it will have given in to coercion both now and later.” Great piece by Soumaya Keynes. With a shoutout to Brad and my piece. 1/

Internal market reform and trade defence on China are clearly interlinked. Cutting intra-EU trade barriers, CMU and industrial policy are different planks for a stable European market that key long-horizon sectors (semiconductors, clean tech, defence) need to invest. 8/