Recommended Weekend Reads
Gauging China’s Economy in Uncertain Times, Assessing the Long-Term Effects of the Trade Wars, Artificial Intelligence and the Future of the US Electrical Grid, and the Race for Dominance in Nuclear Fusion
April 25 - 27, 2025
Please find below our list of studies and articles that we found particularly interesting this week and wanted to recommend to you. We hope you find them interesting and useful, and that you have a great weekend.
The Future of China in the Face of the US Trade Wars
The Once and Future China: How Will Change Come to Beijing? Rana Mitter/Foreign Affairs
If you dropped in to China at any point in its modern history and tried to project 20 years into the future, you would almost certainly end up getting it wrong. In 1900, no one serving in the late Qing dynasty expected that in 20 years the country would be a republic feuded over by warlords. In 1940, as a fractious China staggered in the face of a massive Japanese invasion, few would have imagined that by 1960, it would be a giant communist state about to split with the Soviet Union. In 2000, the United States helped China over the finish line in joining the World Trade Organization, ushering the country into the liberal capitalist trading system with much fanfare. By 2020, China and the United States were at loggerheads and in the midst of a trade war. Where is China going to be 20 years from now? Harvard Professor Rana Mitter does a deep dive, looking at various scenarios.
Gauging the Strength of China’s Economy in Uncertain Times Jeffrey B. Dawson & Hunter L. Clark/Liberty Street Economics blog (Federal Reserve Bank of New York)
Amid increasing pressure on the Chinese economy from China’s trade conflict with the U.S., assessing the strength of the Chinese economy will be an important watch point. While China is likely to counter growth headwinds from the escalating trade tensions with additional policy stimulus, the country’s complex fiscal dynamics and the varying interpretations of the strength of its economic growth made judgments of the efficacy of China’s policy response challenging even in a more predictable environment. In this respect, we argue that aggregate credit is a simple and effective measure to gauge policy stimulus in China. At present, China’s “credit impulse”—the change in the flow of new aggregate credit to the economy relative to GDP—appears likely sufficient to allow it to muddle through with steady but not strong growth over the next year, despite the intensifying trade conflict.
How China-India Relations Will Shape Asia and the Global Order Chatham House
The China–US relationship is widely regarded as the defining geopolitical issue of the 21st century. But relations between China and India arguably hold greater long-term significance for the future of Asia and the global order. These two nations are the world’s most populous,together accounting for almost 40 per cent of the global population. China is the world’s second largest economy, with India currently the fifth largest – and soon to be the third largest. Yet, despite their rise having important consequences for the future of global governance, China–India relations are poorly understood outside of those countries. This report delves into what is likely to happen.
Geoeconomics and Trade
Long Run Effects of the Trade Wars David Baqaee & Hannes Malmberg/National Bureau of Economic Research Working Papers
This short note shows that accounting for capital adjustment is critical when analyzing the long-run effects of trade wars on real wages and consumption. The reason is that trade wars increase the relative price between investment goods and labor by taxing imported investment goods and their inputs. This price shift depresses capital demand, shrinks the long-run capital stock, and pushes down consumption and real wages compared to scenarios when capital is fixed. We illustrate this mechanism by studying recent US tariffs using a dynamic quantitative trade model. When the capital stock is allowed to adjust, long-run consumption and wage responses are both larger and more negative. With capital adjustment, U.S. consumption can fall by 2.6%, compared to 0.6% when capital is held fixed, as in a static model. That is, capital stock adjustment emerges as a dominant driver of long-run outcomes, more important than the standard mechanisms from static trade models — terms-of-trade effects and mis- allocation of production across countries.
G30 Spring Lecture 2025: "Commanding Heights: Central Banks at a Crossroads" Kevin Warsh Lecture at the International Monetary Fund
Kevin Warsh is widely seen as a leading candidate to replace Jay Powell as Chairman of the Federal Reserve Board. Indeed, President Trump has cited Warsh as someone he is considering. Warsh gave a lecture at the IMF this past week as part of the World Bank/IMF meetings in Washington. You can read the remarks via the link in the title above or watch his remarks via this video link.
Supply, Demand and the Post-Lockdown Inflation Surge St Louis Federal Reserve Bank
Only recently have economists started tracking category-level consumer inflation using their associated movements in quantities. Adam Shapiro, an economist and vice president at the Federal Reserve Bank of San Francisco, Adam Shapiro, an economist and vice president at the Federal Reserve Bank of San Francisco, used the supply-demand framework described to classify inflation at the consumption-category level into supply- and demand-driven components. In a recent working paper, St. Louis Federal Reserve Bank economists implemented an extension of Shapiro’s method, which distinguishes between the trend component of inflation and inflation attributable to supply and demand shocks. Their study generalizes his approach in a few ways, distinguishing between the current and past effects of those shocks. This allowed their study to parse the part of inflation that’s expected in the absence of supply- and demand-side “shocks” (the trend), as well as the parts of inflation explained by the ongoing expected effects of shocks in previous periods (past) versus shocks happening right now (current).
The Global Race for Energy Dominance
AI and the Future of the U.S. Electric Grid Rand
Despite its age, the U.S. electric grid remains one of the great workhorses of modern life. Whether it can maintain that performance over the next few years may determine how well the U.S. competes in an AI-driven world. AI is a big part of the challenge. Its vast data centers suck up energy like small cities. But a recent RAND study suggests AI could be a big part of the solution, too. There are risks here—some obvious, some not—and grid operators need to move with caution. But AI could usher in an energy future that is more resilient, more efficient, and more affordable for customers. Companies working with AI have warned that they are already struggling to find the power they need. Keeping them on U.S. soil has become a national imperative, especially in light of the deepening competition with China. That means upgrading and modernizing the grid, much of which was built in the 1960s and ‘70s.
The cheapest way to supercharge America’s power grid MIT Technology Review
US electricity consumption is rising faster than it has in decades, thanks in part to the boom in datacenter development, the resurgence in manufacturing, and the increasing popularity of electric vehicles. Accommodating that growth will require building all sorts of energy producing capacity (e.g., nuclear, hydropower, wind turbine, solar farms, etc.) faster than we ever have before—and expanding the network of wires needed to connect those facilities to the grid. But one major problem is that it’s expensive and slow to secure permits for new transmission lines and build them across the country. This challenge has created one of the biggest obstacles to getting more electricity generation online, reducing investment in new power plants and stranding others in years-long “interconnection queues” while they wait to join the grid. Fortunately, there are some shortcuts that could expand the capacity of the existing system without requiring completely new infrastructure: a suite of hardware and software tools known as advanced transmission technologies (ATTs), which can increase both the capacity and the efficiency of the power sector.
Grid Connection Barriers to New-Build Power Plants in the United States Lawrence Livermore Laboratory
The backlog of proposed power plants that have submitted grid connection requests (i.e., the interconnection queues) is larger than ever. As reported in our flagship Queued Up report, grid connection requests active at the end of 2023 were more than double the total installed capacity of the US power plant fleet (2,600 GW vs. 1,280 GW). Solar, battery storage, and wind energy account for 95% of all active capacity in the queues. The unprecedented volume of requests in queues points to significant shifts in the generation mix of the US power system, but is also evidence of a significant structural and regulatory bottleneck for plants seeking grid connection. The amount of time spent in queues has increased by 70% over the last decade, and withdrawal rates remain high at 80%. Interconnection costs have risen and are highest for wind, solar, and battery storage projects. To better understand the dynamics of interconnection and what solutions may be available, we compiled and analyzed two unique datasets for the first time, in “Grid connection barriers to renewable energy deployment in the United States,” in the journal Joule.
The US Led on Nuclear Fusion for Decades. Now China is in a Position to Win the Race CNN
US companies and industry experts are worried America is losing its decades-long lead in the race to master this near-limitless form of clean energy, as new fusion companies sprout across China, and Beijing outspends DC. Nuclear fusion, the process that powers the sun and other stars, is painstakingly finicky to replicate on Earth. The prize of this energy is its sheer efficiency. A controlled fusion reaction releases around four million times more energy than burning coal, oil or gas, and four times more than fission, the kind of nuclear energy used today. It won’t be developed in time to fight climate change in this crucial decade, but it could be the solution to future warming. The Chinese government is pouring money into the venture, putting an estimated $1 billion to $1.5 billion annually into fusion, according to Jean Paul Allain, who leads the US Energy Department’s Office of Fusion Energy Sciences. In comparison, the Biden administration has spent around $800 million a year.