AI Is Reshaping Global Trade

Jeffrey Roach (00:08):

Hi, I'm Jeffrey Roach, chief economist for LPL Financial, and in this edition, I'll highlight three key factors at play in the global economy. First, China's growth strategy is through exports. China is increasingly looking overseas to make up for weakness at home with its real estate market still struggling and domestic demand sluggish. Exports have become an important source of growth, helping keep GDP expansion near 5%. That's in recent years following just 3% growth in 2022. Despite higher U.S. Tariffs, Chinese exports rose 5.4% in 2025 to almost $4 trillion, even as shipments to the United States declined roughly 20%. Chinese manufacturers are finding new customers across Southeast Asia, Europe, Africa, and other emerging new markets. Now, this is reshaping global trade flows in the process. This shift is helping sustain China's economy, but also intensifying competition for manufacturers elsewhere and potentially exporting some of China's deflationary pressures to the rest of the world.

Jeffrey Roach (01:16):

For investors, China's manufacturing strength remains an important growth engine, although its growing reliance on foreign demand leaves it increasingly exposed to trade restrictions and geopolitical tensions. Second, the AI build out is reshaping global trade. The AI investment boom is impacting global trade, computer prices, and supply chains. American technology companies are pouring billions into data centers, but much of the equipment they need comes from overseas. That helps explain why the trade deficit subtracted from third quarter GDP growth. That's the largest drag since 1947, excluding, of course, Liberation Day distortions. What's remarkable here is that imports have surged despite much higher tariffs, with the average U.S. Tariff rate rising to 14.8% in 2025. We're also seeing a shift in where America buys its goods. China's share of U.S. Imports fell from 13.4% in 24 to 9% in 2025. And that's while Taiwan, Mexico, Vietnam, and India gained ground.

Jeffrey Roach (02:25):

You can see in this chart here, the parabolic growth in U.S. Imports from Taiwan. Meanwhile, strong demand for memory chips is pushing some computer prices and other electronics prices higher. The bigger takeaway is that AI investment is supporting U.S. Growth while increasingly benefiting overseas manufacturers, reshaping global trade and creating new inflation pressures. Third, inflation has a demand-driven problem. Given the latest CPI release, inflation is proving a little more stubborn than investors had hoped. Core prices rose 0.3% in October, and that's for the third consecutive month, reinforcing expectations that the Fed could raise rates in December. What's interesting is that inflation isn't just a supply problem. Consumers are still spending freely on restaurants and travel, even as prices rise, while strong demand for healthcare services and a tight labor market continue to push medical costs higher. Some inflation pressures are certainly tied to the conflict in the Middle East, but resilient consumer demand is also playing an important role.

Jeffrey Roach (03:33):

The encouraging news is that rent inflation has remained relatively stable. The bottom line here is that the Fed may need to tighten policy further to cool the demand side of the economy and in turn relieve some of the current pricing pressures. Well, that's all for now. If you got more insights, follow us on social media and take care.