CAN INDIA ACT IN TIME TO GAIN FROM THE US-CHINA TRADE WAR?

Almost every trade expert I speak to has been talking about the great opportunity that the continued US-China trade war offers to India to expand its trade with the US. Its true that global manufacturers reeling under the tariffs imposed by the US govt have begun looking to South and Southeast Asia to shift their manufacturing operations. High tariffs are hurting their business and they are now looking out of China. This could clearly be an opportunity for India to step in and fill the supply gap. But can it do so?

China has for years exported a wide range of products to the world_from machinery to electric products, and this bouquet of exports is starkly different from the range of products India exports, predominantly jewellery, pharma products, metals and textiles, among others. To replace China overnight in exporting such manufactured goods is very clearly a tough ask for India. What India could do is find gaps in the supply chain in product categories it already exports in. The real gain, though, lies in India’s ability to draw in manufacturers who may be on a mass exodus plan out of China. Here again, India pales in comparison to China when it comes to business-friendly policies. It’s hardly a secret that a number of global companies foraying into the Indian market have complained of delay in land acquisition, procuring business licenses, and other govt permissions for operational ease and a number of them have gone to the extent of wrapping up their operations.

India, thus, at this stage needs bold government policies that truly ease the process of doing business in India. A Mint edit notes that for global firms to move to India from China would need “a very substantial improvement in the basic factors that drive FDI. These include competitive labor costs, a tax and regulatory environment hospitable to business and easy and hassle-free access to all of the factors of production—land, labor, capital and other inputs such as raw material and intermediate inputs.”

Despite the clamour of economists and trade policy enthusiasts, India’s chances at filling the supply gaps in the global supply chains are difficult, if not impossible.

Trump’s Crazy Quibble Over Yuan

First, the madness over Huawei (I blogged about this here) and now, the accusation of currency manipulation – US President Donald J Trump has let the world know that the US-China trade war is far from over. But what exactly has happened with Yuan to warrant Trump’s accusation?

The Yuan fell to its 11-year low against the US dollar last week. It happened because China’s central bank set a lower than usual reference rate for its currency Yuan, and when Yuan hit a low, it didn’t intervene. Trump immediately lashed out, calling China a “currency manipulator”.

China’s Shady Past

This label (of currency manipulation) has come back to haunt China after more than two decades when in 1994, it had earned the tag and rightly so. Currency manipulation is essentially an artificially lowering of the value of a country’s currency against the US dollar, usually done to boost exports. Artifical lowering refers to the weakening of currency by policy measures rather than market forces. With weaker currency, goods and services being exported from a country become cheaper in international markets, raising the volume of exports. Such behavior is unwelcome as gains derived from artificially lowered currencies tend to provide an unfair competitive advantage to countries with weakened currencies, in global trade. China’s export-led economy today is a manufacturing hub, but not without concerns being raised over its currency manipulation in the 1990s. China is known to tightly control its exchange rate and in the last two decades, its always been around 7 yuan per dollar.

US Tariffs and Yuan

In the ongoing US-China trade war, negotiations over tariffs haven’t been going well. Last week, just before the fall of Yuan, US-China failed to arrive at a settlement on tariffs. Instead, US announced more tariffs on 300 billion dollars worth of Chinese goods. China retaliated saying it wouldn’t purchase US agricultural products. This development was succeeded by the fall in Yuan, which China said was driven by market forces. However, for a country known for its tight control over the exchange rate, this was unusual. When the Yuan was falling, China’s central bank, like several times earlier, didn’t intervene.

Here is an excellent piece on currency manipulation that I strongly recommend.

Back to the Q: Is China Manipulating Yuan?

Experts say it depends on whether China runs a huge trade surplus today and as facts stand, China hasn’t been burying foreign exchange neither does it have a large current account deficit as it used to have in the 1990s-2000s. Even US Treasury investigations have concluded for many years now that China doesn’t qualify to be a currency manipulator.

What Now

Experts have termed US’ current labeling of China merely symbolic as the tag of currency manipulator may not have huge and direct implications for either of the two parties involved. However, it’s the intent and purpose of the Trump administration in this matter that appears terrifying. Besides countless reports on China over its intellectual property and other trade practices, Trump government hs its fangs out for China with tariffs and more tariffs. This has huge implications for the global economy (I have already discussed this in an earlier post). Economists at Morgan Stanley have predicted that if the US-China trade war continues for another four to six months, the global economy will plunge into a recession in nine months.

Negotiations between China and the US, irrespective of the name-calling and labeling, seems to be the only way out. It appears that the US and China both would still like to negotiate a deal, given that plans are already underway for a Chinese trade delegation to visit the US next month. Only more trade talks will stop this trade war from getting out of hand.

 

Two insightful reads on the subject that I so want to recommend:

https://mises.org/wire/trumps-hypocrisy-currency-manipulation

http://econbrowser.com/archives/2019/08/guest-contribution-rmb-reaches-7-0-us-names-china-a-manipulator

Should India toe the US line on Huawei?

Huawei, since the start of 2018, has emerged as the most controversial Chinese company. The telecommunications major, with $100 billion in revenue in 2018, has been facing the wrath of US President Donald J. Trump and other leaders who have accused it of aiding the Chinese government with cyber espionage, IP threat and trade violations. The struggle has gone on for too long (the entire timeline of the conflict is here), and with significant impact, potentially shaping the trajectory of the global technology landscape, especially Asia’s.

In the US-China tug-of-war over Huawei, other countries seem to also have acted against the Chinese company. Australia and New Zealand have blocked mobile providers from using the company’s 5G services, besides European telecoms companies — France’s Orange (ORAN) and BT (BT) in the United Kingdom. Germany’s Deutsche Telekom (DTEGY) and Japan’s SoftBank (SFTBF) are reviewing their use of Huawei equipment.

Yet, Huawei has reported an increase in smartphone sales and has also announced the development of its own operating system called the Harmony OS, independent of iOS and Android operating systems. Trump’s ban on the company has led to unpleasant outcomes though: Huawei has laid off hundreds of US workers; its revenues are expected to drop to $100 billion this year, down from around $104 billion last year; and its new launches are severely delayed.

India is roughly 100 days away from its 5G trials and it can’t make up its mind on whether Huawei should be invited to the trials. Reasons are obvious. Huawei operations in India are now in the 22nd year, having built the trust of Indian consumers and a strong market presence since 1998 when it first entered India with an R&D center in Bangalore. India is now a strong market for inexpensive mobile devices and Huawei is doing very well in this market. In 2015, the company also became the first large Chinese corporation ”to supply locally-made products” in the Indian market. Reaching here means huge investments by Huawei in India and this can not be ignored while making any decisions on the India operations of Chinese telecom major. Pre-empting any adverse action, China has gone ahead and warned India of reverse sanctions if it bans Huawei. 

So, should India put curbs on Huawei just like the US has? The answer lies in the policies India wants to adopt to grow its share in international trade. Any attempt to place the curbs would be short-sighted, at best. We can’t deny the presence of domestic lobbies within India who have been wanting Huawei out for the sheer expansion of the company in India’s smartphone market that has made it a market leader. This has happened in spite of the absence of any free trade agreement between India and China. Huawei, for cellular operators in India, also continues to present a more affordable choice given its utterly competitive pricepoint. Placing any curbs at this point in time would only address concerns of domestic cellphone manufacturing lobbies at work, and not really address the future needs of the telecom industry in India which is set to explode with 5G.

Concerns that Huawei may be collaborating with the Chinese government to gather and pass on sensitive information and jeopardize India’s national security, maybe valid and therefore, need to be adequately addressed. But merely banning Huawei isn’t the solution given that there are a number of foreign companies at work in the space and any of them could inflict the same damage as Huawei is feared to inflict. India may be part of US’s plans to forge an anti-China alliance, but it is in such difficult times that it becomes all the more important that India independently decides what’s good for its people. Having Huawei around means India has more choice in terms of smartphones, more competition in the market, and a chance at better telecom services, all of which augur well for the growth of telecom industry in India. With the US closing its doors, Huawei will try its best to hold on to India, and India reciprocating the same can position herself not just as a country that can hold on to its own stance independent of where the US and its geopolitical ambitions stand, but also as a country that thinks and acts to safeguard her long-term economic interests.

The Week That Was: Favorite Reads

I am always intrigued by developments in China, but this piece felt like the disturbing facts have moved closer home in India, especially in the context of what has happened in Jammu and Kashmir in the last few days (I blogged about this here).  Imagine being tracked down by the government down to every step you take or intercepted at every corner of the world you drive to? The court-approved Deadbeat Map does worse to Chinese people, and in that country, such things apparently have stopped bothering people.  The Deadbeat app tracks people blacklisted by the Chinese government for creditworthiness or payment of fines and also allows the dissemination of this utterly private information on social media by complete strangers, to alert authorities! I haven’t heard of a more bizarre government-public partnership at work, enabled by technology! But, imagine this being very, very popular with people in China, and it is.

Adam Minter, in the Bloomberg piece, writes:

Depicted outside of China as a creepy digital panopticon, this network of so-called social-credit systems is seen within China as a means to generate something the country sorely lacks: trust. For that, perpetual surveillance and the loss of privacy are a small price to pay.

….

Rather than generating outrage, these digital debtor prisons have proven extremely popular. A 2018 survey of more than 2,200 Chinese citizens found that 80 percent had joined a commercial social-credit system (Sesame Credit, which requires users to opt-in, was the most popular service), although only 7 percent were aware of that they’d been included within a government system. More surprisingly, 80 percent of respondents either somewhat or strongly approved of social-credit systems, with the strongest support coming from older, educated and more affluent urbanites — a demographic generally associated with more “liberal” values such as the sanctity of privacy.

On social media, at least, China revels in seeing individuals land on social credit-related blacklists. In 2016, when the National Tourism Administration published the names of people banned from plane travel, the news generated thousands of “likes” and repostings on the Sina Weibo social media site.

Hmmm. Read more here.

This Cambridge University Press research also illustrates how, compared to other countries, average public concern in China, especially about issues such as climate change, is relatively low, and concern varies greatly among Chinese citizens, across different provinces and between coastal and inland areas.

Another super interesting piece in The Economist tracked the shift of global banking and finance to India in spite of the constraints it poses to business, thanks to the large churn out of engineers graduating from the country’s university system. Interestingly, unlike manufacturing, global finance firms in India are managing to overcome the typical challenges: a labyrinthine maze of permissions, taxes and red tape, business-unfriendly labour laws, and struggling transport and communications networks.

India has long received other countries’ outsourced jobs. Some of those are unsophisticated, such as answering phones or processing forms. Many, however, rely on Indian universities’ remarkable ability to turn out engineers in great numbers, and computing firms’ ability to use them to solve complex problems. Such tasks may be dismissed as “back-office”. But they are at the heart of modern finance.

In recent years banks have become global networks that link apps on smartphones, workstations used for sales, and sophisticated programs used to manage compliance and allocate capital. Systems that once merely updated balances now determine financial-product marketing—whom to send offers to, when to increase credit limits and when to adjust charges. For banks all over the world, many such tasks are now done in India.
…. bankers say they have been startled by how fast India, notwithstanding its local challenges, has become an intellectual force that is now shaping their global futures.

In EPW, a smart curation of articles to understand inequality in India is enlightening and keeps you updated on the latest in this area. Mainly, the themes here focus on the question of inequality and whether economic growth alone can mitigate it, how inequality is measured and if at all it’s being correctly measured in India, the areas of concentration of wealth, rise in inequality in the post-reform period and long term trends in inequality in India. Another EPW curation of important reads on the growth of Hindu nationalism might be useful too.

A critical McKinsey report released earlier this month on the future of Asia and ways in which the continent will lead the world economy offers an overview of Asia’s role in international trade, corporations in Asia, technology, and the Asian consumer, drawing a comprehensive picture of how the continent is growing and what this could mean for the world.

One of the most dramatic developments of the past 30 years has been emerging Asia’s soaring consumption and its integration into global flows of trade, capital, talent, and innovation. In the decades ahead, Asia’s economies will go from participating in these flows to determining their shape and direction. Indeed, in many areas—from the internet to trade and luxury goods—they already are. The question is no longer how quickly Asia will rise; it is how Asia will lead.

The McKinsey report on International Trade:

Because of its diversity and geographic sweep, Asia is not and likely will never be the same kind of tightly integrated trade entity as the European Union or NAFTA. Although it is a looser constellation of countries, trade ties and cooperation are deepening across the region. Today 52 percent of Asian trade is intra-regional, compared to just 41 percent in North America. This points toward a new trend of firms building self-contained regional supply chains to serve Asian markets. It also indicates deepening trade ties among Asian countries themselves—with much more room to grow. The Regional Comprehensive Economic Partnership (RCEP) is a new free trade agreement that includes 16 countries across the region, including China, Japan, India, and Vietnam.

While trade in goods has flattened, service flows have become the real connective tissue of the global economy. In fact, services trade is growing 60 percent faster than trade in goods—and Asia’s services trade is growing 1.7 times faster than the rest of the world’s. While India and the Philippines are among the biggest exporters of back-office business services, trade in knowledge-intensive services is still in its infancy across most Asian countries and represents an important gap to be filled.

On Corporations:

Asian firms have become global market leaders not only in industrial and automotive sectors but in areas like technology, finance, and logistics. Over the past 20 years, as these economies have evolved, the industry mix of the region’s largest firms has shifted. Manufacturing of capital goods is now a smaller share of the region’s economy, while infrastructure and financial services have grown significantly.

The ownership structures, growth strategies, and operating styles of Asian corporate giants differ from those of publicly owned Western multinationals. About two-thirds of the 110 Chinese companies in the Fortune 500 are state owned. The region also has a number of large conglomerates. South Korea’s top five family-controlled chaebols together account for roughly half of the value in the country’s stock market. Japan’s “big six” keiretsu similarly have outsize weight in the country’s equity market; each one owns dozens of companies spanning several industries. All major Japanese car manufacturers, for example, can be tied back to a keiretsu. India’s top six conglomerates alone employ more than two million people.

 

On Technology:

Whether they are digital leaders or laggards, the next stage of the journey for countries across the region is to go beyond consumer use and encourage wider adoption of digital tools in traditional sectors, from agriculture to retail and logistics. Similarly, the public and social sectors can continue deploying digital systems to make government services and healthcare more efficient. The ultimate goal is harnessing the latest technology tools to boost productivity in a meaningful way.

Innovation hubs are starting to take root. As of April 2019, Asia was home to more than one-third of the world’s “unicorns” (start-ups valued at more than $1 billion). Ninety-one of these companies are in China, followed by India with 13, South Korea with six, and Indonesia at four.

On Asian consumer:

The growing Asian middle class will soon be three billion strong. Southeast Asia alone had some 80 million households in the consuming class just a few years ago. Now that number is on track to double to 163 million households by 2030, with Indonesia, in particular, generating tens of millions of newly prosperous consumers.

Do read the full report here.

Pro-democracy protests in Hong Kong have raged on for more than two months now. This Economist piece succinctly sums up China’s continued interest in this Asian commerce hub and how it has a lot to do with China’s closed economy.

Key points below:

The paradox is that the more autocratic the mainland gets the more it needs Hong Kong commercially. Had China reformed its financial and legal system, the territory would be irrelevant to its global business. Instead the opposite has happened: China has grown fast and globalised, but not opened up.

As a result, Hong Kong’s economy is disproportionately useful to China. It has a status within a body of international law and rules that gives it seamless access to Western markets. The status is multifaceted. It includes: a higher credit rating; lower risk-weights for bank and counterparty exposures; the ability to clear dollars easily; independent membership of the wto; “equivalence” status for its stock exchange with those in America, Europe and Japan; recognition as a “developed” stockmarket by index firms and co-operation agreements with other securities regulators.

Cross-border bank lending booked in Hong Kong has roughly doubled in the past decade, much of it Chinese companies borrowing dollars intermediated through the territory. Hong Kong’s stock market is now the world’s fourth-largest, behind Tokyo’s but ahead of London’s. About 70% of the capital raised on it is for Chinese firms, but strikingly the mix has shifted from state enterprises to tech firms such as Tencent, Meituan and Xiaomi. These firms have specifically chosen not to do mainland listings because the markets there are too immature and closed off from Western investors. Alibaba, an e-commerce conglomerate, is also in the process of doing a Hong Kong listing (at present it is only listed in New York). Most Chinese foreign direct investment flows through Hong Kong. The stock domiciled in the territory has roughly doubled in the last decade, to $2trn. Hong Kong’s share of total fdi flowing into mainland China has remained fairly constant, at 60%. Although the amount of multinational money flowing into and out of China has soared, most firms still prefer to have Hong Kong’s legal stamp.

Meanwhile, the number of multinationals with their regional headquarters in the territory has increased by two-thirds since 1997, to around 1,500. Hong Kong hosts the most valuable life insurer in the world, excluding mainland China, aia, while a global firm with a big Asian arm, Prudential, is about to shift its regulatory domicile to Hong Kong.

This all means that how turmoil in Hong Kong is resolved matters to more than just to its own people. Already boards of multinationals are debating over whether to move their regional domicile to Singapore. Indeed, one existing weak spot for Hong Kong is that major American tech firms, such as Google, Amazon and Facebook, have set up their regional headquarters in Singapore, perhaps because of cyber-worries. An executive with a biotech startup says the company is moving money out of the territory and considering an American listing instead.

China will not take action in Hong Kong lightly: it knows how much is at stake economically and how much its biggest firms depend on the territory, quite apart from the reputational risk. Yet it also sees the situation spiraling into a threat to the Communist Party itself—one that America, it believes, is trying to exploit.

My favorite BJP leader Sushma Swaraj passed away last week. Here is Jaya Jaitley’s beautiful tribute to her.

On Indian economy’s current slowdown, a Business Standard op-ed that debunks the argument that the slowdown is cyclical, and another that takes a hard look at the growth figures, yet again.

Another brilliant piece by my former Mint colleague Remya Nair on how the Modi government has used the Food Corporation of India to keep fiscal deficit artificially low – by transferring its liabilities to the FCI via NSSF loans and keeping the actual food subsidy in the budget low.

I conclude this post two beautiful pieces of writing. First is this post by Adam O’Fallon Price in The Paris Review on his obsessive-compulsive disorder and writing:

Controlling a sentence—controlling this sentence, as I type—is for me the best, most pleasurable work there is. I build the paragraph, tagged by its thematic first word: control. In crafting this sentence, this paragraph, this essay, I get to be both architect and construction worker, and both jobs offer equally pleasing aspects of control. The former involves creative design and abstract thought; the latter brings the visceral, simultaneously logical and intuitive pleasure of finding the right word, moving it around, putting it in just the right place. Having written that sentence, I know I must reverse myself and concede that the idea of there being “just the right place” is illusory—that even this work is, in its essence, as arbitrary as anything else. This is true, but nonetheless as I write, I shut out the world, other responsibilities, Twitter, the news, everything.

Second and last is this touching, forever relevant The Newyorker piece by Toni Morrison who also passed away last week. The sentences that resonated with me:

I have never considered the level of labor to be the measure of myself, and I have never placed the security of a job above the value of home.

India’s Garbage and Cycle Industries Are Facing The Heat, Thanks To China

Two reports in the last couple of days underline the impact of movements and decisions in global trade. This NYT report focusses on the impact on the $25 billion garbage industry in India. The crash in the industry is the result of China’s surprise cut in garbage imports last year. China buys most of the world’s garbage, and US sells the most. In plain demand and supply logic, China’s action cut the demand for trash globally even as trash supply kept overflowing from the US. This has had a severe impact on India’s garbage industry, which is now dealing with low prices and weak demand. This would also have an impact on the environment, as much of the garbage contains plastic which if not disposed of, will be toxic.

From the report:

The type of trash evolved as more Indians could afford more stuff. Water bottles appeared, along with shopping bags, clothes, cardboard and motorcycle helmets. The latest tech, first piles of cassette tapes, then CDs and DVDs started showing up. And cellphones, smartphones and all their accessories.

As the mountain grew it became more exhausting to reach the peak, where the new stuff was dumped. The 10-minute trek grew to 20 minutes. During the hot, dry summers, when temperatures top 110 degrees, pickers lugged liters of water to stay hydrated. Methane fires sprouted up across the mountain, lighting up the night.

China’s shift in policy, and the drop in prices, had a sharp effect on the slum. Workers are now struggling to avoid plummeting deep below the poverty line.

Another IANS report published by Mint said Punjab’s bicycle industry is struggling as cheaper Chinese imports flood the Indian market. It’s estimated that 200 bicycle factories have closed, unable to battle cheaper Chinese.

An excerpt from the report says:

At the heart of bicycle manufacturers’ grouse is how China has gatecrashed the Indian market through the South Asian Free Trade Area (SAFTA) pact, which came into effect in 2006. The agreement paved the way for the eight member countries to reduce customs duties of all goods traded among them to zero by 2016. China isn’t a party to the pact but is still reaping its benefits.