CAN INDIA ACT IN TIME?

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.

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.

Yes! US-China Trade War is slowing down the world economy

The global economy is not doing well, and trade tensions between the United States and China have a role to play. Even as the rift continues, another conflict I wrote about yesterday also needs early resolution before it snowballs into something big.

IMF’s World Economic Output Update released earlier this week underlines the fallout of the trade war between US and China. According to its latest forecast, real global economic growth will drop to 3.2% this year, 0.1 percentage point slower than the forecast made in April. These are worrying figures given that the growth figures stood at 3.6% last year and 3.8% in 2017.

The impact of the deterioration of the US-China trade talks can be seen from the slowing growth rate of global trade during the conflict period, the report underlines. IMF’s forecast for growth in global trade by 2.5% now is 1 percent lower than the forecast made in April. Here is another clear and concise analysis of the trade slowdown on Mishtalk. This is especially worrying because global trade since 2017 has seen robust periods of growth. On tariffs, the IMF has also said that attempts to address trade imbalances by taxing imports are hurting the world economy without fixing the problem.

Trade was also a main concern in the IMF’s annual External Sector Report released last week, with Chief Economist Gita Gopinath warning that such conflicts are shaking the global economy. Another important finding of the report underlined the big shift in global economies: China, which had the world’s biggest current-account surplus a decade ago, is now close to balanced trade with developed countries like Germany and the U.S. dealing with largest surpluses and deficits.

To get back to the ripple effect trade wars have been having on world economies in recent months, Gopinath, in her note on the report, says:

Trade actions and tensions have so far not significantly affected global current account imbalances, as trade has been diverted to other countries with lower or no tariffs. Instead, as highlighted in an earlier blog, these trade tensions and related uncertainties are weighing on global investment and growth, especially in sectors most integrated into global supply chains (where production is carried out across multiple countries).

Slowing growth mostly was found in emerging markets, with India forecast lower by 0.3 percent compared to earlier forecasts, followed by Russia, Brazil, and Mexico. Besides the US-China trade tensions continuing to impact growth across the world, the report also cited policy uncertainty as another impediment to growth. The solutions to mitigate the slowing growth, according to Gopinath, also hinge on policy decisions of governments across the world, policies that are pro-trade and contribute towards strengthening the rules governing international trade:

Many countries are now near full employment and have limited room to maneuver in their public budgets. So, governments need to carefully calibrate their policies to achieve domestic and external objectives. Countries with excess current account deficits, like the United Kingdom and the United States, should adopt or continue with growth-friendly fiscal consolidation, while those with excess current account surpluses, like Germany and Korea, should use fiscal space to boost public infrastructure investment and potential growth.

Moreover, carefully tailored and sequenced structural policies should play a more prominent role in tackling external imbalances, while boosting domestic potential growth. Reforms that encourage investment and discourage excessive saving—for example through the removal of entry barriers or stronger social safety nets—would support external rebalancing in excess current account surplus countries. Reforms that improve productivity and workers’ skill base are appropriate to promote exports in countries with excess current account deficits. Even economies with external positions that we assess to be broadly in line with fundamentals, like China and Japan, need to adopt policies that address domestic imbalances and prevent a resurgence of external imbalances; this requires structural reforms that facilitate competition in sectors like services.

Exchange rate flexibility remains key to facilitating external adjustment. As highlighted in this year’s analytical chapter, varying features of international trade, including the extent of integration into global value chains and trade invoicing in a dominant currency like the US dollar, can weaken some mechanisms of external adjustment and limit the benefits of exchange rate flexibility in the short term. So, exchange rate flexibility may need to be supported with other policies that bolster the export response, including through improved access to credit and transportation infrastructure. Allowing exchange rates to play their role, however, remains key to deliver durable medium-term rebalancing. 

Another report from the World Trade Organization, released this month, underlines a sharp increase in trade protectionism. Approximately $340 billion a year of trade faced tariffs, the report said, marking the second-highest figure on record, surpassed only by the $588 billion in restrictions reported in WTO’s earlier monitoring report.

All these reports, released in quick succession this month, flag trade tensions as detrimental to economic growth. Yet, bilateral conflicts continue, and while there is no alternative to WTO however ineffective and slow it may be at times, not all conflicts can be resolved by the WTO. This year and next are critical to seeing if sparring countries can come together and find effective institutional frameworks for trade negotiations that benefit all.

India and US Trade War Isn’t Unreal

United States–India trade ties have been in news for all the wrong reasons, of late. There may be optimism that it’s just a mini conflict that can be resolved easily, but the road ahead is nothing short of thorny. It’s a crisis that can snowball into a big rift if not managed properly. The institutional arrangements that currently exist between US and India are unable to manage this conflict, as is clear from the continued tone of President Trump’s tweets and statements on India. What makes worse is the protectionist nature of the governments in both countries.

Let’s look at what both sides have built in trade over the years which will be all exposed to risks if the trade ties continue to be volatile:

  • Bilateral trade in goods and services grew at an average annual rate of 7.59 percent between 2008 and 2018. This was double the value from $68.4 billion to $142.1 billion.
  • US was India’s second-largest trading partner in goods in 2018, and the single largest export destination with $54.5 billion worth of goods shipped to the US in 2017.
  • India was the ninth-largest trading partner of the United States in 2018 with US exports to India accounting for 2 percent of overall US exports in 2018, valued at an estimated $33.1 billion, up 87.3 percent from 2008.
  • US service exports to India were an estimated $25.8 billion in 2018, up 157 percent from 2008.
  • US arms exports to India touched $15 billion in the past decade.
  • Exports to India supported an estimated one hundred and ninety-seven thousand US jobs in 2015.
  • Bilateral FDI more than doubled from $24.3 billion in 2009 to $54.3 billion in 2017.

These numbers are enough to understand how important the US-India trade ties are. But as things stand, the disagreements are chronic and deep.  While Indian government’s efforts to engage in trade talks with the US have increased since 2018, the scope for existing Trade Policy Forum and the Indian Ministry for Commerce and Industry for talks between both countries remains limited. It doesn’t help that for bilateral talks, neither of the two countries has figured out an institutional mechanism to engage with each other beyond the Free Trade Agreements (but the recent conflict over FTAs negates even the possibility of any more FTAs in the near future). AT the WTO, they have sparred constantly with no concrete results.

A report released this month by the Atlantic Council’s South Asia Center recommends that both US and Indian governments take steps to manage short-term disagreements and establish a more constructive relationship in the medium and long runs. This would clearly mean reviewing the existing institutional frameworks for reform, brainstorm on creating avenues for market opening agreements and draw a roadmap for the FTAs. It’s indeed a difficult ropewalk but much-needed. Read the detailed report here.