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.

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.

The Big Show About Getting Nothing Done

This blog comes a bit late in the day, but I still wanted to put together some of the important thoughts that have emerged on the G20 summit this year. The big show about getting nothing done – this seems to be the prevailing criticism about the G20 meet in Japan’s Osaka. Of course, Ivanka Trump seems to have made more news than the key issues_sustainable growth, innovation and health_for the summit in 2019. Ahead of the summit, trade analysts keenly watched the highly anticipated talks between US President Donald Trump and Chinese President Xi Jinping, expecting a breakthrough in the ongoing trade war between the two economic superpowers. G20, after all, is a congregation of some of the world’s largest and most powerful economies where world leaders deliberate on the important economic and political issues of the day.

Yet, this year’s event has come under severe criticism from trade experts who mostly are terming the G20 as utterly incapable of advancing solutions to global challenges. It’s true, if you look at it, that G20 actually is a forum of bureaucrats who are good at meetings but not really generating workable outcomes. This year, for instance, what really transpired at the summit are mere mentions of climate change in its communique and US’s repeated justification of its withdrawal from the Paris accord, both quite dull and drab efforts at communicating urgency on the  very serious issue of climate change that has begun its onslaught across the world — from record heat waves in Europe, unprecedented rains and landslides to ecological disasters in Japan. (If you need more convincing on Paris accord and climate change, here is a very useful piece that I absolutely recommend to you.)

All said and done, what is true is also that globally, a broad-based organization taking care of world trade issues at the scale of G20 hasn’t emerged yet. All the best ideas that world leaders may have on pressing global issues in trade and development may stay as ideas if not for a forum like G20 where they, in the least, get discussed.

G20 this year, for instance, didn’t move forward on the utterly critical Dispute Settlement issues, a longstanding pain point in international trade, even as American president Donald Trump keeps violating all trade rules with impunity.

Folks at the NRDC, Han Chen and Claire Wang specifically, have termed this year’s G20 summit as symbolic of Japan’s failure to commit to issues of climate change and coal phaseout. Japan is the world’s 6th largest contributor to cumulative carbon emissions.

They say:

Despite the climate costs Japan has already suffered, its own climate policies are woefully out of date. Prior to the G20 summit, Japan released an uninspiring long term climate strategy that is severely out of line with climate needs, along with watered down language on climate in the draft G20 communique. Japan’s plans for domestic coal expansion and international coal finance continue to draw international criticism, since OECD countries should be phasing out of coal by 2030. The G20 as a whole has also dramatically expanded coal finance, spending at least $63.9 billion on coal per year,  despite committing a decade ago to phase out fossil fuel subsidies.

….Two weeks before the G20 summit, Japan’s cabinet adopted its Long Term Strategy on climate change as part of its commitments under the Paris Agreement. The Strategy seeks to achieve net zero emissions in the second half of the century, but does not set a specific date by which to meet this target. It also maintains Japan’s existing goal to cut emissions 80% by 2050, without specifying a baseline from which to measure emissions reductions. By delaying its net-zero target until after the middle of the century, Japan remains inconsistent with a 1.5C warming limit, which requires reaching net zero emissions by 2050.

So much for the drama in world trade and continued inefficacy of global institutions who continue to be hijacked by the hegemony of the US. Over to next year’s summit now, but if this no-show continues, the voices that doubt its very existence will only grow louder and rightly so.