governance, political economy, institutional development and economic regulation

Posts tagged ‘President Trump’

Trump’s – “ugly American” redux

Trump

President Donald Trump’s administration is showing its a mean. mercantilist machine. Unsurprisingly, for it, international trade is a one-way street, with exports increasing wealth in America, at the expense of the importing economies and imports stealing American jobs. The psychosis is familiar territory for India and scores of developing countries. What is truly unusual is the conversion of the United States of America to this flawed concept and the abandonment of the open economy model, by the erstwhile foremost exponent of this philosophy.

Nǐ hǎo ma America

In today’s topsy-turvy world, Mr Trump is aping the Great Qing emperors of China during the mid-19th century. At that time China was more than willing to sell Chinese silks, ceramics and art in exchange for silver, but felt no need to import any foreign goods or influences. The result was a burgeoning trade surplus. It took export of cheap opium and gunboat diplomacy by the Western colonial powers to balance the trade.

Emperor Quinlong

Unlike China under the Great Qing, the United States runs a massive trade deficit equal to around three per cent of its GDP. This is normal for many developing countries but unusual for a “great power”. American consumers are accustomed to the “opium” of cheap imported goods. It helps that the appetite of foreigners for AAA-rated US dollar securities finances the deficit. But what matters to Mr. Trump is protecting US jobs. Hence the plan to reduce the deficit, particularly versus China, by $100 billion. Hiking import tariffs on metals significantly is part of that  endeavor. Mr. Trump hopes that metals, being intermediate goods, the resultant rise in price of final goods will not be immediately visible. More bizarre tactics may follow.

Jobs for the boys, at any cost 

But higher tariffs will rob both American consumers via higher prices eventually and jobs in ancillary, user trades, which are sensitive to price rise. All this, just to keep jobs alive on life support, in the metals production business. This is bad politics and worse economics – at best a short-term tactic — to signal the Trump administration’s sympathies for Republican rough-necks. The economy wide negative impact will be diluted over time. Mr. Trump believes in deals. So expect to be able to evade the higher tariffs if you are willing to buy enough of iconic American products – like Harley Davidson motorcycles, stetsons and Boeing aircraft.

The US remains the biggest single country, market. It imports $2.7 trillion of goods and services. But the European Union’s market for imports is much bigger, at $6.7 trillion. Japan alone imports $0.8 trillion and China imports $2 trillion worth of goods and services. So the US is steadily dropping away from being a dominant market for world exports.

India is not the target, but we suffer collateral damage

The new import tariff of 25 per cent on steel and 10 per cent on aluminum are of marginal consequence for India. Our share in world steel exports is just 2.5 per cent. Steel exports to the US, over 2012-16, averaged around 6.5 per cent of our total steel exports. We also export metals to other big markets like the UAE, Europe, East Asia and South Asia. Our share in world aluminum exports, averaged 1.5 per cent over 2013-16. The share of the US in our aluminum exports is significant, at 10 per cent. But our largest importer is South Korea, with significant volumes also exported to Mexico, Malaysia, the UAE and Turkey. Indian exports to the US are not of the scale where they could threaten the economic security of American industries. Also, our special relationship with the US, since the 2005 US-India Civil Nuclear Agreement, the shared commitment against terror and common military logistics arrangements, can facilitate privileged access to the US market.

The US – a willful ally

The elephant in the room is US intransigence, amounting to the “ugly American” behaviour. Starting with the US walking out of the 2015 Paris climate change agreement; and its recent regressive approach to immigration — in sharp contrast to responsive European policies; and its most recent arbitrary protection via high import tariffs of steel and aluminum manufacturing jobs — all these have damaged its “soft power”.

 

Of course, the US has the firepower, bolstered by its $600 billion defence expenditure, to promote “gunboat” diplomacy. But faced with China’s relentlessly expanding economic muscle which makes it an implacable adversary in the superpower sweepstakes, the US will be hard pressed to convince its own allies that it can back its brash words with action.

Indians have indelible memories, from 1971, of the threatening deployment of the US Seventh Fleet in the Bay of Bengal seeking to prevent the liberation of East Pakistan by the Bangladeshi Mukti Bahini from the oppressive, quasi-colonial rule of the Pakistani-Punjabi mafia — a long-time close US ally. It was only the counter deployment of Soviet nuclear submarines and warships, in response to a request for help from India, which rendered the USS Enterprise and the rest of the Seventh Fleet toothless. If the US was not willing, in 1971, to face down the Soviets, to help its ally Pakistan, then how credible is its willingness and ability to come to the help of India in facing down a possible threat from China?

mujib

China, our awesome, prickly neighbour

In a networked world, trade, investment and security are intertwined. The US views China as its primary adversary. Luckily for it, China is several thousand miles removed from the American land mass. But China lurks on our northern borders. It spends $180 billion on its military alone — almost equal to the total budget of the Indian government. Whilst, lining up to seek favourable trade terms from America, it would be foolhardy to provoke a trade war with China. India did well, recently, to dilute the potential use of the Dalai Lama’s April 19, 1959 flight to safety in India, as an irritant for “Emperor Xi”.

Navel gazing better than eye-balling

Modi emerging

Prudence lies in following the Chinese strategy of subordinating muscular diplomacy to economic growth till the time is ripe. It remains in India’s interest to adhere to the open economy model. We have limited capital and governance capacity. We must be frugal in allocating them to first build our domestic infrastructure and facilitate private investment, whilst keeping our markets lightly regulated and open to competition and foreign investment.

Let us not obsess about job creation or force-feeding the formal economy. The US creates two million jobs in a year. Non-farm jobs are scarce everywhere. We should become better at generating fiscal resources to redistribute as income support to the “lost generations” of unskilled, unemployed Indians who are older than 50. This will boost domestic demand and fuel economic growth, far better than resorting to failed economic solutions — such as protectionism, subsidies and publicly financed businesses to chase impossible dreams.

Adapted from the authors opinion piece in The Asian Age, March 17, 2018 http://www.asianage.com/opinion/columnists/170318/ugly-american-is-back-shun-all-the-failed-ideas.html

G 20 summit: Not India’s turn to eat

ivanka G20

President Trump’s implicit assessment of the value of the G20 Hamburg summit was best illustrated by letting his daughter replace him, whilst he was away from his seat at the summit and to spend double the budgeted time, holding President Putin’s hand. We should take note.

Did Trump try and devalue the G20, President Xi or both by letting Ivanka replace him?

Despite his oddities and his rhetoric, President Trump is a businessman. He cannot but recognize that his real fight is with China. So occasional side swipes to emphasize US dominance over China are par for the course. But the US is too fat to keep pace with China. Its entrepreneurial juices have dried up, bled by the strain of keeping the American Dream alive – an endlessly aspirational, middle class and a voraciously, acquisitive elite, albeit both sets being more meritocratic than elsewhere. But the strain shows. If there is no public money for infrastructure and Facebook needs to build a village to increase the supply of affordable housing in Silicon Valley, there is something very wrong with institutional incentives in the US.

The football “huddle” to plot strategy

Trump

President Trump’s instincts to deal with a problem is to “huddle” in a group of “familiar” friends. Co-opting Russia into a loose friendly alliance of northern hemisphere countries could be an outcome of such “huddling”. After all, there are the cultural bonds. The UK will be supportive. It was Tony Blair, who persuaded Russia to join the rich country club of G7, which thereafter became the G8. Russia was expelled, in 2014 over its muscular action in Crimea. But the G7 was already in decline, post 2009, whilst the G20 gained leverage, as a more inclusive forum with economic heft.

Russia better as a friend than an enemy

Putin2

Bringing Russia in from the cold, makes sense. It is no longer an ideological threat to the West – just a shade smarmier in its management style. But no more so than other upper middle-income countries. Its GDP, in constant terms, has barely moved from US$ 1.5 trillion in 1989 to 1.6 trillion in 2016 – though it has doubled since 1998, when it reached its nadir at US$ 0.8 billion. Russian expatriates live happily in the US and in Europe.

Hypertension, made in China

china air craft carr

Expansionist Germany was the muscular outlier in the early part of the last century. In the early part of the current century, it is China. Scale matters. Consider that the world’s largest mall, 19 million square feet of space, has come up in Chengdu, western China.

The Chinese manufacturing engine has surplus capacity to feed the world over the next decade with goods, targeted at the price points and quality requirements of local markets, across the globe.

China applies the late CK Prahalad’s principle of, “finding the fortune hidden at the bottom of the pyramid” by supplying consumables and consumer durables to 3 billion humans at the bottom of the economic food chain. And they do it better than local manufacturers, located in countries where the poor exist, including India.

India’s dharma

So where does this leave India? It is not in India’s DNA to kowtow. So, we are a poor fit with China. It is in India’s political DNA to be ideological. Remember Non-Alignment? Ideologically committed bureaucracies are a menace. They must be tamed. To come out tops, from the ongoing international churn towards a transactional future, we need to reign-in our tendency to grandstand. There is virtue in being supremely transactional. But transactions must be anchored in public interest. We have not been very good at that.

Had we been better, we would have got rid of poverty faster than we have. We would have cared more about creating physical and social (education and health) infrastructure and jobs. And we would have exploited every growth opportunity, which came our way, rather than choose to sit out the 1970s and the 1980s on our elitist, immaculately manicured hands.

We do not have the luxury, unlike Latin America and large parts of Africa, of being natural invitees to the western, Christian table of nations. Nor do we fit the dismal, backward looking club of Islamic nations. And we are too large to be helped economically. So, like China, we have no option, except to fend for ourselves.
International trade is our entry point to becoming more competitive.

We need cheap Chinese goods more than China needs our market. We import just 3 percent of China’s exports. We should be trying harder to become part of global supply chains to pull-in foreign investment, technology, jobs and increase net exports. Our traditional links with Russia are valuable but need to be lubricated.

With the US and its West European allies, we share a tradition of democracy – a generic, clunky, artifact to safeguard citizen rights versus the State via an elaborate architecture of self-balancing, institutional power centers. These links can be deepened.
Going under the radar and setting-off no red alerts till we have accumulated critical economic heft is sensible.

Playing second, or even seventh fiddle, to achieve targeted outcomes is better than to compromise outcomes by being top-dog in process matters. But low profile economic diplomacy does not come easy to our colonial style Foreign Policy establishment. Best to remember that we rank seventh in nominal GDP and are a lower middle-income country. We should punch our weight. Doing more is unsustainable.

Adapted from the author’s article in TOI July 9, 2017Blogs http://blogs.timesofindia.indiatimes.com/opinion-india/g20-trumped/

 

 

 

 

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