Export of services

T. N. Ninan makes the point that export of services might exceed the export of manufacturing from India. It is indeed extraordinary.

A good piece, overall. Especially the last paragraph on the implications that a rising share of export of services has for the currency. The failure to raise the manufacturing share of exports or that of GDP is not the failure of the ‘Make in India’ programme. It could have been more accurately stated as, “in spite of the ‘Make in India’ programme”.

More than physical infrastructure – which applies to ease of living and ease of doing business – manufacturing efficiency (critical for exports) is hobbled by rules, regulations and their extortionist implementation. These ensure that scale is never created and manufacturing remains fragmented.

This is a state-level issue. The PM must call for a conclave of BJP-Ruled CMs over a weekend and emerge with a ten-point reform agenda that enable small businesses to grow out of their small sizes.

For small businesses to grow bigger, small minds have to become broader and bigger, first.

A response to Martin Wolf

Mr. Wolf wrote:

The US focus on bilateral imbalances is economically illiterate. The view that theft of intellectual property has caused huge damage to the US is questionable. The proposition that China has grossly violated its commitments under its 2001 accession agreement to the World Trade Organization is hugely exaggerated.

Response #1

“A landmark study by the MIT economist David Autor attributed the loss of 985,000 manufacturing jobs in the United States from 1999 to 2011, or about 20 percent of the total job losses in the sector during this period, to the so-called China shock of exposure to increased competition from China.” (Source: https://www.theatlantic.com/international/archive/2018/08/china-trump-trade-united-states/567526/)

Response #2

“When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. As a first step, the Trump administration should demand that the Chinese government sign the GPA without further delay. But down the road, the administration may be forced to ask Congress for additional authority. If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.” (William Galston, Wall Street Journal, 9th August 2017)

Response #3

“This paper links the sharp drop in U.S. manufacturing employment after 2000 to a change in U.S. trade policy that eliminated potential tariff increases on Chinese imports. Industries more exposed to the change experience greater employment loss, increased imports from China and higher entry by U.S. importers and foreign-owned Chinese exporters. At the plant level, shifts toward less labor-intensive production and exposure to the policy via input-output linkages also contribute to the decline in employment. Results are robust to other potential explanations of employment loss, and there is no similar reaction in the EU, where policy did not change.” (Source: ‘The Surprisingly Swift Decline of U.S. Manufacturing Employment’ by Justin R. Pierce and Peter K. Schott – https://www.aeaweb.org/articles?id=10.1257/aer.20131578)

Response #4

“This paper examines the relationship between county-level mortality rates and exposure to an important economic shock, the trade liberalization associated with the U.S. granting of Permanent Normal Trade Relations to China. We calculate exposure to PNTR as the employment-weighted average exposure of the industries active in each county. We then estimate the relationship between PNTR and mortality using a differences-in-differences framework that nets out any time-invariant county characteristics, as well as annual shocks that affect counties identically. We find that exposure to PNTR is associated with an increase in mortality due to suicide and related causes, particularly among whites. These results are consistent with that group’s relatively high employment in manufacturing, the sector most affected by the change in trade policy. We find that these results are robust to various extensions, including an alternate empirical specification that places no restrictions on the timing of the effects of the policy change as well including controls for changes in state health care policy and exposure of other counties in the surrounding labor market.” (“Trade Liberalization and Mortality: Evidence from U.S. Counties” by Justin Pierce and Peter K. Schott, Federal Reserve Board, November 2016 – https://www.federalreserve.gov/econresdata/feds/2016/files/2016094pap.pdf)

Martin Wolf #2

“the best way for the west to deal with China is to insist on the abiding values of freedom, democracy, rules-based multilateralism and global co-operation. These ideas made many around the globe supporters of the US in the past.”

“This is the most important geopolitical development of our era. Not least, it will increasingly force everybody else to take sides or fight hard for neutrality. But it is not only important. It is dangerous. It risks turning a manageable, albeit vexed, relationship into all-embracing conflict, for no good reason.”

Response #1:

“the West’s 25-year bet on China has failed.” (‘The Economist’ March 1, 2018 – https://www.economist.com/leaders/2018/03/01/how-the-west-got-china-wrong).

Response # 2

“in negotiations with then-President Barack Obama, China’s president Xi had agreed not to turn a series of manmade islands that China had created in the South China Sea into military installations. But then China did just that.” (John Pomfret, Washington Post, 23rd August 2018)

Response #3:

“I believe that we have no adequate economic playbook for competition with China. Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people.” (Ash Carter, Defence Secretary in the Obama Administration, Interview to ‘Politico’, February 19, 2018 – https://www.politico.com/magazine/story/2018/02/19/ash-carter-defense-global-politico-transcript-217023)

Who or what torpedoed the trade deal?

A long-form NYT article by Chris Buckley and Keith Bradsher somehow fails to convince, in the sense that it makes it out that Xi backtracked. If Xi and his emissary took the deal to near-completion, the motivation for him backing out (‘last minute switch’) is not well laid out. That is the article’s major weakness. Therefore, it is quite likely that the truth might lie elsewhere.

That is what Nikkei Asia Review articles have been trying to establish. I had already blogged on one of them earlier. Frankly, I found those articles more interesting and insightful than the one by these two gentlemen. The second article I read in NAR points out that Xi’ colleagues rejected an ‘unequal’ deal. Indeed, the article clearly exposes the lie that Trump was always desperate to do a deal. In fact, a deal was as much in Xi’ interest as it was in Trump’s interest, if not more. But, China’s nationalism and mistaken aggression trumped (pun intended) Xi’s intentions to settle the trade dispute.

Perhaps, it was Xi or his Communist Party or both believe that China’s moment under the sun cannot be denied. In fact, Chris Buckley and Keith Bradsher point out how China’s strident aggression against South Korea backfired:

Mr. Xi’s strategy of engaging in a war of words against other countries has often overreached. In a dispute with South Korea over Seoul’s decision to let the United States deploy an antimissile system, China struck a hard line against the country — only to find itself a year later in a losing position with limited options.

It does look like, however, that Xi is far less in control than is commonly accepted. After all, during this recent Washington trip, his Trade emissary was no longer called Xi’s ‘Special Representative’.

A friend wrote that something similar happened in 2014 during his visit to India:

There were unmistakable signs that his views were not going down well with the foreign policy bureaucracy, or with the think tanks dealing with India. His sin: to call for a settlement of border dispute with India at an early date. The Chinese have taken the position since at least the 1980’s that it would take long to find a solution.

Another thing that stood out: he did not know that his Army was intruding into Indian territory even as he was launching his talks with our Prime Minister. He has made large-scale changes in the structure of the PLA, and has tried to make the other Arms less unequal vis-a-vis the Army, but as late as 2017, the problems had not gone away.

Even the ‘Belt and Road’ initiative was less about a grand strategy but more a series of attempts by local governments and their enterprises to drum up businesses for themselves:

Those who defend the Belt and Road against the charge of debt-trap diplomacy are technically correct. But those same defenders also tend to portray the lack of competitive tenders and over-reliance on Chinese construction companies in Belt and Road projects as “problems” that detract from the initiative’s promise. They miss the central role of the SOE infrastructure-complex interest group in driving the Belt and Road. Structures that funnel projects funded by state banks to Chinese SOEs aren’t “problems” from China’s perspective–they are the whole point. [Link]

In other words, according to Andrew Batson, there is no strategy to trap partner countries in debt through diplomacy. All that Xi did, according to him, was to:

The fact that this model was dubbed the “Belt and Road Initiative” and turned into a national grand strategy by Xi Jinping effectively gave the SOE infrastructure complex carte blanche to pursue whatever projects they can get away with. These projects were no longer just money-makers for SOEs, but became a way to advance China’s national grand strategy–thereby immunizing them from criticism and scrutiny. [Link]

Whether or not there is a grand strategy to trap countries in debt, that is the result and that is how I would interpret critics of the OBOR project like Brahama Chellaney.

Anyway, that is a digression. But, the key is that Xi may have projected himself China’s strongman and may have anointed himself the core and also removed term limits on himself but he may not be fully in control. That is what may have torpedoed the US-China trade deal.

Postscript: It is not going to be easy for the United States to win this cold war compared to the earlier one. As Andrew Batson points out, for political rivals, China and the United States are far more economically integrated than they should be. In my view, that is a consequence of a huge strategic miscalculation on the part of America and of the capture of American elites by China.

Is it really Trump’s trade war?

Today, Friday, the 10th of May, is the day on which Trump would impose tariffs on China, as he announced earlier in the week, if the negotiations with China fail. The tweets were widely referred to by most of the Western (English language) media as Trump re-igniting the trade war. How much sillier one could get?

In their eyes, Trump could do nothing right. If he tweets that he is ready for a deal, then he is bailing out. If he threatens further duties, then he is re-igniting the trade war. 

If their first statement is right that he is keen to sign a deal, then it does not  make them pause and reflect on why he would suddenly threaten tariffs again. In other words, they do not even devote a minute to thinking about what must have happened to make a man – itching to sign a deal, in their words – go back to threatening more tariffs.

This is what seems to have happened:

The diplomatic cable from Beijing arrived in Washington late on Friday night, with systematic edits to a nearly 150-page draft trade agreement that would blow up months of negotiations between the world’s two largest economies, according to three U.S. government sources and three private sector sources briefed on the talks.

The document was riddled with reversals by China that undermined core U.S. demands, the sources told Reuters. [Link]

In effect, China believes that it can get away with whatever it wishes for:

One private-sector source briefed on the talks said the last round of negotiations had gone very poorly because “China got greedy”.

“China reneged on a dozen things, if not more … The talks were so bad that the real surprise is that it took Trump until Sunday to blow up,” the source said.

“After 20 years of having their way with the U.S., China still appears to be miscalculating with this administration.” [Link]

The same cnbc.com that published an article discussing the above, had another article with the header, “Here’s what it looks like if Trump starts a trade war with China”!

How much sillier can it get?!

The short point is that even if there is an agreement on Friday – pretty good chance we might still get one – it will be ‘dead on arrival’ because China has no intention of honouring any of its commitments. Its record on its commitments to WTO, its record of ‘good faith’ negotiations even with this administration suggests that the government in China is redolent with hubris.

On an agreement on Friday, the American stock indices will rally 2% to 3% but that is insanity of a different kind.

A Chinese company perspective on the trade war with America

Business Review and Outlook

10 years ago, the U.S. printed money like crazy and exported U.S. dollars all over the world. Now, the U.S. has become a global enemy, trying to bring back the exported U.S. dollars (the U.S. dollar debt of the emerging market in the first quarter was close to 3.7 trillion) and supply chains, as well as to undermine the asset markets of other countries and the global supply chain order. No wonder the U.S. has made a lot of enemies. Fortunately, Trump does not have the same wisdom as Mao Zedong in making alliance with one while fighting another. He wants to fight the world. But to defeat the U.S. hegemony is not an easy task. The history told us that those who wanted to kick out the big brother would run the risk of being wiped out. Nevertheless, Chinese are savvy and resourceful. Deng Xiaoping said, “we should grope our way across the river, going one step at a time”. Jiang Zemin said, “keep a low profile to make a big fortune”. Han Xin demonstrated his immense ability to endure humility in order to preserve his existence for future accomplishments. Such wisdoms contributed to the creation of incredible historical achievements one after the other.

Today, the U.S. is pushing the trade war to the limit. Yet, it is not easy to cripple the China model, even with Trump’s wisdom. With a looming war, there are risks as well as opportunities. Therefore, the Group’s established policies will remain unchanged. While some projects are delayed pending for the government’s new plan, the Group will always ensure that Shareholders’ benefits are well taken care of.

Source: Half-yearly interim report of the China Properties Group Ltd. (1838 HK) [Link]

Who is really ‘isolated’ in the end?

A rather interesting article in the FT titled, ‘China fears an emerging united front’. You can read it here.

A good article and must have been a difficult decision for a FT journalist to write and for the paper to publish it because from declaring Trump ‘isolated’ to now admitting (even if only reluctantly) that it is China that is getting isolated, must have been too big a pride to swallow.  FT needs to be complimented for taking an ‘in-principle’ decision to swallow pride.

That said, they had decided to  eat their pride but not swallowed their ego because the article (1) fails to acknowledge that how things unfolded could well have been a deliberate strategy on the part of President Trump – they cannot even get around to countenancing that possibility (2) falls back on the habit of ‘but, still…’.

For example, how does it matter what a ‘senior European banker’ thinks on this geopolitical strategy? He points to Trump’s tweets on WTO as evidence of Trump’s erratic behaviour and therefore, his inherent lack of trustworthiness. This goes back to point (1) above.

I can provide a counter-example to the banker’s ‘erratic behaviour’ argument. The American relationship with Mexico appeared to fall off the cliff but they have quietly
renegotiated NAFTA.  Time and again, whether on Trump or on the larger issue of the responsibility for the rise of the ‘so-called’ populism and ‘nationalism’, conventional wisdom is failing to acknowledge that its priors, logic and its framework could simply be wrong. They refuse to admit that. The article is a faint contrarian evidence to the charge above and, to that extent, it is welcome.  While it has succeeded in crossing that first hurdle, it has failed at clearing subsequent hurdles because it is marred by many other habitual bad biases.

Two useful links on China and Africa from one of the comments posted under the article.

China and Soviet Union and other links

Minxin Pei on China losing the new Cold War is well worth a read. It closely echoes this piece. The parallel with Soviet Union is the common aspect in both the articles.

Pakistan wants to renegotiate its OBOR contracts with China. It wants longer maturities and lower rates. It is not prepared to go as far as Mahathir Mohamad did in branding it as ‘neo colonialism’

Arvind Subramanian and Josh Felman have a stark warning about China in this piece for ‘Project Syndicate’. They write:

For any normal country, the build-up of extensive surplus capacity would lead to sharp declines in investment and GDP growth. And that, in turn, would produce financial distress, followed by a crisis if the warning signs were ignored. But China has had a different experience. Its GDP growth has slowed, but investment remains robust, and there is no strain on its banking system.

A simpler explanation is ‘fudged data’ makes impossible contradictions possible.

Their conclusion is unequivocal:

Sooner or later, Chinese exceptionalism will give way to the laws of economics. The world should prepare itself. The consequences could be severe – and unlike anything experienced in recent history.

This piece in WSJ on HNA selling down its stake in Deutsche Bank is worth reading because of the information it provides on extensive acquisitions that HNA had made.

The New Republic has a long piece on self-censorship in American Universities with respect to China. The practices that China adopts to induce self-censorship are very instructive and interesting.

Tail piece: Jack Ma of Alibaba is stepping down as its Executive Chairman. He is 54. Good call.


High external tariffs were effective once

I was preparing for a lecture I have been asked to give on Technology and Development to visiting scholars of Indian Economic Service at the Singapore Civil Services College tomorrow. I had made a mental note of referring to Professor Robert Allen’s work on the history of economic development. I had written on it in MINT in February 2015. Let me recall those words here:

According to him, North America and western continental Europe caught up with the British industrial revolution by adopting the following:

• Internal free market (elimination of internal tariffs)—national single market

• Stable domestic banking system

• High external tariff

• Universal education

• Infrastructure.

They did not catch up practising free trade and open capital markets. What a surprise! [Link]

High external tariff was needed to catch up with Britain which industrialised earlier. Now, President Trump is again resorting to high external tariffs. America has a stable banking system and an internal free market. Its infrastructure is in need of improvement, for sure. In other words, trade barriers were effective. They may well be effective again. Academics are finding it difficult to accept that possibility.

I saw an article by Professor Dani Rodrik in FT.  He was making two points of which I thought one was valid – that the WTO was more intrusive than that of GATT. His second point was that such intrusion did not allow for heterogenous economic models like that of China’s. I thought that the second point was problematic.

Countries are now holding China into account for its failure to honour the very commitments it made when it joined the WTO.  It signed up to it. It benefitted from it. Its breakneck export growth and foreign exchange reserves accumulation were due to its accession to WTO. Higher Foreign Direct Investment into China was also due to WTO accession.

Second, I was not sure if China’s economic model was that heterogenous. It followed Japan’s model  – export growth, undervalued currency and protected domestic markets. Post-2008, China copied the neo-Western model of economic growth – reliance on debt. I doubt if there was much that was or is heterogenous about China’s growth model.

But, on the intrusiveness of WTO (vs. GATT), Professors Joel Trachtman and Simon Lester have responded sharply to Dani Rodrik. You can see their posts here and here.

For what it is worth, Professor Rodrik should also read this Merics brief on what certain things mean in China.

Also, I am not sure many in America see the US-China trade dispute the way Professor Stiglitz sees it. I have cited in these pages from the Harvard-Harris poll of the last few months that those polled did not want a trade war but they also wanted China dealt with, firmly.  Stiglitz writes:

No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war

He may be too harsh on the first part of his statement but he appears most certainly wrong with the second part of his statement. He should go through carefully pages 123-130 of the June 2018 Harvard-Harris poll.

If China was winning the trade war, a rare and risky outburst from a Chinese professor against President Xi Jinping would not have happened.

As of now, it does not appear that China is either winning the battle or the war. China has imposed unremunerated reserve requirements on forward transactions on Yuan and the People’s Bank of China demands ID proof for transfer of US dollars over USD1000.00 Professor Stiglitz has allowed his biases to cloud his judgment.

He should spend some time reading the detailed two-part article that the South China Morning Post on how China might have mishandled the US on the trade dispute. One can find them here and here.

Both he and Professor Rodrik would also find it useful to read the Merics China Monitor dated 18th July 2018 on China’s cosmological communism.

Read this comment too in the FT on strains showing in China.

Not too many people – even those who are ideologically ill-disposed towards Trump find it easy to side with China. For example, FT thinks that IMF would be wrong to bail out Pakistan which tantamounts to bailing out Chinese banks that lent to Pakistan to get China to build some infrastructure as part of its ‘One Belt One Road’ initiative.

Of conclusions and explanations

Financial Times has a series of stories/articles (actually, these days, newspapers mostly their stories with journalists as creative authors – you can interpret it whichever way you want) on the United States announcing tariffs on Chinese goods and on China’s retaliation. A quick glance at the headlines will tell you which way FT is leaning. Well, actually, you don’t even need to cast a sideways or a quick glance. By now, we should know. Let us set that aside for a moment.

Here is an interesting header:

Header 1.png

So, what is this economic lever? You don’t have to wait too long. Another story and another header gives you the answer:

header 2

It was a fun exercise on a Sunday morning, alright.

Making sense of Trump and trade

The title of this post is misleading. It gives the impression that I have figured it out. No, I have not. I am still making sense of both. But, I can begin to see why President Trump is viewed either as too crazy or too much of a genius. These extreme characterisations seem more appropriate than middle ones.

The image of a relatively young and boyish looking Canadian Prime Minister being attacked by a much older person and the Head of State of a much bigger country appeared like an unfair game until you read this one. All the sky-high tariff rates that President Trump mentioned are true!

The article too provides a partial explanation for why the Canadian Prime Minister’s Liberal Party lost the Ontario provincial elections so badly. I did not know about it at all. This Wikipedia entry is good enough for us and the statistics are so clear that you do not have to worry about the commentary. You can figure out what happened yourself.

On ZTE, the President’s U-Turns have baffled and frustrated many, including me. But, it may be a much longer game of chickens and charade. You can figure it out yourself if you have subscription to ‘Wall Street Journal’ and can read this article. I won’t elaborate.

Jamil Anderlini wrote in FT this morning that President Trump seems to have conceded more than President Kim did in their summit meeting in Singapore yesterday. To a degree, Wall Street Journal agreed. The comments on Jamil’s article were strongly critical of him and his judgement. To be fair to him, he had sided with Trump on his trade battle with China but then we all thought that Trump had backtracked on ZTE (or, may be not). Second, we live in a world where analysts and commentators are required to make instant judgements on matters that are slow-moving. So, the comments might be a trifle too harsh.

May be, the header of his article on the Trump-Kim summit was too sweeping and too hasty. See below:


This WSJ Opinion (‘Best of the web’) contrasts the reporting in New York Times now with its reporting in 1993 when a similar opening to North Korea was made under Bill Clinton.

FT readers too have commented that, had the meeting taken place between Obama and Kim, the FT would have reported it very differently. That should make some of these newspapers reflect as to what really are they achieving with their biases and how far their reputation for objectivity had sunk.