Trade Wars which could be a boon for India

The article which appeared in Free Press Journal

Trade Wars could be a boon for India

written by R Kannan December 15, 2018 08:22 AM

The Article appeared in the Free Press Journal Mumbai

The trade war between US and China has created  a turbulence in the global affairs  and  the  trade between nations will undergo a change if the issues between two nations are not resolved soon. In the month of November, US had the highest trade deficit with China. The two countries so far imposed tariffs on $ 360 bn of merchandise trade between them.

US-China trade war will have an adverse effect on many economies which are depending on trade and it will distort the trade flows between countries. The war is likely to push the production to more expensive locations which will lead to price rise and reduced efficiency. Global trade growth  will take a beating, existing global supply chains will be disrupted and investor confidence will dampen. There are two opposite views on What US will do once  the year 2019 dawns. It will go ahead with the proposals and start implementing them. Other view is that, once we come closer to 2019, US could change its stand and moderate the proposals.

While, many countries will be affected by the Global trade war, few countries, will also be winners in this scenario. US and China will explore options for suppliers from other countries to fulfil their demand. They will develop alternate markets for their products and seek new sources to meet their local demand.

The countries which are likely to benefit include, Mexico (auto exports to US will increase), Europe (can export more agricultural produce to China) and many of the Asian countries , especially ,India, Malaysia, Vietnam, Indonesia, Thailand, Sri Lanka, Pakistan, Cambodia, Myanmar can explore the opportunities to increase their exports.

India can focus on increasing the exports from ICT, Automotive, Apparel and Readymade sectors. ICT is one sector, where US government has increased the tariff for imports from China. This is the largest category of imports from China and it amounted to $ 150 bn a year. This will help to hamper the China initiative of Made in China 2025 , which is focussed on increasing the growth of the hi tech sectors in China. India witnessed a phenomenal growth in mobile penetration and other related ICT sectors in the last few years. India had come out with a policy of Hardware manufacturing and few large players, especially in mobile phones had announced their plans for big investment in this sector. India has a very good eco system for hardware development and this could be a good opportunity for India to increase the growth of hardware Industry. The initiatives in India like Make in India, Industry 4.0, will make India attractive for foreign companies to make the investments here.

Automotives. China exported finished vehicles of US $ 7.2 bn. But exports of Auto components from China was at $ 31 bn in 2017. US was the main destination for Auto component exports from China.  This is likely to affect the Chinese exporters. China Imported Finished  Vehicle exports to the tune of US $ 10.3 bn. But most of the brands exported to China, have their local presence in China. Auto components is a very big opportunity. In the last few years, India has become very competitive in Auto sector and emerged as the most preferred location for manufacturing small cars in the world. Further, the Eco system for Auto sector in India is well developed. All the players in the market invest on innovation , R&D and produce global quality vehicles today. Further, the FDI regulations for this sector are very liberal. Indian Auto and Auto component manufacturers can capitalise on this emerging opportunity.

Apparel and readymade Garments. China is the leading producer today and they exported $ 38.7 bn to US in 2017. In 2016, China  had 36.2% of global textile exports and 34.5% of global clothing exports.  The new tariffs by US government , will create significant opportunities for other countries who are leading exporters in the world.  Bangladesh and Vietnam rank second and third in world in exports. But India has the raw material , cotton and  a vibrant Industry. At present, high quality yarns from other countries are not allowed to be imported into India. If India relaxes , this norm, India can move higher up in the value chain and aspire to become the second largest exporter in the world.

India can fill the void of exports from US to China. This will be mainly in the area of agriculture and we can grow crops which are suited to Chinas’ requirements and ensure China continues to buy cotton from us  and start importing other agricultural produce. This will also help in achieving the objective of doubling farmers income and increasing the productivity in agriculture. India has a very huge trade deficit with China. By promoting Agri Exports, the trade deficit with China could be reduced.

By focussing on these sectors, India would be able to significantly increase its exports and it will also aid in  achieving the export targets set by the Government and reduce the trade deficit. The more investment friendly / export friendly policies could be drawn up in these sectors , keeping the export markets as the focus. This is the right time for India to accelerate the development of these sectors.

R Kannan is Head, Corporate Performance Management, Hinduja Group. The views are personal.

Brexit Concerns - The way forward

The article which appeared in Free Press Journal

Brexit concerns: The way forward

written by R Kannan January 3, 2019 8:33 am

When the Brexit referendum was put to vote in UK, the general expectation was that it would remain in the EU. In the June 23, 2016 referendum, 17.4 million voters, 52 per cent, backed Brexit ,while 16.1 million, 48 per cent, backed staying in the union. The difference was only 4% of voters, 1.3 million. Since the time available for Brexit was 21 months from the date of referendum, the UK government was hopeful that before the period gets over, they would be able to strike a deal for post Brexit scenario with EU and other members countries and the Brexit process would be smooth, less painful and could be achieved in a least effort with least cost. After the result of referendum was out, it created ripples in UK. Looking at the thin margin, many felt that , Brexit would be bad for the UK Economy. There were also talks that second referendum should be conducted, since the margin was thin and for a event which would have significant impact for all the stakeholders, it was better to reconfirm the mood of people again before going ahead with such a big economic reform. By end of December 2018, the post Brexit deal is yet to be reached. This has created a lot of uncertainty in the minds of all the stakeholders and will have significant short term impact on the UK economy. Closer to the implementation date, it emerges that there are many issues relating to immigration, trade barriers, cost of doing business, logistics, hospitality, business competitiveness and the need to add many new departments and functions in various government departments with huge financial outlays. Further, it has created a turbulence in terms of future of businesses, employees and the economic growth. Brexit decision is a unilateral decision.

The ECJ, in its recent statement, opined that since UK decided to exit EU on its own, till the post Brexit agreements are in place and the date of Brexit arrives, UK still has the discretion to withdraw from Brexit. Of course, UK has to go through the governance procedures, indicating that it could go through the process of parliamentary vote or any other procedure including a new referendum which would allow UK to withdraw from its proposal to exit EU. As the dead line nears, the expert predictions also indicate that the Probability of UK remaining in the EU has increased. There is an increased concern and wish that UK withdraws from the process of Brexit. Considering the fact that UKs trade with Europe amounts to 49% of its total trade, Brexit is likely to increase the cost of trade in terms of additional procedures, transport delays, additional levies and reducing the ease of doing business. Today many countries are focussing on liberalising the trade and set a goal to move towards higher rank in ease of doing business.

In 2009, the ease of doing business rank of UK was at 5 and it slided to 9 by the year 2018. If Brexit is brought in effect, UKs rank is likely to slide down further. Brexit will increase the trade barriers. To reduce the impact of the barriers, the efforts should be to remove tariffs and eliminate non-tariff barriers to trade. The assumption behind Brexit is that this would happen, which will not be true when it comes to the implementation. When various expert studies predicted the loss of economic output, one of the main reasons highlighted in those studies was the presence of new trade barriers.

Brexit will reduce FDI. Of the total FDI in UK, in Jan 2018, 42.6% of the investments were from EU and from the companies which have strong ties with the UK. After the Brexit, the cross border trade will reduce, thereby reducing the attractiveness of investments by EU companies in UK. Brexit will have impact on availability of skilled employees. As of now, there are one million Britons living in EU and 3.5 million citizens living in UK. EU has made a provision for UK nationals to remain in EU and have introduced a scheme for them to stay in EU. But it is unclear what will happen to 3.5 million from EU who are living in UK. Even UK nationals have started registering for citizenship in other countries to avoid the uncertainty. After the Brexit, it is not clear how the dynamics will work out. If EU citizens leave the country, it will create a big gap in skills required. This will also impact the productivity of the economy. The relationship of UK with other EU countries will undergo a big change.

At the same time, UK will have opportunities to consider other partners to expand its trade, especially from Asia, the countries like; India, China, Malaysia, Vietnam, and Thailand. The predictions by various experts on the post Brexit Scenario, project that there could be an economic output gain of 7% to Economic output loss of 18%. Reduce the ease of doing business and reinstating the barriers to trade is bound to reduce the economic output for both UK and EU. According to various experts, to assess , whether the Brexit is good or bad, there is a need to make the assumptions made for going for the Brexit vote transparent to every one.

While putting to vote, the action plans identified for how the migration would be handled has to be discussed in detail. The post Brexit predictions by UK government includes, the incremental growth , which will accrue to the UK economy through non – Brexit policy related actions. While looking at the post Brexit scenario, the effect of non Brexit policy related actions on economic growth should be separated, so as to understand the real effect of Brexit on the future of UK economic growth. In this world of VUCA, Brexit can have a negative effect on the UK and European economies. Whereas the scope for achieving a very high economic growth through Brexit is very limited. Further, most of the European economies are growing at the rate of 1 to 2 % and introducing a new uncertainty will debilitate Europe when there are other factors like trade wars and withdrawal of Stimulus by US and Europe.

In the light of this, the following options could be looked at in resolving this issue. The government can take measures including , putting the proposal to vote in the parliament, conducting a second referendum or adopt any other procedure as per the UK legislation, which allows the withdrawal of the proposal to made to EU. This will help to maintain the status quo, removing all the uncertainties for both UK and the EU. Till now, no deal has been arrived at and there is an immediate need to decide on the way forward from March 2019. To reduce the impact of no deal, which is likely to be very costly for the UK economy, in the event of deciding to proceed with Brexit,the following options could be looked at. Send a proposal to EU to extend the time period of Brexit by another six months to one year, go with the Brexit and allow the present arrangements to continue for six months to one year, enter into agreements with each individual member country of EU, where the agreement is similar to, mirror image of the one signed by UK to be part of the EU. By considering the above options, UK should be able to come out of the short term uncertainty and will have time to look at all the options which will ensure the continued competitiveness of UK economy and its long-term stable future.

https://www.freepressjournal.in/analysis/brexit-concerns-the-way-forward/1428351

R Kanan is the Head of Corporate Performance Monitoring and Research, Hinduja Group. (Views are personal).