THE HUB

Ira Kalish, Chief Global Economist, Deloitte, Touche Tohmatsu, talks to Prosenjit Datta, Rajeev Dubey and Joe C. Mathew on how India can do well in spite of trade wars, oil, the state of the global economy and the future of global trade.

“TRADE WARS TO HAVE LESS DIRECT IMPACT ON INDIA” Ira Kalish

How do you see the trade war playing out?

A: Dr. Ira Kalish: There is a high degree of uncertainty about it. It’s not clear how far we’ll go and what the specific causes will be. There’s evidence that businesses in the US and Europe are putting investments, particularly in the global supply chain, on hold. What we know is that we’ve already had tariffs imposed and there is threat of substantial tariffs as retaliation. On top of that, there is a threat that the US might withdraw from NAFTA and the WTO. The US has done things that undermine the WTO. The dispute resolution mechanism, which adjudicates disputes between countries, is supposed to have seven members. There are only four now. By the end of the year, only one might be left. That would undercut the ability of the global trading system to function. The worstcase scenario is very high tariffs and disintegrating global institutions. But it may not come to that.

How will it affect India and China?

A trade war will hurt China and I think in anticipation of that the Chinese central bank has eased monetary policy. A significant trade war will spill over into countries highly integrated into China’s supply chain such as Japan, Korea, Taiwan and some South East Asian countries. It will have less direct impact on India due to the small share of trade in economic activity. On the other hand, India is highly integrated into global services supply chains, and it doesn’t appear that trade wars for now will directly affect services. The least it means is that there’s unlikely to be much progress on globalisation of services trade, something that was on the table a few years ago. That would be a lost opportunity for India. I don’t see a huge negative impact directly, maybe only indirectly, if the global economy slows down as a consequence of a trade war.

What does it mean for global trade, especially disruption of supply chains?

Already there is evidence of slowdown in global trade. If there is a substantial trade war, there will be sizeable slowdown in global trade. Some of that will be offset by domestically produced goods, and will mean that companies will have to redesign supply chains. That will entail higher costs, leading to higher prices for consumers and slower growth in consumer spending in major markets. The imbalance will slow economic growth. The tariffs will, at least temporarily, boost inflation in many countries and create pressure on central banks to not cut interest rates and possibly raise them.

One side effect has been a sharp rise in the value of the US dollar and pressure on other, especially emerging market, currencies. We have already seen that creating problems, as emerging countries had to raise interest

The worst- case scenario is very high tariffs and disintegrating global institutions. But it may not come to that.”

rates to stabilise currencies. The risk is that big issues in a couple of countries could have a contagion effect on other emerging markets. While many countries that are at risk are net exporter of commodities, India is an importer. If commodity prices go down, that will be beneficial and probably help stabilise the Indian currency.

Can Europe withstand trade wars with the US?

It depends on the nature of the trade war. If the US imposes short tariffs on automobile trade, that would have a big impact, especially in Germany, because there’s a large globally integrated automobile industry. One reason why the EU is looking to sign new free trade agreements is because it is concerned about closing of the US. Though the European economy is in a good shape — it’s been growing faster on a per capita basis than the US — it continues to have a very easy monetary policy. I would say that one of the biggest risks to Europe is political. Due to persistently high unemployment and immigration crisis, many voters have been attracted to parties on the far left and right. For now Europe is in good shape, but trade wars will be a risk.

Also, Brexit is not going too well. Is it creating more uncertainty in Europe?

It’s an uncertainty for Britain and I think it has probably had a negative impact on business investments in Britain, especially by companies that looked to the UK as a gateway to Europe. There is uncertainty on how Brexit will evolve; uncertainty creates difficulties.

Did Trump feel emboldened to make these moves because the US economy was doing relatively well…

I can’t say what his motivation is. Clearly, there is a constituency in the US with this point of view. There are a large number of less educated and low income workers who have been left far behind. My view is that displacement has a lot to do with technological change which has shifted demand to higher skilled labour and we haven’t seen a commensurate shift in the composition of our workforce.

Many western nations are becoming more competitive in manufacturing because of technology. There is talk of some manufacturing going back to the US. Because it’s hi-tech, will that affect countries like China that are dependent on cheap labour?

India is highly integrated into global services supply chains, and it doesn’t appear that trade wars for now will directly affect services.”

China has already seen a drop in manufacturing employment because the economy is shifting towards services. The manufacturing industry is moving upmarket. The traditional engine of low value-added products made by low wage workers is disappearing because Chinese wages have risen rapidly. Many businesses that sourced low value-added products from China are shifting to countries such as Indonesia, Vietnam and Bangladesh. In the US, because the manufacturing industry has invested heavily in automation, productivity has risen. Some value-added manufacturing is returning to the US, but not jobs necessarily, because it’s highly automated.

Where do you see oil headed in the medium term?

If I could predict oil prices, I might be a very rich man. We’ll continue to see a sizeable increase in US production. And we’re seeing the Saudis also starting to increase output. There is also evidence of slowdown in global demand. That means oil prices will fall the next year rather than rise.

What is your own assessment of where oil will be?

My view is that oil prices are likely to be lower a year from now than they are now. It has to do with the fact that the marginal producer of the world is no longer the Persian Gulf. I would be surprised to see oil go above $100 again but would also be surprised to see it fall below $50.

Is there a future for the WTO or are we seeing a slow collapse or lesser influence after Trump?

It has a future, but it depends on whether or not the US does things or doesn’t do things that reinforce the ability of the WTO to function. There is risk that the WTO could become of less consequence.

They haven’t gone beyond the last two rounds which have been fairly inconclusive; they have not been able to break through.

We haven’t seen much progress on multilateral trade negotiations and right now it doesn’t seem likely that we will in the near future. In many countries, there is a backlash against globalisation, but that could change. If there is a trade war involving protectionism, and if there is a significant economic cost to that, then political perceptions about it might change and you could theoretically wind up with more political support for trade globalisation.

In the past, consumption was driven by salaries rising in manufacturing in countries like China. But now, technology plays an important role in reducing labour in manufacturing and services. Will it create higher inequality? Will it affect consumption?

Manufacturing and services will depend on the relative cost of labour. Because India is still a low wage country, it might still make sense to be in labour-intensive industries. In India, the success of the technology industry is largely predicated on access to highly-skilled workers who are relatively well paid. If the lion’s share of India’s growth comes from that, it will lead to income equality.

India has an opportunity to take the spot that China had 20 or 30 years ago to attract investments to low wage manufacturing and assemble inexpensive goods for exports. India will face competition from other low wage countries but that’s a way of employing people lacking sophisticated skills.

If you really see Africa and the way it can grow, same low wage principle applies there too.

India is a single country. So, if the regulatory, political and legal environment is favourable, it’s a good place to go, whereas Africa is many countries. Most of Africa is still far poorer than India, has poor infrastructure and in many instances there is less protection of private and intellectual property. The competition for India might come from Indonesia, Vietnam, the Philippines and Bangladesh.

What would your suggestion to India to attract more investments?

I think there are many things that drive foreign investment. One is obviously consistent rules about trading relationships. So, it makes sense to have some agreement with trading partners to maintain limited barriers to trade and cross-border investments. Companies are attracted to countries because of many things. That includes quality of workforce, quality of infrastructure and the degree to which countries protect private and intellectual property.

How long do you think this tariff war will last, and if it is posturing, how far will it go?

I do think that it will last a long time that could significantly undermine the global trading system that we’ve come to know, and it probably will lead companies to reverse much of the progress made in terms of development and global value chains. I don’t know if it’s posturing, I don’t know what the negotiating strategy is, I don’t know the degree to which it’s driven by a desire to achieve concessions by other countries or simply by a viewpoint that globalisation is not a good thing. It’ll probably take some time before we know the answer to those questions.

Is it politics that is driving protectionism or do we have flaws within the system?

There is a group of people in the US and Europe who feel left behind, are seeing stagnant wages and are probably vulnerable to the argument that what has affected them is globalisation. My view is that while trade liberalisation does cost some jobs, it creates others. The lion’s share of it has to do with technological transformation. Since that is a harder argument to make politically, it may be easier to say that people have been displaced because of foreign goods and people.

Which are the manufacturing sectors that have become competitive despite job losses in the US?

It runs across the board, in automotives, in other heavy industry, even in textiles, which was traditionally labour intensive.

Some manufacturing factories have shifted back from China to the US. What are your views about it?

In the past 30 years, while there has been a sharp drop in manufacturing employment in the US, there has been a sharp rise in productivity of manufacturing workers because of automation. I expect that to continue. So, even if we see some assembly move from China to the US, I don’t think it will lead to significant rise in manufacturing employment.

The success of the technology industry is largely predicated on access to highlyskilled workers. If the lion’s share of India’s growth comes from that, it will lead to income equality”