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.

Business Today - - CONTENTS - Pho­to­graphs by Mandar Deodhar

“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”

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