White Is The Season’s Colour

Steven Philip Warner | December 2016 Issue | The Dollar Business

Home Alone' turned 'Exorcist' – that's perhaps a logical way to explain 'expectations' turned 'experience' in the most recent race to the White House. Forget months, even days before the big result day, not many Indians would have given Trump – the 'walking-talking political disaster' – a chance of edging past the Democrat lady. But edge past he did. And with ease, leaving the world and India shocked! That was the second shocker of November. This episode is titled - 'White House'.

And the first? Hours prior to the Trump card being revealed, India's PM Modi flashed his three aces. It was as if Modi was hellbent on avenging India’s loss to America in the race to the moon. The surprise was so well-timed and on a scale that Modi’s presence on television for a brief while stumped the nation’s 1.3 billion people (almost everyone, except perhaps school children). Effectively, in one sweep, at 8 pm on the 8th of last month, India saw about 84% of its total currency in circulation declared null and void. We call this episode – ‘White Money’.

Given the discussions that have taken place over both developments, there is much opinion that you would have formed till now, and more that you will in time. Given their macroeconomic nature, both announcements do have their undesirable outcomes. But the positives cannot be overlooked.

Especially, when we talk about the ‘White Money’ episode, by now, most of us in India do seem to have understood the need for demonetisaiton as a national strategy to purge India of black money. [Really?] Conspiracy theories have come alive. Did the non-banking population of India become a victim in the process? If it was all about eradicating black money, wouldn't the government have done best to end higher denomination currencies altogether? Wasn't this simply a ploy to infuse liquidity into cash-strapped banks and heal a 'hurt' banking system? How will the move impact key sectors like auto, cement, real estate, jewellery, telecom, and India’s exports in general? Will the cash-crunch hurt the already underprivileged MSME sector? How about the move resulting in a dividend of Rs.3 lakh crore, which the RBI will hand over to the government (equivalent to 56% of our fiscal deficit)? And what is being done to ensure that the income tax department doesn’t use demonetisation as an excuse to harass people later? And so on... All such questions are over a work-in-progress. Let’s therefore move on to the second episode and understand it from the perspective of foreign trade and policy matters. The ‘White House’ episode.

Because Trump has over the past few months (since he announced his campaign for president in June last year) either insulted women, Jews, African-Americans, a couple of emerging nations, neighbouring States, etc., or has spit statements with loosely-controlled emotions, he has millions in America and billions around the world ‘downgrading’ him as the no.1 decision-maker who can make Uncle Sam tip his hat to a global audience that acknowledges its growing greatness. And that is perhaps the precise reason why India believes less in him as the person whose ascent is more beneficial to achieving its national mandate of becoming great and influential.

From a pure foreign trade perspective, I can think of three big reasons why Trump can be a harbinger of spring for India. [And these are despite high probabilities that a Trump win could worsen an already fragile state of world trade affairs, lead to restricted issuances of H1B and L1 visas to Indian professionals, stricter entry rules into US for members of various religious groups, cancellation of the Paris climate agreement leading to greater exploration and usage of fossil fuels and therefore lower oil prices, etc.]

You must be aware of Ronald Reagan’s Presidential campaign in the very early 1980s. Then, the problem for America was Japan’s manufacturing might. Reagan advocated protectionism and told Americans that, "Japan is part of the problem. This is where government can be legitimately involved." After he became the President, he adopted several protectionist measures, imposing a 100% tariff on many Japanese and South Korean imports for allegedly "dumping" and doing harm to US manufacturing industry and jobs. The “job stealers” as Trump puts it today are in China and Mexico. What worked for the Democrats under Reagan in the 1980s has worked for the Republicans under Trump about four decades later, and it will not be surprising if Trump imposes a blanket ban over many Chinese and Mexican imports into US. He has promised to impose a 45% duty on imported Chinese products. As per estimates by Daiwa Capital Markets, the suggested tariff on Chinese goods would lead to an 87% fall in China’s exports to US – a decline of about $437 billion (at CY2015 levels)! Currently, half (48%) of US imports from China are electronics or machines. These two segments constitute just 8% of India’s exports to US and just 1.5% of the value that China exports to US. So, if Trump does to Chinese exports what he has delivered in his rallies to the White House, India will have the windfall that it needs to get its manufacturing up and roaring. There is of course no way how Trump can block everything foreign-made. First, that will lead to troubling inflation for the American consumer. Second, reactionary measures from trading partners (of blocking Made in America) is a dangerous outcome. However, Trump will start with China if he wants to achieve his primary motive of bringing back about 3 million jobs back to America in another eight years. On Trump’s website that enlists his ‘7 Point Plan To Rebuild the American Economy’, the word ‘Clinton’ appears 6 times, ‘jobs’ 9 times, ‘Trump’ 11 times and ‘China’ 12 times. How serious is he about China? Very!

Another of Trump’s key focus areas, another reason for India to cheer – trade agreements. If he walks out of the Trans-Pacific Partnership (TPP; which he called “a continuing rape of America”), India will be mighty pleased. Trump claims that TPP (a mega deal that involves about 12 countries, including US, Canada, Japan, Mexico, Vietnam, Singapore, Malaysia, etc.) will do harm to local industries and communities, as it takes a TRIPS-plus position. For India however, that TPP may be put in cold storage comes as a good news as it contains obligations on ‘new issues’ like labour, investment, environment, e-commerce, competition, IPR, government procurement, etc. Though these issues are not covered under WTO’s multilateral rules, India will be pleased on overcoming the dual-fear of losing trade partners who become party to TPP (due to the burden of compliance to standards) and exports due to trade diversion. Trump is also considering a renegotiation of terms of agreement under NAFTA. Knowing his hatred for Mexico, he will either have the terms written his way or walk out. It’s common knowledge that NAFTA was created by Mexico as a tariff-free backdoor for exporting to US. And if NAFTA rules are rewritten with lower preference and higher duties imposed on Mexican and Canadian exports, India (for whom NAFTA accounts for a fifth of its exports) could see its manufacturing industry participants smile, especially in pharma, engineering goods, automobile, chemicals and textiles.

Foreign policy and terrorism is another agenda on Trump's mind. He’s made clear his intent to “knock out terrorism” and that could make India a more attractive market to do business in and with. Trump, during his campaign was loud enough to brand Pakistan “the most dangerous country in the world” and spoke of the need for India to be involved as a check to Pakistan. Under him, US will be keen on cutting aid to India’s rather unfriendly nation. It’s important to add here that in September 2016, two Congress leaders (Ted Poe and Dana Rohrabacher), introduced a bill in the US House of Representatives, called the ‘Pakistan State Sponsor of Terrorism Designation Act’. It is likely that Trump will give assent to the bill and declare Pakistan a terror state. What is of greater importance here is that, under Trump, the India-US bilateral relationship could strengthen on various counts, including defence, services (thereby reducing the distress caused amongst India’s services providers on account of a likely reduction in count of H1-B and L1 visas granted), and American investments into India’s fast growing manufacturing and animated services sectors. Speaking of international trade ties, improvement in US-Russia relations under Trump could also mean a freer Russia to conduct trade with for India. India's trade relations with Russia are staggeringly poor — less than $7 billion a year — compared to the otherwise friendly political relationship. Now that West-imposed sanctions on Russia could become a thing of the past, the complementarity of the two economies (in energy, engineering, heavy industry, medicine and other industries) can be explored through exchanges on the North-South Trade Corridor.

There is a common principle that binds the two November episodes of White House and White Money – in the battle between ‘Influential’ and ‘Popularity’, ‘Influential’ wins! And that is the moral that 2016 perhaps has got to teach our policymakers and exporters. China isn’t popular, yet it became influential and got Trump worried. Trump wasn’t popular. Yet he won a hard-fought battle against a seasoned stateswoman. Similarly, PM Modi isn’t popular for playing to the gallery. Yet he was influential in taking a stand that made India discussed and debated in mostly the right light across the world. 56 foreign trips later (as on Nov 17, 2016), Modi won just about some attention from the global investor community to make India move just four ranks up the Ease of Doing Business ladder in two years (to #130 in DB 2017 Rank). Speaking of an influential move, perhaps this ‘White Money’ strategy will catapult India into the league of the most favoured nations to invest in and work with.

But whether that really happens, only time can tell. It will.