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HOME > EXPERT SPE AK > WITH TRUMP TURNING PROTEC TIONIST, C AN CHI NA A ND I NDI A L E A D GLOBAL I S ATION

ATLANTIC FILES JAN 25 2017

With Trump turning protectionist, can China and

India lead globalisation
JAYSHREE SENGUPTA

President Trump meeting automobile industry leaders at Source: Donald Trump Twitter

WhiteHouse

Globalisation has always been the main theme of the annual conference in Davos, Switzerland
every January and it has been zealously advocated by the developed countries. But today, it is
under threat, according to reports from Davos 2017. And strangely the defender of
globalisation today is Chinese President Xi Jing Ping and not any longer the US, the champion
of freed trade earlier.

With Brexit in Britain and US President Donald Trumps vehement objections against
outsourcing by American manufacturers, there has been much discussion recently about the
fate of globalisation. Is it going to be reversed in the next few years and will the US and other
developed countries retreat behind protectionist walls?

Globalisation has bene ted the rich and the top layers of society in most countries. In the
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past few years, especially after the Global Financial crisis of 2008, however a lot has been
written about the rising inequalities between countries and within countries. Recently, Oxfam
reported that just 8 men from the industrialised world had more wealth than half of the
global population of more than 3.6 billion. Rising inequality of incomes between regions in
Britain and between the rich and the middle classes as well as the perception that
immigrants are taking away all the new jobs led to Brexit in June 2016. It is yet to be seen
whether Brexit will solve Britains economic and social problems.

Similarly, Trump has also said that he will make America great again by creating and bringing
back jobs in the US and he will put a stop to all outsourcing of services which will hit India.
But this is an unrealistic short term view considering the past global trends. As long as costs
keep rising, it is economically better for American companies to keep prices down by
outsourcing parts of their production or the entire product to cheaper labour-intensive
destinations which are located in developing countries. The US garment trade, for example,
has ourished by outsourcing to Bangladesh and many well-known branded goods are also
being outsourced to China and other countries in Asia where wages are lower. Otherwise,
consumers would have to pay higher prices for products in the US and they will refuse to do
so. American consumer spending will shrink and this will a ect adversely its GDP growth.

Globalisation has taken place via trade through several millennia. Ancient India exported to
Europe beautiful artefacts, semi-precious stones and textiles, to Africa, cloth and beads. In
the late Eighteenth and mid Nineteenth century France, Indian Kashmiri shawls were a rage
and every society lady possessed one. But its trade stopped due to the Franco Prussian War in
1870-71. Globalisation in the form of migration took place in the 18th and 19th centuries on a
massive scale to the New World from Europe. US received 32.6 million of Europeans from
1800s to 1990s. Indians also went as indentured labour to Fiji, South America and Africa.

But the real globalisation in the form of free trade was initiated in the 19th century after the
industrial revolution by the repeal of the Corn Laws in England in 1840s and corn was allowed
to be imported into Britain to overcome a shortage. There has been an increase in world
trade and nance ever since, though there have been highs and lows.

Globalisation su ered a setback during the great Depression of the 1930s when many
countries turned protectionist. But after the Second World War, the US became the champion
of Free Trade and the pace of globalisation picked up since the end of the Cold War. It is
human nature to want variety and change. During the Cold War, the Soviet Bloc was isolated
from global trade and commerce. The Russians as a result were craving for western consumer
goods and lifestyle till the Soviet Union collapsed in 1990. In India also, during the
protectionist era that ended in 1991, people hungrily bought foreign goods from abroad for
their use in India. Now there is hardly anything which is not available in India.

In the last two decades, China emerged as the biggest producer of consumer goods. After it
joined the WTO in 2001, China became supplier of cheap but good quality products all over
the world, including India. The US was ooded with cheap imports from China which helped
the US to keep in ation down. American companies established factories in China and goods
were transported back home and sold at much higher retail prices, fattening the corporate
wallets and increasing the pro ts of transnational corporations.

Read Also |The world system going through a serious churn

American factories in mid-West, meanwhile, closed down as production was shifted to Mexico
and Asian countries where labour, whose living standards was much lower, worked at lower
wages, for longer hours and with fewer holidays than their American counterpart. The US
companies found to their advantage that Asian and Chinese labour was willing to work at a
fraction of the cost of American labour.

Since the global nancial crisis, globalisation ran into roadblocks. According to US-based
Peterson Institute, the era of globalisation was not accompanied by a general commitment to
liberalising ows of people and it mainly focused on trade and nance. Since the global
nancial crisis, the ratios of world trade to output have been at, making this the longest
period of such stagnation since World War II. The volume of world trade has stagnated
recently between 2015 and March 2016 even though the world economy has continued to
grow. Global trade grew at 1.7 per cent and is likely to slow down further in 2017. In ows of
FDI have remained well below 3.3 percent of world output attained in 2007, though the stock
continues to rise albeit slowly relative to output.
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continues to rise albeit slowly relative to output.

Cross border nancial capital both in ows and out ows are growing more slowly and
are down signi cantly in absolute terms from 2009 levels. It is mainly cross border bank
lending and borrowing that have fallen. Regulations have played a part in curtailing cross
border business as it a ected the value of national currencies. But cross border lending and
borrowing through stock and bond market remains as before the nancial crisis.

Investment and spending has fallen sharply everywhere since the global nancial crisis.
Investment spending in the US is trade intensive and relies disproportionately on a relatively
small handful of producers like Germany for technologically sophisticated products. Increased
spending on infrastructure by the governments will boost investment and growth directly.
Hence growth promoting policies are needed in the US and Trump wants to spend on
infrastructure.

Due to protectionist policies in many parts of the world, trade liberalisation on a multilateral
basis has also stalled. WTOs Doha Round remains in the cold storage. Could this signal a
reversal of globalisation? According to Barry Eichengreen, trade has slowed because GDP
growth has slowed in many countries and not vice versa. Slow trade growth in the world
re ects Chinas economic deceleration. Until 2011, China was growing at double digit rates
and exports and imports were growing very fast. Chinas GDP growth has slowed in recent
years leading to slower growth of Chinese trade. The other engine of world trade has been
supply chains. Trade in parts and components bene ted from falling transport costs,
re ecting containerisation and related advances in logistics. But e ciency in shipping is
unlikely to improve faster than e ciency of what is being shipped, slowing trade.

Yet, today Trumps denigrating WTO and trashing NAFTA and wanting to build a wall between
Mexico and US and imposing punitive tari s on Chinese imports to US re ect his disdain for
globalisation, but going it alone will not help US or any other country. Globalisation is bound
to continue even if there are more protectionist measures taken by Trump. It may, however,
mean that China will take a leadership role in global trade and investment at least among
developing countries and Asia in particular. China is already outsourcing many production
lines to Vietnam and the Philippines. It wants to enter the Indian market also in a big way for
outsourcing. India too is outsourcing many products from abroad.

TPP and RCEP

China has been happy that Trump will scrap the biggest treaty of all, TPP (Trans Paci c
Partnership) agreement which engulfs US and 11 countries in the Paci c and East Asia. It
would not have made much di erence to the trade liberalisation of the region per se because
the US already has FTAs with all 11 members. But it would have led to job losses all around,
according to a paper by noted Malaysian economist Jomo Kwami Sunderam. This was to be
the mega treaty of this century and it was to be a treaty that would bene t the corporations
and not the workers. According to one macroeconomic model, if implemented, the treaty
would have cost loss of around 800,000 jobs over a decade and almost half a million jobs in
the US alone. TPP is more about regulatory behaviour by the big corporations imposed on the
partners rms. Many have opposed it in the past, except for Barak Obama who championed
it. The TPP would have led to the rise of essential pharmaceutical drug prices manifold.

The TPP ( and the TTIP) according to some other economists requires more stringent
enforcement requirements of intellectual property rights, reducing exemptions (like allowing
compulsory licensing only in the case of emergencies), preventing parallel imports, extending
exclusive rights to test data, making IPR provisions more detailed and prescriptive. Under the
Treaty, Patent linkages would make it more di cult for many generic drugs to enter markets.

This would make even life- saving drugs more expensive and would strengthen the
pharmaceutical monopolies on cancer, heart disease and HIV/AIDS drugs.

If it went through, it would have increased the power of corporations relative to states and
could prevent states from engaging in countercyclical measures to boost domestic demand.
Macroeconomic stimulus packages that focus on boosting production would be prohibited by
such an agreement. It would allow and enable corporations to litigate against governments
that are perceived to be outing these provisions because of their own policy goals. China
may well assume the leadership of TPP if invited to do so in a new form in the face of US
backing out.

There is also another important regional agreement: the RCEP (Regional Comprehensive
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Economic Partnership) which will enhance regional trade instead. It is a mega regional Free
Trade Agreement between 16 Asia-Paci c countries, including India, China, Japan, South
Korea, Australia, New Zealand and 10 members of the ASEAN bloc. It may be able to create
the largest regional trading bloc in the world. It aims to cover trade in goods and services,
investment, competition and intellectual property. It aims at countering protectionism. It
accounts for 3.4 billion people with a total GDP of $ 17 trillion approximately 40 per cent of
the worlds trade. It has China and India as members. Already China is an important
participant in industrial and infrastructural production in the ASEAN and South Asian region.
Now it will forge ahead with its huge investment kitty of $4 trillion to $8 trillion under OBOR
over an unspeci ed time horizon.

Members of the RCEP, including India, are worried that China may dump its excess capacity in
many goods including steel as well as other highly subsidized items on the partners thereby
harming the local industry and distorting trade in the process. The negotiation process begun
three years ago is unlikely to be concluded in 2017.India is seeking greater market access in
services as it is a leading services supplier. India with many competing industries is defensive
about eliminating all tari s and opening up goods trade especially to China.

Read Also |What Obama has wrought

It is not just trade which is growing slowly and causing unemployment, but the advances in
technology are causing job losses. Western businesses are pushing towards automation,
digitalisation, robotics and 3 D printing that will undermine low wage countries biggest
comparative advantage. It is responsible for the return of jobs in America. In state of the art
plants, a bicycle can be produced with just 12 employees per shift. The same operation in
China would need 60 people. Thus automation is helping jobs return to countries which
developed the technology viz. the advanced countries. But Reshoring is bad news for
developing countries that transformed themselves for export led manufactured growth. Now
they may be seeing a reversal. Training workers in high tech manufacturing may be the order
of the day in the future. For that to happen, there has to be a big push towards higher
education and technical training which is lacking in many developing countries including in
India.

Rise of regionalism

The growth of regionalism and increase in regional trade is a clear possibility with India and
China playing a pivotal role in increasing trade and investment in the ASEAN and South Asian
region. China already has huge investments in Africa and Latin America. It can even help US in
selling goods in China and other parts of the world.

Chinas Alibaba, one of the biggest internet companies, is now o ering an olive branch to
Donald Trump in the face of a tari hike which will upset Chinese business. Jack Ma, the
chairman of Alibaba, has o ered to sell small and medium US companies products on its
portal for Chinese consumers. There will indeed be a big demand for American dairy and
fruits as the Chinese have been su ering from problems of adulterated and poor quality
food. There could be many other American goods which Jack Ma can sell and which will create
jobs in America. High tari s with a hike of 25 per cent imposed on Chinese goods on the
other hand will most likely lead to retaliation.

Indias case

India is somehow blessed by its huge size and resources which means a big domestic market
and a growing prosperous middle class. Globalisation has increased growth no doubt and
added variety to most Indians everyday life and consumption pattern, but there are many
who have not been votaries of globalisation like the Bombay Club in the past. But now most
industrialists concede that globalisation has enhanced competitiveness and have led to the
improvement in the quality of their products. India is also undertaking foreign investments in
other countries. Outgoing FDI is important for many Indian companies. Many Indians have
found jobs abroad and NRI remittances are signi cant and highest in the south Asian region.
Yet it is universally accepted that globalisation has led to sharp inequalities in incomes and
the rich getting richer and the poor getting poorer in India also.

According to a report by South Africa based New World Wealth, India is the second most
unequal country globally with millionaires controlling 54 per cent of its wealth. With a total
individual wealth of $5600 billion, it is among the 10 richest countries in the world. According
to another source, Credit Suisse, the richest 5 per cent own 68.6 percent while the top 10
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to another source, Credit Suisse, the richest 5 per cent own 68.6 percent while the top 10
percent have 76.3 percent. Also the data shows that the richest 1 percent owned 36.8
percent of the countrys wealth in 2000 while the share of the top 10 percent was 65.9 per
cent but by 2015 the top 1 percent owned more than 50 per cent.

To reduce inequality, the cushioning safety net to protect the poor and the vulnerable has to
be strengthened though there are multiple social security schemes for the poor. Plugging
leakages will reduce the number of poor and will make them shift to the middle classes.
Public investment has to rise in healthcare and education as well as on infrastructure. This is
all the more needed because private investment has been falling in recent years. There is
need to implement reforms that are inclusive of the poor. There has to be progressive
taxation and more people in the tax net which can bring more revenue to have public works
and a more egalitarian society. If poverty is reduced drastically, the demand factor as a result
of such a huge economy will help the regeneration of global trade in goods and services in
the future.

Since attracting FDI seems to be a focal point, it can be targeted to industries that are labour
intensive. This may lead to job creation for the unskilled. Otherwise, with nearly 1 million
people joining the labour force every month, only service trade and the informal sector will
be the available option for them.

Indias manufacturing sector is small (16 percent of the GDP) as compared to China and it has
been the aim of the government to increase it to 25 per cent of the GDP. Only more jobs in
the manufacturing sector can solve the problem and higher productivity will lead to an
increase in its share.

India accounts for only two percent of the global trade. Indias exports can grow if the
direction of trade changes. India can look towards Africa, South Asia and Latin America as
export destinations because as long as the world remains full of poor people, there will
always be demand for labour intensive cheap consumer goods, electronics, chemicals,
machinery and pharmaceuticals India can ll the gap which China is likely to vacate.

Failure to create more jobs in highly populated countries may force labour to migrate to
developed countries in a big way. Such migration may create more tensions in Europe and
lead to the rise of right wing parties and their coming to power. Even if Trump succeeds in
reshoring jobs back to the US especially from Mexico, it will not be easy to resist an increased
ow of Mexican immigrants into US.

On the whole globalisation is likely to continue in a di erent and perhaps more bene cial
form. China and India can play important roles even as US wishes to behave more
protectionist and retreats behind tari s and walls and move towards the Asian century.

The views expressed above belong to the author(s).

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