[Trump’s tariffs] The World Starts To Respond - Issue #130

Countries are wondering about the pros and cons of trading with the USA

The Big Picture

As this newsletter gets written, countries are wondering about the pros and cons of trading with the USA.

South Korea, for instance, is thinking of ways to redu­ce its trade sur­plus, perhaps by buying US LNG or com­mer­cial planes. This decision by acting president Han Duck-soo, however, is roiling politics in the country. A technocrat, his is a stop-gap position, till presidential polls this June, after Korea’s previous president, Yoon Suk Yeol, was impeached over his attempt to impose mar­tial law last year.

Or take Japan. In the immediate aftermath of the tariff declaration, it had vowed to jointly respond to US tariffs along with China and South Korea. Last week, however, armed with sharp warnings from its lawmakers, Japan even went to the US for talks. Those talks, however, were inconclusive. As for the Americans, they were under-prepared, which is what happens when one sets a “90 deals in 90 days” target. As for the Japanese, between coming polls and China’s warning to countries against joining hands with the US and restricting their China trade, they are weighing their options. On this point, a warning by Japanese MP Shinji Oguma is worth a listen.

Turn to developing countries like Lesotho, and similar responses show up.
This tiny, land-locked country of just 2.3 million people, hit hard by tariffs and too poor to buy an equivalent value of its exports from the USA, is one of the big gainers from Bill Clinton’s African Growth and Oppor­tun­ity Act (Agoa), which offered African countries tar­iff-free access to the US market. That window, however, has been closed now. In response, as the FT reported, Lesotho has gran­ted Starlink a 10-year oper­at­ing licence and offered to approve a Mar­ri­ott hotel. It’s also con­sidering anti-poor concessions like grain import­s from the US, accept­ing third-coun­try deportees from the US, and deploy­ing sol­diers to pro­tect US com­pan­ies in min­eral-rich DR Congo.
Despite these concessions, Lesotho still stares at an uncertain future. Apart from the economic and diplomatic costs of these concessions, the country is also unsure whom to approach “because the Trump admin­is­tra­tion (is) yet to put a full Africa team in place”.

And then, there is China. There is speculation about it coming closer to the EU. Chinese manufacturers — and their customers in the USA — are also rushing “to find new mar­kets for their wares or altern­at­ive trade routes to avoid the tar­iffs”, reported FT from the Can­ton Fair in Guang­zhou. “If they don’t talk it out, we’ll have no choice but to stop doing the US mar­ket. We can only try and find more cus­tom­ers in Europe or in coun­tries along the Belt and Road,” a manufacturer told the paper. As for US buyers, they are wondering if they should ask their suppliers to shift to south-east Asia — and to somehow pay the lower tariffs slapped on countries like Vietnam and Cambodia. Apart from these, China might focus more on domestic sales. “Eco­m­merce giants Alibaba, JD.com and Pin­duoduo are lead­ing Chinese inter­net groups in launch­ing mult­i­bil­lion-dol­lar ini­ti­at­ives to help tra­di­tional export­ers switch to domestic sales, as part of a national cam­paign to cush­ion the coun­try’s eco­nomy from a US trade war,” reported FT.

Hardwired into this are further changes. One reason underlying China’s competitiveness has been low wage costs. If it wants more growth from its domestic sector, it will have to push up wages, with all the political consequences that might follow. See the New Yorker interview with Yasheng Huang (in longreads) for more on this.

Elsewhere in the world, Brazil and Mexico are looking to trade more with each other. Brazil is also starting to supplant the US as soybean supplier to China, while replacing Chinese textile and footwear exports to the USA. The country might emerge as a winner from the tariff war, wrote Reuters. What this means for the rainforest now remains to be seen.

That is the calculus of this moment. Countries are responding in four ways: extending concessions to the USA; looking to expand trade elsewhere; larger countries are focusing on greater growth from their domestic markets; and looking to supplant China in US supply chains. In tandem, trade barriers to avoid dumping are also coming up.

In all this, not only is the dollar getting threatened (see longreads), the neoliberal era where multinationals ranged across the world, setting up global supply chains and moved capital with equal ease, might be ending. “Today, US mul­tina­tion­als gen­er­ate more than 40 per cent of their rev­enue abroad,” wrote FT. “The biggest gain­ers were man­u­fac­tur­ers, which on aver­age pay their work­ers over­seas 60 per cent less than staff at home. Now, Amer­ican busi­nesses will think twice before set­ting up new factor­ies abroad, and decisions will not be driven by the straight­for­ward logic of max­im­ising prof­it­ab­il­ity. The large mul­tina­tion­als in par­tic­u­lar will see profit mar­gins under con­stant pres­sure.”

How they respond to this downsizing, where their goals get subordinated to US’ foreign policy ambitions, is the next question. This is a question with some urgency, as this report says, even as US com­pan­ies get snared in reg­u­lat­ory com­plex­ity and stra­tegic fal­louts, for­eign rivals are advancing. BYD is one instance.

PS: Further reading. Trump's tariffs leave China's neighbours with an impossible choice (BBC)

PS: Reports say Trump is now getting anxious. Is the US about to blink?

News of the week

India, too, is looking to profit from the tariff war. Not only is the country looking to “identify and woo US companies looking to relocate their manufacturing from China”, wrote Economic Times, it is also “keen to support Indian corporates” that want to aggressively pursue the US market.

In other possibly related news, India wants data centres to use gas-based power. “Data centres are generally large energy consumers. Hence, utilising gas-based plants to meet their substantial needs could offer both cost advantages and reliability in power supply,” reported Economic Times on 17 April.

This is an odd announcement. A month earlier, on 5 March, the government had also announced a stay on further gas-based power plants. “It does not make sense for the government to revive or increase gas-based power anymore,” a senior government official told MoneyControl. “The power generated through gas-based stations comes to around Rs 13-14 per unit. At the same time, I am getting electricity through renewable sources at Rs 2.4 per unit. Similarly, we are getting thermal power at around Rs 4 per unit.”

Since then, however, India’s LNG buys from the USA have picked up. “State-run oil companies are leading the charge for New Delhi by increasing US energy purchases — after private refiners turned more cautious, weighing profitability and margins,” reported Business Standard. In tandem, the government seems to be wondering who can afford expensive US LNG.

In other news, GQG has bought more shares in Adani. Adani’s Dharavi project is steamrolling along. PTI has published a strange report on how Adani forced Hindenburg to close. And it is not clear if the US case against Adani has been squelched.

The big news coming out of India last week, however, was BluSmart. The EV-based cab-hailing service has been hit by charges of financial fraud. In the longreads section, you will find a bunch of reports on what went wrong.

Also came another reminder that the lasting legacy of the Trump administration might not just be the tariff war. There is also the weakening of the world’s fight on climate change. “The Net-Zero Banking Alliance (NZBA), a UN-backed coalition of banks aimed at advancing global Paris Agreement climate goals through their financing activities, announced a series of significant changes to its framework and principles for members, including eliminating a mandatory requirement for banks to align lending and capital markets activities with the goal of limiting global warming to 1.5°C,” wrote ESG Today. “The changes follow a rapid-fire series of departures from the alliance over the past few months, which saw all major U.S., Canadian and some other banks leaving the NZBA, as political pressure, particularly in the U.S., has targeted financial institutions participating in climate-focused coalitions.”

In the case of the tariff war, one sees the world trying to figure out its responses. With fronts like the NZBA, however, similarly urgent action is yet unseen. What we have right now is some banks exiting, but little else more.

Climate longreads

1. Is the world losing faith in the almighty US dollar? (FT)

2. On NZBA, read this FT report too.

3. From a Camellia’s flat to crores for family: How the Jaggi brothers diverted loan funds meant for BluSmart’s EVs (Indian Express); Tale of missing funds: How Gensol’s Jaggi brothers siphoned Rs 262 crore (ET)

4. "So, there are between five hundred million and six hundred million rural Chinese. They have lower levels of social protection and social entitlement, as compared with the urban Chinese. It’s called the hukou system. I believe that the state should equalise the social protection of the urban Chinese and the rural Chinese immediately. But that means that the government would have to have money going to the rural households in a way that it hasn’t before: education, health care, and other expenditures. And that means that they would have less money to spend on industrial policy, just to make that trade-off very, very concrete. The reason that they can spend a lot of the money on industrial capacity is because they don’t have to spend a lot of money on social obligations.” China’s Plan to Fight Trump’s Trade War (New Yorker talks to Yasheng Huang)

5. Vanishing Act: Will the camels of Rajasthan be the next Cheetah? (Livemint)

6. India & The Global Left: Richard Wolff & Prabhat Patnaik EXPOSE Trump’s Trade War (Democracy at Work)

7. India’s forests are disappearing, but not on paper (Dialogue Earth)

8. What is heat stress? How does it affect animal hormones? (Mongabay)

Book of the week

Last week, we had mentioned More and More and More: An All-Consuming History of Energy, a book which asks if energy transitions are real. Here is a video discussion with the author.