Jun 24, 2015

Export Import Bank debate in the US

Ex-Im Bank of the USA is a federal government backed institution which specialises in trade finance. It is similar in functions to India's Exim bank except that Indian Exim bank doesn't get into trade insurance, which is handled by another body called Export Credit Guarantee corporation of India. In fact, India's Exim bank copies most of the functions of US Ex-Im bank given that US institution predates Indian one by more than five decades. 

US Ex-Im bank is under threat of being de-authorized, unless the US congress re-authorizes it shortly. 

The bank's critics, mainly the republicans, bank on the argument that such subsidising banks lead to market distortion and help private sector players, and therefore, they are a form of corporate welfare scheme. They choose the winners in the private sector by choosing whom to help by providing easy access to credit for international trade. It is nothing but crony capitalism in another form, subsidising the rich. 
The bank's supporters argue that closing down Ex-Im bank would put American manufacturers at a disadvantage in the global market as there are competing banks being run by other countries, notably China, which support the domestic manufacturers to capture global market. This would lead to job losses, and loss of access to global market. 

Most of Indian Exim bank's trade finance is directed in such a way that the buyer in the global market uses it to procure Indian goods. Such finance is directed through lines of credit mechanism, project finance, long term overseas investment finance etc. The Exim banks across the world usually step in to fill a void that is not filled by the conventional banking and regular trade finance. And most of the Exim banks are sponsored by the governments. China is currently the biggest user of Exim bank mechanism for international trade finance.  

It is interesting to note that the US is even debating on the existence of such an important institution. Such important institutions should not be given expiring charter, like what the US has done. It should be enacted by an act of parliament, like what India has done. Exam banks do not just give packing credit or trade insurance, they are the source of stability for long term international trade finance, and are extension of trade and commercial diplomacy. Losing Ex-Im bank for the US might have long term implications which might not be easily quantifiable today in terms of loss of jobs or dollars earned. 

Jun 21, 2015

The frigidity of Indian Exports

The trade figures for May 2015 are here. The trade decreased, both in terms of exports and imports.   Exports were down by around 20% this month over last year, and imports were down by around 16%.  We exported around 22 Billion USD of merchandise in May and imported around 32 Billion USD worth of goods. At this rate, we would be lucky to touch the figure of USD 300 Billion of exports by the end of year.  On services front, the net services earning stood at around 5.6 Billion USD. A new foreign trade policy was released last month, with a stated aim of doubling the exports in next five years.

The last sentence of the above paragraph is in contrast to all other sentences. Therein lies the problem in making policies that target the outcomes that rely on multiple underlying factors. We can't just double exports without addressing the fundamentals that lead to better export performance. 

Now, there are reasons as to why the figures are not encouraging. Oil prices are low. This leads to lower numbers on both imports (crude) and exports (refined petroleum products) as oil is currently the single largest contributor to merchandise trade. Global demand continues to be low, which is another major factor, dragging down the demand for all products in general. Merchandise trade growth as we know it, has peaked, about which I have elaborated in another post here, and that leaves very little elbow for India's trade to wedge in. India continues to suffer from whatever disadvantages it suffered in the area of international trade for long time and not much has really changed on the ground. 

Apart from better global growth and thus better demand, which itself is a distant possibility, there is hardly much that can be done in the short term. A devalued rupee in itself doesn't assure better exports, and even if it helps, it has its own lag effect. 

All is not that bad if we look at our general economy. Though the trade figures are low, our current account deficit, as a percentage of GDP, is under control. Rupee is not volatile. Inflation is subdued, helped by low oil prices. Government expenditure is not worrisome. Monetary sector looks fine, if we overlook the bad debts of banks. What's not so good is the real sector, from which we can derive the exports. Though the Index of Industrial Production data is showing the so called green shoots of growth recently, it is still far from satisfactory. Overall, the macroeconomy is stable, but weak. 

Given the above, if one wants to increase exports, there has to be some kind of built in incentive. The best incentive is the price difference based on market economy, and that is a function of global demand, which is not stirring.

Govt of India has tried various export promotion measures, about which I will elaborate in some other post, but most of them have failed to stir exports. What one must now realise is this. Do whatever, the export performance in the end is a strong function of global demand. Policymakers must realise that there are two, and only two areas where they can intervene to improve exports. 

a) By providing better infrastructure. Infrastructure includes not just roads, ports, and physical infrastructure but also effective regulatory regime, policy stability, governance,  ease of doing business and all other aspects that good governance can provide. 
b) By imparting training and awareness, including support, about international trade. 

The first one, better infrastructure, is a time taking affair. And there is hardly much that can be done in an isolated way. It is a systemic issue and can be tackled only by the whole-of-government approach. 
The second one can be ramped up faster. The various export promotion councils, there were 38 of them last time I counted, have morphed into glamorised beggars, and should be ideally put to task for the second point. Apart from one or two councils, they have hardly proved themselves useful. The DGFT, which makes foreign trade policy, should be a lean organisation and the field offices of DGFT should be the nodes that liaison with state governments and various agencies towards export promotion activities. Unfortunately, DGFT field offices have reduced to implementer of various tax nullification schemes, which can ideally be done by customs. 

Lastly, one must realise that there is nothing called increasing exports by taking measures. An increasing exports is a result of robust manufacturing and services sector that is producing more than the country can consume, and is able to produce goods and services that the world demands. If our exports are frigid, there is a good reason somewhere above. 

Jun 6, 2015

The ITA II at WTO and India's stand

Way back in 2012, I had written about how India is wrong in opposing ITA 2 agreement at WTO blindly. You can find it here.

ITA 2 is the Information Technology agreement - Version 2, that is currently being negotiated at WTO. The agreement is solely a tariff cutting mechanism in the trade of IT hardware products. India was a signatory to the first version, and rightly or wrongly blames it for the poor state of electronic hardware manufacturing industry in India today. India has strongly opposed any expansion of product coverage under the deal. You may read the news reports here and here. The premise is, if we cut the import duties on electronic goods, our domestic electronic manufacturing would suffer as it would then be easier to import than to produce locally.

In the light of time that has elapsed since the last post,  I thought I should revisit the issue.

Meanwhile, Krugman has opposed USA's trade deals, the transpacific and transatlantic deals that are under discussion. He says that these deals appear more to be oriented towards big pharma and Hollywood's needs, in terms of IPR strengthening, than anything arising through the deal in terms of Ricardian gains arising out of increase in trade volume due to respective comparative advantages in different products by decreasing tariff barriers. Because the tariffs are already at the floor and there is hardly much that remains in  terms of tariff negotiations among these nations. 

The views of our policymakers, in terms of opposing the ITA2 deal at WTO, matches Krugman's latest view of cautious opposition about regional agreements. However, the similarities stop at that. Our opposition stems from the insecurity arising out of lack of knowledge about what would happen if we agree on tariff reductions, and a blind belief that we need to oppose in order to gain an upper hand at negotiations. While one may understand that lack of knowledge may lead to taking wrong positions, one fails to appreciate opposing the deal for the sake of opposing. It is naive to support tariff barriers in IT hardware sector for two reasons.

One, the current IT hardware products are manufactured in value chains spread across nations. An iPhone might have its R&D centre at California, but it is manufactured across multiple east asian countries including China. The parts shuttle across boundaries, without hitting tariff walls, until the iPhone is finally assembled at China and is shipped out. Any country that places an additional cost in terms of tariff walls on the free movement of parts risks being excluded from the chain. If India chooses to keep the barriers, it chooses to continue in the silo that it has built for itself. There is hardly any mentionable IT hardware manufacturing in India today. We blame it on ITA1, whereas the truth lies elsewhere.

Two, we have IT software and services sector, that is doing well, and which has a complementarity  with cheap availability of IT hardware. A reduction in import cost of IT hardware directly adds to the bottomline of this sector.

One must also add that the infant industry argument, when it comes to IT hardware manufacturing sector, doesn't hold good. In this sector, an isolated infant industry, protected by tariff walls, cannot survive in this century. One might suggest a myopic approach of using special economic zones to achieve global integration, but if a policy sounds so good for a zone, it cannot be so wrong for a nation. The right way to go about it is to give right incentives to invest in IT hardware manufacturing in India. The recent efforts by the IT ministry is laudable in the regard. We need to integrate with the global value chains if we are to build economies of scale.

Finally, our officials must acknowledge that the era of tariffs is passe. Countries using such regressive  measures face serious threat of being left out from all regional groupings. If one wants to erect walls, it has to be regulatory in nature, through intelligent non tariff barriers such as quality and technical requirements, IP laws and so on. The game has changed.

Lest I be misunderstood as an 'yay-free-trade' champion, I must put the disclaimer that I am talking specifically about IT hardware manufacturing sector here, with regard to ITA2 agreement at WTO. There are areas such as agriculture, where we still need some direct tariff barriers and such general 'yay-free-trade' approach might not be right.