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Why has the U.S. raised trade war stakes?

What are the causes and the consequences of the heightened tariffs battle between the Trump administration and China?

The story so far: On July 6, 2018, the United States administration slapped a tariff of 25% on $50 billion worth of imports from China. China responded immediately with retaliatory tariffs on a similar scale. On May 10, 2019, U.S. President Donald Trump raised the tariff rate to 25% (from the existing level of 10%) on $200 billion of imports from China. Washington is now poised to extend tariffs on all imports from China, which implies that approximately $325 billion of additional goods will enter the U.S. tax net.

When did the trade war begin?

The first stone was cast in what looks to be a protracted global economic conflict when the Trump administration decided, in January 2018, to impose tariffs on solar panels and washing machines. In March, tariffs were slapped on steel and aluminium. China, already facing allegations of dumping cheap metal across global markets, retaliated with duties on $3 billion of U.S. products. By May these tariffs were applied toward the European Union (EU), Mexico and Canada, respectively at 25% for steel and 10% for aluminium. Canada immediately announced plans to impose counter-tariffs on U.S. products worth about $13 billion, with Mexico and the EU following suit. While the U.S. tariffs were levied on raw materials used across the manufacturing, construction and oil industries, the EU, Mexico and Canada targeted consumer goods. The trade dispute between the U.S. and China now includes around 10,000 products of global trade.

Why did Mr. Trump impose tariffs on China?

The American President is a long-time critic of the U.S.’s deficit with its trading partners and believes that countries such as China do not provide a level-playing field for free trade, especially denial of market access. There is also bipartisan consensus in the U.S. that Beijing has taken advantage of the American economy for decades, including by theft of intellectual property, leading to the loss of millions of jobs.

The U.S. trade deficit with China has soared, rising from around $100 billion in 2000 to $419 billion in 2018. The Trump administration considers this a threat to economic, hence national, security. In fact, in addition to the tariffs, the White House has curtailed investment from Chinese entities and visas to Chinese nationals (such as researchers) — and these are directly aimed at curbing industrial espionage. The recent controversy over the arrest in Canada of Meng Wanzhou, CFO of China-owned telecommunications giant Huawei, the declaration of a national emergency for the telecommunications sector leading to a restriction on Chinese products in this area, and the placement of Huawei on the infamous Entity List for import control, hints at the level of anxiety that the Trump administration has over Chinese industrial spying.

Can tariffs address the deficit problem?

There are structural reasons why the trade deficit may be hard to reverse. The U.S. earns a bulk of its net income from services, such as finance, travel and tourism, whereas China exports a far greater proportion of manufactured goods. Therefore, even if the intention behind the crackdown on Chinese trade practices is purposeful protectionism — shielding U.S. domestic industries from foreign competition — it is unclear that the massive shifts in global supply chains required to achieve that goal will happen any time soon, or produce the macroeconomic effects that Mr. Trump hopes they will.

How does the Trump model of ‘tariff economics’ work?

Consider the example of Apple Inc., the Silicon Valley tech giant that Mr. Trump has alluded to on Twitter. Apple has approximately 27 China-based suppliers, most of whom manufacture electrical components for the tech giant. If, through the imposition of tariffs on the products that these suppliers manufacture, the effective cost of production for Apple rises to an uneconomical level, Apple might be compelled to look elsewhere for those components. If many such companies are impacted, that could potentially damage China’s economy to the benefit of relatively low-cost economies.

However, for this competitive tariff ‘model’ to work in reality, the cost of production would have to come down substantially in the U.S. too. Mr. Trump has tweeted that he would offer companies such as Apple “ZERO tax, and indeed a tax incentive,” were they to relocate their production facilities to the U.S. Would this suffice, given the relatively higher cost of labour and capital in the U.S.? Possibly not.

What has the economic impact of the tariffs been?

Higher tariffs have already had an impact on prices for American companies and individuals. The price of steel and washing machines, for example, has already spiralled upward in the U.S. since the trade war kicked off. Reports suggest China’s retaliatory tariffs, and the resulting steep fall in demand for U.S. export products, have impacted everything from soybean from North Dakota to bourbon from Kentucky and fossil fuels, copper and wood. General Motors has cut jobs at assembly plants in the Midwest owing to hundreds of millions of dollars of additional cost associated with the tariffs.

Simultaneously, stock markets have almost inevitably reacted badly to every new announcement of additional tariffs. For example, after the latest failure of bilateral negotiations in Washington, the Dow Jones Industrial Average saw its worst one-day performance in months.

However, the impact that tariffs on Chinese have on overall inflation should not be exaggerated. According to reports, researchers at the Federal Reserve Bank of San Francisco have estimated that “China tariffs have added 0.1% to inflation for consumers and 0.3% for business investment goods”.

Similarly, it may be a while before the full, price-based impact on the Chinese economy is felt. A study by Syracuse University in the U.S. shows that for electronic and computer products, for example, “non-Chinese multinational corporations operating in China supply 87% of the products that will be affected by tariffs, while Chinese firms send only 13%”.

How has corporate America responded?

Apple Inc. fired off a letter to the Trump administration in September 2018 warning that the tariffs were likely to hit many of its core products, including watches, headphones, chargers and adapters. The company said to Robert Lighthizer, Mr. Trump’s senior trade negotiator, “Our concern with these tariffs is that the U.S. will be hardest hit, and that will result in lower U.S. growth and competitiveness and higher prices for U.S. consumers.”

More broadly, while industry groups have generally cheered the White House for taking on China over trade secrets theft or deliberate market manipulations, the mounting costs of tariffs has taken a toll on their operations, leading executives such as Rick Helfenbein, CEO of the American Apparel & Footwear Association to describe Mr. Trump’s policies as a “self-inflicted wound that will be catastrophic for the nation’s economy”.

What has India’s position been?

While India had last year secured an exemption from the U.S. on steel and aluminium tariffs, the U.S. Trade Representative said in March 2019 that India would no longer be eligible for preferential market access to the U.S. under the Generalised System of Preferences programme. This meant New Delhi lost out on $190 million per year in duty reductions. This comes on the back of repeated allusions by Mr. Trump to India’s high tariff barriers, for example impacting Harley-Davidson motorcycles and medical devices.

With an overall bilateral trade value of $126.2 billion in 2017, the U.S.’s goods and services deficit with India was $27.3 billion (2017). In June 2018 India joined the EU and other countries in imposing retaliatory duties to counter Washington’s tariff on steel and aluminium.

When can we expect the dispute to be resolved?

In 2018, at the G20 summit in Buenos Aires, Argentina, Mr. Trump called a “temporary truce” with President Xi Jinping of China after the bruising year-long trade battle between their countries. The agreement that they reached was effectively to pause the trade war and apply themselves toward agreeing a pact. However, it failed to produce any tangible progress. In May 2019, negotiators from the two countries met again in Washington, even as Mr. Trump proceeded with his latest round of tariff rate hike on $200 billion of Chinese imports from 10% to 25%. Unsurprisingly, those talks did not make much headway either. A solution remains elusive for now.

Climate risk protocols

Why UN-led investors have drawn up a guide for firms to rethink threat to companies

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The story so far: On May 10, 20 institutional investors from 11 countries convened by the UN Environment Finance Initiative (UNEP FI) made public a report that helps investors understand how to calculate the risk companies face from climate change. There are key factors that have necessitated this new protocol, which is more like an investor guide.

What led to the investor guide?

This guide was made in line with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), a board formed as a result of an agreement at a G20 summit in London, 2009. This board consisted of representatives from large banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies. The TCFD in 2017 developed voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to stakeholders. To do that they considered the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries.

Why is the report significant?

Climate change is already impacting economies around the world and this will continue to intensify. Extreme weather events, including floods, tropical cyclones, and extreme hot and cold days are already physically impacting business operations. Several reports by the Intergovernmental Panel on Climate Change (IPCC) warn of myriad risk to economies but so far there’s been no specific assessment of how companies can account for such risks.

Policy and technology shifts mean that emission-intensive companies — thermal power and mining, for instance — would become less competitive. These changes pose potentially unprecedented risks — and opportunities — to institutional investors and other financial institutions which are exposed to such businesses.

How was it compiled?

The 20 institutional investors made up an Investor Pilot Group (IPG) and used a methodology developed by an analytics firm called Carbon Delta and the IPG to determine the risk to their portfolios. Each of the IPG members prepared scenarios, on how an average rise of global temperature by 1.5°C, 2°C, and 3°C respectively would impact the “portfolios” the companies they had invested in. This was intended as a pilot project and a model for other companies to account for the risk of climate change to their business activities.

What does the report find?

Investors face as much as 13.16% of risk from the required transition to a low-carbon economy: The 1.5°C scenario, in line with the latest special report by the IPCC, exposes companies to a significant level of transition risk, affecting as much as 13.16% of overall portfolio value. Extrapolating this to the total assets under management (AUM) for the largest 500 investment managers in the world — $81.2 trillion — would represent a value loss of $10.7 trillion.

Utilities, transportation, agriculture as well as mining and petroleum refining sectors are at high levels of policy risk. On the bright side, there were profits to be made too and the report said that there was potentially $2.1 trillion as ‘green profits’ for the taking. However, green revenues generated from the sale of low carbon technologies, which support the transition, will help companies offset costs from complying with greenhouse gas (GHG) reduction policies.

Low carbon technology opportunities help offset risk. Suitably mixing technology opportunities across a portfolio will alleviate losses generated under the 3°C, 2°C and 1.5°C policy scenarios and could mean portfolio benefits by 3.21%, 6.94%, and 10.74% under these scenarios. Finally, if governments delay action to enact climate policies that reduce greenhouse gas emissions, the 30,000 companies in the universe faced a further cost of $1.2 trillion compared to a scenario where climate policy is enacted smoothly and steadily with immediate effect, the report added.

What necessitated these new protocols?

Governments have long been collaborating with scientists who use computer models to forecast how warming will impact their economies. These same models, which have been the basis for inter-governmental negotiations on the greenhouse gas emission cuts they must undertake, are now being used by large companies to plan — and hedge — for the risks posed by climate change.

What is in it for India?

India, in spite of being one of the top greenhouse gas emitters, finds no mention in this report. However, the guidelines proposed can — in theory at least — be adopted by any company based anywhere in the world. India has committed to reducing the emission intensity of its GDP by 33-35% below 2005 levels by 2030.

What is India’s stand on data storage?

As the U.S. talks tough against data localisation, what are the protection regulations in place? What lies ahead?

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The story so far: Facebook’s Mark Zuckerberg recently expressed apprehension about nations wanting to store data locally. According to him, it gave rise to possibilities where authoritarian governments would have access to data for possible misuse. In an earnings call with investors in late April, he reiterated his stance against data localisation, without mentioning a country. Earlier that month, the U.S. criticised India’s proposed norms on data localisation as ‘most discriminatory’ and ‘trade-distortive’. India is at a juncture where various bills are ready to be signed into law that will set data localisation and protection regulations in stone.

What is data localisation?

Data localisation laws refer to regulations that dictate how data on a nation’s citizens is collected, processed and stored inside the country.

Does it matter where data resides?

Among reasons supporting data localisation put out by the Justice Srikrishna Committee report last year, a few key ones are: Data localisation is critical for law enforcement. Access to data by Indian law agencies, in case of a breach or threat, cannot be dependent on the whims and fancies, nor on lengthy legal processes of another nation that hosts data generated in India.

If data generated in India is stored in the U.S., for example, it is dependent on technology and channels such as the undersea fibre optic cable network. Such reliance can be debilitating in the case of a tech or physical breakdown. The report recommends that hence, at least a copy of the data must be stored in India.

Technology playfields are not even. A developing country such as India may be playing catch-up with a developed nation, which may be willing to offer liberal laws. It may not be wise for India to have the liberal rules as other nations would. A key observation of the report is that it is ideal to have the data stored only locally, without even having a copy abroad, in order to protect Indian data from foreign surveillance.

Does India have rules in place for data protection?

Currently, the only mandatory rule on data localisation in India is by the Reserve Bank of India for payment systems. Other than this, there are only reports or drafts of bills that are yet to be signed into law.

Among material available in the public domain on data localisation is the white paper that preceded the Jusitce Srikrishna Committee report, inviting public comments.

The second piece is the Draft Personal Data Protection Bill, 2018 itself which has specific requirements on cross-border data transfers. This is seen as being more restrictive than the recommendations of the Srikrishna Committee. The draft e-commerce policy also has clauses on cross-border data transfer. For example, it suggests that if a global entity’s India subsidiary transfers Indian users’ data to its parent, the same cannot be transferred to a third party even with the user’s consent.

Shouldn’t the level of protection vary according to the nature of data?

The Justice Srikrishna Committee report has made a point about not treating all data alike. The data protection bill too differentiates between ‘critical’ and other data.

Why are companies reluctant to comply?

The disadvantage for a company compelled to localise data is obvious — costs, in the form of servers, the UPS, generators, cooling costs, building and personnel. Companies feel that infrastructure in India is not yet ready to support this kind of ecosystem. For any large e-commerce player in India, costs may go up between 10% and 50% depending on how stringently the final law is worded. The big daddies of e-commerce and social media may not find it too difficult to comply. Small companies providing services in India will find compliance tough. In fact, one of the objectives of data localisation is to give a fillip to the start-up sector in India, but stringent norms can make it costly for small firms to comply thereby defeating this objective. While this places small entities in a difficult position, the spirit of the Justice Srikrishna Committee report seems to imply that this is not reason enough to avoid compliance.

While granting that the data protection bill comes after a lot of homework, observers feel it is still not comparable to the EU General Data Protection Regulation (GDPR), which took a few years to draft, adding scholarly and academic depth to the consultations, inputs and the final wording of the law.

How have other countries fared?

It is well known that Canada and Australia protect their health data very carefully. Vietnam mandates one copy of data to be stored locally and for any company that collects user data to have a local office, unlike the EU’s GDPR; citing national interests, China mandates strict data localisation in servers within its borders. International reports refer to data protection laws in Vietnam and China as being similar, in that they were made not so much to protect individual rights as to allow government to control data.

For the EU, it is clear that customer is ‘king’. Their GDPR is agnostic to technology and sector. Interestingly, the U.S. has no single data protection law at the Federal level. It does, however, have individual laws such as the HIPAA (Health Insurance Portability and Accountability Act of 1996) for health care, another for payments, and the like. Brazil, Japan, Korea and New Zealand have put in place data protection laws. Chile has recently announced the setting up of an independent data protection authority, while Argentina is currently reforming its privacy legislation.

How has India’s policy on data localisation been received globally?

In September 2018, the EU had said in its response to India’s data protection draft bill that “data localisation requirements appear both unnecessary and potentially harmful as they would create unnecessary costs, difficulties and uncertainties that could hamper business and investments”. It added that if implemented, “this kind of provision would also likely hinder data transfers and complicate the facilitation of commercial exchanges, including in the context of EU-India bilateral negotiations on a possible free trade agreement”.

For companies from one country doing business in another, it becomes cumbersome to have two different compliance levels.

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