Advantage China after Trump-Kim summit

For all the talk about China being insecure with regard to potential Donald Trump-Kim Jong Un bonhomie, Beijing is likely to be rather pleased with the events that transpired in Singapore today.

First, soon after the early reports of the agreement came from Singapore, China called for easing sanctions and “establishing a peace mechanism.” The US-DPRK statement also envisions something similar, i.e., the “building of a lasting and robust peace regime.”

Such a framework places Beijing directly at the negotiating table. Foreign Minister Wang Yi underscored this today, saying China had and continues to play a “unique and important role” in the Korean Peninsula issue. The fact that Kim flew on an Air China jet shows Beijing’s continuing influence over Pyongyang.

Second, the formulation of the DPRK committing to work towards complete denuclearisation, while Trump describes US-South Korea drills as “provocative” and talks about ending US force presence in South Korea also works for Beijing in more ways than one. This is essentially what Beijing had been seeking for months, via its double freeze proposal. Moreover, Trump’s characterisation of US force presence in the region isn’t likely to have gone unnoticed in other regional capitals.

For one, the South Korean administration appeared to have been caught off guard with Trump offering the drills as a bargaining chip. The presidency and military both issued statements saying that clarity was needed on “the meaning and intention” of Trump’s remarks.

But more broadly, if US-South Korea military ties and exercises are “provocative,” would Washington under Trump be a reliable partner for states involved in the South China Sea dispute or even Taiwan, irrespective of the Indo-Pacific strategy and Defence Secretary James Mattis’ tough words at the Shangri-La Dialogue.

Also, Trump’s remarks about the cost of military exercises are very damaging. It’s one thing to want allies to carry their weight. But the repeated counting of costs is incredibly short-sighted and likely to raise questions about the costs that the US will be willing to incur to challenge an assertive China in the region.

After today, it appears that for all the rhetoric, Trump is uninterested in incurring those costs. Trump might have sought history in Singapore. But today’s developments mean it’s advantage Beijing.

US should get more tough on China!

The United States struck a deal with ZTE with a penalty of $1 billion and $400 million in an escrow account to end the sanctions imposed against them. The deal also includes a putting in a new compliance department in the company which will report directly to the new chairman.

The consensus is that United States is letting ZTE, go away without getting too much in return. At least they could have imposed a larger penalty to send signals to companies looking to do business with North Korea, Iran, and Russia about the costs of doing so.

Moreover, this will not only harm long-term US interests in the technological space but also give a signal to the Chinese that the United States is willing to compromise on any future conflicts including trade if token solutions are provided directly to President Trump.

Not only that, the US government has mixed in different fields of trade, domestic law enforcement, and national security, without giving clear details on what are the national security risks of letting in ZTE back into the US.

The larger picture is of China challenging the United States in each and every sphere for global dominance and will lie, cheat and steal its way to essential technology, Intellectual Property to further strengthen itself. It’s upon the United States to take more proactive measures to curb this while it still has time, otherwise, it will be too little too less.

 

US Congress should bring in legislation on Taiwan Issue!

The naming issue of Taiwan is heating up between the US and Chinese governments as the deadline approaches in China for airline companies to comply. The Chinese government has asked airlines to remove any reference to Taiwan as an independent country and address it as Taiwan, China. Many international airline companies have already made the change, and US-based airline carriers are the only major holdouts, as they seek clarity from the US government. The US government has already called it ‘Orwellian nonsense’ and is in consultation with its allies such as Australia and UK on the issue.

The solution for this is for the US Congress to bring in legislation on the issue, and debar the US-based airlines from changing the name by law. This issue has blown up way beyond China’s regular diktats against private companies, and should be challenged by the United States and its allies.

Not only that, the US Congress should force by law, the Chinese airline carriers to list Taiwan as a separate country on their international websites in a tit for tat measure.

Obviously, there will be economic consequences for US airlines for not toeing the Chinese diktats, but by bringing in US laws on the naming issue, Chinese airlines will also suffer. Furthermore, if Chinese airlines do cave into the naming of Taiwan as a separate country on their US and international websites, it will be tacit acceptance of the status quo by the Chinese government since most of them are state-owned enterprises!

This kind of retaliatory measure will hopefully put some sense into China to steer clear of the naming issue in future.

 

No Sympathy for Exam Stress

As Indian high schoolers received board examination marks last week, their Chinese counterparts are appearing for their annual gaokao exams this week. The gaokao system, like the Indian board exams, receives a lot of flak for its many flaws. The gaokao examination in China usually determines where these students can pursue their college-level education. However, the main problem is that colleges require high gaokao scores for students who do not originate from that province. This is linked to the hukou system or the household registration scheme (almost an internal passport) which determines where you can work depending on your parent’s origin. As this Atlantic Times article puts it,

China’s prestigious Peking University and Tsinghua University, both based in Beijing, will collectively take about 84 students out of every 10,000 Beijingers who took the gaokao this June; 14 students from every 10,000 who took the gaokao in nearby Tianjin, 10 out of every 10,000 test-takers from Shanghai, and only about three per 10,000 candidates from Anhui,  and a mere two from every 10,000 taking the test in Guangdong.

This has led to a wave of ‘gaokao migrants’- people who move to other provinces or purchase land there so that their children will be able to take the exam in a province that has better universities. So authorities in provinces are now cracking down on those who are hoping to circumvent this system. According to this article in Sixth Tone, the province of Fujian, which has been seeing an increase in such gaokao migration, has cracked down on it:

To stem gaokao migration, Fujian education and police departments issued a joint notice on Monday clarifying the policies for students from elsewhere: Students must have had Fujian household registration for at least one year, and studied at a high school in the province for at least one year, before they qualify to take the exam in Fujian. In addition, their parents must have residency, stable employment, and records of social security payments in the province for at least one year.

Going forward, regulations will become even stricter: For students sitting the gaokao in 2019, the requirements will increase to two years, and three years for those taking the exams in 2020.

What this will mean is that migrants and people from low-income household will lose out either way. This is particularly disheartening, for a system that prides itself on its being a meritocracy.

The Ocean of Humanity

Ex-President Pranab Mukherjee’s speech at the Rashtriya Swayamsevak Sangha (RSS) headquarter has stirred up the proverbial hornets’ nest.

The RSS is not an academic institution. It is a cadre-based organisation with strong ideological moorings. Certitudes are important both for it’s existence and survival. Despite this, they invited probably the most cerebral and scholarly ideological opponent to address their valediction. It shows a certain confidence and suppleness that must be appreciated.

As for the citizen Mukherjee’s speech, it was impressive to say the least. The central feature of his speech was neither the invocation of Jawaharlal Nehru nor of the constitutional patriotism. For me, it was the reference to Tagore’s celebrated poem ‘Bharat Tirtha’. Tagore’s formulations on the nationalism and patriotism are important and have a contemporary resonance for a variety of reasons.

Tagore was in the search of an authentic Indianness. He expressed his vision lyrically in a number of poems and more concretely in the form of Shantiniketan, the institution he established and nurtured. His vision was rooted, yet cosmopolitan; traditional yet modern. Synthesis and reconciliation, and not recrimination, was it’s essence. Tagore was also the most important spokesperson of the Indian version of liberalism. His ‘Ekla chalo re’ is possibly the best articulation of an individual spirit unafraid of the collective tyranny and his ‘Chitto jetha bhayashunyo’ the most appropriate translation of the Kant’s Sapere Aude.

Needless to say, Tagore’s vision of India is very different from the ethnicity and identity centric versions of nationalism. If the subsequent discussions of Mukherjee’s provocative speech can bring out those nuances and rescue the richness of Tagore’s message from the collective amnesia, it will have served it’s purpose.

Consumer Confidence in the Economy has Diminished

The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.

Women: The Unpaid Workers

“With an increase of 22.3 million in the male workforce between 2004-05 and 2009-10 being virtually cancelled out by a fall of more than 21 million in the female workforce, the need to understand the gender dimensions of employment trends in India has acquired a new urgency.”

Let the statistic sink in. The paper on ‘Gender Dimensions: Employment Trends in India, 1993-94 to 2009-10’ by Indrani Mazumdar, Neetha N, drives home the magnitude of the problem in front of us. The authors highlight that “the most striking revelation of the National Sample Survey Office’s (NSSO) 66th round survey is a significant fall in the Female Labour Force Participation Rate (FWPR )between 2004-05 and 2009-10.” The paper expands on how the liberalisation, unlike the popular opinion, did not lead to an increase in the female labour force participation.

One of the key insights of the paper is the drastic increase in the number of unpaid women helpers. As per the NSSO, the employment activity categories have been segregated as self-employed, regular salaried and casual labour. Out of all the three segments, the highest proportion of female workforce is in the self-employed group. However within the self-employed group, the largest proportion of women are employed as unpaid women helpers. From 2004-2009, the total number of employed women rose from 61 to 72.5 per cent, while the regular salaried women only accounted for 9 per cent of the total number. These numbers clearly show that the increase in the FLFPR was mostly due to the increase in the unpaid job rather than the formal jobs.

The paper also shows how the characteristics of the unpaid jobs also varied between rural and urban regions. In rural regions, unpaid workers vary from peasant to supervisors. The jobs are also significantly dependent on the economic background of the household. For instances, the women are usually supervisors only if the land is owned by either their husbands or in-laws or fathers or parents. In urban spaces, the nature of the job is largely different as 43 per cent of the women are engaged in community and personal services which includes domestic workers, teachers, launderers, beauticians, and so on. The second biggest sector that hires unpaid women in urban region is the manufacturing sector (primarily home-based, piece-rated work). 

This disparity in the type of jobs and the variety of them is an indicator of how most of the women work at minimal wages and how vulnerable their jobs are. While in rural regions the family income defines their jobs, in the urban spaces they are mostly engaged in low wage and high risk jobs. With the large segment of women working in the informal spaces like domestic help and agriculture, one of the keys solutions to look at can be to formalise these sectors. A good example would be the increase in the number of online platforms like BookMyBai.

The Omnipotence of Advertising

Warning: Mild spoilers for the second season of Westworld to follow.

Westworld is a TV series that is synonymous with heavy conversations around artificial intelligence and what it means to be human in a world where the distinction between man and machine is blurry. It captures the zeitgeist well, tapping into the elemental fear of robots taking over and juxtaposing it with the ethical dilemma of treating the same robots as equals if they were to attain consciousness. But in the second episode of the ongoing season, a conversation between two characters, one old and one young, shows something else at the core of the fictional theme park: advertising.

The older character is deliberating on whether to invest in Westworld. According to him, the technology is great and it is all very well to create an immersive world that is fantastical, but these are not sufficient reasons to spend his money. The younger man interjects and says that what the theme park offers to the people who run it is far more valuable than what it offers to its guests. And this, he says, is the ability to peek into the lives of people, see what they desire, and use it for advertising and marketing. His argument is accepted.

This is a clever nod to the real world that already exists today, a world in which advertising is all pervasive and is made possible by the proliferation of data and the ways in which it can be processed. It is sobering to reflect on the impact this might have on the development of new technologies.

I’m looking forward now to see if the upcoming instalment of Jurassic World, set in another theme park, also manages to throw in a reference to advertising!

Another Shot at Negotiations with the Taliban

Afghanistan’s President, Ashraf Ghani, has announced an unconditional ceasefire with the Taliban until June 20. At the outset, this looks like a last throw of the dice by Ashraf Ghani at peace before the elections. His tenure as President has seen a worsening security situation and a strengthened Taliban. The latest SIGAR Quarterly report (April 2018) noted that:

The winter months saw an unusual surge of violence in Kabul, reflecting the insurgency’s shift to launching successive attacks on civilians in the capital in response to increased ANDSF pressure in the provinces.

Neither has this ceasefire announcement come out of the blue. Earlier in February, Ghani offered to negotiate with the Taliban without preconditions if they would halt their ties with terrorism and respect the Afghanistan constitution. President Ghani had also raised the idea of the Taliban becoming a political party. That didn’t bear any fruit. The Taliban has only increased attacks in Kabul and has spurned all talks about talks with the Afghan government.

So here we are. The unconditional ceasefire is unlikely to nudge the Taliban into talks. They are negotiating from a position of strength with respect to the Afghan government now. Moreover, the current Taliban leadership is under the direct control of Pakistan and has no autonomy whatsoever. This is what we wrote last year:

The current leader of the Taliban, Haibatullah Akhunzada, is little known and has been foisted by Pakistan to deny autonomy to the group. Together, the Taliban and the Haqqani network – both beholden to Pakistan – have made it clear that their endgame is not talks but conquest. Even though the National Unity Government (NUG) has tried several processes from Istanbul to Murree to Kabul, and has opened up the terms of the dialogue to include a number of wide-ranging issues, Pakistan has made it clear that this military lever will not be transitioned into a political one.

Perhaps the best outcome that the Afghan government can hope to achieve from this unconditional ceasefire is to break the Taliban into credible factions that can become negotiators in the next round of talks.

PS: All this churn favours Gulbuddin Hekmatyar, whose return to Afghanistan in 2017 was engineered by Pakistan and is being repositioned by the Pakistan as a mainstream political leader.

Payment Chaos After Visa Card Crashes

The Visa payment system had crashed on 2nd June due to a network error. This resulted in chaos in the UK and some other parts of Europe. Quite a few people were unable to make the necessary payments or make purchases.

This led to customers being stuck at long queues in departmental stores and even in front of ATMs while attempting to withdraw cash. Retailers were left unable to take payments in shops, bars and other outlets, forcing them to resort to only taking cash or not making sales at all. Petrol stations and toll booths were unable to process the payments, leading to huge queues again.

Apart from customers who use Visa cards, many other financial systems who have built products on top of the Visa infrastructure or retail stores who used Visa card machines were also affected by the network outage.

While the issue was resolved in a day and a half, this incident should give pause to the blind race towards a cashless society. Electronic systems can fail or be hacked, which can leave thousands stranded. Always good to have cash as an option.

Government should divest 100%, not 51% of bank shares

The government plans to merge four state run banks and then sell 51% of its stake in the new merged bank.  Why not sell 100% stake and divest all bank shares? The banks are a drain on government funds, and the government does not need to be present in the banking sector except as a regulator. Even the PM’s Jan Dhan Yojana does not require you to open an account with a state run bank. A private bank will do the job nicely.

The four banks in question are bleeding money. Their combined net losses were over Rs. 21,000 crore (> US $3 Billion) in the year ending March 31, 2018. If the losses keep piling up and divestment is not done quickly, we will end up in with a situation similar to what’s happening with the Air India sale – no buyers!

The Indefatigable Chinese

The US, worried about its increasing trade deficit with China, the decreasing number of jobs created at home, and the ailing steel sector in the US, decided to import a tariff of 25% tariff on all steel imports. It also decided to levy a special 200% import duty on import of Chinese steel and justified it by using the dumping argument.

Briefly, according to the WTO rules, a country cannot impose selective tariffs on goods based on geographical origin. Thus, in case a country is worried about increasing amount of steel being imported from China, it cannot selective put tariffs on only Chinese steel. Thus, the US imposed a tariff on all steel imports, which left many of its trading partners livid. It then made a few exceptions to Canada and Mexico, only to withdraw those later. However, there is one clause in the WTO, which allows you to target a country for tariffs – by showing that the country is involved in a process called dumping. Dumping is a case of price discrimination, where the producer is charging a different price to different customers. This is generally believed to be anti-competitive.

In China’s case, the allegation of dumping is based on the differential pricing of Chinese steel for consumers in China and the rest of the world. Since most Chinese steel companies are state funded, they charge a higher price at home and subsidises the export of steel, in order to conquer the other markets. China denies this, of course.

What is really interesting here though is that the Chinese have found a way to circumvent the additional dumping duties imposed by the US. China state-owned steel manufacturers are buying steel plants in other countries and then, shipping to the US, as reported in this WSJ article.

By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.

“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments.

Hesteel, a Chinese state-owned manufacturer, purchased a dying steel mill in Serbia, invested millions of dollars, ramped up production and has started exporting to the US. Not only that, it also gets to circumvent the high tariff on steel by the EU. By producing within the EU common market area, it can export to the rest of the European Union, without any tariffs or customs. Similarly, China is already investing in steel plants in India, Pakistan, Indonesia, Brazil, and many other emerging economies.

What China has managed to do is put US in a very peculiar position. If it wants to stop import of Chinese steel, it would now have to impose higher duties on a whole host of countries. If it does this, it will face severe backlash from these countries, which would end up severely hurting the US.

The cleverest move perhaps is that China has now forged a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania and is importing 300,000 metric tons of semifinished stainless-steel slabs from an Indonesian plant owned by Chinese state-owned companies. This puts the US in a real pickle.