The US-China 90-day trade truce is unlikely to end the trade war once and for all. It will linger unless China shrugs off retaliating. Curbing the trade deficit is not a near term solution. It warrants persuasive business negotiations rather than coercive methods.
To this end, an aversion of trade war as per the Japanese way provides some tips to ponder. The US-China trade war is in a sense a revisition of the US-Japan trade row. During 1980 and 1990, over a decade, the US and Japan were locked in trade skirmish over Japan’s bulging exports to USA. The USA accused Japan of utilizing a fixed exchange rate with US Dollar. It indulged USA for a tactical currency war by abandoning the fixed exchange rate and raised Japanese yen value in Plaza Accord in 1985. Eventually, Japanese goods became uncompetitive and USA’s imports from Japan declined.
Japan’s economy is export based and the USA was the biggest destination for exports, plunged into haywire. To undo the impact of yen appreciation, Japanese companies shifted their factories to Asian countries and USA. Japanese investment increased more than double in Asian Nies and triple in USA during 1987 to 1989.
Reasons, Asian countries provided turf for low cost production and export to USA therefrom. A spurt in investment in USA provided employment opportunities to American workers and thereby quelled USA ire. Surge in Japanese cheap exports to USA were damaging American domestic industries, which resulted big unemployment in USA.
This is exactly the same way that China is now facing the trade row with the USA. With its trade deficit heightening due to Chinese dumping, the USA adopted similar strategy of trade war to dent China’s cheap exports. With Japan, initially the USA threatened a high tariff war on the Japanese export of cars in mid seventies and later to a currency war in 1985. There is only one difference in this war: Japan avoided retaliation and China has raised retaliation ante.
This has unleashed a fact that investment diversion across the border should be the salutary action to avert the trade war, instead of retaliations. Further, even if a truce is finalized, there are challenges embedded in the truce. These challenges are tough to meet over a period of time, owing to unprecedented changes in global trading system. Given the fragility of the trade truce, which is underpinned for 90 days, though ongoing trade negotiations provide some ray of hope, complete consensus of both sides for a comprehensive truce is unwarranted.
Even though notable moves were made with China agreeing to reduce taxes on car imports from the USA, revising Intellectual Property Laws, enacting new Foreign Investment Law to undo the compulsion for transfer of technology and so on, the truce is unlikely to be complied in toto without a guarantee of reduction in trade deficit and taming the technology war.
Against this backdrop, China should harp on investment abroad, the way Japan did. China has already started an overseas FDI binge following Chinese President Xi Jinping;s call for ‘Go Out’ policy in 2012. It became emphatic for overseas investment. From a paltry overseas investment of US $ 3 billion in 2005, Chinese overseas investment in non-financial sector increased to US $170 billion in 2016. It became the third biggest overseas investor in the world.
Paradoxically, the USA is the biggest receiver of Chinese investment. Chinese investment also made a surging growth in South East countries including Myanmar, Indonesia , Malaysia and Thailand.
China lost inward FDI sheen, owing to a plummeting GDP and export growth since 2011. Despair in China grew. Many MNCs were considering pulling out from China. Best Buy, an American electronics retailer and Media Market , a German company, put their shutters down. Tesco, a British retail giant, joined hands with a local firm, turning down its intention to go alone in China.
China+1 was born out a new strategy for augmenting Chinese overseas investment. Chinese investors as well as MNCs in China started diverting their investment expansion in low cost countries like India and ASEAN nations, without shutting down their China doors. There are three advantages of the new strategy.
First, it acts an hedge against Chinese product’s competitiveness, produced in third countries. Second, It will help risk diversification by spreading production process across the countries. Third, a country like India will act a major savior with big domestic demand.
Should India reap the benefits of China’s overseas investment binge?
Make in India is a prime initiative of Modi government. A lot was done to steer the initiative by dismantling the bureaucratic tangles, improving Ease of Doing Business and reforming FDI policies. Notwithstanding, it lost the steam. Domestic investors were shy to invest. Nevertheless, foreign investors were upbeat to invest. While new domestic investment by Indian corporate slipped to an half in between 2014 and 2017, FDI surged by more than 45 percent during the period.
Hopes are raised on FDI to drive the Make in India. With trade war sullying the investment potential in China, hopes for Chinese investment diversion to India brighten.
Chinese investors are ecstatic to invest in building up India’s innovative digital ecosystem. A big share of Chinese investment in India flowed in the fields of start-up business in India. Nearly US $2.5 billion was committed for investment in Start-up business in between 2015 and 2016. The major investments were Beijing Mitene Communication Technology investment of US $ 900 million in Media.net and Alibaba investment of US$680 million in Paytem and US$ 500 million in Snapdeal. In mobile phones, China has already established its presence in India. It outsmarted Japanese and Korean brands, capturing more than 50 percent of market share by manufacturing in the country.
Mr. Chris Devonshire Ellis, senior partner at Dezan Shira & Associates, a professional services firm providing FDI consultancy services in Hong Kong, said that many of their foreign investors’ clients in China were contemplating to go to India, not necessarily to shut down their manufacturing operations in China, but to take advantage of the large domestic demand.
There is still one question: Should India open a red carpet to Chinese investors, despite the political relation could be tarnished with China’s veto in UN Security Council to designate Mr Masood Azhar, the leader of Jaish-e-Mhammad, as a global terrorist?
Views are personal