The year 2018 was marked by trade hostilities between the United States and China. With exports hanging by a thread, Subir Ghosh looks ahead at 2019.
In mid-November came the heartening news that textiles and apparel exports had jumped-by as much as an impressive 38 per cent in October because of higher overseas demand. According to the ministry of commerce and industry, textiles and apparel exports had reached ₹203.53 billion for October 2018 as against ₹147.79 billion in the corresponding month of the previous year. Textiles exports increased by 28 per cent, and that of apparel rose by 54 per cent that month. Sounded like good news.
The reasons being given for the turnaround were: a recovery in the global economy, a depreciating rupee that helped boost realisation of exporters, and a spurt in demand from the United States (US).
Just two weeks later, The Cotton Textiles Export Promotion Council (TEXPROCIL) added to the euphoria with the announcement that cotton textiles exports had reached $938.91 million in October 2018, marking a growth of 20.3 per cent against the corresponding month of 2017, when exports were valued at $780.37 million. In rupee terms, exports during October 2018 reached ₹6780.39 crore as against ₹5078.74 crore in October 2017, recording a growth of 33.5 per cent.
Even as observers were deliberating whether things were indeed getting better, the commerce ministry tried to make the best of the turnaround, even though that turnaround could well be only a temporary reprieve-by raising duty drawback rates for all segments so as to enable exporters tap global markets with full potential and enhance textile and apparel shipments from the country.
On December 7, the ministry raised duty drawback rates across all varieties i.e. cotton, man-made fibres (MMF), nylon, yarn, fabric and other categories. The commerce ministry periodically reviews duty drawback rates through the duty drawback committee and modifies rates if necessary so that central taxes are refunded in order to avoid the "export" of taxes and retain a level-playing field in the global market. With the tax structure undergoing a phenomenal change with the introduction of the goods and services tax (GST), exporters had been demanding a change in duties.
It remains to be seen how much these would translate into more exports, and in turn to increased industrial productivity. The figures at hand are for October-the month in which the rupee fell to its all-time low of 74.60 (on October 10). Since then, the rupee has been strengthening.
Way Too Fluid
Much of the rise in exports to the US was being pinned to an improvement in the retail market there. In August, the National Retail Federation (NRF) of the US raised its retail sales forecast for the year. The NRF expected 2018 retail sales to increase at a minimum of 4.5 per cent over 2017 compared to the 3.8-4.4 per cent range forecast earlier. "Higher wages, gains in disposable income, a strong job market and record-high household net worth have all set the stage for very robust growth in the nation's consumer-driven economy," the federation remarked in a statement.
A newspaper article at that time mentioned how Indian exporters were reporting a healthy volume growth but also that their "earnings remained weak as reduction in export incentives, high cotton costs and low realisations impacted performance."
Pinning export hopes to the ongoing USChina trade war could have been misplaced. On October 30, US President Donald Trump announced that Indian exports of certain musical instruments, leather, textiles, dairy, chemicals and processed fruits and vegetables to the US would no longer enjoy duty-free access, with his administration withdrawing the concessions from November 1.
Quite a few countries were affected by the latest Trump decree-including Thailand, Argentina, Pakistan, Turkey, the Philippines, Brazil, Kazakhstan and Egypt. But then, the number of Indian products affected (50) was the highest. Those benefits were given to developing countries under the generalised system of preferences (GSP). India, which got $5.6 billion duty concessions, was the biggest beneficiary. The total US imports under GSP were worth $21.2 billion last year.
This could have been a one-off decision, or the first of many more similar decisions to come. The US-China trade-off makes the situation only more fluid. Just because China might lose on the textiles-apparel front does not necessarily mean Indian exporters will have a field day now on.
Hence, Union minister for commerce Suresh Prabhu was right in making a particular assertion at a textiles conclave in New Delhi in the last week of November. He urged industry members to export products to countries other than the US and those of the European Union (EU). Towards this, he affirmed, the government has been making efforts in identifying potential export partners and strengthening relationships with them. An FTA (free trade agreement) with the EU would ease the pressure on industry. The government is looking to fast-track negotiations with the EU and Australia.
But the prospects of an FTA with the EU have been hanging fire for a while, and not much progress has been made on any of the other trade fronts either. The minister, however, was right in pointing out that it would be a better idea to look beyond the US and EU. Trying to cash in on the US-China trade conflict-as the October 30 decision portends-may not necessarily work.
The US and China
It is important to understand the US-China trade-off and look at the numbers. Volumes have been written since Trump took over as president, and since he fired his first salvo. The most recent assessment-particularly from the point of view of textiles and apparel-was published as recently as October 2018. A Coresight Research study pointed out that the US tariffs on Chinese imports appear to have direct implications for the fabrics and yarn categories. Though apparel and footwear are largely excluded from the tariffs, those could be impacted if the US extends tariffs to additional categories.
As things stand, China is the US's largest trading partner in the textiles-apparel category. In 2016, the US imported Chinese textiles and apparel worth $45.2 billion, four times more than it imported from Vietnam that year. China was the largest footwear exporter to the US in 2017, accounting for 56 per cent of US footwear imports, or $14 billion worth of shoes.
The study pointed out, "The highly pricecompetitive nature of the apparel market would make it difficult for many brands and retailers to fully pass on any substantial increase in input costs. That implies that some brands and retailers that source from China would incur a margin impact, should the US apply further tariffs to apparel. Companies that have instituted diversified sourcing practices are better positioned to absorb any future costs associated with tariffs. But even companies that have altered their supply chains are likely to experience some cost increases, as China remains the largest sourcing country due to the size of its supply base, its skilled workforce, and the quality and variety of the end products it produces."
It went on to predict:
- We expect the US's apparel and textiles trade deficit with China to narrow further. The deficit was down 1 per cent year over year in July 2018. From 2013 to 2017, the US increased its apparel exports to China from $47 million to $89 million.
- Apparel goods are largely exempted from the current US tariffs. The exceptions include some specialty articles such as apparel made from fur skin, but if the tariffs are extended to include all apparel products, many US companies may face increased input prices in the short run.
- Over the longer term, we expect US companies to further diversify their sourcing among China's competitors. We note that some products that are "Made in China" cannot be produced elsewhere. US retailers that sell such imports will face increased prices for them, according to the USFIA's 2018 Fashion Industry Benchmarking Study.
- The US fabrics industry is likely to benefit from the tariffs, given the steady stream of exports to China. Such exports increased from $351 million in 2014 to $453 million in 2017.
- Among all apparel and textiles categories, we expect yarn to be the most severely affected by the current tariffs.
- The US yarn trade deficit with China was $322 million in 2017, and we expect that to increase as the new tariffs kick in, since the Chinese yarn market is highly competitive and sees falling imports due to very low prices in China. The country is the world's largest exporter of yarn, accounting for approximately 22 per cent of the export market in 2016, and this may put additional pressure on the US's rising deficit with China.
That's how things are going to remain, but only till this month. Trump has said that the US will raise the rate of tariffs further, to 25 per cent, in January 2019, if the two countries are unable to reach a resolution regarding trade. Many believe that to be a far cry, certainly as of now.
It is a fluid situation and putting all Indian eggs in the US basket would not be wise. India could do well to also explore possibilities with China-of all countries. That would be a tricky terrain to traverse since Indian companies have long been complaining about Chinese companies dumping in India through the Bangladesh route. However, India can now bargain from a relatively stronger position than earlier.
The Regional Deal
Donald Trump had promised to pull out of the Trans-Pacific Partnership (TPP) if he were to make it to the White House. Trump kept his promise soon after he took office. There were many who rejoiced at the time-for differing reasons, of course. Among them were advocates of the Regional Comprehensive Economic Partnership (RCEP), negotiations to which were at that time still in their early days.
The partnership is now very much on the verge of becoming a reality. It would be an FTA between the ten member-states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and the six Asia-Pacific states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New Zealand). It is expected to be inked any time this calendar year.
The RCEP would be the world's largest economic bloc, covering nearly half of the global economy. In 2017, the prospective member countries accounted for a population of 3.4 billion people with a total gross domestic product (GDP) of $49.5 trillion-approximately 39 per cent of the world's GDP, with the combined GDPs of China and India making up more than half that amount. The GDP of RCEP countries is expected to be nearly $250 trillion by 2050, or a quarter of a quadrillion dollars, with the combined GDPs of China and India making up more than 75 per cent of the amount. The RCEP's share of the global economy could account for half of the estimated $0.5 quadrillion global GDP by the year 2050.
The RCEP negotiations, which were expected to conclude in November 2018, still have a number of bottlenecks to clear. Thorny issues remain-including the scrapping of tariffs on agricultural products, facilitating cross-border movement of labour and setting up common rules for e-commerce. Only five of the 18 "chapters", or major negotiation topics, have so far been concluded. The real reason, experts contend, is that many of the prospective member-states go to the polls next year-India, Indonesia, Australia and Thailand. Since many of the decisions would be political in nature, the partnership does not want to wade into troubled waters. Yet, what needs to be kept in mind is that the RCEP talks themselves gathered momentum only in the backdrop of Trump's protectionist policies.
India has a substantial trade deficit with 10 of the countries. The gap with China, Korea, Indonesia and Australia has increased to $63.12 billion; $11.96 billion; $12.47 billion and $10.16 billion, respectively, in 2017-18. It was $51.11 billion, $8.34 billion, $9.94 billion and $8.19 billion in the previous financial year. Others want India to remove tariffs on about 90-92 per cent items that it trades with countries with which it has an FTA. With the non-FTA partners-China, Australia and New Zealand-discussions are on for eliminating duties on 80-86 per cent of the products. India wants 20 years to remove these duties; with China it wants a 25-year timeframe. India is also pushing for a business visitor commitment for the smooth movement of service industry professionals.
Shortly after the November talks, it was reported that the Indian government has sought the services of three think-tanks to prepare a roadmap for the last leg of the RCEP negotiations-the Indian Institute of Management-Bangalore, Indian Council for Research on International Economic Relations (ICRIER) and the Centre for Regional Trade, an autonomous body under the department of commerce. It is a treaty that India cannot afford to let go of. But the decision to skirt the elections in member countries could well indicate that many of the decisions might not go down well with the respective electorates.
Just as Indians have been keenly watching the US-China trade-off, it is interesting to see how the RECP talks are being seen. The December 10 China Briefing of Dezan Shira & Associates which assists foreign investors throughout Asia and maintains offices in China, Hong Kong, Indonesia, Singapore, Russia, and Vietnam looked at the prospects of the RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) of the remaining signatories to the TPP.
It remarked, The CPTPP and RCEP are not mutually exclusive, as participating countries will benefit from the coexistence of two projects. Some observers worry that there is a Spaghetti-Noodle bowl effect between the two agreements, which refers to a phenomenon that an increase of FTAs slows down trade relations between countries. However, research finds that the effect does not exist amid CPTPP and RCEP, and that the two projects are better together.
But whether the RCEP works out well for India would depend on how much it can bargain with China.
A Still Broader View
Things are certainly in a flux. In the last week of September, the World Trade Organization (WTO) downgraded its outlook for global trade as risks accumulated. Its cautiously-worded press release said, "Trade will continue to expand but at a more moderate pace than previously forecast. The WTO anticipates growth in merchandise trade volume of 3.9 per cent in 2018, with trade expansion slowing further to 3.7 per cent in 2019. The new forecast for 2018 is below the WTO's April 12 estimate of 4.4 per cent but falls within the 3.1 per cent to 5.5 per cent growth range indicated at that time. Trade growth in 2018 is now most likely to fall within a range from 3.4 per cent to 4.4 per cent.
"Some of the downside risks identified in the April press release have since materialised, most notably a rise in actual and proposed trade measures targeting a variety of exports from large economies. The direct economic effects of these measures have been modest to date but the uncertainty they generate may already be having an impact through reduced investment spending."
To hammer a clich: things don't look so good. The WTO understood this better than most others, since much of the public discourse over international trade is driven by what it says-its ever-decreasing clout with the failure of the Doha Development Round talks notwithstanding. And others have understood too-in this case the World Bank and the International Monetary Fund (IMF).
On the last day of September, the three organisations called for trade integration to play a larger role in boosting shared prosperity. The report, Reinvigorating Trade and Inclusive Growth, argued that global trade policy can help to unlock opportunities provided by fundamental changes in the global economy.
It began on a rather euphemistic note, "The current focus on trade tensions threatens to obscure the great untapped benefits possible from further trade reform. The opportunities provided by information technology and other fundamental changes in the global economy are yet to be reflected in modern areas of trade policy, such as services and electronic commerce. Greater openness in these areas would promote competition, lift productivity, and raise living standards. In many other areas, such as the rural economy, smaller enterprises, and women's economic empowerment, trade-related reforms are important particularly to foster more inclusive growth." It was as if the three organisations were calling for a cessation of hostilities by the US and China, showing both the benefits of easing tensions.
On October 10, the Organisation for Economic Cooperation and Development (OECD) joined the three organisations in reiterating the concerns. Director-General Roberto Azevedo outlined, "We have to explore all avenues which could ease the current tensions and strengthen the trading system. We all know the risks of further escalation-risks to the economy and risks to the trading system itself, which would multiply the economic risks over the long term. We can't let that happen. We need trade and the trading system to play their part in fuelling growth just as they have done so effectively for seven decades." Trade hostilities certainly have the big players worried.
What none of the organisations dwelt on were the possibilities of new trade equations being drawn up. The RCEP is only one of the many trade blocs that India can look at. On second thoughts, not just look, but explore and extend to their logical conclusions-workable trade deals. That's where the inclusive growth that they alluded to would work for India, certainly for its textiles apparel industry.