Arvind's Newsletter

Weekend reading some short and few long reads

1. Since we have had many headlines this week in India and globally dominated by the Adani group, it worth ending by an opinion piece by T N Ninan, on of India’s most respected financial columnists, to put things in perspective. Adani is down but far from out, he writes.

2. The US job market just won’t quit (Bloomberg). While that’s a sign of underlying strength for the economy and great news for American workers, it’s also a possible pitfall if wage gains don’t continue to ease. Hiring surged in January and the jobless rate fell to a landmark 53-year low, potentially bolstering the Federal Reserve’s argument that more interest-rate hikes are needed to finish off inflation.

Fed Chair Jerome Powell echoed a growing number of economic experts when he expressed optimism that policymakers can pull off a soft landing, avoiding a downturn by quelling price rises without pushing millions out of work. That seems to be the sentiment elsewhere, too. Along with the Fed, the European Central Bank hiked rates this week in its quest to pull inflation back to its 2% target.

But there’s a wild card when it comes to global inflation: China The abrupt reopening of the world’s second-largest economy from Covid lockdowns is set to provide a boost to global growth, albeit at a catastrophic cost in Chinese lives lost. And the sudden rise in consumer demand could trigger price jumps on commodities like oil and gas, putting upward pressure on inflation again.

3.Chip technology, manufacturing and supply chains are at the heart of geopolitics and the push away from globalisation of manufacturing to industrial policy incentivising domestic manufacturing. In this long read Nilay Patel of Verge interviews Chris Miller, author of the Chip War : The fight for the world’s Most Critical Technology, to decode the global battle over chip manufacturing. Some excerpts from this interview followed by full article, which also has audio version.

“Right now the US is trying to cut off China’s ability to make advanced semiconductors, on the judgment that advanced semiconductors are critical to training AI systems. If you can’t get access to the most advanced chips, then you can’t make meaningful advances in AI.

To make an advanced semiconductor, you need to buy machine tools from just a handful of companies around the world that have the precision capabilities to manufacture these tools. One of the most important of these companies is a firm called ASML, which is based in the Netherlands. It has unique capabilities — which no one else in the world can replicate — to produce a type of machine called an EUV lithography tool, without which making an advanced chip is simply impossible.”

“If you have access to advanced chip-making tools, like those produced by ASML and the small number of other advanced tool makers in the world, you have a reasonably good shot at making advanced chips. Now, it’s still not guaranteed you can do it, but the tools are one of the key choke points that only a couple of companies can produce, and none of them are produced in China. The US is thinking about next-generation military and intelligence systems that will increasingly rely on artificial intelligence. AI systems are trained in vast data centres that are full of sophisticated chips like GPUs, which are the type of chips that are used to train AI systems.

If you can’t mass manufacture cutting-edge chips, then you can’t get the data centre capacity that you need to train AI systems. The US is ultimately trying to accomplish stopping China from developing advanced data centres. It’s using the machine tools as the choke point, preventing US firms, and also Japanese and Dutch firms, from transferring this equipment to China. “

“In terms of a war or a blockade between China and Taiwan, the impact on not just the tech sector but all of manufacturing would be close to catastrophic. TSMC produces 90 percent of the world’s most advanced processors, but more than that, it produces over one-third of the new computing power the world adds each year. If you add up all the transistors produced on processor chips, over one-third of them are produced in Taiwan. It certainly would be catastrophic to Apple or to AMD if we were to lose access to TSMC’s facilities, but it’s also dishwashers, microwaves, and autos that would face tremendous disruptions. “

4. China is providing technology that Moscow’s military needs in Kremlin’s war in Ukraine despite an international cordon of sanctions and export controls, according to a Wall Street Journal review of Russian customs data.

The customs records show Chinese state-owned defence companies shipping navigation equipment, jamming technology, and fighter-jet parts to sanctioned Russian government-owned defence companies.

Those are but a handful of tens of thousands of shipments of dual-use goods—products that have both commercial and military applications—that Russia imported following its invasion last year, according to the customs records. Most of these dual-use goods are imported from China.

5. Industrial policy is the new globalisation opines Tyler Cowen in his Bloomberg column in his counterintuitive point of view. Some excerpts from his article is included in his blog Marginal Revolution.

“It would be a mistake, however, to think that these [industrial] policies represent a move away from globalisation. In fact they are an extension of globalisation — and they likely will enable yet more globalisation to come. That sounds counterintuitive, so let me explain.

Start with the domestic subsidies for green energy, as embodied in 2022’s Inflation Reduction Act. Those policies favour domestic firms in industries such as electric vehicles, batteries, and solar power. You could call that nationalism or even mercantilism. Yet those subsidies rely not only on a prior history of globalisation but also an expected future for globalisation. To the extent the US is able to extend its domestic battery production, it is because more lithium and other raw materials can be produced overseas and exported to the US. To the extent the US succeeds with its domestic solar industry, it is by drawing upon earlier advances in Spain, Germany and China — and undoubtedly future advances to come.

Even the most successful “nationalistic” industrial policies rely on a highly globalised world. If carried out strictly on a one-nation basis, industrial policy is doomed to fail. Globalisation has been so thorough, and has gone so well, that at least a little industrial policy is now thinkable for many nations.”

“Just as globalisation can enable or support nationalist industrial policy, so the converse is true. Assume that these various industrial policies meet with some degree of success, and that China, the EU and the US all become more self-sufficient in various ways. Those same political units are more likely to then embrace and support further globalisation.

Some conservatives criticize globalisation while praising industrial policy . They are playing right into the hands of the Davos globalising elite. In fact, that is the best argument for many of these ideas: Today’s industrial policy is not an alternative to globalisation. It is preparing the world for the next round of it.”

6.The Economist has a slightly different view on America’s push away from globalisation towards industrial policy through its proposed massive investment via Inflation Reduction Act. Long Read.

Get behind the wheel of an electric vehicle made in Detroit and drive south. The outline of a city that was once a byword for industrial decline fades in the rear-view mirror. Head into Ohio, where the battery under your feet was made. The semiconductors that regulate its charging speed were made there too, in a vast new factory that counts the Pentagon among its biggest customers. Recharge with electricity transmitted from one of West Virginia’s new nuclear plants, then start the long journey into the heartlands. After the endless wind farms of Kansas, you drive through Oklahoma’s vast solar fields, then loop back to the gulf coast. The trip ends by the water, the bright sun glinting off a spanking-new green-hydrogen plant.

This is America in 2033, if the Biden administration has its way. In the past two years Congress has passed three bills, on infrastructure, semiconductor chips and greenery, that will make $2 trillion available to reshape the economy. The idea is that, with government action, America can re-industrialise itself, bolster national security, revive left-behind places, cheer up blue-collar workers and dramatically reduce its carbon emissions all at the same time. It is the country’s most ambitious and dirigiste industrial policy for many decades.

Mr Biden is taking an epoch-making political gamble. He is acting on so many fronts because he had no choice. The only way to build a majority in Congress was to bolt a Democratic desire to act on climate change on to hawkish worries about the threat from China and the need to deal with left-behind places in the American heartland. On its own, each of these concerns is valid. But in terms of policy, the necessity to bind them together has led America into a second-best world. The goals will sometimes conflict, the protectionism will infuriate allies and the subsidies will create inefficiencies.

To grasp the scale of what is under way, follow the money. The Infrastructure Act makes $1.2 trillion available over ten years for roads, bridges and cables for a new green grid. The chips Act, which promotes making semiconductors in America, contains $280 bn of spending. The Inflation Reduction Act contains $400 bn in subsidies for green tech over ten years; some analysts suggest the true figure will be $800 bn. The money is only part of the picture. With it comes a plethora of rules, from requirements that batteries be made in North America, to restrictions on tech imports and exports on grounds of national security.

A giant plan that has so many disparate objectives does not simply succeed or fail. Its full consequences may not become clear for many years. However, you do not have to be Ayn Rand to question whether the government is up to managing such an ambitious set of projects. For example, because American environmentalism has put preservation first, it takes more than a decade to obtain the necessary permits to connect a renewable project in Wyoming to California’s grid. Likewise, if industries are encouraged to focus on lobbying rather than innovating and competing, then costs will rise.

And some of the aims are contradictory. Requiring jobs to be in America would be good for some workers, no doubt. But if green products such as wind turbines become more expensive, then the green transition will become more expensive, too. And if other Western countries lose vital industries to America as they chase subsidies or duck import restrictions, then the alliances that underpin America’s security will suffer as a result.

Indeed, the entire enterprise may be hard to pull off for lack of affordable workers. The plan would never create lots of solid working-class jobs: in today’s manufacturing, robots staff the assembly lines. But America may also struggle to find enough of the short-term construction workers needed to build out green infrastructure. Unemployment is at 3.5%, a 50-year low. More immigration could help fill vacancies, but it is restricted. Policies intended to help women rejoin the labour market, such as early education, were stripped out of Mr Biden’s plans. Green subsidies therefore risk being diverted into higher wages.

The administration has an answer for its critics. It says that, if America can develop new technologies, build supply chains that are less dependent on China and drive down the cost of clean sources of energy, everyone will be better off. And America has significant advantages: a rich internal market, vast landscapes for solar and wind farms, pipelines for transporting hydrogen and reservoirs in which to store carbon. Its universities and venture capital make it a hub for green innovation. The country is already sucking in foreign investment to work alongside the subsidies. And the policy enjoys a degree of political consensus. Although Republicans are less keen on the green bits, they are even more hawkish on China and even more protectionist.

To help the plan realise its good intentions, three things need to happen. First, the effort going into boosting domestic industry needs to be matched by a sustained programme of trade diplomacy. One way to build a bloc in favour of a cheaper green transition would be to give foreign-made goods access to American subsidies (so long as they are not Chinese, Iranian or Russian). Second, subsidies should tilt towards technologies that are not yet commercially viable, such as new types of nuclear reactor and carbon capture and storage. Public money spent re-shoring the manufacturing of solar panels that could be produced more cheaply elsewhere will be wasted. Third, to build new subsidised infrastructure, America needs reform of its permit laws, perhaps with a federal law that supersedes state and local concerns.

For better or worse, Mr Biden’s blueprint for remaking the economy will change America profoundly. It may succeed in helping deal with an authoritarian China, keeping voters at home from embracing a more radical and destructive politics, and defying the gloomier predictions about the effects of climate change. But be under no illusions, it is audacious to believe that the way to cope with three problems which are too hard to tackle separately is to deal with them all at once. ■