Arvind's Newsletter

1.The Indian Government brings Credit card transactions by Indian individuals while travelling abroad within the annual Liberalised Remittance Scheme (LRS) limit of $250,000 and also levied on international credit card transactions a Tax Collection at Source (TCS) of 20% with effect from July 1 (up from 5% earlier).

2. Tesla’s exploring the possibility of setting up shop in India (again).

Tesla’s proposal to set up shop in India comes after the nation refused to cater to Elon Musk’s demand over reducing import duties on cars last year. India imposes a 100% import duty on fully imported cars with cost, insurance, and freight value of over $40,000. Cars that cost less than that attract an import duty of 60%.

Despite Musk’s rant on Twitter, India made it clear that it would want the carmaker to build vehicles locally instead of importing them from China. The deadlock over higher taxes made Tesla abandon its search for a showroom in India in the earlier instance.

Since its standoff with the world’s most-valued automobile company, India has had a dramatic success in export of mobile handsets manufactured by the world’s most-valued company, Apple. This could serve as a draw for other American companies trying to diversify production out of China. Like Tesla.

Lets see if things are different this time.

Domestic conglomerates like the Tatas and Mahindra are also seeking the early mover advantage in EVs. They have moved ahead with EV offerings, while their Asian and European competitors are betting on hybrid solutions, given the state of charging infrastructure in the country. Once local companies consolidate tax-assisted market shares in EVs, entry barriers will rise in a price-sensitive market like India.

3.Global temperatures are likely to reach record highs over the next 5 years, a new analysis showed as reported in the Guardian. Forecasters at the World Meteorological Organisation said that human-caused warming and the climate pattern known as El Niño will almost certainly make 2023 to ’27 the warmest five-year period ever recorded.

The higher temperatures could exacerbate the dangers from heat waves, wildfires, drought and other calamities, scientists say. Every fraction of a degree increase brings new risks.

El Niño will very likely cause further turmoil by shifting precipitation patterns. The organisation said it expected increased summer rainfall over the next five years in places like Northern Europe and the Sahel in sub-Saharan Africa and reduced rainfall in the Amazon and parts of Australia.

Many world leaders have insisted on the aspirational goal, set out in the Paris climate agreement, of holding global warming to 1.5 degrees Celsius. But nations have delayed making the monumental changes necessary to achieve this goal, and now scientists think that the world will probably exceed that threshold around the early 2030s.

4.Russia’s energy revenues fell 50% as Western sanctions forced Moscow to sell at a discount reported the Financial Times. 

Russia has admitted “problems” with oil and gas revenues that have fallen to their lowest levels in years, underscoring the impact of western restrictions on Moscow’s primary engine for funding its war in Ukraine. However, despite the restrictions, the country exported more oil in April than it has in any month in over a year. But its finance minister told President Vladimir Putin that “there is a problem with energy revenue” nonetheless, because a shortage of buyers means the remaining ones — mainly India and China — can lowball their offers. Finance minister Anton Siluanov tells Vladimir Putin that ‘all these discounts’ are to blame for 50% fall in revenue.

The troubles in Russia are not just fiscal, the veteran Russia correspondent Anna Nemtsova wrote in The Washington Post. The country is in a worse “state of chaos and disarray” than she has seen it in 20 years of reporting.

5.Europe can’t decide how to unplug from China, opines the Economist. Long read which explains EU’s conundrum.

“How should Europe handle China? The continent is trying to decide. After decades of pursuing trade, Europeans are pondering how much to decouple. Their closest ally, America, wavers between China-bashing and war talk on the one hand, and de-escalation and partial detente on the other. Individual European countries struggle to agree with each other.

Last week Josep Borrell, the eu’s chief diplomat, urged Europe’s foreign ministers in a letter to find “a coherent strategy” in the face of “a hardening of the us-China competition”. But it is far from clear what that strategy might be, or whether Europe would remain so closely aligned with America in the event of a war over Taiwan.

An awkward procession of Europe’s leaders to Beijing in the past few months points to the lack of a plan. Germany’s Olaf Scholz paid a visit accompanied by business leaders in November; his foreign minister, who is from a different political party, went last month and struck a tough tone. Spain’s prime minister, Pedro Sánchez, went to open doors to his country’s trade. Emmanuel Macron ostentatiously sought to strike a partnership with Xi Jinping. The French president took 53 corporate bosses with him, and insisted that Europe distance itself from Sino-American tensions and from a conflict over Taiwan. His clumsy comments caused an uproar in Europe and America.

The war in Ukraine has complicated matters further as the mood has turned against autocracies. Most countries on the eu’s eastern flank—which once opened their arms to Chinese investors—have become hawkish. “Russia’s invasion of Ukraine had a sorting effect in Europe when it comes to China,” says Janka Oertel of the European Council on Foreign Relations, a think-tank. It seems that those in the east are as leery of the “no-limits” friendship between Moscow and Beijing as they are of Mr Macron’s talk of “strategic autonomy” from America. Meanwhile, everyone knows that China remains keen to exploit transatlantic differences.

Finding common cause is onerous because it is hard to tell what America wants. Jake Sullivan, President Joe Biden’s national security adviser, and Janet Yellen, the treasury secretary, have each recently distanced the Biden administration from hard talk of “decoupling”, in favour of “de-risking”—a term also used in the past few months by Ursula von der Leyen, the head of the European Commission. (She had intended to distinguish Europe’s policy of managing risk from what seemed to be a tougher American approach akin to economic divorce.) Yet it is not long since the spy-balloon episode, when us-China relations hit a 30-year low. Congress and public opinion in America are hostile to China. Tensions may rise during the election campaign in 2024, and a pugnacious Republican, perhaps Donald Trump, may win.

All this makes it urgent for Europe to devise a coherent China policy. Its leaders need to work out how far they want to reduce its dependency on China, and in so doing also respond to the hundreds of billions of dollars in green-industry subsidies unveiled last year in America’s Inflation Reduction Act. They also need to decide what they would do if America became more demanding. In an extreme case, in the event of a war over Taiwan, Europe might be expected to impose sanctions on China like those it has slapped on Russia, and to back a military campaign. Some hope that the new doctrine of de-risking is a compromise that solves the dilemma. Others fear that it will prove meagre and inflexible in the face of changing technological and geopolitical realities.

Europe is more economically exposed to China than America is. Some 8% of publicly listed European firms’ revenues are from China, compared with 4% for American ones, according to Morgan Stanley, an American bank. Europe and America send a similar share of goods exports to China (7-9%), but because Europe is a more trade-intensive economy its sensitivity is higher. Multinational investments in China are worth 2% of Europe’s GDP compared with 1% for America.

To form a holistic view we have come up with a yardstick of “total China exposure” (see chart 1). This has three elements: exports of goods, exports of services and the sales of Western-owned subsidiaries in China. These figures are for 2020, the last year for which data are available. The services and subsidiaries data include Hong Kong. We define Europe as its six largest economies, including Britain. We measure each country’s exposure as a share of its own economy.

The European big six’s total China exposure has hit 5.6% of their combined GDP, up from 3.9% in 2011. That is higher than America’s at 4.2%. There is a big range: Italy and Spain are at just 1-2%, France and Britain are at 4-5%. Germany is a huge outlier at 9.9%. Two-thirds of the European big six’s exposure is from the sales of subsidiaries in China rather than from exports from Europe. Often these are the Chinese arms of industrial giants such as Volkswagen and BASF.

In the event of a “rigid” fragmentation of supply chains, the eurozone’s gross national expenditure would drop by over 2%; roughly double the amount America’s would, according to the European Central Bank. Germany’s fall would presumably be higher. Similarly, an imf study in April found that in the event of an investment split between the West and China, European gdp would fall by 2%, more than twice the hit to America. In addition, a separation would cause a crisis at some leading European firms that rely on China, including Germany’s carmakers, France’s luxury empires and two British banks.

The emerging policy of de-risking refers to a calibrated reduction in links with China, rather than a wholesale economic decoupling. Even this is a big departure from how things were a decade ago. Back then European businesses were still stuffing their order books with Chinese contracts, suppressing their doubts about rising industrial competition. Overall trade between China and the EU grew 428% between 2002 and 2019.

An EU strategic paper four years ago marked the first stage of the pivot. It argued that China was not just a partner and an economic competitor, but a systemic rival. The effects were swift. Capitals across Europe, which flogged ports and other infrastructure to Chinese investors, started to have second thoughts.

To America’s delight, many countries in Europe began to prise Huawei from their 5G networks (though Germany still let the Chinese telecoms firm in). Remonstrations over human-rights abuses, particularly of Uyghurs in Xinjiang, grew louder. Supply-chain glitches during the pandemic showed the perils of relying too much on Chinese industry. The Sino-EU “Comprehensive Agreement on Investment”, struck in December 2020, was put to one side by Europe. And China’s declaration of a “no-limits” friendship with Russia just weeks before the invasion of Ukraine soured the mood further.

Mrs von der Leyen thinks that de-risking is the next step, and one that Europeans can agree on. But what it means in practice has yet to be clearly defined. It does not mean shutting the door to China altogether. It is partly about diversification, bolstering economic security and eradicating forced labour from supply chains. It is also focused on security concerns: hampering China’s ability to get its hands on security-relevant technology such as quantum computing, which threatens encryption, or semiconductors for military purposes.

Like America, Europe is most strategically vulnerable when it comes to its critical dependence on China for certain supplies. In 2022 China mined nearly three-fifths of global rare-earth elements, used as components in electronic equipment. It also refined 60% of the world’s lithium and 80% of its cobalt, two core inputs for the production of high-capacity electric batteries. Europe imports 98% of its rare earths from China, even more than America, which imports 80% from the Asian power. According to a study by merics, a German think-tank, the EU relies on China for 97% of its chloramphenicol, used to manufacture antibiotics. For America, the figure is 93%.

Just friends
European firms have already been diversifying suppliers since the pandemic, “friend-shoring” to allies, and “near-shoring” closer to home. America’s energy secretary also declared in March that the Biden administration wanted supply chains in countries “whose values we share.” “All of us learned from covid-19 that we have to double- and triple-source, and not only from China,” says a French corporate titan. Firms are looking to India, Mexico, Morocco, Norway and Turkey, among others. Policymakers are pushing in the same direction. The eu has unveiled a Critical Raw Materials Act, designed to ensure that no more than 65% of annual consumption of any listed material should be sourced from any single country by 2030.

In the realm of technology European firms that are embedded into America’s technology industry are mirroring American export controls. ASML, a Dutch firm which makes equipment used to build semiconductors, has limited the sale of its cutting-edge machines to China. Europe’s multinational companies are adjusting how they operate in China, too. In some cases they are divesting. In others they are making subsidiaries in China more self-sufficient, with a higher share of inputs and sales made locally. One measure of this is the share of investment by subsidiaries in China financed from their own profits, rather than from capital sent from Europe. For German subsidiaries in China this has risen from 2% in 2002 and 52% in 2012 to a new high of 85% in 2022 (see chart 2 above).

If these Chinese subsidiaries were perfectly self-sufficient they could in an extreme scenario be separated from the European parent, with both arms able to continue to operate: think of VW Germany and VW China. The result would be huge wealth destruction for shareholders in big European firms (many of whom are not actually European) but less damage to Europe’s economy. In practice this shift to “one company, two systems” is only just beginning and for many large firms decoupling would be severely disruptive.

A final element of de-risking is stricter screening of Chinese investment coming into Europe. Strategic infrastructure is increasingly off-limits for Chinese investors, as inward investment in Europe is screened for security risks. Overall Chinese investment in Europe last year fell to its lowest point since 2013, according to a study by merics and Rhodium Group, a consultancy based in New York. China’s foreign direct investment peaked in Europe back in 2016, Rhodium estimates.

The emergence of de-risking is understandable, but Europe’s middle way is riddled with potholes. Big companies, still keen on the China dream, may refuse to go along for the ride. “There are certain no-go areas on tech in China,” says one senior European industrialist, “but on the rest we are not decoupling; it is business as usual, and the more the better.” When Mr Macron was in Beijing, Airbus, a European aircraft manufacturer, agreed to expand an assembly line in Tianjin, and confirmed an order to sell China 160 planes.

De-risking may also struggle to adapt to technological change and its commercial effects, which can create new links even as old ones are dismantled. Cars are a good example. The EU exports almost no electric vehicles to China. Yet almost all of China’s car exports to the eu, many of which are made for European brands, are battery-powered (see chart 3). Exports have shot up from less than €100m ($112m) a month before the pandemic to around €1bn a month now. As Europe’s motorists seek greener transport, China is both eager and well positioned to flood the continent with cheaper electric models.

The greatest weakness of de-risking in its current guise is that it little prepares Europe for the shock that would follow an attempt by China to seize Taiwan. Europe’s armed forces and its defence industry are already stretched, and the continent would struggle to find the capacity to provide much military support to America and Taiwan. Its leaders have little appetite for involvement in another war. But America would probably expect Europe to enforce the kind of embargo put in place on Russia. That would hurt American firms: despite Apple’s efforts to diversify its production to India, the tech giant still relies on China. But it would harm Europe more, causing a bigger economic hit and destabilising more companies.

Mr Macron’s recent suggestion that Europe should not follow America’s lead on Taiwan, in case it is dragged “into crises that are not [its] own”, delighted Beijing and dismayed European capitals. Gabrielius Landsbergis, Lithuania’s foreign minister, retorted tartly that, at a time when Europeans depend on America’s backing of Ukraine, they should be trying to preserve transatlantic unity rather than “begging for dictators to help secure peace in Europe”.

Officials in Paris note, as Mr Macron eventually did, that it is official French policy to support the status quo over Taiwan. With naval bases and territories in the Indo-Pacific, France has direct interests in the region. “The problem isn’t French policy but the disconnect between what we do and what Macron says, which creates unnecessary doubts among our partners,” notes Antoine Bonda

One virtue of Mr Macron’s comments, notes a Scandinavian minister, is that they have prompted Europeans to talk more about China. Many on the continent fret about escalatory American rhetoric. On May 12th the eu’s foreign ministers managed to agree to a set of principles for future dealings with the country. It will be discussed at the eu’s next summit in June.

The bloc’s deliberations in the coming months will depend heavily on France and Germany, which are its two biggest economies, and among the most exposed to China, and some of the least keen on cutting commercial ties. Mr Macron has long pushed Europe to become more self-reliant. Mr Scholz, faced with divergent views in his coalition government and a strong industry lobby, is still working on a national strategy that will shape Germany’s approach to China (which keeps on being delayed). He is expected to host a bilateral summit with the country next month.

Much of eastern Europe seems wary of Chinese influence. The country’s bullying of Lithuania in recent years over a Taiwanese diplomatic office in the country disgusted many. That is in spite of the fact that central and eastern Europe received some €3.8bn through China’s clubby “16+1” initiative between 2000 and 2017. Comments made last month by Lu Shaye, the Chinese ambassador to France, helped focus minds. He appeared to dispute the legal status of all former Soviet countries (even if China later corrected his remarks).

The end of the affair?
Europe needs a measured debate about what to do next. France and Germany both have reservations about Mrs von der Leyen’s de-risking measures, but they back the principle. Outward investment screening is under discussion, though will be difficult to put into practice. Inward investment screening is up and running, although Europeans disagree on how much to tighten the rules.

Beyond de-risking, collective eu policy has not been thought through. That is in spite of the fact that de-risking doesn’t provide an answer to a scenario in which relations between America and China were to rupture. Since Russia invaded Ukraine, the transatlantic alliance has stood remarkably firm. A Chinese move on Taiwan would prove an even more dangerous, and far more difficult, test.