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Misery Seeks Company – China Courts India to fight US Trade War

Misery Seeks Company – China Courts India to fight US Trade War

US sanctions against China seems to be having its intended effect. As pressure mounts, China’s change of stance is becoming more evident. According to recent reports President Trump and Chinese leader Xi Jinping are likely to meet at the G20 summit in Buenos Aires in November in an effort to work out a solution. But the meeting of the two leaders may not produce any dramatic resolution, given the tough stand of both the countries.

That the Chinese economy is bearing the brunt is in no doubt. Ford reported that its September sales in China fell 43% compared to same period last year. This comes in the midst of a big slump in Chinese auto sales. The IMF, for its part, has already signaled the slowdown of the Chinese economy and put its GDP growth estimates for 2019 at 6.2%. Despite all the bad news on the economic front, Chinese leadership continues to put up a brave face.

The US appears to have its strategy cut out. Vice President Pence, in a hard hitting speech at the Hudson Institute, unequivocally charged China with interfering in US elections and warned of consequences. In its 2018 National Defense Strategy paper, the US has clearly identified the two ‘revisionists powers – China and Russia’ as main threats.  The paper goes on to further recognize ‘China’s military modernization, influence operations, and predatory economics in its efforts to coerce neighboring countries to reorder the Indo-Pacific region to its advantage’ and perceives it as a long term threat to US interests.

The series of events leading up to the new set of tariffs on Chinese imports as well as the subsequent pronouncements should leave no room for doubt about US intentions. If anything, it is clear that the US will not stop with just the trade war. It is only part of an overarching strategy to contain Chinese influence globally.

China’s strategy, on the other hand, seems ambiguous and is banking on flat defiance of the US as a measure of projecting its power. It has unleashed a massive propaganda campaign, particularly in the US media, in a determined bid to win friends. Not surprisingly, many pundits have opined on how the trade war with China is unsustainable and could hurt the US too. But all this may not really alter the situation on the ground which is firmly in favor of the US

On the international scene, China has used its influence to marshal its friends and allies in an attempt to build a coalition to portray the US as the chief villain of the world. In this context, it is indeed interesting to see that China has reached out to India, pontificating on the requirements of ‘a stable environment that will facilitate the growth of the two key economies’. In its attempt to win India to its side in its trade war with the US, it has called for the two countries to join together to bring about a ‘more just and reasonable international order’.

China’s change in tone and tenor – evident in its statements and diplomatic outreach – is only symptomatic of the severe stress on its economy and political leadership. There are also indications of a lack of cohesion amongst its leadership in responding to the US.

Many in India recall the often rancid and undiplomatic statements emanating from its foreign office during the Dokhlam crisis. But the very same establishment has now unleashed the equivalent of a diplomatic charm offensive. This only highlights the fact that the country is up against the wall in its bid to untangle itself from the costly trade war.

But India is no China in every sense of the word. Its economy is a not as big, nor is it as lopsided and heavily dependent on exports to the US for its survival. Secondly and most importantly, India is a plural democracy in the truest sense of the term and is in no danger of a systemic collapse if and when sanctions are imposed.

It is worth pointing out here that following the Pokhran II nuclear explosions in 1998, many countries including China, Japan and Canada condemned India. China, for its part, was at the forefront, demanding international actions against India. But now that the tables have turned, China has suddenly discovered the virtues of ‘regional economic stability and growth’ by working together.

When the US did impose sanctions on India in May 1998 following Pokhran II, the country did not implode. The fact was that its citizens rallied together in support of the democratically elected government. But in China’s case, their leadership is acutely aware that prolonged sanctions could trigger internal unrest and rebellion that could easily threaten its structural integrity as a nation state.

Unlike China, India’s relationship with the US is on an entirely different footing. It has no overt or covert aspirations to unseat the US as the world’s superpower, nor does it have a confrontationist approach to it. But it is indeed true that, like China, India probably has a boat load of differences with the US, on issues ranging from trade to political and world view. But that is par for the course betwixt democracies.

But at the end of the day, despite the differences, the US and India, as history bears witness, have resorted to bilateral discussions to resolve these issues. Unlike China, there is no public record of India threatening or confronting the US.

Being an authoritarian set up, China lacks that fundamental connect with the US or India. At a time when it is in serious trouble with the US, it cannot pretend a have a comradery with India since the latter too is ‘impacted by Trump’s unpredictable trade policies’.

Definitely, China is expending its diplomatic resources in creating a mirage of a synergy with India out of a non-existent common cause.  The ground reality is that the leadership in India and the US are aware of the phoniness of this outreach by China.

In fact India must – and there is ample evidence to think it has – see the speciousness of this argument. It cannot join hands with China to make a common cause. India’s world view and priorities are different and dictated by New Delhi, not Beijing.

Misery loves company and China’s outreach to India is definitely a case in point.

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Posted by on October 15, 2018 in China, Donald Trump, Economics, Foreign Policy, Trade, US

 

Trade War – US Trumps China

Trade War – US Trumps China

As part of a worsening trade war, President Trump on Monday, September 17th, 2018 announced a slew of new tariffs on imports worth $200 billion from China. A 10% tariff will come into effect later this month which will then rise to 25% from January 2019. Not to be outdone, China too has responded with tariffs on $60 billion of US goods that includes meat, nuts, alcoholic drinks, chemicals, etc.

These announcements come in the midst of an already expanding trade and sanctions regime that has already engulfed the EU, Mexico, Canada, Iran and Turkey in its wake. But the response from most nations have been predictable. Fully understanding the potential threat to their vulnerable economies, Mexico and the EU quickly sued for peace.Canada too is in advanced negotiations to resolve outstanding issues. That leaves behind Iran and China in the crosswire.

This has sent shock waves in stock and currency markets all over the world. Many national currencies have tumbled, including India’s Rupee. But the collateral damage will be broader and deeper and continue to strike at the very root of “free trade” as we understand it today.

Several pundits have faulted Trump for his ‘aggression’ on China and have blamed him for what many see as the coming collapse of international trade. While one may disagree with the way Trump has executed the tariffs, he is absolutely right on taking on China. In fact the US has been very late in getting its act together on China.

A patient review of the events and facts may suggest the urgent need to hit the reset button on China. China is, by no means, a saint and has been violating every bilateral and multilateral agreement to further its trade. In fact many nations, particularly the smaller economies in the developing world have long complained of dumping of Chinese goods on their markets that led to the decimation of local businesses in these countries.

US too has long been wary of China stealing civilian as well as military intellectual property for several decades now. Further, China’s scant respect for international law – from its defiance of the International Court of Justice on the South China Sea judgement to coveting its neighbor’s land – is all well known.  If the international community has very little regard for China as a responsible world citizen, it has only itself to blame.

China may be believing it has arrived on the world stage as a super economy and a super power. That probably is the reason it decided to defy the US and impose counter tariffs. The ground reality, though, is that the US is still the largest economy with the most powerful military in the world.

Unlike China, the US has the power and means to impose sanctions and enforce it. The sanctions on Iran is a case in point where it has successfully prevented other nations from buying oil from it.

The Chinese on the other hand have a false sense of their international influence and authority. Their recalcitrance at the negotiating table earlier with the US has indeed surprised many. They seem to have played their hand wrong to their own detriment. The bottom line is that in the current trade war with the US, China will be alone as no other nation will openly defy the US to support them.

As regards the sustainability of the trade war, it is anybody’s guess as to how long this will last before a diplomatic resolution is negotiated. But given the asymmetry in trade – China exports over $200 billion compared to $80 billion of imports from the US – it is more vulnerable and will cave in sooner than later. China’s defiance is ill advised and amounts to a hara-kiri. Delay in arriving at a negotiated settlement will be a punishing setback for China and will undo decades of economic progress.

It must be mentioned here that international trade as we understand today is built on the twin pillars of economic pre-eminence and military might. These two pillars are then artfully packaged and deployed using sophisticated diplomacy to gain maximum commercial and economic advantage. Countries endowed with both emerge leaders and winners. That is the winning formula and all nations understand this very well. But for China to pretend it is on the same footing as the US is indeed churlish.

We must note here though, that history is a mute witness to the fact that when push comes to shove, the true intentions of nation states have emerged. The US and its allies have a track record of not hesitating to weaponize their trade relations and impose sanctions, which really is a proxy for their overwhelming military might, to ‘straighten’ things out.

Of course, this is not to suggest that the current crisis will transmogrify into open armed conflict. Far from it. But the consequences could be as devastating. However, in international relations, the dynamics and power equations keep changing depending upon the underlying economic fortunes of the country. The EU for example, given its weak fundamentals, may not be able to stand up to China. But the US, on the other hand, buoyed by a booming economy, has staying power.

For China, a prolonged face off with the US can have disastrous consequences at home. From unprecedented levels of unemployment to internal unrest and rebellion, anything in between may be a potential outcome.

The ongoing trade war between the US and its major trading partners has powerful lessons for India. India is caught between the US on one side and some of its own major trading partners – Russia, China and Iran – on the other. How India manages to successfully maneuver its way around these treacherous waters of international sanctions will determine – to a large extent- the survival and long term growth of India. But it certainly cannot adopt a confrontationist approach vis-a-vis the US. A collaborative approach will take it places, literally. Prime Minister Modi seems to be on the right track.

 
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Posted by on September 19, 2018 in China, Donald Trump, Economics, India, Trade

 

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Europe On A Slippery Slope

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The attack near the UK Parliament on March 22nd this year by 52-year-old Khalid Masood that killed four innocent people and injured over forty innocent people is a stark reminder of the deteriorating situation in not just UK, but in Europe at large. The continuing episodes of terror strikes in the streets of London, Paris, Brussels, Frankfurt and elsewhere in Europe are not the only burning issue haunting policy makers in Europe.

The continent seems to be firmly in the grip of multiple deep impacting forces that can change the face of Europe forever. The rise of Islamic terror, prolonged economic downturn, Euro-skepticism and the potential breakdown of relations with the US could push the continent over the edge. And quickly. This is cause for concern.

Some historical perspectives on Europe is in order. Europe has long set the global EU_unemploymentstandards for state welfare programs and has been a beacon of liberal thinking in a post-world-war-II world. Minimum wages, state funded health care, subsidized/ state funded education, open borders, ban on capital punishment – you name it and Europe was leading the way in liberal welfare economics and thought leadership.

But the developments in the recent past seem to have put the Europe of yore to shame. With calls for stopping immigration, border walls, restricting infra-Europe labor movement etc., it seems to be unmistakably altering course. As long as the economies were strong and resources were aplenty, European liberalism and altruism had thriven. Not anymore.

Unemployment in European Union has been running high for the last several years following the recession of 2008-2009. In fact, unemployment at some EU member nations like Spain, Greece, Italy – to mention just a few – have been at never seen historical highs.  With tanking economies, all surplus and generosity have vanished and now self-preservation seems to overshadow everything – from immigration, to economic and strategic policy decisions. Many of the recent social and political turbulence are symptoms of this deeper economic malaise. With this trend, in just a few years, Europe will slowly but unmistakable lose its sheen.

EU_terror.pngRadical Islamic terror is another menace that Europe is confronted with. Not a day passes without some report of an act of terror or police action against the terrorists. That the terrorists are able to strike periodically, despite the best counter-terror investments speaks of the magnitude of the problem. The following pic (courtesy: Express.co.uk) highlights the toll of the spread of the scourge of radical Islamic terror across the continent.

Radicalization and high unemployment among local youth as well as the recent influx of Muslim immigrants under the age of 35 has only acerbated the problem. The high incidence of crimes against women in Sweden and Germany has shocked all. Even Chancellor Angela Merkel of Germany has stressed the need for the immigrants to respect local laws. Merkel’s conservative Christian Democratic Union (CDU) party has, although belatedly, called for stricter rules for Islamic preachers and a ban on foreign funding of mosques.

Unfortunately, Europe cannot wish away terrorism. Experience of countries like India suggests that it is a war of attrition and states have to be vigilant over the long haul. Europe needs to remain united and share intelligence and expertise to win. However, recent statements by Prime Minister May suggests otherwise. She has linked the issue of terror cooperation with Brexit and has already sent alarm bells ringing in Brussels.

Thirdly, Europe has always been a lead player in projecting military power across the world. Together with the US, Europe has been part of the prime military and economic leadership – the so called ‘West’. The NATO alliance is central to this power manifestation that has successfully policed the world and determined strategic outcomes, regime changes and what have you.

With Trump in office in the US, the future of NATO is on the negotiating Table. Trump has openly called on Europe to pay its fair share of the cost of upkeep of the alliance. Although, Trump has since clarified that he supports NATO, it is anybody’s guess as to what the future will hold. But more important from Europe’s point of view is where it stands in the pecking order in the alliance. One thing seems to be certain. It will not be business as usual and Europe will have to pay to stay, at the very least.

The EU was again in the spotlight for the wrong reasons. Jean-Claude Juncker, President of the European Commission spoke of breaking up of the US. This unbelievably shocking statement came at a time when the US President Trump has openly stated his disdain for the Union and actively encouraged Britain’s exit. It is the worst diplomatic faux pas a senior functionary of that rank can commit.  You don’t mess with the world’s sole super power and get away with it. The fall out will be keenly watched.

Whichever way this is looked at, it is indeed the rock bottom of relations between two important and powerful bodies in the world. It is very difficult, under the current climate, to see improvement in relations between them. In this clash with the titan, there will be only one winner – and it is the mightier US. The loser in the bargain is obviously the EU. In the coming months, one can expect a frosty pond that will widen the chasm between the allies.

In another disturbing development, Turkey vent its anger against Denmark and Germany in a manner that has startled the diplomatic corps world over. Upset over the ban imposed by Denmark in preventing its ministers from meeting expatriate Turks, Turkey called them “racists” and “Nazis”. These epithets are rarely used and heard in diplomatic exchanges, whatever be the provocation.  What equally surprised observers was the almost effete response from Europe. The Europe of a decade ago, would have called for sanctions against Turkey at a minimum, if not military strikes. But that points to a weakening Europe and Turkey definitely seems to have sensed this.

Europe is a huge economy and a major military power – individually and collectively and most certainly may have the resilience to withstand choppy waters. But the deep impacting forces that are acting in confluence will indeed be a test of every fiber of strength and ingenuity the Union possesses. The biggest worry is the continuing weak economy that could prove to be the tipping point. Europe desperately needs help and must stay united to survive.

Every nation, alliance and trade grouping constantly faces problems. But it is the ability to resolve them that will determine their longevity. The deep impacting problems described above, by themselves, may not be an existential threat. But what is really disconcerting observers is the absence of statesmanship and the inability of European leaders to reach out -bilaterally and multilaterally – and hammer out policy prescriptions that will meet the changing aspirations of newer generation that has suddenly discovered its nationalistic pride. It is equally important to reach out across the pond to the US and partner the Trump administration, rather than confront it. But what we are hearing are shrill jingoistic dialects that create mores fissures and unite none.

While it is too early and almost churlish to predict the demise of the EU in the short term, it definitely does not seem to have a great future even beyond the medium term.

 
 

President Trump orders review of Dodd Frank Act

obama_dodd_frank2Among the slew of executive orders that President Trump signed in his first few weeks in office, was one directing the Treasury secretary to submit a report on the review of Dodd-Frank Act (DFA) and recommend changes in 120 days. I believe this is a step in the right direction to resetting complex banking regulations and ease credit flow and kick start the economy. In this context, it is worthwhile to understand the importance of this law and how it has impacted the financial services industry in a post-recession America.

The banking and financial services industry in the US contributes over 8% of the GDP and is considered as the life blood of the business and economy of the country. Because of the big economic impact banks have on the economy, it is no surprise that it is the most highly regulated industry in the US and probably in the world. Hence the need for prudent regulations is understood and justified. Therefore, the laws that govern its growth and welfare are expected to be living documents and subject to periodic changes so as to be relevant in a dynamic environment. Hence the executive order to review the DFA is a welcome initiative.

The DFA is a big legislation. It is indeed a massive piece of law that runs over 2300 pages incorporating more than 400 rules and mandates. It can be broadly divided into eight key pillars that seek to protect the consumers and regulate the financial markets.

Among the key provisions in DFA, are the creation of the Consumer Financial Protection Bureau (CFPB) -which is responsible for implementing and enforcing compliance with consumer financial laws, stringent regulatory capital requirements, significant changes in the regulation of over the counter derivatives, reforms that regulate credit rating agencies, changes to corporate governance and executive compensation practice and the Volcker Rule ( which bans banks from using or owning hedge funds for their own profit).

The provisions in the DFA were designed to create and sustain a safe and sound banking industry. For instance, the enhancement of the capital requirements of banks created sufficient cushion to absorb loan losses in an unfavorable economy. It also mandates banks to keep a significant portion of their assets in cash and government securities so that they could be easily liquidated in the event of a run on the bank or fast deteriorating macro-economic conditions.

It is easy to see the good intent of the Act. But the experience of banks, regulators and experts since 2010 have been very mixed.  As would be expected, experts in the field have sharply divided views on the efficacy of the Act in achieving its stated goals.

The Dodd-Frank Act had an acrimonious birth and had sharply divided influential Senators and Congressmen. While President Obama claimed victory, the Republicans then had warned that this massive piece of legislation would arrest the flow of credit and slow down recovery and impact job creation.

DFA was enacted to safeguard the consumers and prevent a repeat of the financial crisis of 2008. One of its important objectives to end ‘too-big-to-fail’. But what has the DFA achieved in six years? The ‘too big to fail banks’ remain intact. On the other hand, it has adversely impacted small and medium banks by imposing a heavy regulatory burden on them.

A study by American Action Forum published in 2016 found that the DFA in six years had cost a total of $36 billion – including $10.4 billion in its sixth year of existence. The study further showed that in the six years, DFA has resulted in a burden of 73 million paperwork hours. DFA has indeed been a logistical nightmare for banks.

A Harvard study on the impact of DFA found that the top five bank-holding companies control nearly the same share of U.S. banking assets as they did in the fiscal quarter before Dodd-Frank’s passage. But community banks with $1 billion or less in assets have seen a significant decline.

It would be pertinent for me to point out here that often in their zeal to protect consumers, legislators tend to over-regulate to the point of almost killing the industry.  Human history is replete with instances where laws are often enacted as a knee-jerk panic reaction in the aftermath of a crisis. But these very same legislations are rued over by the same legislators when the crisis has passed and the severity of their actions dawns on them. We have seen this happen periodically in America, Europe and elsewhere. Is it the legislators’ curse on the democratic world – killing us with their concern and zeal?

As a former bank regulator, I have been an advocate of minimum and prudent regulations that achieve the stated goals by imposing minimal financial costs on banks and regulators. Complying and supervising well-intentioned legislations must not by itself be a Herculean task. I have always believed that DFA has been a logistical and expensive nightmare for the bankers and the regulators. To pass the smell test, a law has to be simple, unambiguous, easy to implement and enforce and achieve its stated objectives with ease. On all these counts, in my view, the DFA fared poorly.

But that is not to say that I advocate the repeal of the law. By no means.  The Feds need enabling and powerful laws to maintain a disciplined financial system where banks power the engines of growth by funneling credit flows to big and small consumers alike to achieve sustainable business growth. The review is a welcome move and hopefully make DFA easier and less expensive to comply.

The Trump administration has to exercise caution to not bring in legislations that are too big and expensive to administer, comply and enforce and carry the risk of collapsing under its own weight. The incoming administration has a great opportunity to make a big difference. President Trump has taken the right steps to review the Dodd-Frank Act.

 

 
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Posted by on February 23, 2017 in Economics, Trade, US

 

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Trump’s Economic Diplomacy – A Pundit’s view

As President elect Donald Trump and incumbent President Obama work out details of a smooth transition, Americans and the world at large will keenly follow how the incoming administration takes shape and influences their lives.

Many chaltrump_obamalenges await the new administration. Hot button issues on the domestic front will undoubtedly dominate Trump’s attention. As he assembles a top talent team, Trump has promised economic revival as his top priority with immediate focus on Tax reforms, Infrastructure, Healthcare and Immigration. If he can pull this off, it will be unprecedented and generate millions of jobs for middle America.

As part of this quest, the new administration will certainly reassess US participation in economic and trade agreements. It will seek to renegotiate or redraw these agreements to promote American jobs. Most likely, the Transpacific Trade Partnership (TPP) will be replaced by a new trade agreement.

The Trump administration’s heavy economic agenda will likely be reflected in its foreign policy initiatives also. Economic Diplomacy will dominate while erstwhile interventionist doctrine may take a back seat, if not abandoned altogether. This could mean that US may scale down its involvement from conflict zones and other problematic areas of the world. This new diplomatic doctrine will put the spotlight on four areas – Europe, Russia, China and India.

Relationship with Europe will require a lot of sustained and energetic work. It is no secret that many European leaders have been skeptical of Trump. Their reactions to Trump’s election have ranged from nervous to outright undiplomatic. For example, the French ambassador to US raised eyebrows with his ‘undiplomatic tweets’ that he is reported to have subsequently deleted. German Chancellor Merkel’s response to Trump election was terse and calibrated. These reactions have publicly exposed the underlying discomfort among European allies.

Traditionally, the US has almost had a mystical influence on Europe. Despite differences, mostly bilateral, Europe identified itself with the US as an extension of itself. At least till Trump came on the scene. Trump had been critical of Germany’s intake of Syrian refugees during his campaign. He had also wanted the allies to contribute their fair share for the maintenance of NATO. Trump’s bluntness and his trademark lack of political correctness has soured relations.

It must be mentioned here that much of this disquiet among leaders about Trump has spawned from the fact that they tend to see and read Trump literally – word for word. They see his political incorrectness, but miss the larger message, often relying on an image portrayed by the media to understand him. But the media too, as seen in the election cycle, is guilty of misreading and missing Trump larger message. The sooner Europe gets past this mindset, the sooner will Trump reach out to them.

But the fact is that an economically weakened Europe needs the US for recovery. In return the US too needs Europe’s support in establishing Western might across the globe. This mutual dependence and a long history of partnership will endure and continue to sustain the relationship, albeit with creases that can be ironed out. But that should not dismiss the angst in Europe as the incoming administration works with individual European allies and the EU. However, with his native shrewdness and ability to strike deals, it may not be long before Trump and the allies are back to business as usual.

The North Atlantic Treaty Alliance (NATO) has been predicated on a communist threat from Soviet Union. But after the collapse of the Soviet Union, many strategic analyst have rightly questioned the need for NATO. Trump may be right in questioning the huge cost of maintaining the alliance, given that there are more pressing economic issues at home. But any rethinking on NATO only opens a host of other issues that may not be resolved easily or quickly. That may tie down Trump’s hands on any decision on NATO.

Trump will take a fresh look at relations with Russia. During his campaign, he had mentioned that he was open to improving relations with Putin. There is confluence of interest, at least in eliminating ISIS from Syria. But if Trump reaches out to Russian and succeeds in building new bridges with Putin, there may be early resolution to conflict in Syria. This may also impact east Europe and reduce tensions there. This will be important from EU’s perspective. Any reduction in tension with Russia will also spur trade and that is something an economically bruised Europe is looking forward to. But the cold war era warriors and policy wonks in Washington may not easily come around to reaching an understanding with Russia and hence the problem is likely to fester.

US relations with China may not see any significant change. Even though Trump has talked about China stealing American jobs, no precipitate action may be forthcoming. In fact, Trump’s deal making skills will be helpful in negotiating better trade deals with China. How far he can bring backs jobs from China to USA will be moot question. The US is a high cost center and manufacturing will be expensive, even if tax concessions are offered. On the other hand, China will maintain its currency advantage and enjoy lower costs of production. This will be a real challenge for the Trump administration.

India offers a lot of opportunities for the new administration. Indian Prime Minister has already reached out to Trump and congratulated him. President elect Trump has openly expressed his admiration for Modi. But beyond diplomatic niceties, India has a lot of work to do to step up the relationship with the US. India’s initiative to boost manufacturing under ‘make in India’ initiative and Trump’s focus to bring back jobs to the US may appear to be at loggerheads. But the reality is that there is significant room to maneuver a mutually win-win trade deal. For instance, while India can buy US arms, frigates, aircrafts etc., it can also be a huge market for green technologies – solar energy, digital smart city technologies, desalination technologies, waste disposal industries just to name a few.

Also huge opportunities lie in deepening a regional strategic cooperation that is already in its infancy. For example, Trump and Modi could inject new vigor to the ‘Pivot to Asia’ strategy that could have long term impact for US as well as regional stability in Asia.

 

L’affiare Khizr Khan

The Clinton campaign takes the cake for creative and often ingenious campaign strategies as well as public relations management. The Khizr Khan episode is one such creative genius that the strategists crafted to influence voters decisively in favor of Clinton. Only this time the strategy backfired. khizr

Khizr Khan is the father of Humayun Mauzzam Khan, the 27-year-old US Army Captain and Purple Heart awardee who was killed while deployed in Iraq in 2004. In a dream moment for the Clinton campaign, Khizr Khan pulled out a copy of the US constitution from his breast pocket and taunted Donald Trump to read it – an act that mesmerized viewers into a speechless awe. It will probably be remembered in the annals of election conventions in the US for a long time to come –  for multiple reasons.

As if on a cue, the cable networks, radio and print media went berserk and gushed at the powerful impact Khizr had created. Clinton’s campaign had pulled off a major coup and seemed to have almost stalled Trump’s campaign on its tracks.

If Team Clinton thought it had executed a coup de main, the revelations on Khizr Khan that followed held nasty surprise. It boomeranged and the campaign appeared to nosedive. Clinton quickly lost an 8 percentage point lead over Trump after the convention, to just a 3-point lead per the much respected Reuters/Ipsos opinion poll published on Friday, August 5th 2016. Surprisingly, at this late stage in the campaign cycle, Clinton has failed to establish a clear lead over Trump.

That bore testimony of a highly and evenly polarized electorate. But as the media uncovered more about Khizr Khan’s background, the unease amongst many Americans only grew and escalated the war of words between the two campaigns.

First, Khizr Khan’s past intellectual leanings were discomforting. His published writings showed his strong support for Islamic Law or Sharia, an anathema for Americans. Through his writings, he claimed the supremacy of Sharia and asserted that it was above the constitution or the law of the land since it was God given.

Secondly Khizr Khan seemed to have been inspired by Said Ramadan of the Muslim Brotherhood fame. Many are familiar with the violent past of the brotherhood. There have been calls by the US Congress to designate it as a terrorist organization. Egypt and the United Arab Emirates too have made similar demands. Khizr’s purported connections to the Muslim Brotherhood has not helped Clinton in anyway.

Thirdly, Khizr seemed to have connections to religious extremist elements in Pakistan, specifically to Allah K Brohi. Brohi, who was a former Minister and advisor to Gen Zia ul Haq, the former dictator of Pakistan, had helped create hundreds of madrassas and restore Sharia punishments in that country.

Fourthly, in a subsequent interview with a Pakistani TV network Khan’s praise for the sacrifices of the Pakistani soldiers – who have often been at loggerheads with US forces in Afghanistan- has only reinforced this hardline image of Khan as a wolf in sheep’s clothing.

Lastly, came the exposé in some sections of the media that the Clinton campaign had transferred $375,000 – no small amount – to Khan in early August, although the quid pro quo was not a surprise.

The Khan episode had its share of critical and adverse consequences, albeit unintended. Many Americans, particularly veterans, have been angered that the supreme sacrifice of a Purple Heart soldier was being politicized and have protested it.

Khan, in the meantime, had taken full advantage of his new found but short-lived popularity on prime time television. He appeared in almost every major cable network channel to denounce Trump. But sensing the unease his writings on Sharia had generated among Americans, he quickly made a ‘U’ turn. In the AC 360 show on CNN when asked about his writings on Sharia he said there was ‘no such thing as Sharia’.

Khan went on further to say that the Sharia was nothing but a hodge-podge of British, French and Portuguese laws and could never be implemented in the US. His about turn was complete. But the damage had already been done and there was no winning back the confidence of many Americans – particularly the baby-boomers and large sections of the veterans.

Notwithstanding his denials, Khan’s resume had all the career highlights of a Muslim with strong and yet secret ties to radical Islam. In fact, his denials had only accentuated the problem for Clinton. It is true that none of the intelligence agencies have publicly come out with a possible connection between Khan and the brotherhood or radical Islam. But the Trump campaign has exploited this to the full. Khizr Khan has since refused to meet with the television networks or the media.

The ground reality is that the campaigns face a nervous and a highly polarized America. This nervousness has spawned irrational fears all over. The Clinton campaign is obviously nervous about its inability to prevail over Trump as elections get closer. Hence we are witness to a serving President – a first ever – who is actively on the campaign circuit. While many may see this as inappropriate and a minor breach of ‘Presidential’ conduct at best, it has largely been ignored it in the distractions of a vituperative drama of a highly spirited election.

The Trump campaign on the other hand has been unable to fully exploit Clinton’s gaffes and missteps to its advantage. Americans have been equally appalled by some of his blunt and uninformed remarks – ranging from nukes to NATO.

The Khizr Khan fiasco has some important lessons for both the campaigns. Europe, smarting under repeated terror attacks from radical Islam, has created a society that is ultra-allergic and ultra-sensitive to anything Islam.

Europeans in general and France in particular have been known for the liberal traditions and until recently, had preached to the world the virtues of immigrants – specially Muslims immigrant in creating a diverse society. For decades they have counseled third world countries like India and others about the wisdom and the need to absorb and coexist with Muslim immigrants.

But almost overnight, this allergen of Islamic terror, has drained Europe of any pretense to this liberal embrace of immigrants, especially Muslims. It has resulted in multiple optics –“Brexit”, “Nationalism” and rise of “Right wing” in Germany etc. But the transformation has been quick and complete and there will be no going back. Europe ain’t liberal anymore and the Americans aren’t far behind.

The US has joined the party late and is now fermenting. Clinton’s cynical deploy of Khizr Khan to gain votes oblivious of this fermenting undercurrent has backfired on her and will continue to hurt.  A nervous America can be unpredictable and the even polarization will only make the race to the White House all the more difficult.

 

The hype over #Brexit

The newspapers, TV and internet sites are all about it. In case you woke up late and missed it all, we are talking about #BREXIT, a hashtag that was treBrxit2nding in twitter for long. The Brits voted in a referendum to leave the European Union or EU. Many have called it a devastating and shocking development that could plunge the world into economic chaos.  True – David Cameron the British Prime Minister plans to step down as stock markets around the world went into a cold shudder. The NASDAQ, DJI, S&P in the US reacted nervously and hit negative territory.

Donald Trump, the presumptive Republican Presidential nominee voiced his opinion too. He called it a victory for UK “since the people had taken back their country”.  However, other US leaders on both sides of the aisle were cautious in their response. If the US response was cautious, it had good reasons to be so. It reminded Washington and Capitol Hill of the fragility of the European Union and warned of a potential exodus by other states. An already weak Europe caught in the Brexit crisis, has stoked fears of a full blown European recession and similar consequences on the US economy.  Many European and world leaders worried that if a special US ally like UK could exit, there was no stopping other countries.

Markets in Europe and Asia also reacted negatively to the will of the Brits, it appeared. All this reaction was in response to the referendum result. The UK referendum itself was unprecedented. With the highest turnout since 1992, 72% came out and had their say with 51.9% voting to ‘Leave’ and 48.1% wanting to ‘Remain’. The referendum also showed the geographic split -Brits wanting to ‘Remain’ were concentrated in London, Ireland and Scotland areas whereas the hinterland was rooting to ‘Leave’.

To start with, Brexit itself is at the heart of a complex problem. Many have attributed it to the large influx of immigrants in the recent past as the trigger. In a bad economy, the influx has only aggravated the pressure and really tested the very concept of the ‘welfare state’. Per data released by the Britain’s Office of National Statistics net migration to the UK reached a record 330,000 in the year ending March 2015 while the size of the foreign-born population reached 8,277,000. Many have opined that this could stress the government and infrastructure. For example, the net influx would put pressure on an already aging UK water supply system, not to mention the increase in students enrolled per class in the primary schools.BRexit_Migration.JPG

The referendum also had important lessons for other European nations like – France, Germany, Denmark where nationalist movements have gained strength in the recent past as a reaction to the flood of immigrants.

It may be hard for many to imagine that a net influx of 330,000 migrants could tip the scales in a developed economy like UK.  That number may be small by the standards of the US or other large population centers elsewhere in the world. But it has to be conceded that for a small geography like the UK, these numbers are significant. This issue, has been the last straw on the camel’s back and has created the chasm that has polarized the UK. ‘Remain’ activists have accused the ‘Leave’ activists of xenophobia which in turn has only fueled the growing gap. But the truth is that a long running recession leading to near desperate economic conditions provided the fuel and immigration the spark to ignite the Brexit bomb.

Many observers have raised fears of a recession in Europe and potentially in the US too as a direct consequence of Brexit. The nervousness in stock markets around the world has only accentuated this fear. Some have even predicted the end of globalization and a collapse of international trade.  Others have pointed out that the falling UK currency – the pound – has its own benefits like making exports cheaper and attracting more tourists to the UK. All this may be true in the short run. But I will not bet on the fall of the pound over the long run and hence these benefits may be short lived.

Will Brexit spawn these severe consequences as many fear?  For sure, opinions are deeply divided. First off, much of the fears of a disaster are impulsive reactions and as often happens in such cases, are exaggerated. The stock and currency markets will stabilize soon. Many of the uncertainties we fear today are over the short term.

Truth is that global trade is in the throes of reinventing itself. Brexit, in all probability, portents to the emergence of a new trade order and tariff regime. The crisis itself can catalyze the emergence of new trading paradigms or partnerships – bilateral as well as multilateral – that more accurately reflect the global economic and trade realities, rather than proximity, political and militaristic calculations. There are historical parallels and the emergence of EU itself was a product of such negotiations.  In this context, it is worth pointing out that many of the extant trade blocks and treaties as well as those in the works exclude some heavy weight economies like India and China and hence by definition are not representative of economic and trade realities. For example, Brexit could engender a new trading block that includes UK, Japan, Germany and India sooner than many have imagined. Any permutation of economies that are bound by mutually beneficial trade could emerge.

When we step back and take a 30,000 feet view of the Brexit crisis, we see one country has filed for divorce from a trade alliance. The UK is not the United States in terms of geography or size of its economy. Both the EU as well as UK will continue to trade with each other, albeit in a different tariff regime, and with the rest of the world. Hence painting a doomsday scenario is untenable and devalues human ingenuity and the genius to execute profitable global trade.

The emerging economies of Asia, specifically India and China, will continue to trade with UK and EU. So by no means this is the end of globalization or global trade. In fact, the world will suck up Brexit and move on, faster than many have imagined. Nor will the world go into recession.

Having said that, in all probability, UK businesses in the short to medium term will suffer adverse economic and trade consequences. The Bank of England may lose some serious treasure defending the pound.  But human ingenuity and survival instincts will prevail and new beneficial bilateral trade deals will be worked out.

 
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Posted by on June 25, 2016 in #Brexit, Economics, European Union, Trade

 

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