BIZweek n°310 2 oct 2020
BIZweek n°310 2 oct 2020
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  • Parution : n°310 de 2 oct 2020

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  • Editeur : Capital Publications Ltd

  • Format : (260 x 370) mm

  • Nombre de pages : 10

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VENDREDI 02 OCTOBRE 2020 BIZWEEK ÉDITION 310 f-3 Technology and energy dominate China's imports (% of total goods Imports, 2019 ; US-dollar basic} Electrical machinery and equipment 24.0% (of which integrated cirarits -,accounted for 14.8%) Som= I TC Trade May. lhe irrearrlig Intelligence Unit In this paper The Economist Intelligence Unit clarifies the extent of the inward economic shift underway in Asia, focusing on the region’s leading emerging markets of China, India and Indonesia, and provides advice for businesses and investors on its implications. Among its key findings  : The inward turn in economic policy across emerging Asian markets is driven by geopolitical tensions and security concerns. China’s focus on self-sufficiency is shaped by the worsening trajectory of its relations with the US, while India’s shift in the same direction stems from concerns about economic dependence on China. Secondly, Asia’s inward turn represents a step back from closer global integration, but is not a move to autarky. Countries in the region will still present significant commercial opportunities for foreign businesses and investors. However, EIU expects a trend towards operational localisation to intensify and, for global investors, grasping the opportunity in Asia while managing political pressures in their home markets will be increasingly challenging. China’s dual circulation model  : Managing risk trumps growth Deteriorating diplomatic and trade relations, especially with the US, have deepened Chinese calls for greater economic self-sufficiency. This year, policymakers have been discussing a « dual circulation model » that identifies the domestic market as the mainstay of the Chinese economy, rather than global markets. They see an inward pivot as reducing China’s exposure to the vagaries of the global economy, whether in terms of supply or demand. Dual circulation is set to feature prominently in China’s five-year plan for 2021-25 due to be released in March 2021. In some respects, dual circulation is a restatement of the long-held goal of rebalancing China’s economy. Amid the 2008-09 global financial crisis, China’s government called for efforts to « expand domestic demand » as the country’s export-driven growth model showed its limits. A fresh policy push behind rebalancing is therefore due ; and efforts to boost domestic demand under dual circulation will be more emphatic. This is partly because, for China private consumption offers the best channel through which to deliver sustainable longtermeconomic growth, but it also stems from the government’s sense of significant changes in the external environment. The US-China trade war and the desire of several countries to reduce their dependence on Chinese supply chains suggests that China faces diminished access to overseas markets in the future. Besides cultivating the domestic market ACTA PUBLICA Ine Ifu ; 1 (ofwh - (rude occounted for 11.596), Optical and precision equipment 42% Veigdes and vehicle parts 3.6% Precious meuts and stones 7.9,0) to drive growth, the other key element of dual circulation will be reducing risks tied to import dependency. Given the worsening trajectory of China’s international relations, the authorities are concerned about the security of international supplies of food, energy and technology on which the country depends. We believethat, under dual circulation, reducing these vulnerabilities and fortifying self-reliance in production and distribution will be the priority even if it results in some economic inefficiencies. Risk prevention and the imperative of national security will trump « high-quality growth ». Among all sectors, technology stands out as the area likely to receive the most overt support in achieving self-sufficiency, with semiconductors or integrated circuits (ICs) Responding to Asia’s inward turn For businesses and investors that straddle national borders, Asia’s inward economic turn is potentially troubling. Policies that aim to curb imports or prioritise local companies risk reducing their access to some of the largest emerging markets globally. Led by China, India and Indonesia, Asia posted some of the fastest rates of GDP growth globally pre-coronavirus and we believethat the region will be the quickest to recover economically from the pandemic. In reality, the door is unlikely to close to foreign investors and we do not perceive a dramatic shift to autarky. China, India and Indonesia all retain a (varying) dependence on foreign goods and capital that it will be difficult to erode, even with concerted policy pushes. This should ensure a continued role for foreign trade and investment. Efforts by these countries to boost their domestic economies through structural reforms also point to enhanced commercial opportunities. There will be variations among the three countries, however. China is the most economically advanced of the group and its embrace of foreign participation is likely to be most selective, given its greater domestic resources. There will still be areas where the authorities will be keen to entice more foreign capital when it aligns with strategic and economic goals ; recent liberalisations for foreign investors in the financial sector, for example, will encourage local companies to lift their competitiveness while also providing an influential source of foreign support for stable diplomatic ties with China. The overall trend, however, will be towards a diminished role for foreign firms as strengthening domestic companies widen their market share. Besides support from the state, local companies are likely to be more adept at adjusting to domestic market Machinery and mechanIcal appliances 9.2% Plastics and articles there of 3.5% organk chem ical s 18%C.opper and articles thererd 2.0% enjoying the strongest attention. The vulnerability has been highlighted by the pressure applied on Huawei and other Chinese technology companies by US actions to restrict their access to global technology through export controls. As one of the world’s largest importers of energy, China views energy security as one of its top priorities, with any risk to supplies likely to have significant implications for industrial production and consumption. In 2019 almost 85% of China’s oil consumption was derived from imports, while imported gas accounted for over 40% of consumption. In contrast with technology, China is less dependent on the US and its allies for energy imports—Saudi Arabia and Russia are its largest suppliers of oil, while preferences, especially in the consumer sector. India and Indonesia are likely to be more embracing of foreign participation. India’s « self-reliance » movement still retains a prominent role for foreign investment, other than from China. In Indonesia, too, despite the expansion of import substitution policies, the government remains keen to welcome foreign investment in areas such as manufacturing, ecommerce and infrastructure, while caps on foreign ownership in some sectors have been loosened. Both India and Indonesia will struggle in their goal of movingup the value chain without foreign support and they see an opportunity to attract investment amid supply chain relocation from China. The operational challenges for foreign investors will be significant, however, unless there is progress towards deregulation of land and labour markets in both countries. 6 Cont’d on page 7
VENDREDI 02 OCTOBRE 2020 BIZWEEK ÉDITION 310 the bulk of gas imports come from Turkmenistan. Nevertheless, concerns about potential disruptions to shipments, including via sea-lanes in the South China Sea where geopolitical tensions have risen, suggest energy security will be a feature of the dual circulation strategy. Self-reliant India  : Closing the door to China The Atmanirbhar Bharat (« Self-reliant India ») initiative is a culmination of different factors reflecting economic and security challenges faced by India. India entered the Covid-19 pandemic with significant economic challenges. Real GDP growth had been on a downward trend for three consecutive years, slowing to 4.2% in fiscal year 2019/20 (April-March), creating challenges in finding employment for the nearly 5m workers entering the labour force annually. India’s low state capacity, poor healthcare infrastructure and highly populated urban centres have left it particularly affected by the pandemic, which has weighed further on the economy. The 23.9% year-on-year contraction in real GDP recorded in April-June amid lockdown measures was the steepest among any G20 economy over that period. While the self-reliance initiative focuses on the Indian economy, it is as much about reducing India’s economic dependence on China. India’s views on China have hardened in recent years and border clashes involving the two countries in June 2020 have given rise to the view that its larger, more powerful neighbour represents a threat to national security. Self-reliance prioritises weaning India off Chinese imports and, at the same time, exploiting a reassessment of relations with China around the world to attract supply-chains shifting out of the country. Under the initiative, we expect the government to ease domestic regulations. Special importance will be given to the loosening of land and labour laws, which have been a significant pain point for private companies. While some progress has been made on this front, with various Indian states having suspended labour regulations for the coming years through ordinances, we expect permanent progress on this to be slow because of domestic opposition. In addition, the authorities have committed to withdrawing (without a specified time frame) from non-strategic sectors of the Indian economy by privatising state-owned firms (known as public-sector undertakings or PSUs) and reducing their number to a maximum of four in strategic sectors, providing an opportunity for private and foreign investment. We expect the government to expand its existing incentive schemes (for goods production and settingup infrastructure) to attract foreign investors and support Indic aimsto redue its depenirlence on arrns imports (Import s of amis by country, figures in 5IPTtl t tend-indicA I or valses expresed inrnd lions, 1315.10 I f àuki lu et RiP2Ja 11.114  : Ir ; ()Ce.111 Uudi Anhie (ro.11141 t] Pd ka.sifterdniinirigiroonriorramotote.rei Inultwe. Ih ! amok, erifirer r tkee domestic manufacturers. In a step to dissuade imports and further support domestic industries, we also expect the government to increase non-tariff barriers on low-cost competition to Indian manufacturing industries, such as through adjusting quality control standards, and increasing import tariff rates on products that could be alternatively made in India. Besides sectoral opportunities, India’s inward turn also poses some economic risks. A more protectionist trade stance and any increase in tariff rates for imports may lead to punitive tariffs or the revocation of trade benefits from its partners. Most recently this was seen when the US revoked India’s access to its market under the generalised system of preferences, citing high Indian import tariffs. It willalso ensure that India remains outside emerging regional trade blocs from which it could benefit. Another risk with the self-reliance initiative is the possibility that the government, while implementing increasing tariff and non-tariff barriers, does not follow through on the broader reformagenda. If the government does not undertake the opening of various sectors to private enterprises, ease overbearing regulation and privatise loss-making PSUs, India’s manufacturing sector will be rendered further uncompetitive. Furthermore, this would make future governments averse to openingup the economy again. Indonesia  : Import substitution makes a comeback In Indonesia, import substitution policies are showing signs of making a comeback. In recent years the country has appeared committed to outward-looking free-trade agreements. Association of South-East Asian Indonesia airs for greater industriel self-sufficiency (Targe ; Tor indu rial self - sufficiency, 2020 24) ACTA PUBLICA 7070 7074 11, ri. or dommik efflpmints e el wrial ; e-educt% et) 49% 54% haw,nt flamme prarkicu in governtrent proniternont (›.,) 466Oit, 525 » Nad us iteinal ['pro Itictç Mitée, withrrinre Man 25% al Io I encureinent plie 6.]O 8.100 Shate of prolutis required ta havn national laandards setetri (SNI) cerulicaucin mt, 20% SrxrcrvMbrh‘liy Iratml r y (1(.14rTierdirr.1.1.11), he Ecog-horn4sI Int 1114,41w Unir Nations (ASEAN) countries, through the founding pacts of the ASEAN Economic Community (AEC), have secured significant tariff reductions across member states. Indonesia has also been among the more vocal supporters of the Regional Comprehensive Economic Partnership, a megaregional trade agreement set to harmonise many existing trade agreements. However, protectionist sentiment has never been far from the surface and it may be that the country sees such trade agreements primarily as ways to promote its exports. Indonesia’s president, Joko Widodo (Jokowi), has expressed concerns about Indonesia being a destination for exports from other ASEAN members once the AEC is finalised. The Indonesian government has also managed to retain many non-tariff barriers, despite its rhetoric. According to the World Bank, 69% of goods imports to Indonesia are subjected to non-tariff measures, like pre-shipment inspection and traceability requirements, compared with 31.1% in Thailand and 38% in Vietnam. Besides insulating parts of the domestic economy, Indonesian policy towards cross-border trade and investment is also influenced by structural factors. A persistent current-account deficit has been a longstanding concern for successive Indonesian governments owing to the volatility it can cause in the rupiah’s value. A weak rupiah increases the cost of external debt repayment for the country. The coronavirus pandemic is further encouraging an inward-looking tendency. In July this year Indonesia’s Ministry of Industry outlined a target of reducing import reliance across a range of sectors, including machinery, chemicals, metals and electronics, with a goal of shifting 35% of current imports in such areas to domestic sources by 2022. While the road map is stillat the planning stage, it appears to be a more emphatic version of earlier self-sufficiency plans backed by the ministry, such as those targeting a higher share of domestic products in government procurement. The government’s programme can be attributed to several concerns. First, the additional safeguarding will help distressed stateowned enterprises (SOEs). Among the more notable of these is PT Krakatau, a steel maker, which is dependent on government support and has been struggling to restructure its debt. The government has requested all import steels to be subjected to SNI starting from September, an initiative pushed by the firm. Alongside this, imports for capital-intensive goods in the electronics, machinery, and pharmaceutical sectors have drained Indonesia’s foreign exchange and widened the trade deficit. Unlike China and India, Indonesia’s inward-looking policies are not guided by specific geopolitical concerns but are more an assessment of domestic economic interests. The country has few trade tensions with the US or China, for example. The trade deficit with China is substantial, but Indonesian exports to China have increased substantially over the past few years. While investors may therefore find themselves relatively insulated from geopolitical tensions in Indonesia, navigating domestic political interests remains challenging. As noted, SOEs retain a protected role in key segments of the economy, such as finance, metal processing and construction. Scrutiny willalso be applied by the authorities to investments in sensitive primary sectors, such as mining and palm oil plantations. A lack of skilled labour and trained scientists, as wellas a poor record in protecting intellectual property rights, makes Indonesia a less desirable investment destination for research-intensive industries like pharmaceuticals. Loi The Fccoorntu Intelligence Und tllpI cors) 7

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