The Unmistakable Clues to Janet Yellen’s Visit to India

Friendhoring is an experiment in which the United States plans to favor its political allies when building new supply chains and revamping existing ones. The idea is to exclude China from supply chains. “For too long, countries around the world have been too dependent on risky countries or a single source of critical inputs. We are proactively deepening economic integration with trusted trading partners like India,” Yellen said in Delhi last week.

The term is said to have been coined a few weeks ago by Yellen, a former chairman of the US Fed and one of the world’s most renowned economists.

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By weakening the U.S.-China trade relationship, President Joe Biden aims to reduce U.S. economic dependence on China and tame geopolitical ambitions and growing assertiveness. aggressive from Beijing. He also fears that China, not the United States, controls the technologies of the future.

The United States has traditionally relied on export controls to hold China down technologically for a generation, but without hurting American business revenue through low-cost manufacturing. But even Donald Trump’s trade wars were less aggressive than the Biden administration’s trade assault on China.

Tariffs and quotas put in place during the Trump presidency remain as well as rules such as “Buy America” ​​requiring manufacturers to use American iron and steel, for example. Additionally, the Biden administration has banned U.S. companies from exporting semiconductor chips and manufacturing tools essential to making high-quality chips to China.

Sweeping export controls announced last month bar US citizens and green card holders from working in China’s semiconductor industry. The world’s major chipmakers from all countries – South Korea, Japan and the Netherlands – will have to rethink their supply chains to be on the safe side of these US export controls. Many of their employees stopped working in China within hours of the White House announcement.

The United States also spends billions of dollars in subsidies and tax credits to spur the creation of domestic chip factories. As part of friendhoring, the United States also plans to favor battery ores processed in countries with which it already has preferential trade agreements. Biden’s Inflation Reduction Act (IRA) gave a tax credit to electric vehicles assembled in North America, not just the United States, extending the benefit to Mexican and Canadian automakers as well.

What are the implications? There could be a full-fledged tech cold war that could disrupt supply chains, make advanced chips more expensive, and deprive the modern, tech-dependent global economy of vital rare metals.

Second, chips will become more expensive at a time when high global inflation is already hurting. The US-China decoupling will inevitably increase production costs around the world, as there could be second-round effects: China could retaliate, given that it processes just under three-quarters of the world’s lithium and has monopolized the supply of rare metals.

Third, the commercial world can be fragmented into blocs: one led by Russia and China and the other by the United States. Although the chances of that are low. Finding allies and building neat alliances isn’t that easy. Already, given its deep manufacturing ties to China, Germany is taking a different stance on Beijing, which Mint Snapview wrote about.

Despite protracted negotiations, the United States has yet to reach preferential trade agreements with Japan, the EU, and even India, which diminishes the appeal of any offshoring benefits.

The EU, Japan and South Korea are not eligible for the tax preference that Canadian electric car makers will receive, and they are unlikely to be too happy that the level playing field is disrupted.

Finally, the reliance on friendly offshoring shows that competing with China is still not how the United States thinks it can win the tech war with China. If the experiment fails, there could be supply chain disruptions and related vulnerabilities.

What are the implications for India? India will not be immune to the changing dynamics, the inevitable chaos as supply chains are adjusted and realigned, and the possibility of the rise of a new world trading order.

India is building its autonomy in semiconductors. Building autonomy and strategic alliances means both gains and costs, as companies will need to be compensated to stay away from the cheapest sources of inputs and technology and conform to choices dictated by geopolitical calculations. governments. Can the public treasury bear the budgetary costs of the subsidies that this requires? If it’s not taxpayers, consumers will foot the bill for higher costs.

The Modi government is spending millions of dollars and has lined up more tax incentives and subsidies to boost the industry. The biggest trading houses, from Tatas to RIL, have announced big ambitions. Yellen’s friendship comments are a strong signal for chipmakers to diversify supply chains away from China and favor India instead (she also met with business leaders at Microsoft India Development Center, Noida, on this trip, the first as US Treasury Secretary). This is an opportunity worth seizing, given India’s ambitions in semiconductor manufacturing.

Second, Biden’s export controls are meant to clamp down on the Chinese military’s use of advanced chips, blunting its aggressive ambitions — something India’s strategic watchers can’t complain about.

Third, Yellen’s statements show that there is limited disenchantment with India despite New Delhi’s calibrated stance on Russia and the war in Ukraine.

By failing to echo the US-led Western alliance’s anti-Russian rhetoric on Ukraine and increasing rather than decreasing imports of Russian crude, India is straddling the middle ground of in a way that is not old-fashioned non-alignment. India criticizes the spillover of economic difficulties onto developing economies from Western sanctions directed against Russia. Nonetheless, India is participating in the Indo-Pacific Economic Framework grouping launched by the United States in May and stands to benefit from Biden’s trade assault on China.

Yellen’s statements confirm that New Delhi’s consistent thinking behind what may appear to be a contradictory position is understood and accepted in Washington.

Dalip Singh, deputy national adviser of the United States, had drawn strong reactions during a state visit to India this summer by commenting disapprovingly on India’s purchase of Russian crude. Yellen’s interview with Reuters last week was a stark contrast. She made the US position unambiguous that India can buy oil from Russia at any price as long as it does so without using Western services (i.e. the Swift and other international payment mechanisms and agreements that are covered by the sanctions against Moscow).

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