Home / Opinion / Views /  The unmistakable cues from Janet Yellen’s visit to India

On a visit to Delhi, US Treasury Secretary Janet Yellen said last week that the US is building supply chains and trading relationships primarily with friendly, democratic nations, or ‘friendshoring’ — India is one such trusted partner it plans to deepen ties with, as it diversifies away from countries that present geopolitical and security risks to supply chains.

Friendshoring is an experiment through which the US plans to favour its political allies when building new supply chains and refashioning existing ones. The idea is to exclude China from the supply chains. “For too long, countries around the world have been overly dependent on risky countries or a single source for 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, former US Fed Chair and one of the world’s most highly regarded economists.

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By weakening US-China trade ties, President Joe Biden aims to reduce US economic dependence on China, and tame Beijing’s increasingly aggressive geopolitical ambitions and assertiveness. He also fears that China, not the US, will control the technologies of the future.

The US has traditionally relied on export controls for keeping China technologically a generation or so behind although without hurting American companies’ earnings from low-cost manufacturing there. But even Donald Trump’s trade wars were less aggressive than Biden administration’s trade assault on China.

The tariffs and quotas put in place during the Trump presidency remain along with rules such as ‘Buy America’ requiring manufacturers to use American iron and steel, for instance. Additionally, the Biden administration has barred American companies from exporting semiconductor chips and critical manufacturing tools for making high-grade chips to China.

The sweeping export controls announced last month forbid US citizens and green-card holders from working in China’s semiconductor industry. The world’s leading chipmakers from across countries — South Korea, Japan and Netherlands — will have to re-fashion their supply chains to be on the right side of these US export controls. Many of their employees stopped working in China within hours of the White House announcement.

The US is also spending billions of dollars in subsidies and tax credits to spur setting up of domestic chip fabrication plants. As part of friendshoring, the US plans also to favour battery minerals processed in countries with which it already has preferential trade deals. Biden’s Inflation Reduction Act (IRA) has handed a tax credit to electric vehicles assembled in North America, not just the US, thus extending the benefit also to Mexican and Canadian automakers.

What are the implications? There could be a full-blown tech cold war that could disrupt supply chains, make advance chips pricier, and deprive the modern technology-dependent world economy of vital rare metals.

Two, chips are going to get costlier at a time high inflation globally is already hurting. The US-China decoupling will inevitably raise cost of production around the world, as there could be second-round effects: China may retaliate, given it processes just under three-fourth of the world’s lithium, and has monopolised supply of rare metals.

Three, the trading world may get fragmented into blocs: one led by Russia-China and the other the US. Although the chances of that are low. Finding allies and building neat alliances is not all that easy. Already, given its deep manufacturing linkages with China, Germany is taking a different position on Beijing which Mint Snapview wrote about.

Despite prolonged negotiations, the US has yet to conclude preferential trade agreements with Japan, EU and even India, which diminishes the appeal of any related friendshoring benefits.

The EU, Japan and South Korea are not eligible for the tax preference that the Canadian electric cars makers will get, and are unlikely to be too happy about the level playing field getting disturbed.

Finally, the recourse to friendshoring shows that outcompeting China is still not how the US thinks it may 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 shifting dynamics, the inevitable chaos, as supply chains are adjusted and realigned, and the possibility of the rise of a new global trade order.

India is building self-reliance in semiconductors. Building strategic self-reliance and alliances means both gains and costs, as companies will have to be compensated for staying away from the cheapest sources of inputs and technology and instead fall in line with choices dictated by geopolitical calculations of governments. Can the exchequer afford the fiscal costs of the subsidies that this demands? If not taxpayers, then consumers will foot the bill for the higher costs.

The Modi government is spending crores and has lined up more in fiscal incentives and subsidies for spurring the industry. The largest business houses, from the Tatas to RIL, have announced grand ambitions. Yellen’s comments on friendshoring are a strong cue to chipmakers to diversify supply chains away from China and favour India instead (she also met business leaders at Microsoft India Development Centre, Noida, during this trip, the first as US Treasury Secretary). This is an opportunity to be grabbed, given India’s ambitions in semiconductors manufacturing.

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

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

By not echoing the anti-Russia rhetoric of the US-led western alliance on Ukraine, and increasing rather than decreasing import of Russian crude, India is straddling the middle ground in a way that isn’t old-fashioned non-alignment. India is critical of the spillover of economic hardships into the developing economies from the western sanctions directed at Russia. All the same, India participates in the Indo-Pacific Economic Framework grouping launched by the US this May, and stands to benefit from Biden’s trade assault on China.

Yellen’s statements confirm that New Delhi’s coherent thinking behind what may seem like a conflicting position is understood and accepted in Washington.

Dalip Singh, US Deputy National Adviser, had drawn sharp reactions while on a state visit to India this summer by commenting disapprovingly on India’s purchase of Russian crude. Yellen’s interview to Reuters last week was a contrast. She made the US position unambiguous that India can purchase oil from Russia at any price it wants as long as it is done without using Western services (i.e., the Swift and other international payments mechanisms and arrangements that are covered by the sanctions against Moscow).

Elsewhere in Mint

In Opinion, Dani Rodrik writes big powers are handing the keys to the global economy to their security establishments. Allison Schrager says investors burnt by crypto must not learn all the wrong lessons. Sanjeev Krishan & Sambitosh Mohapatra say India Inc should play a larger role in financing climate action. Long Story narrates how the RBI went wrong on inflation

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