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Types of International Lies

 

James Rubin: A Modern Diplomat

 

Economic Update about The US and Europe

 

Mearsheimer's predictions for 2024

 

John Mearsheimer on Israel and Russia

 

The Israel Palestine Mis-Information war

 

A Quick Run Through of Modern Indian History: The Dilemma of an Indian Liberal by Gurcharan Das

 

Review of The Vaccine War

 

Pakistan's Wars: An Alternative History

 

A level Economics: Russian central bank raises interest rates by 3.5 percentage points

 

A level Economics: Can India Inc extricate itself from China?

The Economist

China and India are not on the friendliest of terms. In 2020 their soldiers clashed along their disputed border in the deadliest confrontation between the two since 1967—then clashed again in 2021 and 2022. That has made trade between the Asian giants a tense affair. Tense but, especially for India, still indispensable. Indian consumers rely on cheap Chinese goods, and Indian companies rely on cheap Chinese inputs, particularly in industries of the future. Whereas India sells China the products of the old economy—crustaceans, cotton, granite, diamonds, petrol—China sends India memory chips, integrated circuits and pharmaceutical ingredients. As a result, trade is becoming ever more lopsided. Of the $117bn in goods that flowed between the two countries in 2022, 87% came from China (see chart).

India’s prime minister, Narendra Modi, wants to reduce this Sino-dependence. One reason is strategic—relying on a mercurial adversary for critical imports carries risks. Another is commercial—Mr Modi is trying to replicate China’s nationalistic, export-oriented growth model, which means seizing some business from China. In recent months his government’s efforts to decouple parts of the Indian economy from its larger neighbour’s have intensified. On August 3rd India announced new licensing restrictions for imported laptops and personal computers—devices that come primarily from China. A week later it was reported that similar measures were being considered for cameras and printers.

Officially, India is open to Chinese business, as long as this conforms with Indian laws. In practice, India’s government uses a number of tools to make Chinese firms’ life in India difficult or impossible. The bluntest of these is outright prohibitions on Chinese products, often on grounds related to national security. In the aftermath of the border hostilities in 2020, for example, the government banned 118 Chinese apps, including TikTok (a short-video sensation), WeChat (a super-app), Shein (a fast-fashion retailer) and just about any other service that captured data about Indian users. Hundreds more apps were banned for similar reasons throughout 2022 and this year. Makers of telecoms gear, such as Huawei and zte, have received the same treatment, out of fear that their hardware could let Chinese spooks eavesdrop on Indian citizens.

Tariffs are another popular tactic. In 2018, in an effort to reverse the demise of Indian mobile-phone assembly at the hands of Chinese rivals, the government imposed a 20% levy on imported devices. In 2020 it tripled tariffs on toy imports, most of which come from China, to 60% then, at the start of this year, raised them to 70%. India’s toy imports have since declined by three-quarters.

Sometimes the Indian government eschews official actions such as bans and tariffs in favour of more subtle ones. A common tactic is to introduce bureaucratic friction. India’s red tape makes it easy for officials to find fault with disfavoured businesses. Non-compliance with tax rules, so impenetrable that it is almost impossible to abide by them all, are a favourite accusation. Two smartphone makers, Xiaomi and bbk Electronics (which owns three popular brands, Oppo/OnePlus, Realme and Vivo), are under investigation for allegedly shortchanging the Indian taxman a combined $1.1bn. On August 2nd news outlets cited anonymous government officials saying that the Indian arm of byd, a Chinese carmaker, was under investigation over allegations that it paid $9m less than it owed in tariffs for parts imported from abroad. mg Motor, a subsidiary of saic, another Chinese car firm, faces investment restrictions and a tax probe.

A convoluted licensing regime gives Indian authorities more ways to stymie Chinese business. In April 2020 India declared that investments from countries sharing a border with it must receive special approvals. No specific neighbour was named but the target was clearly China. Since then India has approved less than a quarter of the 435 applications for foreign direct investment from the country. According to Business Today, a local outlet, only three received the thumbs-up in India’s last fiscal year, which ended in March. Last month reports surfaced that a proposed joint venture between byd and Megha Engineering, an Indian industrial firm, to build electric vehicles and batteries failed to win approval over security reasons.

Luxshare, a big Chinese manufacturer of devices for, among others, Apple, has yet to open a factory in Tamil Nadu, despite signing an agreement with the state in 2021. The reason for the delay is believed to be an unspoken blanket ban from the central government in Delhi on new facilities owned by Chinese companies. In early August the often slow-moving Indian parliament whisked through a new law easing the approval process for new lithium mines after a potentially large deposit of the metal, used in batteries, was unearthed earlier this year. Miners are welcome to submit applications, but Chinese bidders are expected to be viewed unfavourably.

In parallel to its blocking efforts, India is using policy to dislodge China as a leader in various markets. India’s $33bn programme of “production-linked incentives” (cash payments tied to sales, investment and output) has identified 14 areas of interest, many of which are currently dominated by Chinese companies.

One example is pharmaceutical ingredients, which Indian drugmakers have for years mostly procured from China. In February the Indian government started doling out handouts worth $2bn over six years to companies that agree to manufacture 41 of these substances domestically. Big pharmaceutical firms such as Aurobindo, Biocon, Dr Reddy’s and Strides are participating. Another is electronics. Contract manufacturers of Apple’s iPhones, such as Foxconn and Pegatron of Taiwan and Tata, an Indian conglomerate, are allowed to purchase Chinese-made components for assembly in India provided they make efforts to nurture local suppliers, too. A similar arrangement has apparently been offered to Tesla, which is looking for new locations to make its electric cars.

Some Chinese firms, tired of jumping through all these hoops, are calling it quits. In July 2022, after two years of efforts that included a promise to invest $1bn in India, Great Wall Motors closed its Indian carmaking operation, unable to secure local approvals. Others are trying to adapt. Xiaomi has said it will localise all its production and expand exports from India which, so far, go only to neighbouring countries, to Western markets. Shein will re-enter the Indian market through a joint venture with Reliance, India’s most valuable listed company, renowned for its ability to navigate Indian bureaucracy and politics. zte is reportedly attempting to arrange a licensing deal with a domestic manufacturer to make its networking equipment. So far it has found no takers. Given India’s growing suspicions of China, it may be a while before it does.

The Future of War

 

How do governments pay for wars?

Russia’s invasion of Ukraine has led to a sharp rise in defence spending writes John Paul Rathbone in the FT

Next April, for the first time in more than three centuries, Danes will have to work on the holiday of Great Prayer after the government scrapped the religious day off partly to pay for extra defence spending. 

The decision, approved in March, was deeply unpopular: in one poll, 70 per cent of Danes opposed it. But economists have praised Copenhagen for enacting a plan to meet its rising defence bills, unlike many other governments. 

“Nobody wants to pay more taxes. But at the same time, everybody wants better defence and good health services too,” John Llewellyn, a former head of economic forecasting at the OECD, said. “At some point the issue will be forced into the public arena, as nobody is clear how the funds will be raised.” 

Japan, worried by China’s rise and the risk of war in the Indo-Pacific, has not specified how it will fund a planned two-thirds increase in its defence budget by 2027. The UK, spurred by Russia’s war on Ukraine, wants to eventually boost military spending to 2.5 per cent of gross domestic product but only as “fiscal and economic circumstances allow”. 

Germans, unnerved by Russian aggression, want to increase defence spending, but not if it means losing a public holiday. France has not detailed how it will pay for a planned 40 per cent rise in its military budget over the next five years. The same is true for Poland, which aims to almost double its spending to 4 per cent of GDP. 

How to pay for wars is an issue as old as war itself. Cicero, the Roman statesman, said the “sinews of war are infinite money”. In 1694, the Bank of England was founded to help William III finance war with France. Today, even as the world appears increasingly chaotic, spending looks more finite amid an environment of rising interest rates and high government debt burdens. 

Europe is in the middle of its biggest armed conflict since 1945. Geopolitical tensions between China and Taiwan are on the rise. Iran may soon be able to make a nuclear weapon. In addition, global challenges such as climate change and migration may also force governments to spend big. 

The Stockholm International Peace Research Institute (Sipri) calculates that global defence spending rose by 4 per cent to reach a record $2.24tn last year. This year, it is set to continue rising, even as higher rates increase governments’ borrowing costs. 

Economists such as Lawrence Summers, former US Treasury secretary, and Olivier Blanchard, former chief economist at the IMF, have suggested higher defence spending could even contribute to driving interest rates higher. 

“One scenario is that countries which already increased defence spending in 2022 continue to do so, while those that have said they will begin to increase defence spending in 2023 actually start,” said Diego Lopes Da Silva, senior researcher at Sipri’s military expenditure and arms production programme. 

Among the world’s five biggest defence spenders, the numbers are mind-boggling. 

In the US, politicians carved out an exemption in the debt ceiling talks to allow for a 3 per cent rise in military spending to $886bn in 2024. China’s defence budget, which Sipri estimates to be $292bn, is on track this year for its 29th consecutive annual increase. 

Russia, which spent an estimated $86bn on defence last year, has meanwhile said there will be “no funding restrictions” for its war against Ukraine, even as its budget remains classified. India plans to increase its defence budget by 13 per cent this coming year to $73bn, while Saudi Arabia, fearful of a nuclear Iran, now spends 7.5 per cent of GDP on defence, second only to Ukraine. 

In Nato, only seven of its 31 members last year met the alliance’s self imposed defence spending target of 2 per cent of GDP. If they all did, total outlays would rise by over $150bn a year, FT research shows. 

While war was one of “the most expensive and least productive of human activities”, James Grant, a financial historian and editor of the Grant’s Interest Rate Observer, noted that there was “also a tendency for peace to explode periodically in our faces.” 

Grant added: “When that happens, there is often a confluence of promises to pay and money printing.” 

As a general rule, “short, hot wars” that require a sudden surge in spending are financed by extra borrowing, while “long, cold wars” that require sustained defence spending are financed by taxes. 

The Napoleonic and first and second world wars were largely financed by debt. By contrast, during the long decades of the cold war, the west financed its defence spending through higher taxation. In the quarter century that preceded the fall of the Berlin Wall, tax revenues among OECD countries rose on average to more than 32 per cent of GDP from 25 per cent, while debt levels generally fell. 

“For short wars, governments can finance the expenditure by borrowing,” said James Macdonald, author of A Free Nation Deep in Debt, a history of public finance and wars. “But if there is a long war, the more it goes on, the more you have to use other methods, such as taxes.” 

Wars are also often accompanied by higher inflation and the suppression of interest rates. During the second world war, US wholesale prices rose by an average of 8.2 per cent a year, even as interest rates on long-term debt were fixed at 2.5 per cent — a gap that helped Washington inflate away the value of the bonds the US issued. 

“All wars are generally associated with some inflation. Politicians don’t like to put up taxes [to pay for wars], and inflation is a hidden tax,” said Richard Sylla, co-author of A History of Interest Rates. 

Economists suspect rebuilding long-term defence spending, which has dropped by a third across OECD countries since the fall of the Berlin Wall, would require a mix of higher taxes and spending cuts elsewhere. 

“The politics can’t be avoided,” said Llewellyn. “Societies face a series of conundrums and some difficult choices have to be made.”

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On Pakistan and its hatred of India