Weekend reading links

1. How is global trade changing due to Trump tariffs?

US tariff revenue surged almost fourfold from a year earlier to a record $24.2bn in May, while imports from China fell 43 per cent from the same month in 2024... China's exports are up 4.8% on last year despite a sharp drop in trade with the US.

There's also emerging evidence that Chinese firms are rerouting exports to the US through South East Asia and EU countries to avoid the high tariffs on Chinese exports.

The value of Chinese exports to the US dropped 43 per cent year on year in May, according to figures published by the US census bureau — equivalent to $15bn-worth of goods. But the country’s overall exports rose 4.8 per cent in the same period, official Chinese data showed, as the shortfall in trade with the US was offset by a 15 per cent increase in shipping to the Association of Southeast Asian Nations trade bloc and a 12 per cent rise to the EU... 

Separate research by Capital Economics estimated that $3.4bn of Chinese exports were rerouted through Vietnam in May, a rise of 30 per cent compared with the same month last year. Indirect trade through Indonesia also increased markedly, with an estimated $0.8bn rerouted in May 2025, 25 per cent higher than May 2024. Exports of electronic components such as printed circuits, parts of telephone sets and flat panel display modules to Vietnam were up 54 per cent, or $2.6bn, in May 2025 compared with a year earlier, Chinese data shows... Indian exports to the US jumped 17 per cent in May compared with a year earlier, while imports from China and Hong Kong rose 22.4 per cent according to Ajay Srivastava, founder of the Global Trade Research Initiative, a research group.

This is a good graphic on what products have been squeezed following the tariffs. 

2. The US equity markets are going about their merry ways overlooking the real costs that are introduced by the Trump tariffs. 

Despite the carve-outs and climbdowns, the US’s overall average effective tariff rate now stands at 15.8 per cent, according to calculations by the Yale Budget Lab — the highest rate since 1936 and an increase of more than 13 percentage points since Trump returned to office in January.

A big cause of concern is the uncertainty associated with Trump policies that are taking its toll on investments.

The most tangible consequence of the Trump tariffs so far is not supply chain reordering, but the sudden dearth of dealmaking, according to Persson of EY. A survey of dealmakers by PwC in May found that 30 per cent were either pausing or revising deals because of the uncertainty caused by tariffs. Among those pushed back amid the uncertainty included bids for Boeing’s navigation unit and an expected £4bn sale by buyout group Apax of insurance group PIB. The sudden slowdown flew in the face of investor expectations that Trump’s return to the White House would trigger a wave of M&A activity on the back of a deregulatory splurge, according to Josh Smigel, partner in PwC’s deals practice. As a result, Smigel calculates, private equity firms are holding about $1tn worth of assets that — absent the Trump uncertainty — could have been redeployed back into the market if planned exits had not stalled.

3. Has Israel won the battle, but only to lose the war?

Mr. Netanyahu’s relentless and unapologetic military response to the Oct. 7, 2023, Hamas-led attack that killed 1,200 people and took 250 people hostage has cemented the view of Israel as a pariah, its leadership accused of genocide and war crimes, and disdained by some world leaders. In opinion polls globally, most people have a negative view of Israel. In Gaza, the war against Hamas has taken a devastating toll, killing tens of thousands of people and leaving more than a million homeless and hungry. Much of the enclave has been reduced to rubble. Poverty and hopelessness are rampant... Israel’s actions have shattered a rock-solid, bipartisan consensus in the United States for defending Israel. Now, support for the country has become a fiercely contentious issue in Congress, the subject of angry debates and protests on college campuses and fuel for a surge in antisemitic incidents in the United States and around the world... Israel has created a new wave of global opinion critical of its goals and methods. And many Israelis now feel threatened while abroad, even as they are more secure at home... 

In a Pew Research survey of 24 countries around the world published last month, negative opinions about Israel have surged. In 20 countries, more than half of the people said they had an unfavorable view of Israel. In eight countries — Australia, Greece, Indonesia, Japan, the Netherlands, Spain, Sweden and Turkey — more than 75 percent held that view... Just 46 percent of Americans in the latest Gallup survey expressed support for Israel, the lowest number since the company began asking the question a quarter-century ago. A third of the respondents in the United States said they sympathized with the plight of the Palestinians, up from just 13 percent in 2003... Inside Israel, the decision to prioritize military victories over the return of the hostages has deeply wounded many people. And the violence has strained the good will of the country’s allies and neighbors.

4. Thrive Capital, founded by Josh Kushner, the brother of Jared Kushner is charting a new model of VC investing.

The approach Kushner has developed since launching Thrive 14 years ago: get close to founders, remain loyal through crises and concentrate funds in a small number of companies. Betting a billion dollars or more on a behemoth inverts the classic venture model: firms typically write dozens of small cheques in young start-ups; most fail, but the flops are more than offset by a few spectacular successes... venture capital has mutated from a cottage industry into an institutionalised asset class... The shift has left VCs with a choice: remain faithful to early-stage investing and hope for outsize returns, or scale up funds to meet increasingly massive private companies. Thrive is attempting to manage both, writing cheques for multibillion-dollar start-ups its team believe can still multiply 10 or 100-fold in value... Most VCs split funds between dozens of start-ups, but the vast majority of a Thrive fund will go to just 10-15. The firm has put 10 per cent or more of earlier funds to work in single companies, including workplace messaging app Slack, GitHub, Instagram and Stripe. Thrive first invested in Stripe, then valued at $3bn, in 2014, and has increased its stake multiple times, including investing close to $2bn last year... the firm has quietly shown intense fealty to founders during moments of crisis, such as during the boardroom coup that briefly ousted OpenAI’s Altman last year. Kushner was instrumental in returning Altman to the company after less than a week... 

Thrive’s rivals, including more established West Coast firms, dismiss the approach as closer to asset management. “We invest in companies, they trade in stocks. It’s like an ETF [exchange traded fund] for venture,” says a partner at one Silicon Valley firm. “But private companies are not stocks. You can’t get out when they start going down.” Speaking privately to the FT, some institutional investors question whether Thrive’s massive bets can ever deliver “venture-style returns”. Others say it is too soon to judge a group whose biggest investments have not yet cashed out. Thrive’s biggest portfolio companies, including OpenAI and payments start-up Stripe, have racked up massive paper gains. But until they go public or are acquired, profits won’t be returned to institutional investors in Thrive’s funds... The payout for Thrive and its backers would be enormous should Stripe, OpenAI, or defence tech company Anduril go public... Thrive has raised a total of $12.3bn, and now has almost $25bn under management, making it one of the largest VCs in the country.

Interesting that Mukesh Ambani has a 3.3% stake in Thrive capital as part of a consortium of investors! 

5. This is a very good graphic that shows how VCs are experiencing a squeeze in their cash flows.

Much the same could be said about PE funds.

6. Private equity in data centres.

The private equity giant Blackstone spent $10 billion in 2021 to acquire QTS, and has been pouring billions more into the company to help it expand its data centers... This largely unglamorous industry is critical for A.I. leaders to get right. QTS leases its facilities to companies like Amazon and Meta and supplies the electricity and water needed to power and cool their computers... Blackstone calls data centers one of its “highest conviction investments.” Blackstone is already one of the world’s largest owners of office buildings, warehouses and science labs, but it has sunk more money into data centers and related infrastructure than into almost any other sector in the firm’s 40-year history. All told, Blackstone has put more than $100 billion into buying and lending to data centers, as well investing in construction firms, natural gas power plants and the machinery needed to build them... (it) says it still sees strong demand from tech companies, which are willing to sign what they describe as airtight leases for 15 to 20 years to rent out data center space... 

Blackstone is not alone. Data centers are drawing a crowd on Wall Street — investment giants like KKR, BlackRock and Blue Owl have collectively plowed hundreds of billions into the industry. As investment firms announce larger and larger deals, one Wall Street executive says he jokes about “Braggawatt” deals, as data centers are typically measured by the wattage they use. The spending frenzy has created concerns about whether too many data centers are being built... The complexity and cost of running A.I.-focused data centers stem from the vast amounts of power they guzzle, which can be about 10 to 20 times as much per server or rack as general cloud computing. There is also the need to keep the centers operational 99.999 percent of the day, or the “five nines” in industry parlance. That equates to about five minutes of downtime all year for maintenance or to switch out servers.

7. China's dominance of clean energy technologies

China has also begun to dominate nuclear power, a highly technical field once indisputably led by the United States. China not only has 31 reactors under construction, nearly as many as the rest of the world combined, but has announced advances in next-generation nuclear technologies and also in fusion, the long-promised source of all-but-limitless clean energy that has bedeviled science for years.

And, buoyed by President Trump's policies, America retains leadership of fossil fuels.

This reversal is striking.

Americans created the first practical silicon photovoltaic cells in the 1950s and the first rechargeable lithium-metal batteries in the 1970s. The world’s first wind farm was built in New Hampshire nearly 50 years ago. Jimmy Carter installed solar panels on the White House in 1979... In 2008 the United States produced nearly half of the world’s polysilicon, a crucial material for solar panels. Today, China produces more than 90 percent.

This is a good description of China's manufacturing prowess.

Last June, the Urumqi solar farm, the largest in the world, came online in the Xinjiang Autonomous Region in China. It is capable of generating more power than some small countries need to run their entire economies. It’s hardly an anomaly. The other 10 largest solar facilities in the world are also in China, and even bigger ones are planned. The Chinese automaker BYD is currently building not one but two electric vehicle factories that will each produce twice as many cars as the largest car factory in the world, a Volkswagen plant in Germany.

Finally, a graphic that captures China's clean energy investments globally.

Chinese firms are building wind turbines in Brazil and electric vehicles in Indonesia. In northern Kenya, Chinese developers have erected Africa’s biggest wind farm. And across the continent, in countries rich with minerals needed for clean energy technologies, such as Zambia, Chinese financing for all sorts of projects has left some governments deeply in debt to Chinese banks. Since 2023, Chinese companies have announced $168 billion in foreign investments in clean energy manufacturing, generation and transmission, according to Climate Energy Finance, a research group.

8. Tim Harford points to a new paper by David Autor and Neil Thompson who use an "expertise" framework to explain the impact of automation and AI on jobs. Autor and Thompson pose a question

Would we expect accounting clerks and inventory clerks to be similarly affected by automation? There are several well-established approaches to analysing this question, and all of them suggest that the answer is “yes”. Back in the day, both types of clerk spent a lot of time performing routine intellectual tasks such as spotting discrepancies, compiling inventories or tables of data, and doing simple arithmetic on a large scale. All of these tasks were the kind of things that computers could do, and as computers became cheap enough they took over. Given the same tasks faced the same sort of automation, it seems logical that both jobs would change in similar ways. 

But that is not what happened. In particular, say Autor and Thompson, wages for accounting clerks rose, while wages for inventory clerks fell. This is because most jobs are not random collections of unrelated tasks. They are bundles of tasks that are most efficiently done by the same person for a variety of unmysterious reasons. Remove some tasks from the bundle and the rest of the job changes. Inventory clerks lost the bit of the job requiring most education and training (the arithmetic) and became more like shelf-stackers. Accounting clerks also lost the arithmetic, but what remained required judgment, analysis and sophisticated problem solving. Although the same kind of tasks had been automated away, the effect was to make inventory clerking a job requiring less training and less expertise, while accounting clerks needed to be more expert than before. 

The natural worry for anyone hoping to have a job in five years’ time is what AI might do to that job. And while there are few certainties, Autor and Thompson’s framework does suggest a clarifying question: does AI look like it is going to do the most highly skilled part of your job or the low-skill rump that you’ve not been able to get rid of? The answer to that question may help to predict whether your job is about to get more fun or more annoying — and whether your salary is likely to rise, or fall as your expert work is devalued like the expert work of the Luddites.

9. Two graphics that capture the essence and outcome of One Big Beautiful Bill (OBBA). One, stripped off all its hype, OBBA is a giant tax cut bill.

And its biggest beneficiaries will be the richest.

Analysis by scholars at the University of Pennsylvania suggests that Americans earning under $18,000 would lose $165 in 2027, or 1.1% of their income. By 2033 their annual losses would rise to $1,300 on average—about 7.4% for the group. The richest 0.1%, earning over $4.45m, would gain more than $300,000 in 2027, a 2.3% increase. Much of this comes indirectly, via changes to corporate taxes, which are usually assumed to benefit wealthier households who own stocks... Analysis of the House version by scholars at the University of Pennsylvania suggests that Americans earning less than $16,999 would lose about $820 a year—a 5.7% reduction in median income for that group. The richest 0.1%, earning more than $4.3m, would gain $390,000, a 2.8% increase.

10. Driverless EV trucks are already operational in a coal mine in Inner Mongolia. (HT: Adam Tooze).

Yimin is one of the five largest open-cast coal mines in China. During peak season, it used to require about 300 trucks, operated by around 1,200 drivers working shifts around the clock, to transport coal to processing sites, and soil, sand and rocks to dumping grounds. But managers said the mine faced a shortage of drivers. Dangerous driving conditions led to high attrition rates, compounded by declining interest among younger generations in pursuing this profession. “Truck drivers face exhausting workloads that often lead to health issues,” said Yimin mine director Shu Yinqiu. The solution came earlier this year with a fleet of 100 photovoltaic-battery-powered, self-driving trucks. They represent the world’s largest deployment of autonomous electric mining trucks, highlighting China’s resolve to upgrade its traditional industries with advanced technologies, as the nation grapples with a shrinking labour force and an ageing population...

Key partners in the project include Huawei Technologies, Xuzhou Construction Machinery Group, State Grid and the Beijing University of Science and Technology. Now, instead of a thousand-man crew, just 24 people, divided into four teams, are needed to operate the 100 new trucks. Staff monitor and control the vehicles from the comfort of a remote control room, where live-feed videos and real-time traffic information are displayed on multiple screens... As of September, the China National Coal Association (CNCA) estimated there were over 1,500 automated mining trucks in China. It predicted that number would triple to 5,000 by the end of this year and exceed 10,000 by 2026... A fleet of 100 unmanned trucks could save coal mine operators 40 million yuan (US$5.6 million) in driver salaries annually, according to CNCA estimates.

11. Major announcement for the establishment of a PCB and Copper Clad Laminate (CCL) manufacturing facility by Syrma SGS Technology at Naidupeta in Andhra Pradesh with an investment of about Rs 1800 Cr and in partnership with South Korean company Shinhyup Electronics Ltd. The project is expected to be commissioned by 2026-27 and can avail incentives under the GoI's Electronics Component Manufacturing Scheme (ECMS). In 2024, the GoI had imposed a 30% anti-dumping duty (ADD) on bare PCBs to boost domestic production. The Indian PCB market was valued at $6.2 bn in 2024 and is estimated to grow by a CAGR of 16.4% from 2025-33. 

12. Spain wants to avoid the costs of being part of NATO, while wanting to access its benefits. It was the only standout against accepting the goal of 5% of GDP defence spending target by NATO members at the recent NATO summit. At the same time, as FT reports, one of its defence firms, Indra, which is 28% owned by the Spanish Government, is benefiting from NATO defence spending. 

In April, the group was given a role in 12 European Defence Fund research and development projects and made the leader of one involving radars. Its executives were in Ukraine last month pitching their wares... In the air, Indra is Spain’s lead participant in Europe’s flagship fighter jet project, the Future Combat Air System, a sometimes prickly partnership with Airbus, which represents Germany, and France’s Dassault Aviation.

13. India's derivatives market, and how Jane Street abused it before SEBI cracked down.

In December 2020 — when Jane Street first set up its Mumbai arm — the monthly turnover of futures and options markets on the National Stock Exchange had reached nearly $300bn, from just $134.7bn four years earlier, and by December 2024 stood at $512.7bn. This became a fertile terrain for Jane Street. Between January 2023 and March 2025 the firm netted an overall profit in India of about $4.3bn, Sebi said in its order on Thursday.

14. Using dupes of expensive brands appears to be a trend in the US, as seen from the ongoing fight between Lululemon which has sued Costco of copying at least six patented clothing designs, including its popular Scuba hoodie and Define jacket.

Once seen as embarrassing parsimony, buying knock-offs has become a fashion statement of its own. Egged on by hashtags, TikTok videos and media articles, customers are leaning into the fun of finding cheaper but still good alternatives, turning the search for dupes into a public treasure hunt. Nearly half of US consumers surveyed by analytics firm First Insight said they had tried a product specifically because it was a “dupe”, and 70 per cent of shoppers who make more than $150,000 said they were more likely to try a dupe than other private label goods...

The warehouse store’s $20 sweatshirt mimics the ornamental stitching and pouch pockets of Lululemon’s Scuba offering, which sells for six times the price. And Costco’s dupe of the Design jacket mimics an unusual line of curved stitching across the back. Lululemon contends in its lawsuit that those specific details violate the “trade dress” patents that it has registered over the past two years, as well as a trademark on the colour description “tidewater teal” that it applied for one day before filing its claim that Costco had “unlawfully traded upon Plaintiffs’ reputation, goodwill and sweat equity”.

Interestingly, US laws allow considerable flexibility in the interpretation of design patents.

US rules protect makers from infringement claims if the similarities are based on function rather than distinctive design. The warehouse group could also try to turn the dupe craze to its advantage by arguing that consumers are unlikely to be misled into believing that they are buying a Lululemon original. Costco’s products are clearly marked with either the Kirkland brand or the manufacturer’s name. Despite the publicity, most patent attorneys expect the dispute to settle, as Deckers’ first Uggs lawsuit did last year. Each side has too much to lose from a trial. Costco could be on the hook for gigantic monetary damages, while “if Lululemon were to lose, it would be open season” for other duplicates, says Josh Gerben, a DC trademark attorney.

15. Good story on how Tamil Nadu's industrial development strategy has brought about broad-based regional development across the state.

16. AI in primary health care.

Shishu Mapan, an artificial intelligence (AI) tool trained on over 30,000 infants, built by scientists at the Wadhwani Institute for AI, a non-profit that develops AI-based solutions for social impact. Using a short, arc-shaped video while the newborn is undressed and laid on a cloth sheet, the app estimates the infant’s weight and growth metrics, which eliminates the need for scales or guesswork... AI-powered tools like Wadhwani AI’s app could become frontline essentials, capable of transforming child health outcomes where the system often falls short. It also eases the burden on frontline health workers, who often struggle to keep up with high demand in rural areas... AI-powered tools like Wadhwani AI’s app could become frontline essentials, capable of transforming child health outcomes where the system often falls short. It also eases the burden on frontline health workers, who often struggle to keep up with high demand in rural areas... AI-powered tools like Wadhwani AI’s app could become frontline essentials, capable of transforming child health outcomes where the system often falls short. It also eases the burden on frontline health workers, who often struggle to keep up with high demand in rural areas.

17. Interesting that even as the overwhelming majority of the world has no confidence in Donald Trump, India stands alongside Israel in having the highest confidence!

Wonder what actions of Trump warrant such confidence?

18. Patent cliffs facing pharma companies.

Keytruda... cancer medicine is one of the world’s best sellers, earning Merck $29.5bn in sales last year... In 2028 Keytruda’s patent ends... Drugs worth about $180bn of revenue a year are going off patent in 2027 and 2028, according to research firm Evaluate Pharma, representing almost 12 per cent of the global market. Bristol Myers Squibb and Pfizer are also facing 2028 patent expirations for top-selling drugs. 

Interesting aspects of the Pharma industry.

While all innovations can be patented, the pharma industry suffers from patent cliffs in ways that others such as the tech industry do not. This is mainly because the key active ingredient in a drug is covered by one main patent, which is hard to invent around, and chemical formulas are relatively easy to copy. Sampat of Johns Hopkins says the median number of patents per drug is around three to five, not the hundreds or thousands that cover, for instance, an iPhone. “So any given patent expiring doesn’t matter all that much for something like the iPhone, as it would for a drug,” he says. Also unlike the iPhone, few patients are loyal to their brands and healthcare systems are eager to cut costs by moving to generic versions quickly after they are released. Many countries have laws allowing pharmacists to automatically swap out branded prescriptions with generics.

19. The problem with the rail ticket subsidy of Indian Railways

This monopoly network transports 13 million people every day and its non-premium services are heavily subsidised. According to the railway minister, the cost of travel per km by train is ₹1.38 but passengers pay only 73 paise, a subsidy of 47 per cent. Though the government dishes out large sums for passenger subsidies, part of the gap is supposed to be covered by freight services and premium air conditioned passenger services. The problem with this cross-subsidy policy is that railway freight services have been steadily losing share to road transport over the decades and its profits are not enough to cover the losses from passenger services. As for AC services, some of which make money in some years, they account for a minuscule 5 per cent of overall passengers. The proliferation of low-cost airlines and growing air connectivity — ironically, this, too, is government policy — is likely to diminish demand for this segment, despite the investment in semi high-speed premium Vande Bharat service.

20. The NPAs on bank loans to MSMEs are at historic lows.

Gross NPAs in the system have touched a new low of 2.3 per cent of loans, with a sharp drop in NPAs in MSMEs. Gross NPAs in MSMEs declined from 6.8 per cent in 2022-23 to 4.5 per cent in 2023-24 and further to 3.6 per cent in 2024-25. NPAs in the MSME sector have historically been of the order of 9 per cent or more... bankers have found innovative ways, such as the Trade Receivables Discounting System (TReDS), to finance MSMEs... The TReDS book was about ₹2.7 trillion, or 10 per cent of the MSME book, in 2023-24. It cannot explain the current NPA level of 3.6 per cent on the entire MSME exposure. The NPA level in the Emergency Credit Line Guarantee Scheme (ECLGS) is 5.6 per cent. Recall that the ECLGS was introduced during the pandemic in May 2020 in order to facilitate additional lending to MSMEs and prevent a secular collapse in the sector on account of a crisis of liquidity. The eligibility conditions were pretty stringent. Only MSMEs that were solvent prior to the onset of pandemic were meant to qualify. The loans granted under ECLGS in the period 2021-23 amounted to ₹3.68 trillion or 12 per cent of loans outstanding to MSMEs in 2024-25. If gross NPAs on the ECLGS loans were 5.6 per cent and NPAs on total MSME loans are 3.6 per cent, that makes the performance on the remaining 88 per cent of MSME loans truly impressive.

21. Finally, a graphic below on the spectacular reduction in the price of green energy sources since 2010.

Subsidies and international trade

The primary international trade challenge facing countries in manufacturing is that they must compete with China. To achieve this, they must bridge a significant competitiveness gap. Econ 101 points to increasing productivity (through the likes of improving worker skills and using the latest technologies), investing in infrastructure, lowering the cost of capital, and easing regulations. 

This overlooks an important aspect. A critical requirement to compete with China is to maximise economies of scale. In most sectors, this, in turn, cannot be achieved without being export-focused. This, in turn, draws attention to export promotion policies, especially important to bridge the competitiveness gap arising in particular from China’s massive economy-wide indirect subsidies. 

This is especially important with component manufacturing, the next stage of value addition in India’s manufacturing strategy. The low domestic market volumes and the need to maximise economies of scale mean that Indian manufacturers must aim to Make in India for the World. 

India does not have anywhere near the fiscal resources to match China in providing economy-wide subsidies. It must rely on direct and targeted export subsidies. But, despite the near complete paralysis of WTO and egregious violation of its provisions by the major economies (read US and China), India has been surprisingly reluctant to support industrial policies that support the promotion of exports.

The WTO’s Subsidies and Countervailing Measures (SCM) Agreement categorises two kinds of “prohibited” subsidies - those “contingent on export performance” (Article 3(1)(a)), and those “contingent on the use of domestic over imported goods” (Article 3(1)(b)). It allows for subsidies that are specific to enterprises, industries, and regions. When the SCM and other WTO Agreements were being negotiated in the nineties, it was thought that only the subsidies contingent on export performance would be trade-distorting in any significant manner. It was also thought that the subsidies specific to enterprises, industries, and regions (or the economy as a whole) could not be sustained at the scale required to distort trade in particular products, much less global trade in general. 

China has proved otherwise. This necessitates a wholesale revisit of the WTO itself. 

In this context, it’s useful to place the issue of trade-related (or export promotion) subsidies in perspective.

For a start, as Lorenzo Rotunno and Michele Ruta show, there has been a sharp rise in the use of domestic subsidies in industrial policy, especially aimed at manufacturing, and by developed and emerging economies. They categorize subsidies into four groups - production subsidies, direct transfers (including state aid and grants), policies resulting in a loss of government revenues (tax breaks), and policies wherein the government assumes risk related to the beneficiaries’ actions (loans). 

They show that trade finance and export subsidies and incentives are the two main types of export promotion policies. While both have declined over time, the latter now dominates and is still employed by several countries. 

They analyse the impact of domestic subsidies on international trade flows. 

Exports of subsidized products from G20 emerging markets increase 8 percent more than exports of other products, with no evidence of selection. The gravity estimates confirm that subsidies promote international relative to domestic trade. These spillover effects are concentrated in some industries, such as electrical machinery, and are stronger when subsidies are given through tax breaks than other policy instruments. 

Reka Juhasz and co-authors have a new paper that uses supervised machine learning tools on data from policy announcements in the Global Trade Alert (GTA) database to analyse policy language (instead of policy instruments) to categorise industrial policies (IPs) across the world over the 2010-22 period. They define industrial policy as deliberate government action aimed at altering the composition of the domestic economy to achieve a public goal. Their findings:

The new data on IP suggest that i) IP is on the rise; ii) modern IP tends to use subsidies and export promotion measures as opposed to tariffs; iii) rich countries heavily dominate IP use; iv) IP tends to target sectors with an established comparative advantage, particularly in high-income countries.

The graphic below points to the eight most commonly used industrial policy instruments, which highlights that export-related measures (mainly trade financing) are the second largest category of IP interventions. In fact, export-related measures run a close second to non-export subsidies among IP interventions. 

This figure reveals that most export-related IP measures are deployed via trade-financing, and, to a lesser extent, financial assistance in foreign markets… export-related IP measures tend to operate by providing financing as opposed to directly incentivising exporting… much industrial policy seems designed to facilitate participation in export markets... Finally, this finding highlights that modern industrial policy requires fiscal resources and high administrative capacity. Specifically, states need sufficient fiscal revenue to subsidize firms and promote exports, as well as the administrative capacity to identify which firms to support.

Michael Pettis and Erica Hogan point out that focusing on direct subsidies conceals the true extent of trade-distorting subsidies. Instead, they show that indirect subsidies have become the main instruments of export promotion. The table below captures commonly used indirect trade subsidies.

For example, surplus economies typically have undervalued currencies as part of their trade strategies. Having an undervalued currency subsidizes manufacturing at the expense of households because households are all net importers—as they do not produce for the purpose of exporting—while net exporters are mostly manufacturers. An undervalued currency makes the manufacturing sector in that country more competitive, while reducing households’ consumption capacity… repression of interest rates below the neutral real interest rate has also been a powerful cause of financial transfers from household savers to manufacturers, as seen in Japan in the 1980s and China in the 2000. Further, overspending on transportation and infrastructure serves as an especially significant transfer from households to manufacturers in China today. Other transfers include centrally directed systems of credit, low penalties for environmental degradation, repressive labor laws, and restrictions on worker mobility.

They argue that such indirect subsidies constitute a transfer of wealth from households to manufacturers. They write 

Economies that heavily subsidize manufacturers at the expense of households will typically have: larger manufacturing shares of GDP than their trade partners, since manufacturers must migrate to jurisdictions where workers are paid the lowest relative to their productivity to remain globally competitive in a hyper-globalized world; lower consumption shares of GDP than their trade partners, reflecting the cost of the subsidies on consumers; and large, persistent trade surpluses, as the repressed household income used to pay for manufacturing subsidies makes it impossible for domestic household consumption to balance trade. When all three conditions hold, it is almost certain that repressed household demand is subsidizing manufacturing. And, indeed, we see this reduction of household consumption and increase in trade reflected in economic data for surplus countries (and the opposite trend for deficit countries). 

Yet another instrument used by China to distort trade is its State Owned Enterprises (SOEs), which systematically cut back on imports during trade wars. Chinese SOEs make up a fifth of Chinese imports from the US, providing the country with a valuable trade policy instrument that others don’t have. 

Felipe Benguria and Felipe Saffie examined the period from early 2018 when the first Trump administration initiated a trade war with China, and found that US exports fell relatively more during the trade war in products with a high Chinese import share by SOEs. It found that while tariffs account for an 8% reduction in trade, SOEs account for another 4% decline. They also find that the period of decline in US exports to China in sectors with a higher SOE share also saw an increase in Chinese imports from the rest of the world, pointing to further evidence in favour of the SOE effect. 

They write also about how China may have used its SOEs as a retaliatory weapon against the US tariffs. 

We have also found evidence that the SOE effect was stronger among industries located in Republican–voting US counties, suggesting a political motivation just like the literature has found for tariffs. Our work is the first to provide evidence on the use of state–owned enterprises as tools of trade policy, in any context… We have shown that while US exports facing Chi- nese tariffs were gradually rerouted toward other markets, this was not the case for exports facing the reduced demand by Chinese SOEs.

A World Bank report finds that subsidies have larger trade-distorting effects than even tariffs.

Subsidies create trade-distorting effects for both agriculture and manufacturing exports... Subsidies can be more distortive to trade flow than existing tariffs barriers. The distortionary effect of subsidies on trade, expressed in ad valorem equivalents, is estimated at 15 percent for agriculture and 8 percent for manufacturing… Trade-distorting subsidies can displace trade and production in other trading partners, with important repercussions for developing countries… A disproportionally large number of programs are implemented by major trading countries that have the economic heft to distort global markets for goods and services.

It also finds that the prevailing global trade rules are ill-equipped to deal with subsidies. As indirect subsidies have become the main distorting factors in international trade, and also given its own current dysfunctional state, it’s time to revisit the WTO’s provisions. 

In any case, since 2019, after the US refused to allow appointment of members to the Dispute Settlement Body that hears appeals from members, the WTO has become a toothless organization. This has also encouraged a revival of bilateral and multilateral associations, and countries have come together to also settle their disputes through negotiations. This trend will only be accentuated as the US under President Trump becomes more and more unilateral in its trade engagements. In fact, the reciprocal tariffs announced by the US signals a clear regime shift back to the pre-WTO era. 

Weekend reading links

1. The Ken has a story which writes that the UPI has now become an oligopoly involving two companies - Phone Pe and Google Pay, who together make up nearly 85% of the UPI transactions. The NPCI had announced a 30% cap for any one company in 2020, and the deadline has since been extended to end of 2024. 

2. Chinese local governments are raising tariffs and fees on various utility and other services. 

China is taking the rare step of sharply increasing fares for riders on four major bullet train lines, in its broadest move to address rising costs and heavy debts since construction of the system began nearly two decades ago. The higher prices for train tickets are part of a push to raise prices for public services. Earlier this year, water and natural gas bills started going up in some cities. Public services in China are heavily subsidized by local governments. But huge municipal debts mean that these governments have less money on hand to keep prices down... China has already pushed up electricity charges considerably since 2021 for many factories, although residential customers continue to pay low, subsidized electricity rates...

The bullet trains... infrastructure has been paid for with enormous borrowing, which has reached $870 billion just for China State Railway Group, the state-owned enterprise that runs the rail network... Many of its lines are owned by joint ventures with provincial and municipal governments that helped pay for construction and are becoming less able to subsidize transportation... China has opened 28,000 miles of bullet train routes since 2008. Routes connect every major city and hundreds of smaller cities and towns. To put its size in perspective: The system is long enough to span the continental United States more than 10 times from New York to Los Angeles. The first line opened right before the Beijing Summer Olympics. China’s bullet trains typically run at either 186 or 217 miles per hour, depending on the route. Because the tracks are straight, the trains run for long distances without slowing down... With the price increases, the peak fare of a second-class high-speed train ticket from Wuhan to Guangzhou, a nearly 600-mile trip that takes less than four hours, will soon be $78. A ticket in first class, which has two seats on either side of the aisle like economy class on American trains but more leg room, will cost $125, and a lie-flat business class seat will cost $273.

3. In pursuit efficient management of their times, couples are taking to using work-management tools like Slack and Notion. This is one more example of efficiency maximisation taken to its extremes.  

4. The optimal currency area benefits that the richer South India gets over the poorer North India.

The more industrialised, richer countries get a huge captive market in the EU in which they can sell their products.  Those that have adopted the euro as their currency also get a huge competitive advantage as their labour becomes cheaper (relative to labour productivity), while that of the relatively poor countries in the euro — such as Spain, Greece, and Portugal — more expensive. The Bertelsmann Stiftung Foundation showed that German growth was 0.5 per cent per year higher due to the euro — largely because its national currency the D-Mark would have been stronger, and, as a result, exports were lower. Similar benefits also accrue to Austria and the Netherlands, and even to Denmark, which is not in the EU but keeps its krone pegged to it.  So, while the richer parts of the EU subsidise the poorer parts through fiscal transfers, they also gain by having a captive market and an undervalued currency that improves their competitiveness across the world.

5. Fascinating account in NYT about the evolution of road usage in New York City.

New York City’s streets were laid out before anyone knew how they would ultimately be used — long before cars were even invented. The first city planners could not have anticipated Uber vehicles, let alone Amazon deliveries or commuters on electric scooters. In New York’s earliest days, the streets were a free-for-all. People walked or rode horses. There were no crosswalks or stoplights; if you had to cross the street, you simply walked across the street. Soon, horse-drawn vehicles used the streets alongside pedestrians, and people dashed between them. (Later, New Yorkers dodged streetcars in much the same way, giving the Brooklyn baseball team its name.) The arrival of bicycles neatly encapsulated the city’s ever-shifting debate over how the streets should be used — and by whom. By the 1890s, the streets were full of bikes. Men and women took to cycling through the city so quickly — and dangerously — that it was called “scorching.” About 100 years later, in 1987, speeding bike messengers were deemed so dangerous that bicycles were banned from Midtown — temporarily. Today, the city encourages residents and visitors to ride bikes. New York has bike lanes and a flourishing bike share program, plus an explosion of food delivery powered by e-bikes. The renewed popularity has also come at a grave cost: Last year 30 cyclists were killed on city streets, and 395 were severely injured...

“At the end of the Gilded Age, right before World War I, suddenly, there were motor vehicles everywhere,” said James Nevius, an author and New York historian. The development meant people could move around faster — but it also put more people in danger. In 1920, there were about 200,000 registered vehicles in New York City; by 1925 that number had more than doubled. A century later, that figure is two million. And yet New Yorkers are still using the same streets that were laid out generations ago. In Manhattan, the rigid street grid was designed in 1811. Avenues are 100 feet across. Cross streets are 60 feet wide, including the space for sidewalks on both sides. That’s 720 inches in which to fit not just cars but also pedestrians, baby strollers, trash, compost, scaffolding, bicycles, e-bikes, scooters, skateboards, package delivery trolleys, garbage trucks, delivery trucks, food carts, 5G towers, dining sheds, trees, CitiBike docks, buses, taxis, ambulances and on-street parking. It’s like a giant game of Tetris — except all the pieces just won’t fit. In fact, some of the pieces are growing larger: In the past decade, the average vehicle got 12 percent longer and 17 percent wider. (Cars’ blind spots have also gotten larger.) And the number of pieces just keeps expanding. New York City’s population reached 8.8 million in 2020, and the New York region is now home to nearly 19 million people. The city’s population has dropped some in the past few years, but city officials believe that recent population estimates have significantly underestimated the number of newly arrived migrants, which, by some counts, is over 180,000...

Over the past 10 to 15 years, sweeping pedestrian plaza initiatives — detouring cars and encouraging space for sitting and strolling — have gradually changed the landscape, from the Jackson Heights neighborhood in Queens to Times Square. The Open Streets program restored pedestrian-first streets, free of cars and safe enough for strolling, chatting and letting kids ride bikes... And there are plenty of other places to look for inspiration: In Bogotá, Stockholm, London and Paris, certain streets are being closed to cars. There is an effort in Europe to avoid the oversize pickup trucks and SUVs that make American roads so deadly. Paris has designated “school streets” where cars have been removed to make way for children. Cycling is flourishing in Europe; emissions are down.

6. The investment-side story of the Indian economy over the last few years is nicely captured in this table.

Surging government capex has been the driver of economic growth, even as private capex and consumption have declined. The former has been driven by railways and highways, whose expenditures have indeed risen sharply. But the rise in government capex is exaggerated by the government assuming the debts of NHAI and Railways. Finally, the space for the government capex increase has been facilitated by the post-covid surge in fiscal deficit. 

Underlining the weakness in private investments throughout recent years, the value of completed projects has mostly stayed the same in real terms from 2017-18. 

This is likely to remain so for a longer time given that project completion in future is dictated by the projects started in recent years and today, and they have yet to show signs of an uptick. From a recent BS oped, this about private consumption and corporate investment trends.

The most recent National Accounts Statistics (NAS) show a drop in the annual rate of growth of consumption from around 7 per cent between 2011-12 and 2018-19 to a little over 4 per cent in the past five years.(Table 1.1 NAS 2024). In fact, the second advance estimate for 2023-24 shows only a 3 per cent growth in private consumption. In a large country like India, a slowdown in private consumption growth will affect corporate investment. That is why the recent NAS shows a drop in the annual rate of growth of private corporate investment from a little over 10 per cent between 2011-12 and 2015-16 to under 5 per cent in the years since then until 2022-23. (Table 1.11 NAS2024).

The weakness in private investment is despite the much improved corporate balance sheets, with the share of excessively leveraged corporates being among the lowest in Asia. And bank credit growing at record rates. 

7. Dani Rodrik critiques those who rail against Chinese green energy subsidies, arguing that they have dramatically reduced the prices of green technologies and expanded its access manifold. He argues that the need of the hour is more industrial policy and subsidies by all countries to make green technologies more affordable and accessible. He describes the case for subsidising green industries like China has done as "impeccable". 

He does acknowledge the problems with China's subsidies.

Countries have other interests besides the climate, of course. They can harbor legitimate concerns about the consequences of other countries’ green-industrial policies for jobs and innovative capacity at home. If they judge that these costs outweigh the climate and consumer benefits, they should be free to impose countervailing tariffs on imports, as trade rules already allow. It would be better for the world overall if they didn’t react that way, but nobody can or should stop them.

The problem is with the last line. While the Chinese green power subsidies have achieved tremendous success in mainstreaming green technologies, it has come at the cost of destroying local green industries elsewhere and making all countries chronically dependent on China for green technologies. Given green technologies are a major share of today's and future manufacturing, the destruction of the domestic manufacturing bases across countries due to cheap Chinese exports is a prohibitive and unacceptable price to pay. It becomes a serious, almost existential, national security risk when there's a Cold War raging and the near-certain weaponisation of its dominance in these frontier technologies by the Chinese government. 

The manufacturing trends in green technologies are an encore of what has happened across the manufacturing sectors in the last two decades. Thanks to the cheap Chinese imports, the manufacturing base that's essential to create the good jobs that Dani Rodrik frequently writes about has been seriously weakened across developed and developing countries. Besides, the world has become excessively dependent on China for even basic manufacturing, as the Covid 19 painfully exposed. 

Economists should consider this trend in manufacturing as a failure of comparative advantage. If there's a strong Matthew Effect, whereby the dominant producer is able to strengthen their position with economies of scale and subsidies, then comparative advantage and trade end up leaving the world economy worse off.

8. Among advanced economies, the Germans work the least and the Americans the most.

According to the OECD, the average annual hours worked by Germans are down 30 per cent in the past 50 years, falling a quarter below US levels, reflecting Europeans’ growing preferences for longer periods of leave and more leisure time.

9. Alan Beattie points to a problem with the definition of subsidies. The IMF has been pointing to "implicit subsidies" or countries failing to internalise the external costs including air pollution and road traffic accidents. 

By this measure, annual global fossil-fuel subsidies are a massive $7tn, nearly three times as much as worldwide spending on defence. This has caused considerable consternation in policy circles: old subsidy hands correctly point out that these estimates of implicit subsidies are highly uncertain and hence cannot practicably form the basis of international rules. They also often lead to a misleading idea — unfortunately propagated by the fund itself, its sister organisation the World Bank and the UN — that trillions of dollars are being spent on fossil-fuel subsidies and could be redirected elsewhere. In reality, the public money that supposedly funds implicit subsidies does not yet exist: it’s notional revenue from a tax the IMF thinks ought to be levied but isn’t.

Such subsidies are clearly defined by value systems and preferences of certain groups of countries. It raises several questions. What should be an acceptable level of internalisation? Why should only certain kinds of social costs be considered (labour standards, pollution etc.), whereas certain others are not considered (labour displacing technologies, cross-border capital flows)?

10. Rahul Jacob in Livemint has some stats about India's trade figures

A Federation of Indian Export Organisations report says that apparel, knitted garments, marine products, plastics, and gems and jewellery had grown at just 1 % to 2%. In fact, during 2023-24, while goods exports contracted by 3%, exports of textiles, leather, gems and jewellery and marine products declined 9%... A report earlier this year by Global Trade Research Initiative, a think-tank, contains alarming data-points on India’s decline in the global garments market. It states, “In 2023, China exported $114 billion worth of garments, followed by the EU with $94.4 billion, Vietnam with $81.6 billion, Bangladesh with $43.8 billion, and India with just $14.5 billion… From 2013 to 2023, Bangladesh’s garment exports grew (cumulatively) by 69.6%, Vietnam’s by 81.6%, but India’s grew by only 4.6%."

11. Finally, via Kyle Chan, some interesting graphics on the iPhone in the Nikkei Asian Review. The prices of iPhone components have been rising.

Apple has been largely absorbing a significant part of the price increases.

The share of China in the components cost is tiny. 

But the low share does not reveal that the components are manufactured in China - 87% of Apple's 187 suppliers have production facilities in China and China/HK headquartered companies make up more than half of Apple's suppliers.