06 March 2019

U.S.-China Trade War: A Lowdown


A short explainer on the trade war between the U.S. and China. 

U.S. trade in goods with China 
 
(latest info, as of November 2018, sourced from www.census.gov, a U.S. government website)

  • Imports from China: U.S.$493.49 billion
  • Exports to China: U.S.$111.16 billion
  • Trade Balance: minus (–)U.S.$382 billion

Why
The U.S. accuses China of high tariffs (taxes) on American products, which make them expensive for the Chinese to buy.

Also, Washington has accused Beijing of doing nothing to prevent theft of intellectual property rights (like counterfeit goods and pirated software) and stealing of trade secrets (including through corporate espionage or by breaking into computer systems of American companies to gain access to cutting-edge technologies). The U.S. estimates the damages from China’s bad behaviour at around $600 billion.

Tariffs & Impact
To punish China for its bad behaviour and inaction, the U.S. imposed high tariffs on around Chinese goods (like handbags and heavy machinery) with $250 billion. Tariff increases ranged between 10% and 25%.

China hit back with $110 billion in tariffs on American goods.

The U.S. has postponed imposing another of tariffs on Chinese goods (worth $200 billion) as negotiations are underway to broker a better trade deal.

As of today, the Chinese have agreed to buy more American goods, especially agricultural products (like soybean). Farmers are among the major vote banks of Donald Trump. However, to push Trump to buckle down, China has imposed higher tariffs on goods (like coal and chemicals) made in Republican strongholds.

Beijing has also agreed to reduce tariffs on some American products to help those products gain wider market access.

Tariffs (taxes) on Chinese goods would make American products cheaper (comparatively) in the home market. This would induce Americans to buy more American goods (and not expensive Chinese goods).

China’s exports to the U.S. make for nearly 25% of its total exports. A drop in its exports to the U.S. could harm Beijing a lot more than it is willing to admit; of course, bragging aside, Beijing knows that a drop in exports to the U.S., especially amid a slowdown in its economic growth, could lead to industrial contraction, higher unemployment, and social unrest.

Status today
Both the U.S. and China have dug in their heels, though both countries cannot afford to do that for a long haul. Washington and Beijing are waiting for the other to blink, though both parties are staring at each other.


04 March 2019

Venezuela Crisis in a Nutshell

In this short explainer on the crisis enveloping Venezuela, I have tried to be brief and to the point.


Nicolas Maduro                   Juan Guaido


Who’s Who in Venezuela


President: Nicolas Maduro, a hardcore socialist, anti-U.S., leader of United Socialist Party of Venezuela.   

Who supports Nicolas Maduro:
    (a) Within Venezuela: Supreme Court of Venezuela, Defence Forces of Venezuela, PDVSA (state-owned oil company); 

(b) 
Outside Venezuela: China, Russia, Turkey, Iran, Bolivia, Cuba, Nicaragua  (last three are in the Americas).

Who does Maduro blame for the current crisis
: United States of America.

Challenger: Juan Guaido, self-declared Interim President since January 2019 and leader of Popular Will, a centrist party.

Who supports Juan Guaido
:

(a) Within Venezuela: Low-ranking military officials and huge popular support.
(b) Outside Venezuela: U.S., UK, Argentina, Brazil, Chile, Colombia, Ecuador, Peru, Panama, Costa Rica, Guatemala, and Honduras.

Role of Oil in Venezuelan Economy


  • Oil reserves in Venezuela are said to be among the top 3 in the world.
  • Oil accounts for 98% of export earnings. 
  • Oil accounts for 50% of GDP
  • High global oil supply, falling crude prices, and poor extraction technology have led to a big decline in oil production – all of which have drastically reduced the government’s export earnings, thereby widening revenue deficit. 
  •  In 2018, GDP shrunk by double digits for the third consecutive year. 
  • Government does not have foreign exchange reserves to pay for imports and loans. 
  • Venezuela has been in default since 2017 – meaning, it has not paid back foreign loans and not paid for imports. 
  • U.S. and other countries have a long-running embargo against Venezuela; this has shrunk market for Venezuelan products and reduced avenues for borrowings.

Major Problems

  • Great political and economic instability 
  • Mostly, a result of catastrophic humanitarian emergency. 
  • Severe shortage of food, medicine, & other essentials – mostly because of hoarding, embargo, and hyperinflation. 
    • Hyperinflation, meaning very, very high rate of inflation, is leading to doubling of prices of essential goods every 19 days on average. Current inflation is around 85,000%. Thousands of health professionals have left the country, leading to medical emergency. 
    • Lack of access to food and healthcare have pushed 90% of people below the poverty line.  
    • On average, a Venezuelan has lost around 12 kg of body weight since 2017. 
    • It is believed that some 3 million have already fled Venezuela; the number is likely to rise to 5 million by the end of 2019.

In a nutshell, years of economic mismanagement, misdirected welfare policies (subsidizing almost everything through high revenue earned by oil exports), huge debt, massive shortage of essential stuff, hyperinflation, political instability – have all led to the current catastrophic humanitarian crisis in Venezuela.

01 February 2019

The Explainer: Budget at a Glance


In India, there is hardly any economic event that captures popular imagination as much as the Union Budget. This Explainer will focus on the complex budget jargon that puts off even 'interested–in–budget' souls.

What is a Vote on Account?
The Central Government must seek approval of the Parliament to withdraw money from the Consolidated Fund of India to meet expenses.

A full budget goes through a long process; with elections due soon and without parliamentary approval, the Central Government may run out of cash to meet expenses. This may paralyze the functioning of the government (a la the shutdown in the U.S.).

Tell me more about Vote on Account (VoA).
VoA is generally undertaken for only two months and can’t exceed six months.

VoA is taken in two cases:
o   Government is unable to pass a full Budget by 31 March;
o   Term of the current government ends close to 31 March.

VoA is different from Interim Budget in one major aspect:
o   Interim Budget focuses on both revenue & expenditure whereas the VoA focuses ONLY on expenses.

What is a Fiscal Year?
Any twelve–month period that is used for submission of accounts, taxation purposes and to state financial reporting by private and public sector companies is called a Fiscal Year.

In India, the Government has laid down the provision that the 12–month starting on April 1 and ending on March 31 of next year will be treated as a Fiscal Year.

To put it in perspective, this article is being written on 1 February 2019, i.e., in Financial Year 201819. This is also called Fiscal Year ’19.

In the same way, the financial year for 201920 will start on 1 April 2019 and will end on 31 March 2020. So, on 1 April 2019, we will enter Fiscal Year ’20.

Define Budget.
The Budget is a statement of revenues and expenditures for the coming fiscal year, i.e., the one that starts on April 1 of this year.

What does the Budget consist of?
Look at the table graphic below. This document titled, Budget at a Glance, is the best document to understand the components of the various types of figures in the Budget.


The Union Budget 201920 consists of the following:
(a)   Actuals for 201718,
(b)   Budget Estimates for 201819,
(c)   Revised Estimates for 201819, and
(d)   Budget Estimates for 201920.

The Actuals for 2017–18 may be represented as such but they STILL would be PROVISIONAL only. This means that these figures are NOT the final figures for 2017
18 but are subject to further revision. In fact, the final figures for 201718 will only be available toward the end of Financial Year 201819 (or Fiscal Year ’19).

Budget Estimates (BE) relate to the figures set out by the Finance Minister in his Budget Speech last year (i.e., in February 2018) for the Financial Year 201819.

However, all figures related to revenue collection, expenditure, other allocations – are subject to change. These numbers are mere ESTIMATES and not actuals. As the year progresses, such figures may sometimes need to be revised. For example, if there is low industrial and agricultural activity (meaning lower economic output), tax collections may dip. 
This, in turn, will reduce the government’s Revenue Receipts.

In such case, the Government may revise the Budget Estimates (made in the Budget). Such altered figures are labeled Revised Estimates (RE). These RE are listed in the third column.

In the fourth and last column, you will find Budget Estimates for the coming Financial Year 201920. These figures reflect the various estimates made by the Government in terms of Receipts (including tax collections) and Expenditures (including interest payments and salary payments to government employees).