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Global Top Cat

India: A True Friend

By Yiannis G. Mostrous, on Jan. 28, 2017

At this point, 2017 is shaping to be the year where getting the micro call correct will be more important than getting the macro one right.

The current uncertainty in economic and trade policy is higher than at any other time in recent memory. Likewise, the world’s political picture (especially in Europe and the US) is becoming increasingly unpredictable.

The main reason for this uncertainty is the election of Donald J. Trump as the 45th president of the most powerful country in the world. The president’s agenda, on the economic front, aims to change the rules of the game regarding how the US and, consequently, the global economies operate.

It may be early for details, but the president and Republican-controlled Congress have been explicit enough noting that a much needed tax reform is the first priority. The centerpiece of this reform is what has been termed “border tax adjustability”.

Don’t let the wonky phrasing distract you from the changes it will bring to global trade. Although the issue is complicated, the main idea is: no taxing of revenues from exports and no deductions for the cost of imports.

Emerging economies, as a whole, will be affected the most, at least initially. Asia, because its economies are generally open to trade while revenues are largely derived from developed economies, will be particularly affected. Specifically, South Korea and Taiwan will feel the “border tax adjustments” the most. India and Indonesia should fare better.

Asia’s headwinds will be significant, because the region accounts for 67 percent of the US goods trade deficit. In terms of absolute dollar value, China, South Korea and Japan will be most impacted. But the entire region will eventually take a hit due to Asia’s integrated supply chain.

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