Tuesday, September 25, 2018

Is moving production out of China to avoid US tariffs feasible?

The Trump administration imposed an addition 10% tariff (will jump to 25% by the end of the year) on $200 billion worth of Chinese imports to the US. This is in addition to 25% tariff on $50 billion worth of Chinese imports. The escalating trade war between the US and its usual trading partners is forcing companies to rethink if it is as appropriate, profitable and reliable to continue producing goods in China as it was before. However, relocation to countries such as Bangladesh, Cambodia, Ethiopia, Thailand, and Viet Nam may not be that easy. 

Companies have two choices: (i) to raise productivity sufficiently so that the gains offset the cost escalation due to additional tariffs (think in terms of marginal effect); and (ii) to relocate production somewhere else to take advantage of cheaper labor and business costs but with no change in tariff structure. The first option is almost impossible in the immediate term. The second option is doable, but are there necessary physical and social infrastructures in place to realize it in other countries?

Convenience and reliability of production, transportation and distribution are of paramount importance. Good roads for workers to commute, reliable and unclogged transportation network for ferrying goods in and out of the country, political stability and disciplined trade unions, good governance, and adequate supply of electricity  are some of the supply-side constraints that need to be addressed in addition to business-friendly policies. This, at least, applies to Nepal.

Excerpt from a news story from NYT:

Huffing, snorting and in no hurry to move, the big-horned bovines occasionally meander across the Khmer-American Friendship Highway, the dusty, 140-mile route linking Phnom Penh’s factories with the port in the coastal city of Sihanoukville. They are not the only potential obstacles. At quitting time, factory workers heading home on foot and motorbikes clog the road. For factory owners on deadline, those crowded roads can mean frustrating delays.
[…]But China will be hard to quit. From zippers and rivets on jackets and jeans to the minerals used in iPhones, China makes or processes many of the ingredients that go into today’s consumer goods. It has a dependable source of workers who know how to hold down factory jobs. It has reliable roads and rail lines connecting suppliers to assembly plants to ports. Countries like Vietnam and Cambodia, by contrast, lack China’s vast supplier base and dependable roads. More workers have to be trained. Many companies have to start from scratch.
[…]One day a few years ago Mr. Bobrovizki arrived at his factory to find several unions had locked it. Negotiations took weeks. In Cambodia some unions are backed by the party of Hun Sen, the prime minister, adding to political risks for foreign companies.“I lost half a million dollars in those two weeks that they blocked my gate,” Mr. Bobrovizki said.
[…]One American company recently told a supplier with a factory in Phnom Penh that it wants to take its China production down to zero as soon as possible in order to avoid tariffs, said Bradley Gordon, a lawyer who advises multinational companies in Cambodia. That Phnom Penh factory plans to hire 1,000 more workers in the next month and employ nearly 10,000 workers by next year.
Still, China remains an efficient place to do business. Its logistics network is vast and quick-moving. Over the past three decades, China has built 4.7 million kilometers, or about 2.9 million miles, of highways. It has 13 of the world’s 50 largest ports, and three of the top five. China’s sheer manufacturing capabilities are unrivaled. One measure of its output, called manufacturing value added, shows that China makes roughly as much as the United States and Japan combined.

Meanwhile, companies producing electronic goods are already thinking of moving part of production value chain out of China. Here is a news story from Reuters:

[…]Several companies, including SK Hynix of South Korea and Mitsubishi Electric, Toshiba Machine Co. and Komatsu of Japan, have been plotting production moves since July, when the first tariffs hit, and the shifts are now underway, company representatives and others with knowledge of the plans said. Others, such as Taiwanese computer-maker Compal Electronics and South Korea’s LG Electronics, are making contingency plans in case the trade war continues or worsens.
[…]The quick reactions to the U.S. tariffs are possible because many large manufacturers have facilities in multiple countries and can move at least small amounts of production without building new factories. Some governments, notably in Taiwan and Thailand, are actively encouraging companies to move work from China.
[…]At SK Hynix, which makes computer memory chips, work is underway to move production of certain chip modules back to South Korea from China. Like its U.S. rival, Micron Technology, which is also moving some memory-chip work from China to other Asian locations, SK Hynix does some of its packaging and testing of chips in China, with the chips themselves mostly made elsewhere. Most of SK Hynix’s production will not be affected, the source added, since China’s dominance in computer and smartphone manufacturing makes it by far the largest market for DRAM chips.
[…]Toshiba Machine Co. says it plans to shift production of U.S.-bound plastic molding machines from China to Japan or Thailand in October. The machines are used for making plastic components such as automotive bumpers. “We’ve decided to shift part of our production from China because the impact of the tariffs is significant,” a spokesman said. Mitsubishi Electric, meanwhile, says that it is in the process of shifting production of U.S.-bound machine tools used for metal processing from its manufacturing base in Dalian, in northeastern China, to a plant in Nagoya.

Monday, September 24, 2018

Budhi Gandaki project re-awarded to Chinese firm, MPs to execute 20 projects, and more

From The Kathmandu Post: Budhi Gandaki Hydropower Project, once again, has fallen into politicking. The KP Sharma Oli administration last week decided to rope in China Gezhouba Group Corporation (CGGC), reverting the erstwhile Sher Bahadur Deuba government’s decision to develop the 1200MW project with internal resources. The Cabinet meeting on Friday directed the Energy Ministry to initiate the process to award the project to the Chinese developer. As per the Cabinet decision, the ministry has been asked to hold talks with the Gezhouba, prepare a proposal, and strike a deal to execute the $2.5 billion reservoir project.

Following the government decision, the Energy Ministry will now invite the Chinese company for talks and prepare a draft of the memorandum of understanding (MoU) before signing it, according to multiple sources at the ministry. “The understanding will be signed to execute the project under the engineering, procurement, construction and financing (EPCF) model,” said one senior official.

Multiple sources at the Energy Ministry said the proposal was taken to the Cabinet directly by the Prime Minister’s Office (PMO) without involving Energy Ministry officials. “We came to know that the Chinese developer had filed an application at the prime minister’s office, expressing interest in executing the project under the EPCF model,” said another official who spoke on condition of anonymity because he wasn’t allowed to discuss details of the proposal. Energy Secretary Anup Kumar Upadhyay, however, said he was unaware of the recent development and has yet to receive instructions from the PMO.

Local Infrastructure Development Partnership Programme: Guideline allows MPs to execute 20 projects in single constituency

From The Kathmandu Post: Going against the budgetary provision, the government on Friday endorsed the working procedure of Local Infrastructure Development Partnership Programme, which not only increased the number of projects, but also allowed lawmakers to have their say in project selection. Government officials said the working procedure has effectively ended the efforts to make the programme less distributive, as it has allowed federal lawmakers to execute as many as 20 projects in a single constituency.

The programme is modified version of controversial Constituency Infrastructure Special Programme (CISP) and the Constituency Development Programme (CDP) implemented through lawmakers. According to officials at the Federal Affairs Ministry, the option of selecting as many as 20 projects goes against the current fiscal year budget that states maximum of five projects related to road, drinking water, irrigation and river control could be carried out in one constituency. While drafting the working procedure, the ministry had proposed for selecting maximum 10 projects within five areas. However, after a strong pressure from the lawmakers, the number was doubled to 20.

After a strong lobby from lawmakers, it has given sole authority to select the projects to a committee headed by directly elected lawmaker and represented by parliamentarians from proportional representation and the lawmaker in the National Assembly. This goes against the provision of the current budget which had envisioned forming a committee co-ordinated by directly elected representative from particular constituency and represented by members of federal parliament, provincial parliaments and heads of the local governments.

Cabinet approves splitting of CAAN

From The Himalayan Times: The Cabinet meeting on Friday gave permission to the Ministry of Culture, Tourism and Civil Aviation (MoCTCA) to split the Civil Aviation Authority of Nepal (CAAN) into two different entities — regulatory body and air navigation services provider.

“Since the Cabinet has given permission to split CAAN into two entities, MoCTCA and CAAN will frame a new act to implement the decision,” said Sanjeev Gautam, director general at CAAN. He further mentioned that after the formulation of the new act, MoCTCA will first forward it to the Parliament for approval. “After it is endorsed by the Parliament it will come into implementation.” In 2012, the government had formally announced that CAAN would be divided into two separate autonomous bodies. The government had said it would create two entities by dividing CAAN so as to improve the regulatory mechanism and also to develop civil aviation infrastructure.

Sunday, September 16, 2018

Twin deficits in Nepal

It was published in The Kathmandu Post, 14 September 2018

Nepal’s external sector has remained fairly stable for more than a decade. The current account balance--a measure of the country’s earnings from and expenditure on traded goods and services--has been positive for most of the time despite a weak export performance, thanks to large remittance inflows. Unfortunately, the external situation took an unexpected turn last year: The current account deficit swelled to a level not seen since the fiscal year 1995-96.

The expected large increase in imports along with a widening fiscal deficit (the difference between government revenue and expenditure) has increased the odds of external sector instability. It will deplete foreign exchange reserves and deter foreign direct investment as investors worry about the country’s ability to supply them convertible currency for repatriation of their return on investment. The government faces the delicate task of addressing twin deficits (large fiscal and current account deficits) without reining in productivity-enhancing expenditure and intermediate goods import.

High imports

In fiscal 2017-18, the current account deficit widened to 8.2 percent of the Gross Domestic Product (GDP), around $2.4 billion, up from a deficit of just 0.4 percent in the preceding year, but sharply down from a surplus between 2011-12 and 2015-16. The last time the current account deficit was above 6 percent of the GDP was during the four consecutive years before the country embraced liberalisation reforms, and in 1995-96. This time, despite large official workers’ remittances, which was almost insignificant then, the current account deficit has increased drastically, led by an ever-increasing trade deficit.

The current account balance includes the value of transactions with other countries in merchandise goods, services, income and transfers. The merchandise trade deficit reached a record 37.7 percent of the GDP owing to stagnating exports (about 3.1 percent of the GDP) but large imports of about 40.8 percent of the GDP. The country’s exports have been suffering from a range of supply-side constraints such as inadequate supply of infrastructure (particularly electricity and road network), labour disputes and political instability, high cost of finance, lack of required human resources and technical know-how, ad hoc non-tariff barriers, and policy implementation paralysis. Recently, two of the major constraints, political instability and supply of electricity, seem to have been taken care of. The other constraints continue to affect industrial output.

Meanwhile, imports of fuel and agricultural and industrial goods have been surging due to increased demand for imported products in the absence of sufficient and competitive domestic production. It widened the trade deficit which is so high that even a surplus in other components (including remittances) of the current account was not enough to balance it. Tourism receipts are meagre compared to its potential, and remittance inflows are moderating due to a decrease in the number of outbound migrant workers.

The government and some economic analysts argue that the high current account deficit is not a bad thing because it will help boost growth in the coming years. Normally, a moderate level of current account deficit due to imports of large machinery and intermediate goods may be beneficial to low-income countries like Nepal. The theoretical logic is that they not only boost current growth prospects but also expand potential growth because the large imports will enable exports to grow in the future and narrow the trade deficit. However, in reality, this is hard to achieve due to the nascent financial market, which normally plays a vital role in efficiently allocating capital, and weak institutional and governance regimes.

Nepal’s current import basket is hardly composed of productivity-enhancing machinery and intermediate goods. Imports of petroleum, the top import item, account for about 11 percent of total imports. The other imported products are used in the industrial sector as raw material or intermediate goods and are either consumed domestically or exported. The issue is that domestic value addition in these industries is low, and the likelihood of a drastic change in the productivity-output landscape anytime soon is also unlikely. The top imported goods have hardly changed in recent years.

The top five imports from India are petroleum products, vehicles and spare parts, MS billet, machinery and parts, and cement. They accounted for 50 percent of total imports from India last year. Note that imports from India make up about 65 percent of total imports. Agricultural items such as rice and vegetables also feature high on the import list from India. From China, we are importing electrical and machinery parts and readymade garments. From the rest of the world, our top imports are gold and silver, aircraft and spare parts, and agricultural products. A government obsessed with revenue mobilisation has no incentive to reduce imports of vehicles and machinery parts because taxes on them are an important source of customs revenue.

Boost earnings

Nepal cannot do much to alter the pegged exchange rate with the Indian rupee. However, the government could proactively work to address the supply-side constraints which are forcing companies to operate below their installed capacity and increasing their cost of production. Currently, costly production is not only substituted by competitive imports, but exports are also declining as price competitiveness is eroding despite the competitive advantage from preferential treatment accorded to our exports.

Increasing exports and tourism receipts besides replacing substitutable imports by domestic production is an ideal policy. However, this will be realised only after we take care of the binding supply-side constraints and infrastructural and services related issues in the tourism sector. In addition to implementing timely trade and industry related policies, foreign direct investment should be increased for which the existing laws and the Investment Board Act need to be amended. Until then, the government should advocate a policy to reduce unnecessary public spending and unproductive private sector credit flows that support imports. The large current account deficit right now reflects low domestic savings and high consumption, indicating a reckless fiscal policy and credit flows to unproductive sectors.

Saturday, September 15, 2018

0.9 million economic establishments engage 3.4 million people in Nepal

On September 13, the Central Bureau of Statistics released preliminary results of the first ever National  Economic Census 2018. The preliminary results are based on enumerator’s control forms, which is basically a summary sheet of details in form B. Data collection was done between 14 April and 14 June 2018. The census is now the basis for designing sampling frame of economic establishment for forthcoming surveys and censuses. 

The economic census covers most of the economic establishments, the unit of analysis, in the country. It includes registered agricultural, forest and fishery businesses; mining and quarrying; industrial production; electricity, gas, etc; drinking water supply, sanitation, waste management and processing; construction; retail and wholesale trade, and sale and repair of vehicles and motorcycles; transportation and storage; hotels and restaurants; information and communication; financial intermediation; real estate and business activities; professional, scientific and technical activities; public administration; education; healthcare and community related activities; arts and entertainment; and other relevant economic activities that are either registered or not registered.   

Nepal has 0.92 million economic establishments, where about 3.4 million people are engaged. The sex ratio of persons engaged is 150 (male per 100 engaged females).  

Here are the major highlights from the preliminary results:
  • Number of establishments: 922,445 
    • For comparison, Japan has 5.8 million, Indonesia 26.7 million, Sri Lanka 1 million and Cambodia 0.5 million
  • Number of persons engaged: 3,408,746
  • Number of persons engaged per establishment: 3.7 
    • For comparison, its 9.9 in Japan, 2.6 in Indonesia, 2.8 in Sri Lanka, and 3.3 in Cambodia
  • Number of establishments per 1000 people: 31.6 
    • For comparison, in 45.4 in Japan, 105.6 in Indonesia, 50.3 in Sri Lanka, and 34.6 in Cambodia 
  • Kathmandu has the largest number of economic establishments (13.4%), followed by Jhapa (4.2%), Rupandehi (4.2%), Morang (2.8%) and Sunsari (2.4%)
  • The lowest number of economic establishments is in Manang, Mustang, Dolpa, Rukum East and Rasuwa (all less than 0.1% of total)
  • The density of economic establishment is 6.3 per sq km
  • Number of economic establishments by province (persons engaged in brackets):
    • Province 1: 168,434 (580,000)
    • Province 2: 117,588 (424,367)
    • Province 3: 282,056 (1,190,721)
    • Gandaki: 100,688 (341,818)
    • Province 5: 147,892 (527,960)
    • Karnali: 42,817 (132,425)
    • Province 7: 62,970 (211,555)
For interested folks, here are key highlights from the last census of manufacturing establishment

Saturday, September 8, 2018

Nepal can now use Chinese ports for third country trade and more

China allows Nepal access to its ports, ending Indian monopoly

From The Kathmandu Post: Two years after signing the Transit and Transportation Agreement, Nepal and China have agreed on the text of the protocol to the agreement that would allow Nepali traders and businessmen to use Chinese sea and land ports for third country trade. With this agreement, Nepal’s long dependence on India for third-country trading has ended, allowing Nepal to trade from the Chinese sea and land ports once the deal goes into effect. Prime Minister K P Oli had signed the Transit and Transportation Agreement with China in March 2016, following months-long Indian blockade at the southern border.

The major takeaway of the agreement is that Nepal can use four Chinese seaports, three land ports for third country import, and export through the six dedicated transit points between Nepal and China. “The Chinese side is also open for Nepal to use its other seaports if Nepal requires them,” said Joint Secretary at Ministry of Commerce and Supplies Rabi Shankar Sainju, who led the Nepali delegation in the talks. The Department of Transport Services Director General Wang Shuiping led the nine-member Chinese delegation at the meeting on Thursday.

The agreed-upon text would be signed during a high-level visit from China, the date or details of which have not been announced, said a foreign ministry official. The Chinese side hinted that the protocol can be signed during Chinese President Xi Jinping’s visit to Nepal, expected to take place in 2019. There were suggestions that the Chinese president was supposed to visit this year, but Chinese officials told Nepali counterparts that his schedule was packed this year.

According to a press statement issued by the Ministry of Industry, Commerce and Supplies following the agreement on Thursday, China has agreed to let Nepal use Tianjin, Shenzhen, Lianyungang and Zhanjiang seaports and Lanzhou, Lhasa and Xigatse dry ports for trading with third countries.

One major hurdle to implementing the deal, according to the Nepali officials, is the upgradation and improvement of Nepal’s roads to China. Other challenges facing Nepal are poor infrastructure on its side of the border, including maintenance of highways and construction of dry ports to park the imported and exported goods. “This is a major breakthrough, but we have to upgrade our infrastructure too,” said Sushil Lamsal, deputy chief of mission at the Nepali Embassy in Beijing. He was also part of the Nepali delegation.

Imported goods would be transported up to Xigaste by Chinese rail and Nepali containers would bring them from Xigaste to the Nepali border. Currently, Nepali containers are permitted up to Kerung. The same rule applies to two other land ports. Nepal will provide lists of import and export goods that would be transported as well as electronic bills of all items transported to China. China electronically monitors all goods containers.

In 2012, Nepal and China agreed to open six dedicated land routes: Humla, Korola, Rasuawagadhi, Tatopani, Olangchung Gola and Kimangthanka. Currently, only the Rasuwaghadi-Kerung route operates.


On the same note, how viable will be third country trade through China? Here is an excerpt from a piece I wrote two years ago: "Practically, it bears little significance unless Nepal upgrades existing connectivity as well as constructs new commercial custom points with China, reduces cost of doing business, establishes trust among traders on both sides, and boosts productive capacity by taking decisive action on policy and implementation fronts. "

Nepali workers to benefit as Qatar lifts ‘exit permit’ system

From The Himalayan Times: The decision of the Qatari government to allow most migrant workers to leave the country without an exit visa will facilitate thousands of Nepalis working in the Arabian nation to return home without any hassles after completion of their work contract, as per recruiting agencies. The government of Qatar on Wednesday partially scrapped the ‘exit permit’ that had been preventing migrant workers from leaving the country without their employers’ permission.

This decision of the Qatari government has been welcomed by labour-related international organisations, including International Labour Organisation (ILO) and Amnesty International. “The decision is an important first step towards dismantling Qatar’s exploitative sponsorship system,” Amnesty International said in a statement issued today. As Qatar is one of the major work destinations of Nepali migrant workers, both the government and recruiting agencies said that the recent decision of the Qatari government will facilitate almost 300,000 Nepalis currently working in Qatar.

“Due to lack of enough human resources and lengthy process to hire new employees, we had often received complaints of employers in Qatar extending work contract of Nepalis against their will and not facilitating them in acquiring exit permits even after their work contract had ended,” informed Rohan Gurung, president of Nepal Association of Foreign Employment Agencies. According to him, this decision of Qatar will ease the process for Nepali workers to return home. As per available data, an average of around 100,000 Nepalis go to Qatar for jobs every year.