Changing the World Order: Tariff Edition

Summary

In an insightful discussion hosted by Capitalmind, the world's changing order through tariffs and its implications on global economies are dissected. The conversation explores how America's historical economic influence is waning due to industrial shifts and rising competitors like China. The impact of tariffs on trade, technological progression, and investment opportunities in India and abroad are examined. It emphasizes the need for countries to innovate and adapt in response to these global changes and the resulting investment potentials in sectors like manufacturing and defense.

Highlights

• The US has historically used its economic might to structure global trade around its currency and consumption patterns 🇺🇸💰.
• China's shift from a manufacturing hub to a diversified economy is reshaping global trade dynamics 🌏.
• America's tariffs aim to rebalance trade but may inadvertently accelerate global economic fragmentation 🌐.
• Opportunities for local industries and defense sectors arise from tariff-induced trade shifts 🛡️.
• As global trade faces hurdles, investments in domestic manufacturing look promising 📈.

Key Takeaways

• America's long-standing role as a global economic giant is being challenged by emerging markets like China 🇨🇳.
• Tariffs disrupt global trade but create local manufacturing opportunities 🇺🇲🔄.
• The US debt ceiling drama is analogous to periodic fasting days in the lunar calendar 🌖.
• China's strategic import reduction and local manufacturing boost strengthen its economic power 🏭.
• Investment opportunities arise in defense and local consumption amidst shifting trade dynamics 🔍.

Overview

In a comprehensive discussion, Capitalmind delves into the evolving world order shaped by economic policies and tariffs. The conversation highlights how America, long seen as an economic titan, is now facing challenges from rising markets like China. Historically structured to benefit from global trade and currency supremacy, the US is re-evaluating its strategies as emerging economies assert their presence. This shift poses significant implications for global trade relations.

Key to this new order is the role tariffs play in redefining who makes what around the world. As tariffs disrupt traditional trade flows, they force a reassessment of where manufacturing and investments should be focused. While America seeks to insource production to reinvigorate its economy, emerging markets like China continue to expand their local capabilities, reducing dependency on imports while boosting exports.

For investors, these changes present both challenges and opportunities. As global trade shifts, investors are encouraged to look into sectors that will benefit from increased local manufacturing and defense spending. The focus on domestic production not only promises job creation but also stability in a fragmented economic era. Understanding these dynamics is crucial for navigating the future investment landscape.

Chapters

• 00:00 - 03:00: Unwritten Contracts and Tariffs This chapter delves into the concept of unwritten contracts and their impact on tariffs. It draws parallels between America's debt ceiling and India's financial management, discussing the implications of VC money halting and how to manage financial portfolios effectively both domestically and internationally.
• 03:00 - 07:00: America's Role in the World Order The chapter discusses America's complex role in shaping and maintaining the global order, particularly focusing on tariffs. Deepak's article on tariffs is described as refreshing and insightful, offering a different perspective from common narratives. The conversation sets the tone for an experimental episode diving deeply into the article's content and implications, suggesting a nuanced discussion on America's economic strategies and their global impact.
• 07:00 - 13:00: Changing Dynamics: US, China, and Europe The chapter titled 'Changing Dynamics: US, China, and Europe' discusses the impact of US policies on the global order, with a specific focus on tariffs and investment opportunities. It highlights how initial US strategies in shaping the world order were successful to a point but eventually led to dissatisfaction among large population segments. This chapter examines the consequent shifts in global economic and investment landscapes, particularly the emerging opportunities in India and abroad.
• 13:00 - 20:00: Economic Adjustments and Trade Deficits This chapter discusses the rapid economic adjustments and trade policies implemented by the US, with a specific focus on the changes made during Trump's administration. The narrative delves into the historical context of the world order established post-World War II, describing an implicit global contract led by the US. The chapter highlights the challenges and disruptions faced within this order, particularly due to the swift policy shifts aiming to condense long-term economic strategies into a short timeframe.
• 20:00 - 27:00: Automation and Manufacturing Shifts This chapter discusses the role of automation in shifting manufacturing practices, with a historical reference to trade tariffs. During the 1940s, significant import tariffs were leveraged by countries like Britain and America to protect domestic industries. For instance, Britain imposed an 85% tariff on Indian textiles to promote its own textile industry while maintaining a much lower tariff on British textiles exported to India. This disparity highlights the historical use of economic policies to influence manufacturing and trade dynamics.
• 27:00 - 34:00: Global Trade Complications The chapter titled 'Global Trade Complications' discusses the era around the end of the Second World War. It highlights significant historical advancements such as the Industrial Revolution, the invention of cars, and the development of nuclear bombs. A crucial focus of this chapter is the United States' economic policies during this time, particularly the outlawing of private gold ownership, juxtaposed against the backdrop of a nation deeply valuing individual freedoms like gun ownership as enshrined in the Second Amendment.
• 34:00 - 41:00: Domestic Economies and Global Power Shifts The chapter discusses the shifting dynamics in global power, particularly highlighting America's role as a major consumer and its influence on international politics. Despite unusual happenings, America aimed to bring stability by offering protection from perceived threats like the USSR. This period marked America's significant impact on the global stage.
• 41:00 - 48:00: Investment Strategies in a Tariff World The chapter titled 'Investment Strategies in a Tariff World' begins by discussing the global shifts in power and economy following significant political changes, such as Brexit and the decline of colonial empires. It highlights the rise of America as a leader in consumerism, amidst other countries like Europe recovering from war-related devastations, and Japan facing post-war challenges. Despite these upheavals, nations are navigating the new world order by adapting their investment strategies within this tariff-influenced landscape.
• 48:00 - 54:00: Future of Global Trade and Economy The chapter 'Future of Global Trade and Economy' covers the strategic role of the United States in global defense and economic stability. It discusses how the US has historically provided defense to regions like Europe, Japan, and Taiwan, ensuring a peaceful world order. In exchange, global trade with the US is conducted in dollars, allowing nations to sell goods to America and utilize the earnings to purchase essential commodities, such as oil, needed for production. This system supports the enhancement of global lifestyles by facilitating affordable production.

Changing the World Order: Tariff Edition Transcription

• 00:00 - 00:30 this I think was that unwritten cont So for America the akadashi equivalent is the debt ceiling I mean Nvidia came from there All the greatest companies are still coming from there What's going wrong but it's the equivalent of the VC money stopping What is the way that you'd like to handle your portfolio in India or the little bit of money you may have abroad suddenly there was a glut of very very good phones competing with an iPhone They broke Breton Woods by saying we are not going to give you gold
• 00:30 - 01:00 Deepak you know I've heard about pretty much everything I can bear to hear about tariffs uh in the last couple of days So when you pushed out your article on tariffs and something of a new world order I was almost like nervous to read it But then in in vintage capital mind fashion you've managed to put together something that's both a little different fairly refreshing and shares some insights onto it that is different from what I've read so far So I thought we'll do one episode almost as an experiment to dive into this article and talk a bit
• 01:00 - 01:30 more about what your argument is on tariffs and most importantly to whoever is listening to this uh talk about what investing opportunities this creates for your portfolios in India and abroad So let's start Um you were saying in in this article you wrote that the US has sort of helped create this world order Um it had a certain plan Things went fairly well up to a point but then they started to diverge from that and then there was large sections of the population for whom this new world order wasn't really working out And so in
• 01:30 - 02:00 response to that uh someone like Trump came in and he took something that would have taken many decades and he decided to do it in like months Uh and that's where we are today So could you describe what is this so-called world order the US really set up and then what went wrong with it yeah So I think you know sh there's a un there's been an unwritten contract in that in the world and that unwritten contract is something that's come out of say the second world war you know before the second world war the US had a huge tariff thing on its on
• 02:00 - 02:30 on imports into the US uh Brit before that Britain did and Britain had had uh you know it had 85% import tax on Indian textiles which were handworn uh because they wanted to promote British textiles and because they were ruling India at the time they said uh textile imports to India from Britain were only at 5% So there was an uneven so Britain America they've all kind of grown up on tariffs Uh but in 1945 after the world was starting to develop There was
• 02:30 - 03:00 industrial revolution was done We are doing inventing cars and you know nuclear bombs and whatever and whatnot And uh during this period uh is when the uh the the world was kind of getting out of the second just before the second world war ended America had already outlawed the private ownership of gold I mean a country that values guns so much It's the second amendment of u you know its constitution uh was able to tell
• 03:00 - 03:30 people that we are going to not allow you to own gold when they private citizens could own guns but it's remarkable that you know America could do that So many strange things are already happening that they they want to bring some semblance of normaly to the world and they said listen you guys we are the consumers now and America is the consumer and America was one of the largest consumers in the world you also as a world need protection from this USSR Russia thing and therefore we will do that uh the world was getting into
• 03:30 - 04:00 this free thing so America and so Britain for instance was forced to uh give up uh it's all it's all its colonies and all that So there was Brexit in the real terms So from that perspective and then you you were creating this new world order where America was a forefront of consumerism and every other country other than Europe Europe was kind of kind of nursing its wounds kind of get back into shape and all that stuff and uh Japan was devastated in the war and America
• 04:00 - 04:30 said we'll take care of your defense Europe We'll take care of a defense Japan Taiwan whatever else And we'll uh make sure there's a world order that involves peacekeeping from the US which is primarily the defense expenditure And all of you guys can trade with the US in dollars So you buy we'll buy your stuff we'll pay you in our currency and then you can use that currency to maybe buy oil and things like that Fine You can use the oil to make the stuff that we want We wanted to do it cheap We are upgrading our lifestyles So therefore we
• 04:30 - 05:00 don't don't want to be stitching clothes So we'll pass the stitching clothes to India and Vietnam and China and all that We don't want to be making shoes ourselves but we'll wear them So oh you know what we'll give you $10 to stitch a shoe for us but if you want to buy our shoes you're going to have to pay us $100 because that's how much we pay for the shoes So you know there was a natural artifact of things And then American brands were very big European brands are very big European brands were anyway there from the Rolexes to the
• 05:00 - 05:30 bunch of others and all that stuff But American brands like Pepsi Coke were in their infancy American cars were in their infancy Ford had uh done a bunch of work in terms of that in just a couple of decades earlier Uh their banking businesses were fairly large Uh uh so it was mostly Europe and the and America that were kind of ruling the roost here on top of the on the rest of the world the the contract was we'll spend we'll give you our currency mostly the US dollar and you guys will either
• 05:30 - 06:00 buy oil for it uh or you know what you guys have to save your money so you will buy back the US dollar in terms of government debt so when you buy back my government bonds uh you are keeping your money as dollars except certain government bonds the my government does not have to fund itself so to give you an example in India for every 100 rupee deposit 22 rupees is or was required to be stored in ramen
• 06:00 - 06:30 bonds Um now it's 18 rupees that's required required but there's a bunch of things that go around Now why was this they called it the liquidity ratio statutory liquidity ratio But the reason for this was that if you told banks that they could buy whatever they wanted they would not be able to fund the government they would not fund the government and the government would have to pay very high interest on whatever it borrowed So then you force the banks to take every deposit and put a certain amount of money in government bonds You're basically saying listen you have to lend
• 06:30 - 07:00 the government about quarter of all the deposits you have then another bunch of things and then you'll probably be able to lend only the rest Now uh this ensures that the government has a steady supply of uh buyers for its bonds It needs to issue bonds all the time because almost all governments run a deficit America could run a deficit but did not have to force its own banks to buy its government bonds because it could tell other countries that you could buy you
• 07:00 - 07:30 guys buy my bonds This is so crazy that it used to be as much as 30% of all issued American debt was owned by foreigners It's a huge amount because in India even after uh three years of allowing foreigners to buy our or maybe a decade of allowing foreigners to buy our debt uh in an unrestricted fashion they probably own less than maybe 3% of our debt but 30% was owned for of the US 35%
• 07:30 - 08:00 or something like that was owned by foreigners This is great because now if the government can borrow from foreigners the private sector does not have to lend to the government So they can lend to everybody else So people could borrow grow and prosper So a Nike could borrow money from a bank use that money to get its shoes stitched in Vietnam or China or whatever and bring the shoes back and sell it locally for a higher price pay the interest off from
• 08:00 - 08:30 those loans The interest was low because the government was borrowing at a cheap rate and therefore private was also borrowing at a cheap rate And this lowcost interest fueled their economies in a very big way This I think was that unwritten contract Now we start to see where this starts to break Right I'll pause you here to say let's say that I know you've been vocally critical that even the RBI has lends a lot more to the US government than it perhaps does domestically to or something to that effect Um but are people obliged to
• 08:30 - 09:00 invest those US dollars in US treasuries can't they do something else with it grow their own economy or whatever this is a great question A central bank holds a US dollar on its balance sheet so that it can issue currency against it Now in the 1940s to the to early 1971 uh every issue of the US dollar was backed by gold or supposedly was backed by gold because nobody actually because you could take a dollar and say give me some grams of gold against it In 1971 when Germany said give me back my gold
• 09:00 - 09:30 uh America said we are going to break this whole there is called a Breton Woods convention So they broke Breton Woods by saying we are not going to give you gold if you give us the dollar So they didn't have anything backing it at all Now every other country meanwhile said the US dollar is back to gold So we will back our currency against the US dollar So we'll buy US dollars and when we buy US dollars we will give you guys my currency whether it's a Vietnamese dong whether it's a US uh Indian rupee
• 09:30 - 10:00 or whatever So I will therefore this RBI will own US dollars and then print Indian rupees against that US dollar Very straightforward notion Now what you're saying is could they use those US dollars for some other reason other than buying US government bonds you can do it in two ways I can spend it to buy oil which would be an import That means the dollars go away from me But I have to have some dollars because I need oil tomorrow as well So I need I need to have a flow of the second thing I could
• 10:00 - 10:30 do is uh instead of buying US government debt I could buy euro debt or euro bonds I could buy Japanese yen So that involves converting the US to euro and then buying euro bonds Involves converting the US to JPY and buying JPY This is exactly what happened So over a long period of time India and China and all these countries started buying American debt Uh China owned more than one I think 1.2 1.3 trillion dollar worth of uh this debt But over the last
• 10:30 - 11:00 decade both India and uh China have reduced their holding of US debt but their reserves remain high because what they've done is taken their reserves and bought European debt and Japanese yen and Australian and so on So the the complication of this whole process has meant that America is still buying from India and China but China is not buying back American government debt It's buying European government debt It's by
• 11:00 - 11:30 Japanese command debate So America is kind of asking the question wait what will happen to my contract that I will spend on you and you guys will buy my debt i guess this is the natural thing to the next point So is this what started breaking yeah So this and by the way this is not now I'm talking about a decade ago where things started to change 2007 is when uh 30% of all 35% of all uh American debt was owned by foreigners Today it is down to 15 or 16% uh China had primarily the US 35% of all
• 11:30 - 12:00 its exports were to the US Now it's 13% So China on the other hand figured out that America cannot be the only game in town and took its biggest customer and said well we can't have more than onethird our exports to one country then started exporting to other countries including India including Russia including Europe and so on It's come to a point where America is only 13.5% of Chinese exports So to give you an example I mean we we we'll talk about this a little more but only 13.5% from 35 means it's about 1/8 or less than 1/8
• 12:00 - 12:30 nth of um um uh Chinese exports So that means China's dependence on you know America decreases over time but it's not been the same the other way around China has been very very vocal about saying I will not allow you to export to me easily So they buy iron ore but they sell steel They buy uh you know
• 12:30 - 13:00 soy meal to give their you know to feed the pigs in China and they they a huge pork consumption in uh in in China itself but they don't like to import things like machinery and you know semiconductors and stuff like that So over a long period of time they said let's find out what all we import and slowly eliminate that by manufacturing that here the famous story goes about China uh actually spending millions of dollars building a factory to make that
• 13:00 - 13:30 little steel ball that goes into ballpoint pens for which there are only two manufacturers in the world both of them in Germany because the market is only that much I mean how many ballpoint pens will you ever sell in the world and based on it's a known number it's a known number and you don't sell much more than that and you are essentially uh the balls of I mean there's no point of adding a third player but China's rule was that I don't want to import stuff that is important and critical for
• 13:30 - 14:00 the world that we live in and therefore they started making their own and and it was high precision manufacturing bridge that they finally figured out and got this done So they're crazy about saying we don't want our dependence on another country to increase This was different from the west which was saying if you manufacture boil point well pens well and the steel ball well I will just buy from you why should I go and build something which I don't have the skill for you seem to be the best person to do it which is classic liberal capitalism
• 14:00 - 14:30 which is that whichever country does whatever it does best let it do it and it will then buy something else that so for instance you buy my Pepsi cola and I will so India and I will buy your ballpoint pen you know so since that kind of a thing It's like a trade mechanism except this trade was increasingly more becoming America being importing from China for the most part I'm saying India and all are out of it But America not being able to export back to China meaningfully The best cars
• 14:30 - 15:00 in uh China were uh the cars that were being selling like crazy were at some point American Then they switched to European and suddenly there was no import at all because China was making its own cars and China was not a car manufacturer of any magnitude 10 years ago and suddenly today they are the source of some of the world's most advanced cars in the electric circuit and all that stuff How has this happened it has not happened because it suddenly occurred to China that they should build
• 15:00 - 15:30 cars It's a planned process of saying we import cars we should not be importing cars let's make our own cars And the government has gone on to that act and said okay let's do it and they've done it over a period of time I'm and I I fully sympathize with China because China is communist and all American actions against countries in the early parts of the 60s and 70s have been against communist countries USSR was a communist country uh which they had a cold war in 1990 They fought a war in
• 15:30 - 16:00 Vietnam to free it from the clutches of communism and they got beaten badly uh but Korea North Korea is communist and favors China South Korea is still protected by the US and favors capitalism favors America in that sense So to that extent China was a right to be afraid that I can't be too dependent on this guy But remember America was importing from it happily saying that I don't care that you're communist But till now I mean the the narrative you're building how has this ended badly for
• 16:00 - 16:30 the US in any way i mean as you said there's classic liberalism they were the ones selling you goods at thousand% margin or whatever nonsense and you were the ones doing basic commodity manu manufacturing or basic uh goods manufacturing so they seem to have the better end of this deal as far as I was yes and by by and large it was like a little bit of a thought process that said listen we have my I have this Nike guys who want to make shoes they want to sell the shoes in America to Americans and then we will go to China and ask them to make the shoe for us we just
• 16:30 - 17:00 make the shoe because all the money has to go to branding and marketing which are higherend job We'll sit in an AC room We will design uh uh marketing campaigns on how to just do it and how to let's go or whatever and all that stuff So all of this stuff is going to be done by the smarter guys in America The stupid work of actually building that shoe is going to be done by China and we will but we will say oh you need to use these materials because we have tested in them in America We've tested
• 17:00 - 17:30 shoe sizes all that stuff Now to America for the longest time China was a dumb manufacturer You give it stuff good things come out and then we market it in a better way Except China didn't think of it like this And neither does India by the way And this is very clear You send us a shoe to do I might look at this and say listen you use these materials but maybe if you use these other materials you might build a better shoe So the initial contract stuff was
• 17:30 - 18:00 more like Chinese people telling America why why don't you use this and so Americans were like oh these people can do more than stitch shoes really and then I'm not saying this from a negative basis it was that way China was not the greatest place to be neither was Hong Kong neither was Singapore these were places that were early stages of development it's like looking at some some roads in certain towns in India and saying that these people are undeveloped and uncoupled and if we give them anything please uh you know hopefully they will clean up clean clean their act
• 18:00 - 18:30 not only China and Singapore and Hong Kong clean their act they got smarter so now they were saying well if they're manufacturing shoes like this and we can learn from the manufacturing process that they're making shoes like this can we not maybe automate part of this process and maybe make our own shoes in a certain way and to the extent that China was making shoes for itself America didn't care too much it would have preferred of course if China could buy shoes from America But because the shoes in America were
• 18:30 - 19:00 10x the price it's $10 for a shoe to uh stitch But it's $100 for a shoe if you want to buy it So obviously the workers in that Chinese factory can't afford these Nike shoes So to that extent you don't have a market in China So they thought that China is not the market But China on the other hand was more like listen we'll make these shoes maybe sell them for $30 in China itself By the way this is happening in India as well India also people make shoes people
• 19:00 - 19:30 make textiles They used to make them for foreign companies but they figured out how to make make textiles for ourselves So to slowly over a period of time we got better and better and better at it and we said we'll sell to each other Then China went the next step which is I make such good shoes that I'm going to sell it right back to you So it may not happen with shoes but think of this as a machinery phones cell phones America designed the cell phone sent it here China started making the cell phone said "Oh we can make better cell phones
• 19:30 - 20:00 ourselves." Suddenly there's Oppo there's Vivo there's Zia Xiaomi there is you know bunch of these things America created an Android technology Uh China absorbed it and built their versions of Android which were much better and put it on their phones or much better or different Suddenly there was a glut of very very good phones competing with an iPhone uh which is also manufactured in China So to the extent that you were say the
• 20:00 - 20:30 contract was you guys will do cheap stuff and then you said ship it to us and we'll make it expensive for people to buy Now wait you're making stuff that's as good as ours and selling it back to us and they're as good as the products that we've built or better Uh that's cheating Somehow we have been conned out of this but they haven't been I mean really it's just a natural like if you give intelligent human beings an opportunity to do something intelligent they will do and figure out that there's something intelligent to be done about it right so I'll come back to sis saying look I I I understand what you're saying
• 20:30 - 21:00 but I mean obviously we're all biased by the news sources we consume or the narratives that we subscribe to but I continued to believe that this was an inevitable consequence as you just said of of of sharing stuff but the US continued to have the better end of this deal because uh I mean the narrative was that post 2008 while the crisis may have originated in say the US that financial crisis it's the UK and Europe that really never got their growth back on track and now the US is significantly richer than them um Japan at one point was doing so incredibly well they were
• 21:00 - 21:30 also perhaps taking advantage of some global system but then after that their crash in the '9s or whatever they've had 30 years of just going sideways by and large um China clearly is doing extremely well but they also have like issues with I know there was some stuff around real estate and they've overbuilt and so on and India to that extent is always a a small player in the scheme of things So I'm still struggling to understand where the US's frustration is really coming from because by all accounts I mean Nvidia came from there
• 21:30 - 22:00 All the greatest companies are still coming from there What's going wrong i mean yeah I mean honestly and you know Nvidia is built by a person who's not American in origin Origin origin Yeah Right He's not like Jensen Wang is uh Taiwanese or something Yeah I think so And even TSMC which is owned or creates one of the largest amount of chips for the US uh Apples and Googles and all that is still uh uh you know it's it's not American um India and Intel moved its fabs a lot of the fabs to China and
• 22:00 - 22:30 to other places I think and Taiwan as well and I don't know about Taiwan but basically they don't manufacture everything that they do in this thing Taiwan Intel got beaten by Japan in semiconductors So they had to because Japan did so well in semiconductors that Intel had to up the ante and move to processors microprocessors which of course has made them really rich But and the Japanese could never compete there So to to a certain extent I think you're right in the sense that why is America unhappy about this at all but there was
• 22:30 - 23:00 something more sinister downstream because what was happening in this whole process was America was getting shut out of these markets in some way or the other and uh it was always finding it more difficult to sell to them because these countries would keep their currencies weak in order for them to continue to be exporters to the US and in when they did that they would automatically buy more dollars because that's the only way you can keep a
• 23:00 - 23:30 currency PE is to sell your currency and buy dollars So you kept you sold your currency bought dollars let the dollar appreciate as much as it could You use those dollars which you had bought to buy US government debt Everybody was fine But when people stopped buying US government debt which is the last decade suddenly America's like wait we've got all this debt and we use this debt and they think of it in only one direction America is saying we use this debt to protect you we protect you protected you
• 23:30 - 24:00 Taiwan We protected you Europe protected Japan Um we don't want to do that You need to pay for it yourselves Uh meanwhile Germany's like excuse me if you're going to ask me to protect myself I'm going to instead of paying you for my defense why don't I just take care of my defense which means I will buy or build the machinery required to protect myself whether it is a underground submarine or it's a ship
• 24:00 - 24:30 or it's a weapon I can figure that out because I am a manufacturing powerhouse uh and you know over a period of time and I'm saying this has culminated in this right now but a lot of countries also try to trade with each other in the dollar and sometimes not in the dollar so so when you trade with China you don't have to trade in US dollars you can trade in remanb by itself or in a bilateral format China on the other hand also started going to countries and saying listen
• 24:30 - 25:00 I'll give you a loan you don't have any renmanb to give me I'll give you a loan in renmanb you use that to buy my products Japan did that to India it said we will do this project and that we will give you a loan of so gazillion yen and then you will use that yen to buy the goods and services from Japanese people so like excuse me if we borrow from you and then we give you back the money to get your people to do stuff why are we benefiting this process we'll get a train for Sure but I would pay you forever to maintain it Why don't we manufacture things here japan was
• 25:00 - 25:30 resistant Eventually they said "Okay we give up We'll do it." Suzuki realized that it's cheaper to manufacture in India and took over the Maroti's government stake in Maroti and now has built a factory that they going to use to build to the for the entire world What they've done is moved manufacturing away from Japan and put it into India to serve the world and perhaps India as well India's Marauti is still one of the largest uh the largest car manufacturer in India So it's use it
• 25:30 - 26:00 to it's using that plan to serve the Indian market but also using the plan to serve uh foreign markets Interestingly this is what has brought some technology into India which was not available at all So automatics uh transmissions were only available in high-end cars Today a low-end cario has automatic transmission at four lakhs per car So you got this because Suzuki was able to transplant that thing here It was the Indian managers that said listen you have that there It's not really expensive Can we use it here please they're like fine And
• 26:00 - 26:30 then suddenly you have a four lakh car with you know so manufacturing creates um adjacencies and you know the equivalent of a hallway conversation in an office which is not planned but because it happens great things come You meet manufacturing in your country suddenly one extra thing comes out of it China saw the benefit of this massively America didn't because it outsourced all its manufacturing It saw a great amount of work in advertising and marketing and high-end technology which did not require uh uh human you know you could
• 26:30 - 27:00 still sit in AC room and make it So in in that sense but you China got all the manufacturing progress right what America I think seems to be bothered about now is the fact that listen you somehow we've been stiff we we've paid for all the stuff the defense and you're not letting us do what we want which is sell you stuff which is sell you stuff and because we not you're not allowing us to sell you stuff I'm going to put tariffs on your imports so that you guys uh because I have a trade deficit with
• 27:00 - 27:30 everybody they're looking at it narrowly from the perspective of a trade deficit But this trade deficit has paid for their debt for the most part If you take away the debt that is owned by foreigners Americans will have to pay 100% of all the government borrowings and the government's borrowings are increasing every year and they have a you know a monthly debt ceiling drama like in in India you have a um you know uh there is a there's a phases of the
• 27:30 - 28:00 moon and one of them is ikadashi ikadashi is the 11th day of the lunar calendar so the 11th day you're supposed to fast so this 11th day comes twice a month right so you can you can you can you can kind of do it you you have two fasts a if you want So for America the akadashi equivalent is the debt ceiling So every once in a while they will just borrow too much and then go to everybody and say we will stop everything and the whole American government will stop working if you don't allow us to increase the debt ceiling Then the one
• 28:00 - 28:30 of the parties will say I want to throw the right to have hamsters with two left toes and they will have a five-day argument about that It'll become a big drama So it's like this you know akadashi is on steroids because America doesn't do anything halfway everything has to be anyway the this is the the the thing that America does but they their debt is going up and their debt doesn't isn't going to stop just easily because the government spending has been out of control basically because they were
• 28:30 - 29:00 getting funded up the wazoo So if Doge is going in now and why it's so popular is because they're like why are we spending so much money on all this stuff it's because now the Americans are paying for it When you had other countries pay for it nobody cared right but it's the equivalent of the VC money stopping and suddenly the company's saying "Shit we to get profitable somehow." So you want to remove your trade deficit you want to remove your fiscal deficit So somehow you know in this rush for efficiency we're getting trade deficits happen and it is being
• 29:00 - 29:30 portrayed from the narrative perspective as this is great for America So I I mean fine so you introduce these tariffs um is this the best is this actually going to make a difference to the trade deficits and so at some level it will the response is that surely the jobs that exist in China aren't going to move to the US right no one is going to be doing precisely this stuff in the world so I mean for instance if you have to build a Nike factory in America it's not going to be stitched by hand so they
• 29:30 - 30:00 because not many Americans are going to want to do this but guess what there will be some jobs created But America will try to automate these factories But your answer to this will be Deepak if it could be automated It could be automated right now Know what is them stopping them from doing this tesla built an automated gigafactory for cars in the US Why couldn't uh I mean so why are they asking you know China to make their cars the answer is it's expensive It's expensive to an extent where uh the
• 30:00 - 30:30 cost to make a shoe by using a factory automated factory would make the shoe cost maybe $300 instead of $100 and America is not willing to pay $300 for a shoe that's why it's being outsourced So if you force an insourcing today force it the shoe will cost $300 and that is inflation So this is a problem because now you're you're forcing a function that was otherwise coming Nobody was creating new car factories in the US but Tesla did Nobody was creating a new giga factory in the
• 30:30 - 31:00 US but Tesla SpaceX or whatever that some company solar regardless something did So basically manufacturing was coming slowly in an automated fashion to the US Trump is saying accelerate it I want all these tariffs to help me make more stuff in the US May still happen to the extent but what goes away is world trade So countries that are dependent on exports and trade are going to be the most hit in this because America as a
• 31:00 - 31:30 consuming society will finally figure out how to produce for itself but it will go through a massive recession because you have an inflationary uh issue that will a lot of jobs and I'll give you an example okay and maybe this is unrelated You could put 500% tariffs but there's one thing that was not getting affected It was called drop shipping So you could build a website in which you said "I am going to give you these fancy little cutlery and
• 31:30 - 32:00 items and steel knives and all that stuff Uh guess what it's $50 a piece $100 a piece you can buy a set for $400." That fantastic So you click buy and a person in China packages it makes it packages it and sends it directly to your address So the shop is located in America Shopify makes the software for the shop It's located in America but it never receives the goods Shopify might
• 32:00 - 32:30 be Canada but I keep I forget what it is called now One doesn't matter Yeah it's a 51st No 50th No not 51st Okay But uh the the interesting part about this was America this American supplier was using software to sell stuff but was never receiving the goods The goods would go directly to the end user Now you're asking me deep but the tariffs there no tariffs under $800 worth of shipping
• 32:30 - 33:00 This is called a deminimist law which was essentially said listen if it's worth less than $800 don't bother just ship it It's not worth us trying to get any tariffs on it But I don't think America intended that there will be billions and billions and billions of dollars of drop shipping where the company in China is saying I'm getting so many orders I can put a large container full of this deminimous shipping objects put them on a ship and send it to America In America it will not be taxed It will not be tariffed and
• 33:00 - 33:30 it will directly go to the end shop of everybody else When Trump came in the first thing he did was removing minimal shipping Unfortunately they didn't think about the fact that they had already created a federal hiring freeze which is I want to reduce the fiscal deficit So no more people to be hired by the federal authorities All the ports are effectively federal authorities to handle deminimous shipping uh less than $800 objects You need a lot more people You can't hire them because it's a federal hiring freeze So boom you have a
• 33:30 - 34:00 issue of all this stuff piling up on the ports People are saying "Listen we can't get our regular stuff because all this stuff is piling up on the ports." They said let's drop it for now He's brought it back He's brought it back in the tariffs and said deminima shipping is back We will figure out a way to handle these packages but guys uh when it when we are able to handle it this deminima shipping is out So that means less than $800 the full tariffs will apply Right so you you've created what's happened really is there were loopholes around
• 34:00 - 34:30 this process and all that stuff and you created these mechanisms that could have avoided these tariffs similar to how India created Maicius India wants to tax foreigners and it has a principal stand on we want to tax everybody and all that stuff but nobody taxes foreigners So India created a law with Maicius and said um you know what if you come from Maicius I won't tax you because we have a treaty Now suddenly somebody in India got wild and said you can't why you giving why you giving morishes a free hand We removed the Maishes treaty Now India is the only country that taxes
• 34:30 - 35:00 foreigners on investments in India So you know every other country is like a little confused saying wait we thought that was the way out that was unofficially the contract No no we've broken the contract So every country is breaking its contracts in a different way China is breaking contracts like on mass right in the way that says well yes Taiwan is an independent country sort of or not maybe not a country so you know in issues like this have been plaguing
• 35:00 - 35:30 the world for the last decade what Trump is doing and I argue this forcefully is that it's a part of this exercise where the world is anyway going into an isolationist mode and we want it for some strange reason I think you raised the example that things like a one year waiting for an Indian person to get a tourist visa abroad or how our prawn or shrimp or something is Yeah So for instance there's no reason why and by the Biden administration had after co not
• 35:30 - 36:00 fortified Indian uh consulate staff at all So there are one twoyear waiting periods for a tourist visa to the US Why and this is not because Trump brought it in It was there in the Biden time frame The idea is they want to introduce non-tariff barriers and one of the bar things is when India visits the US It's not just that India brings in money into the US and India and the Indians go there and spend they learn stuff from America and bring that back to India and
• 36:00 - 36:30 maybe they make business deals and bring that back to India or raise VC funding and bring it back funding whatever it is it's I think it brings in is a great dynamic So uh why are shrimp Indian shrimp are stopped at the border in Europe and told that they are too much antibiotic content but if you look at the similar antibiotic content in Thailand they have our our antibiotic content levels are supposed to be onetenth what they are so how can we so
• 36:30 - 37:00 it's basically a cruise to say listen maybe we're importing too much shrimp from you so we will stop it by putting arbitrary uh health rules the FDA comes to India and says uh you know what you're manufacturing these drugs here but the paint color on your walls is not right so I will cancel give you a warning and you will not be able to export to me for the next 6 months this is not because they just want to keep us in line they just want to come in and say it's not like because you see the observations and I've seen them they are of this quality the paint color on your
• 37:00 - 37:30 walls was not right the I don't know I got a weird smell when I walked into one room all stuff like this is just you When I was a when I was in in college if you were doing a debate and you had to do an there was something called jam just a minute You were told to talk about something for a minute non-stop Uh I still talk like that maybe once in a while but takes a bit longer than takes a bit longer than you know So when you did that and you didn't really have thoughts on what to do you would use
• 37:30 - 38:00 some arbitrary references somewhere in the middle and they would stop you and say "Don't do that That's time wasting tactics." So this is time wasting tactics in that sense They're basically they want to come here and slow down your growth as a drug manufacturer Covid wave basically took FD away from actually doing coming and doing stuff and then we got a huge amount of bump in farmer exports because they couldn't come and in fact at that time they were hating the fact that we were making our drugs for ourselves when we were told to make this uh vaccine the vaccine was
• 38:00 - 38:30 going to be manufactured India said listen we need enough for our own people we have 1.4 four billion billion people uh in India they said well you can't do that we have to sol this is our drug and you should make it for us first so India of course India worked out a mechanism where everybody was happy it turned out the vaccine wasn't all that fancy anyway let's not go there but let's not go there but any so the issue that happened was that um uh these non-tariff barriers they stop people visiting they stop doing this are something that has been
• 38:30 - 39:00 happening for the last few years India has tariff barriers India went down the other route and said you're doing all this stuff to us 10% tariff to everybody Some some things will add more tariffs So India has 10% tariffs on everything Every single thing I don't agree with that also I think we should be allowed to import raw materials and make final objects Get steel cheap but export uh uh you know cars and you know other machinery and all that stuff Why charge us import duties for steel as well but
• 39:00 - 39:30 of course that that's a question that I you know if one man's uh final product is another man's intermediary product So you could always argue that one versus the other But either way is this contract was being enforced now by tariff and non was broken by tariff and non-tariff barriers across the globe America was also part of it Uh in many ways America was trying to do this to China So slowly even Biden had introduced 20% tariffs on Chinese products which China responded by a 20%
• 39:30 - 40:00 devaluation of its own currency When you do that the Chinese manufacturer earns the same in yuan uh though the dollar amount may be lesser if he reduces the price What what uh Trump is saying is that I want I don't care about the tariff numbers I want the actual deficit to balance and to that extent they might come to India and say you have about 40 30 $40 billion deficit with us in goods please buy our defense equipment worth
• 40:00 - 40:30 say $15 billion the problem in that is India's defense capex budget is $15 billion we can't buy all that from America because America can choose to like it did in Afghanistan uh sequester our reserves it can choose in Russ like in Russia's case he told Russia that its dollars were worth nothing because you couldn't use it for anything else So you can't have that as your overall thing and still manage to say convince the world that it's I if anything I think
• 40:30 - 41:00 the rupee should have become an independent currency much earlier and we've talked about it but right now I think they're forcing our hand and forcing everybody's hand and saying trade is not important to us anymore If it's important to you you'll have to come and pay your homage to us If it's not important to you then we don't want to talk to you Okay but the US is perhaps the wealthiest and most important customer there is If you use any sort of logic around this I would assume that people would get very
• 41:00 - 41:30 alarmed if the US makes these uh has these concerns or these complaints and whether or not they're justified they would want to negotiate because you who doesn't want a wealthy customer who always wants more stuff So two three things here Uh the wealthy customer was only the US It was 40% of US world GDP Today it's only 24% of world GDP So to that extent other countries have come and taken its place China has but China doesn't allow other people to service it But India does India is more open Europe
• 41:30 - 42:00 is relatively more open other than the antibiotic stuff and you can't get a visa to shenen if you I mean it's very difficult very hopefully as I mean it's been it's 3 years we took a holiday to Australia because the Australian visa was much easier than you know try to go to Europe for a holiday but that's a different aspect there these non-tariff barriers exist but they're not meaningfully large so I think uh to that extent Europe is still open for business India is still open for business China
• 42:00 - 42:30 is not open for external business If you want to buy from them they're open If you want to sell to them they're not been they haven't been quite open So to that extent I think things have changed in that So I so but uh the world order has only shifted here What it means is can I afford to lose the US as a customer to Vietnam no Because they're all very dependent on exports They became dependent on exports because China started using Vietnam as a way to use as a conduit to products that were
• 42:30 - 43:00 eventually going to be sold to the US Now Vietnam has been slapped on with taxes And Vietnam is being told that listen if you get products from China you are not going to be given a tariff-free kind of zone But Vietnam is also like if I don't get stuff from China what am I going to do because I don't have stuff to I don't have enough of a manufacturing ecosystem to be able to manufacture all those products But they'll have to build it So they'll it will help Vietnam to do this because their domestic economy is nothing yet I
• 43:00 - 43:30 mean not meaningfully large Um Taiwan fantastic country very developed depends on America for its probably existence They cannot afford to hurt uh America So they said they will borrow they will they will you know take the deficit down to as low as possible and use only American products if required because they make semiconductors but they still going to can use American cars and use American defense equipment and so on So they could still continue to do that Uh
• 43:30 - 44:00 now go switch to in India or Europe So Europe is like listen yes we do export to you but we we also have a great domestic economy so we don't need to export to you for us to survive Uh well I say this from a perspective of uh maybe Germany but not the others because the others don't export as much as anything else but anyway they have there is a fairly large European level economy as well China anyway is is a different thing China has 13% of its exports to
• 44:00 - 44:30 America Sure you could say 13% loss is a huge loss 13% of GDP's exports to America Uh sorry 13% of its exports are to America If you lose 13% you will hurt your GDP But I say this America is not going to be able to lose all of Chinese imports at one shot Essentially what they're going to do is saying listen even if I say I won't take your imports who's going to make my semiconductors phones towels this that and the answer
• 44:30 - 45:00 to towels may be India but not semiconductors and not phones yet so how do we get more and more work out of uh China at all if we don't get it then the American consumer is going to suffer or pay those extremely high duties anyway so to the extent it's not possible to wrench out China from this process China understands that it's not only America that has the leverage but it's also China that has it And China is like worst case what happens i lose you as a customer I have my domestic economy I'm fine with that That intros you know I
• 45:00 - 45:30 will do everything for ourselves is a wall that the Chinese have built over a long period of time They're not going to give it up just so easily India has suddenly realized that it needs this It needs a domestic economy to consume and produce because in the process of producing you create consumers Uh Henry Ford when he uh in 1919 or something he had this uh thing that he went to workers and he couldn't get any workers to come to Detroit to work he started
• 45:30 - 46:00 paying them 3x the regular wage The workers got so much money they could afford cars by themselves So he created his own customers by paying them and then of course then they started a massive cycle and all that stuff because the producers became the consumers and I think India needs the same thing You need producer but you don't need to manufacture for the world You need to manufacture for someone who needs stuff and that someone can be in India itself China's built its economy like that I
• 46:00 - 46:30 think it's a great thing Um and India is one of the few economies which actually makes its own cars Uh Europe is one for one part China's other Korea maybe uh but Korea also makes it for export and America uh I don't think there's a Canadian car I don't think there's a Mexican car there isn't a Russian car uh there isn't a Brazilian car or of any meaningful sort not that you know but okay I I I take your thing but now rather than predict how countries are
• 46:30 - 47:00 going to respond per se I think you've given the idea I'd like to bring the focus back to the portfolios and how you should invest this so given this is the state of the world and it looks like they're not backing down from the tariffs very obviously What is the way that you'd like to handle your portfolio in India or your port or the little bit of money you may have abroad if you're a customer listening into this episode and you're somewhat in agreement with what you've said so far So yeah so what I what I talked about maybe sounded like doomsday as a scenario but it's a doomsday only for trade I don't think it's a meaningful problem right now because you could still trade at higher
• 47:00 - 47:30 tariff levels and yet consu produce a lot more stuff for the domestic markets right so to that extent in India I think the defense for instance because I don't think we'll give up our defense law rules very easily We will continue to build a lot more for defense for railways for Indian infrastructure locally So Indian manufacturing should get continue to get a lot of impetus because it's going to create jobs in India and anyway the world's giving up on trade So even if for instance we went tomorrow and said we will remove our
• 47:30 - 48:00 tariffs America is not going to remove its tariffs because the rule is that he wants he wants our uh you know uh exports minus imports to balance out So what we will what he expects is that we will import more from him What we are saying is maybe we will export less to you uh in that sense So to me the exporters are less advantageous Maybe the drugs uh manufacturers and textile manufacturers today look okay because drugs haven't been taxed and uh textile
• 48:00 - 48:30 manufacturers face a lot of uh you know export competition from China and Vietnam who have both been tariffed now but my question is we've also been tariffed so if they have been tariffed 40% and 30% We've been tariffed 25% So it's like because we're all tariffed Americans are going to have to pay more for our textiles And if that means that America's usage of our products should drop because if I was able to buy
• 48:30 - 49:00 something at $100 if it became 120 or 130 I'm not going to buy enough of it So if my if they see volume drops of 20 or 30% And we see volume drops of 10% They're still seeing a volume drop So are they a good investment the answer is not in the first year perhaps in subsequent years but not in the first year So I would say they're not the ones that are interesting to me are Indian domestic manufacturers uh people who may create um replacements
• 49:00 - 49:30 like machinery for European uh engineering manufacturers uh the things that might say you build for us rather than China that may be partially impacted uh because countries are going to be like we need an alternative to China in the first there there's smaller uh benefits to it but I think the biggest beneficiary is just going to be domestic consumption oriented uh items where the supply chain
• 49:30 - 50:00 is starting to be located in India that is from an Indian perspective but if you're abroad this opens out new things Germany is going to produce for itself so it has producers who are exporters but also has small producers who uh will not be meaningful exporters anymore So we'll I think see some of them start to develop in a in a different way German defense manufacturers may actually be a or America I mean European defense manufacturers British Aerospace or
• 50:00 - 50:30 Airbus or all of these guys might actually become good investments going forward uh I'd be bearish on say companies like Shopify because if their drop shipping goes away uh then you have problems in terms of number of shops coming up and all that stuff The I would be but I would be bullish on maybe small American manufacturers who are in who already have located facilities located in America like bicycles Apparently bicycle
• 50:30 - 51:00 uh trade is very interesting China is was China has basically broken down India's bicycle manufacturing industry comprehensively They have built better bikes uh at lower prices than anybody in India can produce to the point where Chinese imports are in hugely in demand for the Indian bicycle industry Uh and but Indian bicycle industries always existed Hero cycles and this and that They just didn't evolve properly Maybe now is the time for them to do so But however America's always had a local domestic bicycle manufacturing industry
• 51:00 - 51:30 which didn't get that much you know because each bike was $4,000 and all that stuff Exactly So uh this is not like for the faint-hearted but uh that industry is seeing some comeback now simply because the Chinese imports are going to get more expensive So you're going to have a little more demand on this front And if you create more demand the production facilities can get more optimized So the $4,000 bike can become a $3,000 bike at volume So there will be
• 51:30 - 52:00 some downstream impacts of this from an investing perspective We have to see the impact of this But I think here's the thing and I'm saying this and I could be very wrong tariffs are probably here to stay we should just adjust ourselves to a larger uh economic picture where tariffs are going to restrict trade and everybody's going to have to build for themselves But guess what when you have a situation when people are going to have to build for themselves you find the builders and you invest in them So that's where the investing opportunity
• 52:00 - 52:30 is in there So we're recording this on Tuesday April 8th and let's hope we're not horribly wrong and he doesn't roll back all tariff Or actually let's hope maybe let's hope we are horribly wrong I mean I'm pointing a doomsday scenario for what was the past and we only know the past right that's right Okay Thanks Ep Thanks