#309 Roadblocks, Milestones, and U-turns
The US Trade Deficit Tangle, Unintended Consequence of Restricting Heavy Goods Vehicles, Tech Denials Reach a Turning Point, and Land Pooling Protests in Punjab.
Global Policy Watch: Whither Trade Deficit?
Global policy issues relevant to India
—RSJ
After a couple of months of being distracted with wars around the globe and a bid to win the Nobel Peace Prize, President Trump, last week, returned to the one unchanged ideological position that he has held on to for the better part of his adult life. That is, trade deficits are bad, and tariffs are the answer to balance them.
So we had a new round of threats and deadlines issued. Trump sent out letters to various heads of state that were essentially his TruthSocial posts with a US government seal, giving them one last chance to negotiate a deal or face consequences within the next 30 days. He also turned the screws on the EU, one of America’s biggest trading partners, by demanding a minimum tariff of 15-20 per cent after weeks of talks where the EU bloc was trying its best to keep that to the baseline tariff of 10 per cent. Much of this renewed vigour on tariffs came after some surprising second-quarter data. US stocks continued to look past Trump’s announcements and scale new all-time highs. The U.S. inflation rose to 2.7 per cent in June, but the rise was still modest compared to the runaway expectations. Inflation might still bite later in the year when the full impact of tariffs plays through, but right now, it still gives Trump the ammunition to go after the Fed Chair for rate cuts. And, US revenues from customs duties for the second quarter were about $50bn more than the same quarter last year, as the tariffs started bringing in the extra revenues with barely any real retaliatory action by the US trading partners in sight (barring China and Canada to some extent). These are early days, but the trends suggest global brands are absorbing the tariff impact by bringing down supply chain costs or redistributing the price increases to markets other than the U.S. to minimise the impact on volumes in their largest market. We will have to wait and see if this continues, but if it does, Trump will claim victory for his tariff strategy. My guess is this is exactly how it will go. The world will bear the cost of tariffs and the rise in inflation in lieu of the U.S. customers. There might be a long, drawn-out retaliation that America’s largest trading partners will eventually inflict on it, but by then, Trump would have declared victory and retired from office.
I have written earlier about Trump’s mercantilist view that running a trade deficit means the other country is winning. A core argument here is that for several decades now, the US has had a persistent trade deficit, which hasn’t corrected itself through price adjustment. This means that over time, the self-regulating mechanism should have kicked in; the Dollar should have devalued itself to make exports more attractive and imports costly, and bridge the trade deficit. The reason this hasn’t happened is that export-oriented countries like China have used their domestic industrial policy—production subsidies, easy credit to the industry, repressed labour costs, restrictions on labour mobility in tandem with trade policy that is supported by tariffs, import controls and an undervalued currency—to keep their manufacturing competitiveness artificially high. The domestic industrial policy, therefore, acts as a proxy to trade policy and doesn’t allow the comparative advantage between the US and China or other countries to play out as written in textbooks. In effect, the US will continue to pay the price of the distorted industrial policies of these countries that suppress domestic demand, subsidise manufacturing and externalise the excess capacity to keep the trade deficit high. This has hollowed out American manufacturing while its consumers overconsume. The problem isn’t just limited to this. Because capital flow into the US is free from controls, the trade surplus of China and other such countries has meant foreign capital has flown into America, buying domestic assets, mostly bonds and stocks. This excess capital has meant the domestic savings rate in the US is unnaturally low, further reducing aggregate household savings and rewarding consumption. So the simple MAGA-nomics answer to this persistent trade imbalance, the root cause of all evils, engineered by a distorted industrial policy of these countries, is therefore simple. First is a steep tariff increase on all goods from countries with a trade surplus with America. Second, bring in capital controls to prevent these countries from exporting their savings to buy up US assets. The eventual outcome of this, as may or may not be desired by the MAGA movement, is a rise in inflation and a slowdown in consumption in the US and an eventual depreciation of the dollar. Will that work for them?
A new working paper, The US Trade Deficit and Foreign Borrowing: How Long Can It Continue?, by Tamim Bayoumi and Joseph E. Gagnon of the Peterson Institute, attempts to answer this. It suggests that setting America’s net investment position on a sustainable path will need a potential trade adjustment of about 2 per cent of GDP, implying a 15-20 per cent drop in the dollar's real effective exchange rate. It is a pretty detailed paper on understanding the US CA deficit, the exorbitant privilege of the dollar and how Trump tariffs will most likely “drive rates of return on US foreign liabilities up by more than rates on US assets”, making things worse.
I have extracted key parts of the conclusion of the paper below:
”This paper has explored the causes and consequences of persistent U.S. external deficits over the last 45 years and whether the recent fall in CA balance to ~4 percent of GDP is a cause for concern. We argue that the persistent deficit reflects unique features of the United States, including the large size and relatively strong growth of its economy and the dynamism and creativity of its financial and technology companies. More specifically, the U.S. seems to be better at creating marketable securities, including safe assets, that foreign investors wish to buy. These features make US assets attractive to foreign investors and enable United States to run large current account deficits at comparatively low rates of interest.
… We find that the present level of tha trade deficit is not likely to be sustainable as it would push the net international investment position (as a ratio of GDP) beyond levels that have been sustained in any advanced economy. Setting the net investment position on a sustainable path requires a substantial but not unprecedented increase in the US trade balance. If exorbitant privilege is maintained, the adjustment is some 2 percent of GDP, implying a depreciation in the real effective exchange rate of some 15 to 20 percent.
Continuing the present unsustainable path makes the net international investment position even more negative and increases the eventual adjustment needed. It also raises the risk that investors will no longer see US assets as safe, implying an end (possibly abrupt) to the favourable funding rates implied by exorbitant privilege. To minimise the risk of financial turbulence and an uncomfortably rapid adjustment, policymakers should act soon to reduce some of the underlying imbalances driving the deficit. Most notable is the large U.S. fiscal deficit. Measures to stimulate domestic spending overseas would help offset the contractionary effects of any U.S. fiscal consolidation.
President Trump’s attempt to eliminate the U.S. trade deficit through tariffs is not likely to succeed without either causing a recession or driving rates of return on U.S. foreign liabilities up by more than rates on U.S. assets. The response of bond and foreign exchange markets to the April 2 tariff announcements suggests that the latter possibility is in play. Reducing the trade deficit at the cost of higher interest payments to foreigners would be a pyrrhic victory, as it would not necessarily make the deficit more sustainable, and it would make any given net international investment position more costly to maintain.” [The US Trade Deficit and Foreign Borrowing: How Long Can It Continue?, Bayoumi and Gagnon]
India Policy Watch #1: Rickety Vehicles on Rickety Roads
Insights on current policy issues in India
—Pranay Kotasthane
Over the last six months, my commute times between North and Central Bengaluru have increased by 50 per cent. It's too rapid an increase to be justified by the rise in vehicles. The root cause is poorly planned infrastructural works—several white-topping and public infrastructure projects have begun and show no signs of completion. The resulting road blockages have had a spillover effect on alternate roads not meant to carry heavy traffic.
Nevertheless, the extra 40 minutes of commute time has one positive effect: you start hunting for public policy stories in the chaos. Just think of it: Traffic is India's true microcosm. India’s cultural and linguistic diversity is only matched by the vehicles (and mammals) on our roads. What my colleague Nitin Pai calls a sense of “us-lessness”—a glaring lack of social capital—is epitomised by urban traffic. People break traffic rules merrily, the aggression levels are high, and selfishness is the norm. On the other hand, just like the world wonders about how India continues to thrive despite its many contradictions, it’s equally a marvel that most Indians, on most occasions, choose to follow traffic rules despite the payoffs being higher in the short term for breaking rules and behaving selfishly. That’s why I repeat: traffic is the true microcosm for India.
However, the policy story I want to narrate today concerns the proliferation of unsafe cargo vehicles on our roads. As usual, this is a case of the unintended consequences of policy actions. Here’s how.
Across our cities, the sight of a large truck lumbering through peak-hour traffic is a common source of frustration. In response, city traffic police have implemented a seemingly logical solution: ban Heavy Goods Vehicles (HGVs) from city roads during busy hours. The goal is simple and well-intentioned: reduce congestion, cut down on pollution, and make streets safer. But as we know, there’s no perfect public policy; only trade-offs. And this HGV ban has unintentionally made our roads slower and riskier.
While the big, regulated trucks are kept at the outskirts, the demand for goods doesn't just disappear. Instead, it’s displaced onto a shadow fleet of smaller, faster, and unsafe vehicles. This "regulatory displacement" has created two hazardous workarounds that slip through the regulatory net.
First are repurposed agricultural vehicles. The tractor-trolley is now ubiquitous on Bengaluru roads, while the improvised three-wheeler “Jugaad” vehicles crudely assembled from scrap parts and powered by irrigation pump engines are popular on streets in North India. These vehicles exist in a legal black hole: unregistered, uninsured, often without number plates, and utterly devoid of basic safety features like effective brakes or crash-worthy frames. Designed for low-speed farm work, they are dangerously unstable on paved roads.
The second, more insidious threat comes from illegally modified mini-trucks. These Light Commercial Vehicles (LCVs) are the workhorses of last-mile delivery. However, many operators weld dangerously oversized, high-walled cargo bays onto the chassis, extending far above the driver's cabin. The cargo bays can sometimes extend to twice the height of the driver’s cabin. This increases the vehicle's centre of gravity (CG), making it prone to rolling over, especially during a sharp turn or a sudden manoeuvre. This ticking time bomb is then sent into the chaos of city traffic, where a simple evasive swerve can trigger a fatal accident.
This situation persists due to deep systemic failures. While India’s Motor Vehicles Act technically prohibits such modifications, the law focuses on punishment rather than proactively creating a market for safer alternatives. This legal gap is widened by a chronic enforcement deficit. An under-resourced police force means these unsafe vehicles operate with near impunity.
Let’s see how some other places tackle this problem. Small trucks are a common sight even in Singapore, given the limited space available on the island. But these are well-designed miniaturised trucks rather than jugaad vehicles. Singapore manages its urban freight with an integrated system of clear vehicle categories, mandatory international safety standards, and consistent enforcement.
On the other hand, we have banned HGVs only to find ourselves trapped amidst unsafe, slow vehicles. Apart from increasing enforcement, there is perhaps a case for a new, purpose-built vehicle category—the "Urban Logistics Vehicle" (ULV). These ULVs would be required to meet safety standards. By linking peak-hour operating permits directly to these new safety standards, the policy could provide an incentive to modernise.
Matsyanyaaya: Tech Geopolitics, Practice vs Theory
Big fish eating small fish = Foreign Policy in action
—Pranay Kotasthane
The practice of technology geopolitics often precedes theory. The atomic bomb was used before the theory of nuclear deterrence came up. Back then, people thought the atomic bomb was just a ‘very big bomb’. Only after its first use did scholars develop the theory that nukes are best deployed as political weapons, not war-fighting ones.
Many decades later, we are again in a phase in which the practice of tech geopolitics is moving much faster than the underlying theory.
Take last week, for instance. Three months after shutting down Nvidia’s H20 chip sales to China, the Trump administration approved their sale again. These are not the most advanced chips used in cutting-edge training workloads, but they handle inference workloads well. By allowing its sales to China, the US has accepted that there are diminishing returns to technology denial.
On the one hand, this reversal will undoubtedly help Chinese AI firms catch up with the world’s best AI models. On the other hand, this move will also give the US companies some respite. China is Nvidia's largest market, home to 50 per cent of AI developers. If that market is completely closed, American firms like Nvidia will find it difficult to raise revenues and reinvest them in the next round of research and development.
Moreover, despite the bluster, China cannot replace Nvidia easily. Intel didn't win the processor wars because it built the best chips - Sun's SPARC and DEC's Alpha were technically just as good. Intel won because it created an ecosystem that was too valuable for developers and manufacturers to abandon. The switching costs were prohibitive. That's the advantage Nvidia has with its CUDA developer platform. Even if China develops domestic substitutes, it will still need Nvidia for deployment in foreign markets because of CUDA's centrality. Developers across the world work on CUDA and are familiar with that ecosystem. Just like China hasn't been able to replace Intel's x86, replacing another globally popular ecosystem is unlikely.
Chinese AI models are competitive despite all the GPU restrictions. They might not be the best on some parameters, but they are good enough for domestic use from a strategic perspective. The crucial element is which models and standards are used outside of China. That's where US companies have an advantage. As long as the world is tethered to US hardware and software, China’s digital exports will find it difficult to find a foothold outside China. And that’s perhaps the best outcome that the US can hope for.
Similarly, there are reports that China’s rare earth export controls are facing a pushback from domestic producers, who are worried that other countries will soon commercialise substitutes or create rare earth processing plants outside China. Here again, export controls are hitting their limits.
That brings me to the general trend. In the initial phase of the latest round of heightened technology geopolitics, nation-states were quick to deploy export controls, end-use restrictions, and investment restrictions in the hope that these strategies will prevent their adversaries from catching up. However, countries are now coming to terms with the reality that such controls often end up being counter-productive. The theory is catching up with the practice, and I think we have hit peak technology export controls. By the end of this decade, I predict that blunt technology export controls will go out of fashion, and nation-states will shift to other instruments like attracting talent and screening outgoing investments. We have reached a turning point.
India Policy Watch #2: Land Pooling Trouble in The Protest State of India
Insights on current policy issues in India
—Pranay Kotasthane
There are protests in Punjab. Yet again. This time around, the target is the Punjab Government’s Land Pooling Policy 2025, which was notified last month. Before we discuss the protests, let’s understand what land pooling means.
Land pooling (land readjustment) is needed because acquiring land in India is super expensive for development authorities. It became even more expensive after the new law for land acquisition in 2013, which increased the compensation rates substantially. This made the cash-strapped urban governments look for other options like land pooling. Anirudh Burman explains it well with an example:
“For example, the Delhi Development Authority (DDA) introduced a land pooling scheme for developing specific parts of Delhi in 2018. Compared to land acquisition, DDA’s policy does not require the DDA to acquire land. Landowners can agree to pool their land, form consortiums, and transfer their pooled land to the DDA. Once 70 percent of the landowners in a given locality agree to pool their land, the DDA will develop this land. It will use up to 40 percent of the pooled land to provide public amenities and infrastructure like roads, hospitals, etc. Once the amenities have been provided, the remaining 60 percent of the land will be used by the landowners or their consortium for developing residential, commercial, and other facilities.
This is fiscally advantageous for the DDA, which reportedly has a cash deficit of Rs. 9,600 crores. While the DDA would have to spend money to acquire land under a policy of acquisition, land pooling does not require any such expenditure. In the latter, the DDA’s expenditure will be limited primarily to the infrastructure development in pooled areas. In fact, the DDA is charging external development charges of Rs. 2 crores per acre from every owner/consortium for providing this infrastructure.” [Anirudh Burman, Land Pooling in India]
This is not unlike the land readjustment policies that make Japanese cities great. Readjusted land accounts for nearly 30 per cent of urban land and has allowed the city to modernise its infrastructure despite its density and spread. Readjustment is less coercive than acquisition; it’s theoretically voluntary and protects the interests of those who fear being displaced.
Many states and cities in India have tried land pooling over the last decade. Punjab’s first land pooling policy was made in 2013 and updated in 2020. Under the new Land Policy 2025, the provisions, according to the Indian Express, are as follows:
For every 1 acre of land pooled, landowners will get a 1,000 sq yard residential plot and a 200 sq yard commercial plot (1 acre= 4,840 sq yards). In the case of larger contributions, for every 9 acres of pooled land the landowners will get 3 acres of developed land, suitable for group housing. For 50 acres pooled, they will get 30 acres of developed land.
The policy is currently being rolled out in 27 cities across Punjab, in districts such as Ludhiana (24,000 acres targeted), Mohali (6,000 acres), Amritsar (4,464 acres), Jalandhar, Patiala, Bathinda, and Sangrur. [Kanchan Vasdev, Indian Express]
But pooling also requires high trust, a good execution record, and community action to convince holdouts. This is how Japan gets it done, from a brilliant article by Anya Martin in Works in Progress:
“An individual project begins when a promoter, usually a developer or group of landowners (or homeowners), but potentially also a city council or railway company, decides that a particular area could be used more valuably than it is now. The core idea is that some land could be more valuable if it had more or better infrastructure, whether that is sewerage and water, or, more often, a new railway station, or wider, more evenly distributed streets. In many cases this also means upzoning the land to permit denser development.
This organization or group approaches the landowners, who are often a mix of homeowners or farmers, and discusses the proposals with them. If they seem amenable, the promoter gets to work. They set up a council, which will make a new land plan for the affected area. The plan sets out the land to be used for infrastructure, the land to be sold as ‘reserve land’ to fund the project, and how the remaining land is redistributed to the owners. This last step is essential. Land readjustment aims to equalize the share of value that everyone gets, so that everyone enjoys the same percentage value uplift from the scheme. There are often parallel changes to the city plan, commonly upzoning, typically put into place on the same day as the land readjustment is passed.
Usually the process goes on for several years, with consultations and public meetings to decide on a final plan that is likely to get consent. In agricultural land readjustment, the total land area stays approximately the same, and plots are merged and reorganized to try and generate more efficient and equally valuable consolidated plots. Moving from agricultural to urban land is more complicated, since a third or so of the land will be lost to parkland and infrastructure, so plots typically shrink significantly, but get much more valuable, counterbalancing this.”
That’s precisely what the Punjab government was after. On paper, the policy appears to be a rational, efficient, and less coercive alternative to land acquisition. It promises a win-win scenario: the government gets land for infrastructure without massive capital outlay, and landowners become partners in development, swapping their agricultural land for highly valuable developed plots. How, then, do we make sense of the protests?
This is where the groundbreaking work of James M. Buchanan and Gordon Tullock in The Calculus of Consent becomes essential. Their theory explains that what seems rational for the collective (the government or a majority of landowners) can be deeply irrational and costly for the individual. According to this logic, the protests in Punjab are not an emotional rejection of development, but a logical response based on a rational calculation of costs by individual farmers.
Buchanan and Tullock’s central argument is that individuals will only agree to a collective action if the benefits outweigh the costs. The most significant costs are of two types:
External costs: These are the damages or losses an individual is forced to bear from a collective decision they disagree with. These costs decrease as the number of individuals required to agree on a decision increases. The more people required to make a decision, the less likely that it will go against any one particular individual.
Decision-making costs: These are the time and effort costs required to reach an agreement among the necessary number of individuals. These costs increase as the number of individuals needed for a decision rises.
Buchanan and Tullock’s insight was that the rational individual will seek a decision-making rule that minimises the sum of these two costs. In land pooling, this is practically achieved by requiring a supermajority rule, i.e. the pooling happens only if 80 per cent or more people agree to the proposal. This way, decision-making costs are reduced compared to the case where a 100 per cent approval rewards NIMBY holdouts. The external costs are also reduced compared to a simple majority decision-making rule, since a high threshold of 80 per cent of people have been brought on board.
Punjab protests indicate that the external costs haven’t reduced yet. The possible reason could be the high cost of uncertainty. The Japanese model is built on a foundation of high trust and a long, consultative process. In Punjab, a farmer must weigh the government's promise of future developed land against the risk of project delays, bureaucratic corruption, and unfair valuation. This uncertainty is a massive external cost. The farmer is asked to give up a tangible, productive asset today in exchange for a speculative asset in the future, bearing all the risk of the government's execution. This situation is further compounded by the perceived success of the farm laws 2020 protests. Protesting farmers have now become a weapon that all opposition parties (the BJP, Congress, and Akali Dal in the present case) are happy to exploit.
The Japanese model works because its implementation is rooted in a culture of consensus-building that respects the individual's position. In Punjab’s case, minimising external costs would require building trust by conducting pilots in small pockets, delivering on the promises to the affected, frontloading compensation, and only then scaling up in other districts. For now, brace for more protests.
HomeWork
Reading and listening recommendations on public policy matters
[Podcast] Don’t miss this Puliyabaazi with Dr Gurbachan Singh on the root cause analysis of urban slums in India.
[Article] An excellent backgrounder on China’s shipbuilding industry, by
.[Article] Here’s a counter-argument on the H20 ban.
Article on protests in Punjab is a signal to know more about land pooling. Unintended consequences of ban on heavy vehicles is eye opening. Thank you.
The idea of Urban Logistic Vehicle is appealing and should be pitched ahead. Also with omnipresent Totos with underage, unlicenced drivers, uninsured vehicles have made even tier 2 tier 3 cities choking. Not sure about Smartness but cities are becoming more dumb day by day.