Middle powers like India are wiring trade ties to dodge US-China fallout: Jean-Pierre Landau

A spate of trade deals and economic partnerships stitched by middle powers such as India, Canada, and the European Union (EU) are signs that they are preparing for the fallout of economic ties between the two of the world’s largest economies — the US and China, said Jean-Pierre Landau, a Professor in the Department of Economics at Sciences Po (Paris), in an interview with The Indian Express.

Amid worries of a looming debt crisis, Landau said the US debt is still very safe compared to the others, but part of that safety rests on the expectation that the institutions will be respected. However, aggressive measures taken by the US are aggravating the debt problem. Edited excerpts:

The US-China conflict is going beyond a trade war. What is your take on how the middle powers, such as India, are navigating this power struggle?

The concept of middle power is a very interesting and challenging one. The way we see things moving clearly is a sort of organised attempt (by middle powers) to keep trade relationships stable, unimpaired by too many protectionist measures, by signing free trade agreements and cooperative economic agreements. The EU, Canada, and India are very active in this area. So, they are all trying to keep a network of trade relationships protected from the US and China. Up until now, it has managed very well.

This being said, we’re still very much in a vulnerable situation. We are not immune to a possible financial shock coming from either the debt markets, the private credit markets, or the stock market. We have the G20, we have BRICS, but they don’t have the kind of operational mechanism for financial and monetary cooperation that would be necessary if we have financial troubles coming in.

I would say India is in a special position because of its size and plays an important role in the emerging world. I would say Europe is a beacon of monetary stability. It has a very credible monetary regime and a very credible central bank. So, these are the pillars on which we might want to build.

What is your sense of the looming debt crisis? The US has become more aggressive in its efforts to bridge its trade deficit due to rising debt.

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On debt, I think the causality may be the reverse of the one you have described. I don’t think the US is becoming aggressive because they have a debt problem. I think the fact that they’re becoming aggressive is creating a debt problem. It has led people to question the commitment of the US to the stability of its institutions. I mean, you see the president challenging the independence of the central bank. The US debt is still very safe compared to the others, but part of that safety rests on the expectation that the institutions will be respected, the stability will be ensured by the government, and if there are doubts, they come from the actions of the authorities themselves.

AI-related investments are driving global trade, but there are fears of a bubble.

High stock market valuation is a concern. There are three concerns. The second concern is circular financing. So, big chip makers are financing their clients and creating sales for themselves out of their own loads. That may have limits. Since it is a totally new technology which is extremely capital intensive, the ability of this model to generate the cash flow which will justify the valuation and the debt accumulation is definitely a question mark. So, in my view, it’s not so much a question of a bubble, and if there’s a bubble, a pure stock market bubble, we can absorb it. But the question is the viability of the whole financial structure and growth which is taking place in that sector

AI is also driving a debate on what would be the right energy mix. The Trump administration is betting on nuclear. What do you think will be the future of energy? The last nuclear power plant in Germany shut down in 2023.

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I am very biased when it comes to nuclear power. I think it is the energy of the future. It will help us solve all other environmental problems. It will solve air and water problems. The problem with nuclear power is that of governance. You cannot have nuclear power in a failed state.

From a pure economic perspective, I think the coupling of renewables with (other) networks is not economically rational. You need a very special type of network for renewables which can manage the intermittency of renewables, and that network is actually very expensive. So, at the moment in the current state of the technology as I see it, renewable is very good for local usages which may be 15-20% of energy requirement.

If we get to a situation where the battery technology gets much better, then we may see expansion of renewables much more than we have before. But we don’t know. So, again, it’s a question of technology.

I think the knack and the key of industry is to manage the sequencing, growth and introduction of those technologies. We all want to be champions of creative destruction. Some of us create before they destroy others, like Europe; destroy before they create, and it doesn’t work. That is why China, which is the biggest polluter in the world, is still dominant in those (clean) technologies because they have a way of introducing the technology when they are mature and they support growth.

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There’s a very strong theme of reindustrialisation. How effective can it be amid the concentration of industries in China?

I think the way China has managed to integrate into the world has created problems for everyone. There is a problem with the way they have done it in the last 10 years, not before — the last 10 years, the way they have managed is obviously very disruptive and problematic. Second, we can all reindustrialise.

We can all have our domestic industries, and the question is whether we keep growing, because part of our growth has come from the fact that we specialise, we organise cross-border, we interact with each other, and my concern is that for very legitimate reasons of strategic autonomy, resilience, independence we throw a little bit of baby with water and we engage into strategies which ultimately will produce lower.

So yes, we can all industrialise. France can produce if we want; we can produce all our cars, or it’s going to be terribly expensive, and we won’t have growth. That’s it. Can we manage to have a system which is more resilient, more robust, more respectful of our autonomies and still produce the kind of prosperity? We should not forget that the previous system has produced incredible benefits in terms of reducing poverty.

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Then, if we look at that level — the big challenge we have in the future — especially for Europeans, is a common challenge (that) is Africa. The African population will double in 30 years, so basic math tells you that if we don’t double at least the stock of capital in Africa, it’s (going to be) a big challenge for everybody.