This article is based on “International trade is not a zero-sum game” which was published in The Indian Express on 23/10/2021. It talks about the need for India to promote free trade and shun protectionism in international trade.
U.S. Trade Representative (USTR) in its 2021 report “National Trade Estimate Report on Foreign Trade Barriers” has pointed out that India’s average tariff rate of 17.6% is the highest of any major world economy.
With the aim to protect domestic industries from dumping and other trade distorting practices by China and others, India has increased its tariff rates and stricten its other non-tariff measures.
Trade protectionism might have immediate benefits to the economy, however, all economists agree that, in the long term, it hurts economic interests of the country.
Tools of Protectionism
India, inter alia, other countries use various tools to protect its economy from unfair trade practices. Some of them being-
- Tariffs: A tariff is a tax imposed by a government of a country on imports or exports of goods. High tariffs will raise the cost for foreign producers to sell their goods in a domestic system, providing strategic advantages for local producers.
- India has one of the highest tariff rates in the world.
- Import Quotas: This is the act of limiting the number of a certain good that can be purchased from a given country, ensuring that domestic producers maintain a portion of the market share.
- Local Content Requirement: Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically. India uses it for defence contracts and technology sectors issued in India.
- Sanitary and Phytosanitary (SPS) Measures and Technical Barriers to Trade (TBT) Measures: These two types of measures are allowed under the WTO to protect health and environment of other countries. They also bind other countries to follow a country’s standard in technical products.
- Anti-dumping duty: Dumping is the process of selling goods far below market value to drive out competition. India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
- According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014.
- Rules of Origin: India amended the Rules of Origin requirement under the Customs Act. India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
- The intent appears to be to dissuade importers from importing goods from India’s Free Trade Agreement (FTA) partners.
Arguments for Protectionism
- National security: The argument pertains to the risk of dependency upon other nations for economic sustainability. It is argued that in case of war, economic dependency can restrict one’s options. Also, the other country can affect other country’s economy in a negative way.
- Infant industry: It is argued that protectionist policies are required to protect industries in their initial stages. As if the market is kept open, global established companies can capture the market. This can lead to the end of domestic players in the new industry.
- Dumping: Many countries dump their goods (sell them at lower price than their cost of production or their cost in the local market) in other countries.
- The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly.
- Saving jobs: It is argued that buying more domestically will drive up national production, and that this increased production will in turn result in a healthier domestic job market.
- Outsourcing: it is common practice for companies to identify countries having cheaper labor and easier systems of governance and outsource their job work. This leads to loss of jobs in domestic industries.
- Intellectual Property Protection: Patents, in a domestic system, protect the innovators. On a global scale, however, it is quite common for developing nations to copy new technologies via reverse engineering.
Arguments against Protectionism
- Trade Agreements: India has benefited immensely from international trade agreements. As per the Commerce Ministry data, India has entered into Free Trade Agreements (FTA) with about 54 individual countries.
- They provide tariff concessions thereby giving opportunities for exports of products including those related to small and medium enterprises (SMEs).
- Against WTO Regulations: India has been a member of WTO since its inception. WTO’s regulations prohibit imposing restrictions on imports from other countries.
- They can be imposed only for certain purposes like balance of payment difficulties, national security etc. Such barriers cannot be imposed to protect domestic industry from healthy competition.
- Inflationary in Nature: Protectionist policies by restricting imports, can lead to rising prices in the domestic market. Thus, hurting the interest of the consumers directly.
- Uncompetitive Domestic Industries: By protecting the local industries, they have no incentive to innovate or spend resources on research and development (R&D) of new products.
- Improving Ease of Doing Business:Though progress has been made, India still lags behind many larger nations in critical metrics such as starting a business, enforcing contracts and registering property.
- Improving on these metrics can help Indian firms to compete globally and get a bigger market.
- Make In India: The focus should be on encouraging innovation, research and development and entrepreneurship in the country. This will prepare Indian companies to compete in the sectors of the future.
- Boosting Private investment: It will, in turn, boost up Growth, Jobs, Exports and Demand.
- Predictable and transparent Trade Policy: It will allow Indian firms to plan their capacity and finances in advance. They will be able to allocate their resources for expansion and R&D. This will allow them to be competitive in the international market
- Free Trade Agreements (FTAs) : India needs to effectively utilise FTAs, especially with East Asian nations (ASEAN), Japan, South Korea to its advantage to boost investments, exports and technology transfers to and from these nations.
- Resolving Trade Issues: Trade issues with US and other countries should be resolved at the earliest to eliminate investors' doubts in the Indian trade regime.
What India needs is to draw a fine balance between the interests of domestic industry and giving trade concessions to multinationals to attract foreign investment in the form of FDI.
The goal of a $5 trillion economy by 2025 needs comprehensive, multidimensional and multi-sectoral efforts to achieve it.
Drishti Mains Question
“Protectionism may be beneficial in the short term, but in the long term, it hurts the economy.” Comment.