Don’t Copy Trump On Trade

India will hurt itself most by setting up protectionist tariff barriers

TOI Editorials

With President Trump dominating the political discourse on trade, there is increasing pressure on the government from India Inc to erect import barriers and support domestic manufacturing, which has been struggling to compete with cheaper imports from countries such as China. If the US – traditionally the staunchest advocate of free trade – thinks that restricting imports will help its economy then India must go the same way, or so goes the argument. Due to upcoming elections the ruling political dispensation led by Prime Minister Narendra Modi is under serious pressure to revive private investment, ramp up economic growth and create jobs.

There is no shortage of people – both in government and the private sector – who think that by checking imports, India can push indigenous manufacturing and create enough jobs for its rapidly growing army of young and restless job seekers. In the pre-1991 era, many business tycoons got used to enjoying virtually no competition from cheaper and better quality imported merchandise. They fancy a return to the good old days of protected markets and monopolistic rent. For them, Trump’s recent tariff actions followed by Chinese counter measures provide the much-needed context for India to justify its own version of protectionism.

Thus, India has been raising import duties starting with items such as steel followed by automobile parts and components, footwear and toys. Given the cosy nexus of big businesses with top bureaucrats and politicians irrespective of party affiliations, more such hikes in import duties are likely to creep in. But if any country should know about the perils of protectionism, it is India. We can’t really discount the economic damage caused by decades of import restrictions that former Prime Minister PV Narasimha Rao’s government tried to dismantle with limited success. Even that limited success in dismantling the control raj has given a big boost to India’s economic growth prospects.

Despite increasing support among Indians for copying Trump’s trade tactics, duty hikes will create an inefficient industrial structure that will backfire on India. It will raise the cost for downstream industries, penalise exports, limit consumers’ choices and worse, it may trigger retaliation from trade partners who expect to lose from tariff hikes. In today’s world, industrial production is a multi-location phenomenon. Thus, any increase in tariffs will further drive India out of regional and global production networks, which require seamless movement of components and parts across borders several times during the production process.

India learnt the hard way, during its licence-quota raj, that raising import barriers penalises exports. Protected markets make domestic businesses focus inward, making them complacent about cutting cost or upgrading quality. As a result, exporting domestically produced goods becomes increasingly difficult in an intensely competitive global market place. Domestic consumers too lose in the process, from a lack of choice and poor product quality that often comes at relatively higher prices – the characteristics of a typical captive market. This has been India’s major lesson from pursuing socialist economic policy for over four decades.

The evidence from abroad, including the US, is also not supportive of mercantilism. An earlier import duty hike on steel products in March 2002, by former US President Bush didn’t work and had to be withdrawn by December 2003. India’s own experience is not much different. Last year, increase in duties and imposition of minimum import prices (MIP) led to a surge in domestic steel prices and the government had to warn steel companies not to keep prices above Rs 40,000 rupees a tonne, which adversely affected consuming downstream industries.

Besides, retaliatory trade action could harm India’s growth prospects by shrinking the size of overseas markets, as its domestic market is not large enough to let Indian businesses realise economies of scale or be able to absorb a million a month new job seekers who’re joining the country’s workforce. As for the US, it’s worth remembering that even industries Trump says he is supporting are now opposing him, for instance, automobile manufacturer General Motors. This is not to argue that Indian businesses are not disadvantaged. They are – but that’s mostly because of internal factors such as inefficient logistics, business unfriendly border and customs procedures and a series of poor sectoral regulations ranging from healthcare to textiles that jack up the cost of doing business, discourage value added production and drive away entrepreneurs. India should focus its attention on addressing the internal constraints that have been keeping its manufacturing sector inefficient.

There is no denying that an increase in import duties may provide some temporary respite, but in the end it will do more harm than good. The presence of a consensus based multilateral trade body like WTO has served India and other developing countries well both in seeking better market access or fighting unfair trade competition from countries such as China or the US. India should rather work with the EU and Japan to reform a WTO that is ineffective in tackling China’s unfair trade practices. India must also expedite crucial trade pacts, in particular, those with the Eurasian Economic Union, the EU and Latin American trade bloc Mercosur to find alternative export destinations and somewhat compensate for likely losses in traditional export markets. This is also the time to persuade a China targeted by Trump’s trade war to be more willing to allow Indian merchandise, especially farm produce and pharmaceuticals, into its large domestic markets.