‘National security can justify higher tariffs’

National security concerns could justify imposing higher customs duties on imports from certain countries, particularly China, once India has established more free trade agreements (FTAs) to secure the supply of key intermediates, NITI Aayog member Arvind Virmani said.

Virmani said once the proposed FTAs with developed economies such as the European Union (EU) and the UK are effective and functional, one could look at the broader issue of import concentration and differential tariffs to achieve “diversification and de-risking”. He added that he was only speaking in terms of economic ideas and not government policy.

With tariff-related measures, Indian businessmen can be encouraged to look beyond China for sourcing intermediate goods and raw materials at competitive prices and the required quality, once India breaks into global supply chains comfortably and scales up its share in world trade, Virmani said.

China accounted for about 32% of India’s merchandise trade deficit during 2022-23, according to official data. During the year, India exported $15.23 billion worth of goods to China while importing $98.51 billion from the country, registering a trade deficit of $83.1 billion.

India has been lowering basic customs duty on raw materials and intermediates like components while raising the duty on finished products to encourage local production. However, heavy dependence on China for raw materials and intermediates remains a concern for policymakers.

“Because China has made everybody think that it is the place to go for intermediate goods, we shouldn’t ignore others—there are other smaller producers around the world which have near the same price and quality offered by China,” Virmani said, adding that till the time India moves deeper into the global supply chain, we can’t afford to curb those imports from China.

Virmani said that the usual way of influencing the import preference of businesses is through tariffs, and a careful strategy on Chinese intermediate goods can prompt companies to look for such intermediate goods elsewhere.

Virmani highlighted the need for India to break into the global supply chain and said production-linked incentives are playing a key role in creating economies of scale so India can compete on the global stage.

At least two-thirds of world trade happens within supply chains while one-third happens independently, he said. The global trade is driven by multinational corporations from the US, EU, UK, Japan and more recently, South Korea, he said.

“Our exports are independent exports while much of the global trade has shifted to supply chains led by MNCs. For example, there are consumer-led supply chains like Nike and Adidas, there are big wholesale companies, and there are producer supply chains led by the likes of Apple and Samsung. A very small fraction of our trade is in this chain. We are somewhat outside of it. The only way to get our exports up comprehensively is for us to be a part of the supply chain,” said Virmani.

If we have FTAs with the developed countries, it is easier to break into those supply chains, Virmani said.

He explained that the FTA between Vietnam and the EU gives Vietnam a 12.5 % advantage in the electronic supply chain over India. Once India signs an FTA with the EU, we will be on par with Vietnam in this regard. “Getting on the supply chains means a part of it. Then, it (scaling up the share in world trade) will depend on your competitiveness. Become competitive with other countries that are in the supply chain. FTA is an interim step to break in, and then you have to be competitive. We are currently at a disadvantage with all countries that are in the FTA regime and have zero tariffs,” Virmani said.