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Not withdrawal from RCEP, but protectionism in India can end up hurting industry and consumers in the long run (Photo: Mint)
Not withdrawal from RCEP, but protectionism in India can end up hurting industry and consumers in the long run (Photo: Mint)

Protectionism should worry India

Among large economies, the US and India have imposed the most trade restrictions in the past three years to promote domestic manufacturing, data shows

India’s last-minute withdrawal from signing the Regional Comprehensive Economic Partnership (RCEP) treaty has reignited the debate on the trade policy and protectionism in Asia’s third largest economy. How far RCEP would benefit or harm the country remains a matter of debate. But what is beyond debate is India’s rising protectionism, which can end up hurting both consumers and industry over the long run.

Data from the Global Trade Alert (GTA) database shows that over the past three years, among the largest economies comprising the G-20 group, India is only second behind Donald Trump-led US in imposing restrictions on trade.

The GTA database is a trade policy monitoring initiative by Simon Evenett and Johannes Fritz, economists with the University of St. Gallen, Switzerland. The database attempts to record all unilateral actions by governments, including those by public institutions such as the central bank, which affect trade. The countries affected by each such action are identified on the basis of existing trade patterns between the countries concerned.

Even as it sharply criticized rising protectionism in the US under the Trump administration, India itself raised tariff walls in the last two budgets, ostensibly to promote domestic manufacturing. These moves reversed a long-held policy of liberalizing tariff rates which India had followed since 1991. Such unilateral restrictions on trade affect all economies, and arguably isolate India more than the decision to opt out of any one trade deal. Expensive imports after all make even our exports costlier since much of what we export is based on imported inputs. They also hurt consumer interests since consumers end up paying higher prices.

Such decisions also end up hurting Indian industry on three counts. First, tariff increases in any one industry (say, steel or electronics components) can hurt other firms in another industry (say auto-makers and electronics assemblers). Second, such tariff walls erode the competitiveness of domestic firms over the long run and raise the ‘cost’ of entering any trade pact, such as RCEP, since the gap between India’s tariff rates and those of others remain wide. Finally, such unilateral tariff walls end up inviting retribution from trading partners.

And the GTA data does show that has faced a backlash, especially from the advanced G-20 economies. Among the largest economies in the G-20 group, China and India have been hit the hardest by protectionist measures of advanced G-20 economies in the last three years. The emerging G-20 economies have, however, been less harsh on India so far.

But this could change if calls to raise tariff walls against other emerging markets, particularly China, materializes. Concerns about India’s rising trade deficit with RCEP members, particularly China, led to India’s withdrawal from the proposed pact. And such concerns have also led to calls for policies to stem the flow of imports from these economies, particularly Chinese imports.

But any such move could end up being counter-productive for the reasons discussed above, benefiting a few domestic firms, but hurting others. A recent Indian Institute of Foreign Trade (IIFT) working paper authored by Sunitha Raju and V Raveendra Saradhi suggests that concerns about imports from China may be misplaced.

They show that between 2007-08 and 2015-16, growth in imports from China was associated with growth in gross value added (GVA) and output across Indian industries. Of the 26 major industries selected for the analysis, GVA declined for only three industries—steam generators, iron and steel, and games and toys. Categorizing Chinese imports into capital, intermediate and consumer goods, the authors found that imports of intermediate goods boosted output the most (growth of 163%), followed by capital goods imports (93%) and consumer goods imports (73%). Thus, the authors argue that imports of intermediate and capital goods from China have the greatest effect on the manufacturing sector.

Competition from Chinese imports also improved overall industry efficiency by forcing out inefficient firms and allowing efficient firms to increase their market share, the researchers show. In particular, this has helped boost the chemicals and pharmaceuticals sector with both sectors improving their export performance.

India’s lurch towards protectionism has also meant that India’s integration in global value chains (GVCs) has suffered in recent years. Between 2007 and 2017, GVC participation rate for most developing countries declined, a recent World Bank report shows. But the decline for India has been sharper than for others.

It is worth noting that India’s export performance has been lacklustre since then. India’s share in global merchandise exports has stagnated in the 1.6%-1.7% range since 2013 even as India’s GVC links with other economies has come down.

It is worth noting that during India’s export boom in the 2004-09 period, when share of merchandise exports rose nearly half a percentage point to 1.3% of global trade, India’s integration in GVC networks had also risen.

More generally, India’s export growth and overall GDP growth rate in the post-liberalization era has been far higher than it was during the long period of protectionism that preceded it. Higher protectionism does not seem to have brought any sizeable benefits for the country whereas greater integration did benefit the economy as a whole.

India can realize its ambitions of becoming the next factory of the world only if it opens up its economy and adopts fair and predictable trade rules. India’s policymakers must refuse to give in to protectionist lobbies, and instead force domestic firms across industries to become globally competitive if they want to see India grow rapidly.

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