Opinion | Don't blame Donald Trump for Indian protectionism4 min read . Updated: 24 Mar 2019, 11:59 PM IST
It is not just India’s import tariff increases but its active interference in trade and commerce that the US has a problem with
There is a peculiarly insouciant tone to much commentary on the opening salvo of a putative trade spat between the United States and India. This, as readers will be aware, was the notification to the US Congress by President Donald Trump on 4 March that the US plans to withdraw tariff concessions to India under the Generalized System of Preferences (GSP). The reaction by Indian officials, in the first instance, has been to downplay the likely impact, a reaction that has largely been mirrored by Indian commentary on the issue.
Thus, it is argued that GSP covered only a small proportion of total Indian exports to the US, and that the loss in tariff-free entry for these products will cost only $190 million, missing the point that this very likely understates the true impact, which depends not only on current exports but the reduced export level once the loss of preferences kicks in. Further, it is argued, Trump is a protectionist, so it’s natural that India would fall within his cross-hairs at some point. This is yet another diversionary tactic that fills in for introspection.
Nevertheless, the upshot of this widely held narrative is that India has little to fault itself for and Trump, as ever, is the villain of the piece. This is convenient, overly simplistic, and self-serving. Certainly, Trump has a mercantilist, transactional view of international trade that does not accord with economists’ doctrine of the mutual gains from trade. Yet, India’s trade policy, too, under the Narendra Modi-led government, has been far from coherent and can best be characterized by a turn back to protectionism after a quarter century or more of trade liberalization. Writing in this newspaper (India’s Protectionist Folly) on 12 February 2018, shortly after the last full-year budget of the Union government, economist Pravin Krishna and I noted the “regrettable backsliding" of the Modi government on trade liberalization and made an argument for a renewed liberalization push.
It is not just India’s tariff increases but its active interference in trade and commerce that has irked the US—in particular, the extremely ill-considered and ill-advised price caps on certain medical devices that have harmed US producers and benefitted only incumbent Indian firms, without necessarily helping consumers (it is salutary to remind ourselves of one of the first lessons of a first-year principle of an economics course: price controls only cause shortages and queueing, and rarely, if ever, fix the problem they are intended to solve). In addition to this, there are restrictive new rules on e-commerce, which have harmed Walmart Inc. and Amazon.com Inc.—as well as Indian consumers—with uncertain benefit for small-scale traders, the intended beneficiaries and a natural constituency for the governing party.
There is little doubt that it is lobbying by affected US industries, allied with his own naturally protectionist instinct, which has driven Trump’s decision to withdraw India’s preferential access to the US market under GSP. This does not, however, provide an ex post facto cover for poor decisions by India. Indeed, apologists for India in its current trade dispute with the US are disingenuously using US protectionism as an alibi for prior Indian protectionism.
It could be argued that, given Trump’s protectionist bent, India’s GSP access to the US market might have earned American ire even in the absence of protectionist backsliding by India. As a counterfactual scenario can never be observed, this cannot be ruled out as impossible, but it strikes me as less than probable. Whether or not you agree with Trump’s methods, and, as a trade economist, I do not, this does not gainsay the fact that his targets thus far have been related to perceived unfairness in terms of access of US firms to foreign markets or alleged manipulation of trade rules or of exchange rates to favour local firms over their US rivals. This clearly fits China and it is a shame that poor Indian policies have put us in the same basket.
Let me be crystal clear: I am not advocating that India bend principled policy positions in response to American pressure, such as on intellectual property protection, where I have long argued that India is absolutely right in refusing to adopt stringent American norms that would be totally against India’s national economic interest, given our perceived areas of comparative advantage, including (most obviously) generic pharmaceuticals.
I am, however, arguing that a misguided pursuit of protectionist policies, in the failed hope of reviving a moribund Make in India initiative, is not in India’s own national economic interest, and has the added disadvantage of placing us in Trump’s protectionist cross-hairs. This is doubly harmful: our protectionism harms us to begin with and Trump’s putatively protectionist response harms us further.
The obvious gap is a coherent and well thought-out trade policy paradigm that aims to maximize India’s interests by promoting Indian exports where appropriate, rather than by resorting to protectionism in a futile bid to substitute inferior and costly domestic production for imports. In any event, whatever India has been trying is clearly not working: our exports as a share of the world total have been stuck in the mud at 2% for longer than ever. This is even more reason why we in India can ill afford to saddle ourselves with the folly of protectionist policies, which we ought to have discarded for good in 1991.
Vivek Dehejia is resident senior fellow at the IDFC Institute, Mumbai. Read Vivek’s Mint columns here.