After Donald Trump took over the rein of governance in the US, it has started imposing higher import duty on imports coming from the rest of the world. Other countries have also followed the suit and are increasing import tariffs. In this manner, a trade war has started in the world. According to the recent report of the United Nations, India is among some select countries which are going to benefit greatly from the current trade war. The report says that although this trade war will lead to a significant reduction in global trade, India’s exports may grow by 3.5 percent.
Although foreign trade remained almost free during the early period of history, i.e. the tariffs or other restrictions on imports coming from other countries were minimal. But later on Governments started imposing heavy import duties coming from other countries and sometimes it took the shape of competitive exercise. Basic idea of imposing tariffs on goods coming from other countries used to be protection of domestic industry from foreign competition. In the meantime, foreign trade theories propounded an understanding developed between economists that if all the nations of the world remove tariffs and non tariff barriers and walk on the path of free trade, then all the countries will benefit because people will get cheaper goods.
Countries will achieve the efficiencies in production according to their comparative advantage. Though, there was no flaw in these theories per se, if followed honestly, however problem started when the theory was used by the benefit of a few against interests of many others. For instance, by using this argument of free trade, British Government was able to impose cheaper machine made goods, against the interests of our small artisans and industries. Our industry decayed and dependence on agriculture increased. Economists named it de-industrialization. We can say that the industrialization of India ended due to free trade. Under the pressure of nationalist leaders in the freedom struggle, the foreign Government was forced to impose tariff on goods coming from England, what was termed as discriminatory tariff, and that was the time when modern textile, sugar, cement and paper industries started getting established.
In the era of globalization in the last 28 years, protectionism has not only become a history, it is considered to be a curse rather. This period witnessed elimination of all types of tariff and non-tariff barriers to trade between countries, especially after World Trade Organization (WTO) came into being. In the name of rule based trading system under WTO agreements, now countries were bound by the agreements, to carry on trade based on the principle of free trade. In the initial years of the WTO, due to dismantling of barriers of trade, global market started expanding. Generally balance of trade of member countries didn’t disturb much.
But after the entry of China in the World Trade Organization, circumstances changed and today we see that more than 130 countries trading with China are facing trade deficit with China, that is, imports of these countries from China are more than their exports to China. In such a situation, industries of these countries are getting destroyed and unemployment is increasing. However, simultaneously, some countries, mostly having partnership with China have been specialising in some products. For instance, production base for components used in electronics, telecom products, cars etc was established in number of countries. Due to free trade, supply chain of these components has become global, which is being called ‘Global Supply Chain’.
Protectionist stance of the United States has caused a panic in the world economy in general and China and its supplier countries in particular. Those who believed that growth in international trade is the only way to spur growth in the world economy have started feeling that this is an end to world’s economic growth. Though, it’s true that as overseas demand increases, it leads to greater production at home, therefore growth in international trade provides an opportunity for expanding production. However, after US’s protectionism, global export demand has started contracting, impacting production. However, we understand that whether it is protectionism or free trade, it’s never one sided.
After increase in tariff by the US, other countries are also forced to change their foreign trade policy and they too have started adopting protectionist stance. In such a situation, the question arises, where this game will end? Blind supporters of free trade have started arguing that this will block the path of development of the world. Prices will increase and the welfare of the consumers will get severely affected. Due to the global supply chain being interrupted, industries in different countries will be in huge danger now and unemployment will also increase, supporters of free trade argue.
Due to fast increase in imports from China, not only trade deficit has grown out of proportion, there has also been a huge crisis of foreign payments in these countries. Today, while the United States and some other countries are hiking import tariffs on their imports, countries like India are getting an opportunity to revive their industries which were forced to close down due to cheap imports. Significantly, India could not become any significant part of the global supply chain. It is well known that parts of electronics and telecom equipment are mostly not made in India. The biggest losers on the Global Supply Chain by the US blocking of China’s goods will be South-East Asian countries. In India, the companies producing automobiles, telecom, electronics, consumer goods etc, mostly import their components from other countries. Any disruption in the global supply chain may prove to be a boon for Indian manufacturing. Due to the increase in import duties by the government in the last one year, imports have started falling. This has helped India in halting the depreciation of rupee. And now this latest UN report is again confirming that India stands to gain from trade war is seemingly on the same lines.
It is true that increase in the import duties causes increase in prices of these commodities, impacting middle class. However, it would also encourage the production of these items in the country and if in this manner the ‘Make in India’ gets a boost then short-term losses to the middle class could be more than compensated by increasing production and employment in the country. We have to understand that in the past 25 years, free trade has not done good to our industries and agriculture, therefore protectionism should not always be seen as a bad policy. If our trade partners are adopting protectionism, one-sided free trade can be harmful to us. Need of the hour is to take advantage of increasing protectionism in the world, by protecting our industries and move forward to increase both manufacturing and employment in our country.―Daily Excelsior