With the formation of the World Trade Organisation (WTO), establishment of rule-based trading system, progressively led to removal of tariff and non-tariff barriers on imports. Protectionism not only became history, it was also being considered as a curse. Whenever a country tried to impose tariff or non-tariff barriers to imports, the affected countries may submit petition to the dispute settlement body of WTO and invariably the countries imposing tariff and non tariff barriers were made to bend, as they faced prosecution by way of sanctions and penalties.
However, in the past couple of years, the United States (US), the greatest proponent of WTO and free trade, is turning protectionist. US President Donald Trump has been saying time and again, that he would stop all those imports, which are ruining US industries; and for that he would not hesitate to impose heavy import duties. During his election campaign, he repeatedly said that his first task would be to restart rusting factories of US and provide employment to unemployed Americans. The American president believes that the major culprit in the game is cheap imports from China. Sometime back the US imposed 25 per cent duty on import of steel and 10 per cent on aluminum. India retaliated by raising import duties on 29 products coming from US. A few days back, the US has announced hike in import duties on imports worth US$50 million coming from China. It is being felt that international trade, which was going on unhindered, free from tariff or non-tariff barriers, is endangered due to protectionist policies of US. In economic jargon it's said that international trade is like a war, and if any country imposes protective tariff on imports coming from any one or more countries, the international trade is converted into a war zone. Therefore, the protectionist policies being adopted by the US are be termed ‘trade war’.
What could be the impact of trade war?
Because of the onslaught of Chinese imports, where Chinese products are dominating in most of the countries, the US is not the only country whose industries are getting affected. Out of 164 member countries of WTO 130 countries are facing trade deficit with China as their imports from China are exceeding their exports. As a result industry is getting ruined in most of the countries and unemployment is on the rise. However, the dilemma is that all these countries that have not raised the tariff on imports from China are elsewhere, it is only the US that is trying to stop imports from China by raising tariffs. The US is increasing tariff on imports coming from all countries, which is causing huge worry to the other countries of the world. This has been the general belief that to increase growth in the world, the solution lies in growth of international trade.
Incentive to increase production always comes from increase in demand, of which international demand is very vital. With the help of international trade, nations can specialise in the production of commodities, which they can produce most efficiently. And with the help of foreign exchange earned from the sale of such commodities these countries can import those commodities in case of which they don't enjoy advantage of production efficiency. However, with the US imposing tariff on imports coming from other countries and therefore attempting to effectively curb imports to protect its own industries, may go a long way in disturbing supply of foreign exchange to other countries, which would ultimately hurt the growth of international trade. India's export to USA is nearly 15 percent of its total exports. In 2017-18 India exported nearly US$48 billion to the US, whereas its import from the US was US$26.6 billion. The US is a big market for not only India but also many other countries of the world. Due to restrictions imposed by the US, rupee may get weaken as supply of foreign exchange would get adversely affected. In the past few years India has been fulfilling our demand for foreign exchange by way of exports of goods and services, remittances coming from non-resident Indians (NRIs) and also by Foreign Direct Investment (FDI) and was generally saved from significant depreciation of Indian rupee. However, because of trade war initiated by the US, supply of foreign exchange may get disturbed causing payment problems resulting in depreciation of rupee.
The US is even imposing restrictions on immigration of Indian people by bringing changes in their visa rules. As a result of these measures our young people working in the US are getting adversely affected, which may affect not only our youth serving in software industry, but also remittances by NRIs, coming into India.
What India can do?
War has to be seen as war only. As such if the US is trying to restrict our exports, India also needs to protect itself. We must understand that our major trade deficit comes from China. Therefore, without giving any concessions to China we need to increase our trade relation with other countries to boost the supply of foreign exchange. We may have to impose protective tariff on Chinese imports.
Renowned industrialist Anand Mahindra says that, given the size and composition of Indian economy we need not worry from this trade war as we do not depend upon any single country or commodity for our exports. However, this is also true that most of our imports from America are high technology imports, such as nuclear reactors, boilers and aircraft, reduction of which may go against our development efforts. However, the US needs to understand that consumer products from India are beneficial for American consumers. Similarly, BPO and software exports from India etc. tend to reduce the cost of American companies. Therefore, it may be suicidal for the US to impose restrictions on imports of goods and services from India.
Protectionism is not always bad
It is correct that free trade, if honestly adopted, can benefit all. The argument that if we continue to protect the inefficient domestic industry, inefficiencies will creep into the system, hindering healthy industrial development, is also valid. However, we find that countries are not honestly adopting free trade. If the government is able to safeguard and promote the domestic industry while following international trade agreements and using the flexibilities available therein, it will be a welcome step.
Free trade cannot be one sided. We must understand that every cloud has a silver lining. As trade war has begun in the world, countries may once again start learning self reliance, which may increase production at home and revival of domestic industries. Taking cue from the US, India can also strive to restart many of its fading industries such as telecom, electronics, chemicals, APIs and others, which slowed down due to huge inflow of Chinese imports in the name of
‘free trade’.
