EDITORIAL ANALYSIS : Is protectionism compatible with liberalization?

Source: The Hindu

• Prelims: Protectionism, liberalization, LPG reforms etc
• Mains GS Paper III: Government planning, mobilization of resources, LPG reforms, protectionism etc

ARTICLE HIGHLIGHTS

• Since 2014, India has on average seen a 5% rise in average tariff rates.
• Economists Arvind Subramanian and Shoumitro Chatterjee said, India has raised import tariffs on over 3200 goods from most favored nations, which signals a protectionist stance to shield domestic industries.
• The Central government says it is liberalizing India’s Economy, but its economic policymaking on the external front has been marked by rising protectionism.
• With policies such as Atmanirbhar Bharat, there seems to be a conscious effort to protect the domestic economy from foreign competition.
• However, on the same hand, the government has, rightfully, come up with bills and policies which promote the export of products from India (Foreign Trade Policy 2015-20 and the recent re-establishment of the US-India Trade Policy Forum) and encourage manufacturing and assembly lines (Production Linked Incentive Scheme or PLI) to be set up in the country itself.

INSIGHTS ON THE ISSUE

Context

Globalization:

• Globalization envisages a borderless world or seeks a world as a global village.
• Origin of Modern Globalization: What today is referred to as globalization, started with the end of the Cold war and the disintegration of the Soviet Union in 1991.
• Driving Factors: Globalization was the offshoot of two systems — democracy and capitalism — that emerged victorious at the end of the Cold War.
• Dimensions of Globalization: It may be attributed to accelerated flow of goods, people, capital, information, and energy across borders, often enabled by technological developments.
• Manifestation of Globalization: Trade without tariffs, international travel with easy or no visas, capital flows with few impediments, cross-border pipelines and energy grids, and seamless global communication in real-time appeared to be the goals towards which the world was moving.

Pros of Globalization:

• Access to Goods and Services: Globalization results in increased trade and standard of living.
  • It heightens competition within the domestic product, capital, and labour markets, as well as among countries adopting different trade and investment strategies.
• Vehicle of Social Justice: The proponents say globalization represents free trade which promotes global economic growth, creates jobs, makes companies more competitive, and lowers prices for consumers.
• Increases Cultural Awareness: By reducing cross-border distances, globalization has increased cross-cultural understanding and sharing.
• Sharing Technology and Values: It also provides poor countries, through infusions of foreign capital and technology, with the chance to develop economically and by spreading prosperity.

Cons of Globalization:

• Rise of Global Problems: Globalization has been criticised on account of exacerbating global disparities, spread of international terrorism and cross-border organised crime, and allow for the rapid spread of disease like Covid-19.
• Backlash of Nationalism: Despite the economic aspect of globalization, it has resulted in National competition, advancement of national ambitions.
• Moving Towards Cultural Homogeneity: Globalization promotes people’s tastes to converge which may lead to more cultural homogeneity.
• Due to this, there is a danger of losing precious cultural practices and languages.
• Also, there are threats of cultural invasion of one country over another.

De-Globalisation or Protectionism:

• Protectionism refers to government policies that restrict international trade to help domestic industries.
• Tariffs, import quotas, product standards, and subsidies are some of the primary policy tools a government can use in enacting protectionist policies.

Protectionism in Global Arena:

• Globalization had already begun to plateau or stagnate since the 2008-09 global financial crisis (GFC).
• This is reflected in Brexit and the US’ America First Policy.
• Further, trade wars and the halting of WTO talks is another recognition of the retreat of globalization.
• These trends pave the way for an anti-globalization or protectionism sentiment, which may further amplify due to the spread of the Covid-19 pandemic.

Protectionism in India:

• In the past few years, many countries have criticized the Indian economy for becoming protectionist. This can be depicted in the following instances:
  • Not opening up for imports, particularly after the Indian Government failed to agree on terms for a mini trade deal with the US.
  • India walked out of the 15-nation Regional Comprehensive Economic Partnership(RCEP) of Asian countries.
  • The “Atma Nirbhar Bharat (Self-Reliance) initiative”, launched in May 2020, after the beginning of the pandemic, was also perceived internationally as a protectionist move.

Tools of Protectionism:

Arguments for Protectionism:

• National security: The argument pertains to the risk of dependency upon other nations for economic sustainability.
• Infant industry: It is argued that protectionist policies are required to protect industries in their initial stages. As if the market is kept open, global established companies can capture the market. This can lead to the end of domestic players in the new industry.
• Dumping: Many countries dump their goods (sell them at lower price than their cost of production or their cost in the local market) in other countries.
• Saving jobs: It is argued that buying more domestically will drive up national production, and that this increased production will in turn result in a healthier domestic job market.
• Outsourcing: it is common practice for companies to identify countries having cheaper labor and easier systems of governance and outsource their job work.
• Intellectual Property Protection: Patents, in a domestic system, protect the innovators. On a global scale, however, it is quite common for developing nations to copy new technologies via reverse engineering.

Arguments against Protectionism

• Trade Agreements: India has benefited immensely from international trade agreements.
  • As per the Commerce Ministry data, India has entered into Free Trade Agreements (FTA) with about 54 individual countries.
• Against WTO Regulations: India has been a member of WTO since its inception. WTO’s regulations prohibit imposing restrictions on imports from other countries.
• Inflationary in Nature: Protectionist policies by restricting imports, can lead to rising prices in the domestic market. Thus, hurting the interest of the consumers directly.
• Uncompetitive Domestic Industries: By protecting the local industries, they have no incentive to innovate or spend resources on research and development (R&D) of new products.

Issues with the current policies:

• The government’s external protectionism should be compatible with its broader liberalization agenda:
  • If we cut customs duties, remove elements of protectionism, firms in India which are users of those goods become more competitive.
    • So, we grow exports from India by making raw materials cheaper. Again, one man’s output is another man’s input.
    • So, the wild strategy is to just remove all barriers to globalization
  • In India there’s a long list of sectors in which the government has embarked on import substitution that encourages domestic production.
    • The emphasis is on producing in India rather than on efficiency
  • Centre’s external protectionism merely a reflection of its domestic economic policies:
    • There are many bottlenecks that are impeding India’s participation in global supply chains and in the world of globalized production.
      • For example labour markets where we need to figure out where those domestic bottlenecks are that are holding back large scale labour intensive investment in India.
    • Ease of doing business is a major issue, external and domestic reforms have to go hand in hand.
  • Discretionary government policy in the name of Atma Nirbhar Bharat brings along with it the risk of possible favouritism towards special interest groups:
    • Industrial policy requires having a high level of knowledge, forecasting capability, and intellectual capacity in government.
      • Market economy is a great method of discovery. It is a tool for figuring out what works and what doesn’t.
    • There should be a policy that the government and industries have a dialogue.
      • This has been the reason behind the success story of many Southeast Asian countries.
    • The government needs to hear what the players on the ground need, and respond adequately.
  • Indian Consumer be allowed to buy foreign goods if they are cheaper and better: The government needs to play the role of a facilitator rather than interfering with the ability of an Indian consumer to buy something from abroad or the ability of an Indian Firm to buy something from abroad or the ability of an engineering firm to raise capital from a cheaper source abroad, and so on.

Are we getting closer to the pre-1991 era of trade protectionism?

• Production Linked Incentive (PLI) scheme is that incentives are linked to certain capacities. It seems like a policy that was followed during the industrial licensing era, which was called the minimum economic scale.
  • The government was telling the industry what could be the minimum economic scale and then directing the industry to produce along those lines.
• Another argument is that a lot of the regulatory system is moving in somewhere national champions get policy support and foreign companies do not.

Way Forward

• Improving Ease of Doing Business:Though progress has been made, India still lags behind many larger nations in critical metrics such as starting a business, enforcing contracts and registering property.
  • Improving on these metrics can help Indian firms to compete globally and get a bigger market.
• Make In India: The focus should be on encouraging innovation, research and development and entrepreneurship in the country. This will prepare Indian companies to compete in the sectors of the future.
• Boosting Private investment: It will, in turn, boost up Growth, Jobs, Exports and Demand.
• Predictable and transparent Trade Policy: It will allow Indian firms to plan their capacity and finances in advance.
  • They will be able to allocate their resources for expansion and R&D.
  • This will allow them to be competitive in the international market
• Resolving Trade Issues: Trade issues with US and other countries should be resolved at the earliest to eliminate investors’ doubts in the Indian trade regime.
• Balance between domestic industry and multinational firms: India needs to draw a fine balance between the interests of domestic industry and giving trade concessions to multinationals to attract foreign investment in the form of FDI.
  • The goal of a $5 trillion economy by 2025 needs comprehensive, multidimensional and multi-sectoral efforts to achieve it.
• Increasing Production: Enhance domestic Production as well as put thrust to increase exports and promote research to become more independent. India needs to plan now for the next 20 years.

QUESTION FOR PRACTICE

1. The broader aims and objectives of WTO are to manage and promote international trade in the era of globalization. But the Doha round of negotiations seem doomed due to differences between the developed and the developing countries.” Discuss in the Indian perspective.(UPSC 2016)

(200 WORDS, 10 MARKS)