Dr Ashwani Mahajan
In the past 27 years due to ongoing process of globalisation and later getting manifested by the advent of rule based trading system in the form of World Trade Organisation (WTO), the tendency has been to shed all barriers to trade, may it be tariff or non tariff barriers. As per the constitution of WTO, of which there are now 168 members, if any country raises tariffs or erect non tariff barriers to trade, then affected country can make use of dispute settlement mechanism to reverse the same.
Till recently, no country has been arguing explicitly, in favour of protectionism; rather tariff and non tariff barriers erected earlier were removed over time. In India prior to WTO, import duties more than 400 percent used to be imposed on many commodities, and there were more than 1400 items on which quantitative restrictions (QRs) were imposed. As against this, today leaving some exceptions import duty between zero and 10 percent is imposed and QRs have been totally removed.
Point of major concern is that because of offensive trade by China in the last more than 15 years, markets all over the world are overshadowed by Chinese products. Metals like steel, aluminium and others; electronics and telecom equipment; infrastructure and project goods; fertilisers; chemicals; pharmaceuticals and APIs used therein; and goods of day today use are all generally imported from China. In the process, most of the industries all around the world started getting closed. In the process China turned into manufacturing hub of the world and trade deficit kept on mounting in most of the countries. Donald Trump, Republican candidate for US election also raised the issue of closure of US industry and resulting unemployment and linked it with free trade. He promised to revive the rusting factories and create jobs by restricting import from China and also from other parts of the globe, by raising tariffs.
In India it’s an open secret that due to mass scale dumping by Chinese products into India, most of our non-ancillary industries closed down. Most of our small industries are now ancillaries of large industries like automobiles, pharmaceuticals, chemicals, consumer goods both durable and non-durable. As a result of this, share of manufacturing in GDP either stagnated or even declined in some years.
This is known to all that our domestic industry either couldn’t withstand competition from cheap Chinese products or went out of the market. Our electronic and telecom industry couldn’t really take off; and our established machinery, chemical and consumer goods industries were badly hit.
Despite this no effort was made to safeguard industry from Chinese onslaught by imposing tariffs or even anti dumping duties. One reason for lack of action from policy makers was partially their fear of action from WTO if China files complaint in Dispute Settlement Panel there. Another major reason for inaction was the overwhelming fervour of the policy makers and main stream economists in India, in the doctrine of free trade. Belief in free trade was so profound that there was seldom any effort by them to even making use of the flexibilities available in WTO agreements. It’s notable that in these agreements every country has committed a bound rate of tariff for each commodity. However, the belief in free trade, meaning thereby belief in dismantling all barriers to trade, our applied rates of tariff are much less than bound rates of tariff. This gives us flexibility to raise tariff in making cases. Apart from this every nation has the mandate in WTO to raise barriers to imports for protecting health and environment by way of phyto-sanitary measures and security concerns. So far, we didn’t make much use of these measures, because of the overwhelming belief in the doctrine of free trade. This is reflected from the fact that policy makers have been patting their back for increasing size of foreign trade as a percent of GDP, irrespective of the imbalanced trade.
Though, on several occasions affected countries have filed cases before Dispute Settlements Panels against the breach of WTO rules and agreements; however, these breaches were only exceptions. Generally countries have been following rules of the game. However, in recent past voices against free trade have become more pronounced in view of the adverse effects of globalization on various economies. Firstly, Donald Trump during his election campaign made several comments against free flow of imports from the rest of the world, especially China and later after taking over the reign of power, his decision of increasing tariff on imports of steel and aluminum and his threat to stop imports from the rest of world has given rise to a new debate around the globe that, whether world will go on the path of protectionism. Recently, at the Davos meeting of ‘World Economic Forum’ Prime Minister Modi has also stated that protectionism is no less disastrous than terrorism. But, immediately after that meeting, when protective tariff was imposed on various commodities in the budget, protagonists of free trade were not able to digest this decision and many of them have written articles against the same.
Protectionism is not always bad
Though, this is correct that if free trade is honestly adopted by all the countries, it can benefit all. This argument is also valid that if we continue to protect inefficient domestic industry, inefficiencies would in the system, hindering the healthy, industrial development. However, in realty we find that countries are not honestly adopting free trade. China has been dumping (selling at prices much lower than the ones, which they charge in their domestic market) their products all over the world. Government of India has also initiated anti-dumping duties on more than 100 items coming from China. Imposition of anti-dumping duties is a very tedious job, because Government of India has to ensure that, conditions of anti-dumping duties are thoroughly investigated. But since we are imposing lower tariffs than the bound rate of tariff, there is flexibility available with the government to raise the tariff and safe-guard the interest of domestic industry against dumping.
In fact if Government of India is able to safe-guard and promote domestic industry while following the international trade agreement and using flexibilities available therein, this would be a welcome step. This is unfortunate that the people who are criticizing the Government for being protectionist have generally not studied that whether there is any breach of international agreement or not. If it is true then their criticism is not only incorrect, but also against national interest.
In addition to this after adoption of protectionist policies by US Government, other countries also need to rethink about the policy of free trade. In fact free trade cannot be one sided. We have to espouse our trade policy based on trends in other countries. In the last, we can say that though theoretically free trade may be good, its future would rest on the extent of credence of different countries in free trade.
(The author is Associate Professor, PGDAV College, University of Delhi)
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