Protectionism does not pay

Raising import tariffs will hurt Indian consumers the most

Last Thursday, US President Donald Trump announced his decision to impose 25 per cent tariff on imported steel and 10 per cent on imported aluminium. Not surprisingly, this sent shock waves across the world as exporters of various commodities feared that the protectionist impulse in the US would lead to a full-fledged trade war. In fact, Mr Trump specifically mentioned India and China as he laid out his policy. “We’re going to be doing a reciprocal tax programme at some point so that if China is going to charge us 25 per cent or if India is going to charge us 75 per cent, it can’t be that we charge them nothing,” he said. In the immediate aftermath of Mr Trump’s announcement, metal stocks across the board in India as well as in several other countries plummeted. After all, a likely glut in the global market will push down prices of steel and aluminium, hurting company profits.

Mr Trump’s announcement has thus fed the protectionist impulse in India. At least one prominent Indian industrialist has gone public with his comment that India should mirror Mr Trump’s protectionist tariff move to safeguard domestic manufacturing. His reference was to China, which has a surplus production of about 15 per cent, which it uses to disrupt the steel industry the world over by dumping cheap steel. Others have said that India will not be hurt even if it were to enter a trade war. But the Indian government will do well not to fall for such fallacious arguments. That is because increasing import tariffs will provide relief to Indian companies at the cost of consumers. If the world does not join in, President Trump, or at least his electorate, will soon enough realise that raising trade barriers will only promote inefficiency among US steel producers at the cost of consumers in that country.

If global steel prices fall as a result of a glut, India should use this opportunity to boost its own productivity and improve its infrastructure at a lower cost. As such, it should avoid being entangled in an artificial argument that conflates real national interest—read the interest of the Indian people—with the profitability of some domestic companies that may not have the wherewithal to compete globally. India, of all countries, should need no reminding of the damage protectionism can do. Until the 1990s, its economy was virtually closed, highly planned—and stagnant. Growth surged thanks to bold market-opening reforms. Years later, much remains to be done, and the reforms are unfinished work. The other reason why the government should avoid the protectionist route is protection from imports for large companies increases the input costs for small industry, which are downstream value-adding companies that provide most of the manufacturing jobs and exports. It is sometimes argued that China succeeded partly by propping up fledgling companies, but tariffs there have been falling steadily for decades. So the central message for policymakers in India is to set their own house in order by means of securing financial sector stability and making it easier for doing business. That is a far better route to take than joining the chorus for protectionism.