Welcome the march of protectionism

The Government Minister is trying to ride the two horses of globalisation and protectionism simultaneously. The prime minister proudly announced as Davos that while globalisation is giving way to protectionism across the world, India “remains open for business”. He laid the red carpet for foreign investors. On the other hand, the finance minister raised import duties on a number of products like solar panels and smartphones in the recent budget indicating a retreat from globalisation. Among these two tendencies, we should get off the horse of globalisation, and ride on the horse of protectionism. Here is why.

The two pillars of globalisation are foreign investment and foreign trade. Let us consider investment first. It is indeed true that Multinational Corporations (MNCs) have brought advanced technologies in certain sectors. Cars produced in India today give mileage of up to 25 kilometers per liter of petrol. The cars produced in India in the 1980s gave an average of barely 8 kilometers. However, this positive development is not necessarily due to the coming of the MNCs. The cars produced by home grown Mahindra & Mahindra Limited are competing globally with MNCs. The cars produced in India in the 1980s could have similarly given fuel average at par with the MNCs if the domestic policies had encouraged technological up gradation.

The role of the MNCs will be clarified by a simile. Say, a newlywed bride makes sumptuous food using ghee instead of refined oil. Now, the food would be as sumptuous had the mother-in-law too used ghee. Yet, the family says that the bride has made sumptuous food. Similarly, it is true that the MNCs have produced fuel-efficient cars. But the cars produced by domestic automakers would have been as fuel efficient had the Government allowed free entry and easy access to latest technologies. Yet the country is being told that the MNCs have made fuel-efficient cars. Therefore, while the positive contribution of MNCs in bringing advanced technologies is admitted; it is likely that similar advanced technologies could be obtained by domestic businesses.

The MNCs also bring foreign investments. However, the net positive impact of globalisation on investment is doubtful for two reasons. First reason is that a part of the inward foreign investment is actually “round tripping.” Indian businessmen send their money abroad through hawala and bring it back into India as foreign investment. Second reason is that large amounts of monies are legally going out of India as outward foreign investment. The Government has lately allowed Indian nationals to remit monies abroad for outward foreign investments. This outflow has increased recently and the Finance Minister expressed concern about this in his recent budget speech. Thus, the gains the investments coming to India via globalisation could also be attained by restricting the outflow of our money by adopting protectionism. The alleged gains from globalisation due to access to advanced technologies and to foreign capital could, therefore, also be obtained by adopting protectionism.

The second pillar of globalisation is trade. All member countries have reduced the import duties on goods as mandated by the World Trade Organization (WTO). This has led to the availability of cheap goods, especially from China, to our people. At the same time the increase in imports has killed a large number of our domestic industries. The handmade wood toys previously sold at the Mughal Sarai Railway Station, for example, have completely disappeared. Cheap plastic toys imported from China have taken over the market completely. The hard choice before the finance minister was between making cheap imported goods available to the consumer versus providing jobs in domestic industries. The Finance Minister has chosen to protect jobs even if the price of goods in the market increases. This is a welcome step. The increase in price due to protectionism could be temporary in a large country like India. The Government could encourage domestic competition as the Telecom Regulatory Authority of India has done successfully in the telephony sector. Domestic competition can beget us nearly the same benefits as may be brought by global trade.

The expected benefits from free trade due to our accession to the WTO would have been more had the developed countries truly opened their agricultural markets for goods produced by our farmers. This has not happened because the developed countries have been able to disguise the subsidies given to their farmers. Hence our gains are less. In any event, the free trade under the WTO is less relevant for us because our competitiveness lies in the export of services such as software, translations and online tutorials which are outside the ambit of the WTO. In the end, free trade in goods has only provided our consumers with cheap goods like Chinese toys but taken away their jobs.

The balance sheet of globalisation is like this. On investment, globalisation has indeed brought certain advanced technologies; but these technologies could also have been brought by domestic businesses had the Government provided encouragement in this direction. On trade, globalisation has indeed provided cheap imported goods to our people; but these cheap goods could also be produced in India had the Government encouraged domestic competition. Both the alleged benefits from globalisation are, therefore, ephemeral. The Finance Minister must, therefore, be congratulated on embracing protectionism and taking a firm step back from globalisation.

Our position is not unique. Even developed countries are taking steps back from globalisation. A report in the Boston Review says: “Globalisation is in deep trouble. In the United States, the election of Donald Trump and the wave of proposals to renounce old trade agreements…and close borders to immigrants all suggest that populist and anti-globalisation forces are succeeding. Elsewhere around the world, hostility to globalisation can be seen in the Brexit vote in Britain, the Five Star Movement in Italy, the near-misses of far-right candidates in Austria and Netherlands, and the electoral tallies of left and right anti-globalisation candidates in France.” These developments indicate that the retreat of globalisation is real. The alleged benefits are not accruing to the people across the world.

The rhetoric of the Prime Minister at Davos is unreal. He said globalisation is giving way to protectionism but India “remains open for business.” The fact is that India will kill herself if she remain open for business as the Prime Minister has proclaimed.

We should get off the horse of globalisation and ride on the horse of protectionism.

The writer is a former professor of Economics at IIM Bengaluru.