Free Trade Cannot Be One Sided
LOWER IMPORT BARRIERS WORK ONLY IF OTHERS ALSO PLAY FAIR
In the past 27 years, the tendency has been to shed all barriers to trade, both tariff and non-tariff. As per the constitution of the World Trade Organization, or WTO, if any country raises barriers to trade, the affected country can use the dispute settlement mechanism to reverse the same.
Till recently, no country was arguing explicitly in favour of protectionism; rather, barriers erected earlier were being removed. In India, prior to the WTO, import duties of more than 400 per cent used to be imposed on many commodities, and there were more than 1,400 items on which quantitative restrictions (QRs) were imposed. As against this, today, leaving some exceptions, import duty of 0-10 per cent is imposed, and QRs have been totally removed.
Because of aggressive trade by China in the last more than 15 years, markets all over the world have been overshadowed by its products. In the process, most industries around the world started getting closed. China turned into a manufacturing hub and the trade deficit of most countries started mounting. US President Donald Trump, in his election campaign, raised the issue of closure of US industry. He promised to revive the rusting factories, create jobs and also restrict imports.
In India, it’s an open secret that due to mass dumping of Chinese products, most of our non-ancillary industries closed down. Most of our small industries are now ancillaries of large industries such as automobile, pharmaceutical, chemicals and consumer goods. As a result, the share of manufacturing in GDP either stagnated or even declined in some years. It is known to all that our domestic industry couldn’t withstand competition from cheap Chinese products. Our electronic and telecom industry couldn’t take off; and our established machinery, chemical and consumer goods industries were badly hit.
Despite this, no effort was made to safeguard industry from the Chinese onslaught by imposing tariffs or even anti-dumping duties. One reason for lack of action from policy makers was partially fear of action from the WTO if China complained. Another major reason was the overwhelming faith of policy makers and mainstream 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 use the flexibilities in WTO agreements. In these agreements, every country has committed a bound rate of tariff for each commodity. However, due to belief in free trade, our applied tariff rates are much less than
the bound rates. Apart from this, every nation can raise barriers for protecting health and environment. So far, we have not made much use of these measures, because of the overwhelming belief in the doctrine of free trade. This is reflected in the fact that policy makers have been patting their back for increasing foreign trade as a per cent of GDP, irrespective of the trade imbalance.
Generally, countries have been following the rules of the game. However, in recent past, voices against free trade have become more pronounced. First, Donald Trump made several comments against free flow of imports, especially from China. His decision to increase tariff on import of steel and aluminum has given rise to a debate whether the world will go on the path of protectionism.
Recently, at the World Economic Forum, Prime Minister Narendra Modi stated that protectionism is no less disastrous than terrorism. But, immediately after that, when protective tariff was imposed on various commodities in the Budget, protagonists of free trade were not able to digest it.
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.