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Do higher import tariffs really protect Indian industries?

Do higher import tariffs really protect Indian industries?

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  • GS 3 || Economy || Economic Reforms || Globalization

Context

  • In its 2021 report “National Trade Estimate Report on Foreign Trade Barriers,” the United States Trade Representative (USTR) said that India’s average tariff rate of 17.6 percent is the highest of any major world economy.
  • India has increased tariff rates and tightened non-tariff measures to safeguard indigenous industry against dumping and other trade-distorting activities by China and others.While trade protectionism may boost the economy in the short term, all economists believe that it harms the country’s economic interests in the long run.

Various Tools of Protectionism

  • Tariffs- A tariff is a tax levied by a country’s government on commodities imported or exported. High tariffs will increase the cost for foreign producers to sell their goods in the domestic market, giving local companies a strategic edge. India has one of the world’s highest tariff prices.
  • Import Quotas-This is the act of limiting the number of a particular good that may be acquired from a given country in order to ensure that domestic producers keep a share of the market.
  • Subsidies- Subsidies are negative taxes or tax credits that are given to domestic producers by the government.
  • Standardization- The government of a country may require all foreign products to adhere to certain guidelines. For instance, the UK Government may demand that all imported shoes include a certain proportion of leather.
  • Anti-dumping duty– Dumping is the practice of selling items at a fraction of their market worth in order to eliminate competition. India is the leading proponent of anti-dumping legislation designed to protect domestic industry from foreign competition.
    • According to WTO, India launched 233 anti-dumping investigations between 2015 and 2019, up from 82 between 2011 and 2014.
  • Rules of Origin – The Customs Act in India was revised to include a requirement for Rules of Origin. To ensure compliance with the rules of origin requirement, India has imposed onerous constraints on imports.The intention appears to be to discourage importers from purchasing items from India’s FTA partners.

Why do countries adopt Protectionism?

  • Saving infant industry- It is believed that protectionist policies are necessary to safeguard emerging sectors. Global established firms can conquer the market if the market is kept open. Domestic participants in the new industry may be forced out as a result of this.
    • Dumping: Many countries dump their goods in other countries (sell them for less than their cost of manufacture or local market price).
  • Dumping has the goal of increasing market share in a foreign market by driving away from the competition and creating a monopoly.
  • Saving jobs- It is suggested that purchasing more goods made in the United States will improve national production, which will lead to a healthier domestic labour market.
  • National security- The argument is about the dangers of relying on other countries for economic survival. Economic dependence, it is believed, can limit one’s alternatives in the event of a war. Furthermore, the other country’s economy can have a detrimental impact on the economy of the other country.
  • Outsourcing- It is typical practice for businesses to locate nations with lower labour costs and simpler governance frameworks and outsource their operations to those countries. As a result, jobs in domestic industries are lost.
  • Intellectual Property Protection- Patents protect innovators in a domestic system. On a global basis, however, it is extremely typical for developing countries to reverse engineer innovative technologies.

Implications/ consequences of Protectionism

  • Harm both consumer and industry- In the long term, it will harm both consumers and industry.
  • Isolation- unilateral trade restrictions damage all economies and, in some ways, isolate India. Withdrawal from the RCEP, for example.
  • Cost of Export and Import Increases- Expensive imports raise the cost of our exports because so much of what we export is dependent on imported components.
  • Consumer Impact- Consumer interests are also harmed by protectionism because customers end up paying higher prices.
    • Protectionism benefits only a few domestic enterprises while hurting others.
    • Tariff rises in one area can wreak havoc on businesses in other industries. For example, steel or electronic components, as well as automobile manufacturers.
  • Erode the competitiveness- tariff walls erode the competitiveness of domestic firms over the long run and raise the ‘cost’ of entering any trade pact, such as RCEP, since the gap between India’s tariff rates and those of others remain wide
  • Trade war- Such unilateral tariff walls end up inviting retribution from trading partners.
  • Against WTO Regulations- India has been a member of WTO since its inception. WTO’s regulations prohibit imposing restrictions on imports from other countries.
    • They can be imposed only for certain purposes like a balance of payment difficulties, national security, Such barriers cannot be imposed to protect domestic industry from healthy competition.

India and Increasing  Protectionism

  • Increase in average tariffs- From 8.9% in 2010-11 to 11.1 percent in 2020-21, India’s average tariff rate of 17.6 percent is the highest of any major world economy.
    • These tariff hikes have shattered India’s political consensus on tariff Liberalisation, which had been in place since 1991.
  • Anti-dumping measure initiator- India is the leading initiator of anti-dumping measures designed to protect domestic industry from import competition.
  • Expanding the scope of Article 11(2)(f): India recently amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good if it is necessary to prevent injury to the economy.
    • Expanding the scope of Article 11(2)(f) to cover any good is inconsistent with India’s WTO obligations.
  • Restrictive rules of origin- Undue claims of FTA benefits pose a threat to the domestic industry. Subsequently, India amended the rules of origin requirement under the Customs Act.

Two Recent Protectionist measures in the wake of Covid-19 pandemic by India

  • Launch of the “Atmanirbhar Bharat” policy which translates to “self-reliant India”, to promote local industry and reach self-sufficiency in the near future.
  • Restriction on FDI in Indian companies from border-sharing countries such as China now requires prior approval of the Indian government.

Way forward

  • Integration with global markets- India should integrate with global markets to ensure appropriate labor-intensive manufacturing jobs, as production occurs through supply networks.
  • Improving the Ease of Doing Business-Despite advances, India still falls behind many larger countries in crucial criteria such as launching a business, enforcing contracts, and registering real estate.
  • Boosting the manufacturing sector-Given India’s natural comparative advantage in labor-intensive economic activities, proper manufacturing infrastructure and the repeal or modification of debilitating anti-business labour policies should assist such enterprises.
  • Tariffs can be used to increase revenue, however, it is preferable to have a small, uniform tariff (one that applies to all items) rather than large tariffs in seemingly arbitrary sectors.
    • This would assist avoid the issue of the “effective” rate of protection deviating from the nominal rate, as well as the potential worsening of the tariff inversion problem.
  • Boosting Make in India initiative – Encouragement of innovation, research and development, and entrepreneurship in the country should be a priority. This will enable Indian enterprises to compete in future industries.
  • Increasing private investment will enhance growth, employment, exports, and demand for Indian goods.
  • A predictable and transparent trade policy is needed -It will allow Indian businesses to plan ahead of time for capacity and money. They will be able to allocate resources for expansion research and development. They will be able to compete in the international market as a result of this.

Conclusion

  • It’s worth noting that India’s export growth and total GDP growth rates have been much greater in the post-liberalization era than they were during the long period of protectionism that preceded it. Only by opening up its economy and adopting fair and predictable trade laws would India be able to accomplish its dreams of being the world’s next factory.
  • India needs to strike a delicate balance between the interests of domestic industry and trade concessions to multinationals in order to attract foreign direct investment (FDI).
  • To attain the aim of a $5 trillion economy by 2025, extensive, multidimensional, and multi-sectoral initiatives are required.

Mains model Question

  • Protectionism may be useful in the short term, but it is detrimental to the economy in the long run. Comment.

References