In the past 27 years, due to ongoing process of globalisation, later getting manifested by the advent of rule-based trading system in the form of the World Trade Organisation (WTO), the tendency has been to shed all – tariff or non-tariff – barriers to trade.
As per the constitution of WTO, of which there are now 168 members, if any country raises tariffs or erects non-tariff barriers to trade, the affected country can make use of dispute settlement mechanism to reverse these.
Till recently, no country had 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 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 between zero and 10 per cent is imposed and QRs have been removed.
A 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 and aluminium; electronics and telecom equipment; infrastructure and project goods; fertilisers and chemicals; pharmaceuticals and APIs used therein; and goods of day-to-day use are all generally imported from China.
In the process, most industries around the world started to shut down. China turned into the manufacturing hub of the world and trade deficit kept on mounting in most countries.
Donald Trump, as the Republican candidate for the US presidency, also raised the issue of closure of US industry and resulting unemployment and linked it with free trade. He promised to revive factories and create jobs but also to restrict imports from China and from other countries by raising tariffs.
In India it’s an open secret that due to mass-scale dumping by Chinese products into India, most non-ancillary industries closed down. Many of our small industries are now ancillaries of large industries like automobiles, pharmaceuticals, chemicals and consumer goods, both durable and non-durable. As a result of this, share of manufacturing in GDP has either stagnated or even declined in some years.
It is well known that our domestic industry either couldn’t withstand competition from cheap Chinese products or went out of the market. India’s electronic and telecom industry couldn’t really take off; and 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 their fear of action from WTO if China filed complaints in the Dispute Settlement Panel there.
Another major reason for inaction was the overwhelming fervour of policy-makers and mainstream economists in India for the doctrine of free trade.
Belief in free trade was so profound that there was seldom any effort by them to even make use of flexibilities available in WTO agreements. It’s notable that in these agreements every country has committed to a bound rate of tariff for each commodity.
However, due to the belief in free trade, meaning thereby belief in dismantling all barriers to trade, India’s applied rates of tariff are much lower than bound rates of tariff. This gives us flexibility to raise tariff in some 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 haven’t made 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 themselves on the back for increasing the size of foreign trade as a percentage of GDP, irrespective of the imbalanced trade.
While on several occasions affected countries had filed cases before Dispute Settlements Panels against breach of WTO rules and agreements, these were exceptions. Generally countries have been following rules of the game.
However, in the recent past voices against free trade have become more pronounced in view of the adverse effects of globalisation 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. After taking over the reins of power, his decision of increasing tariff on imports of steel and aluminum and his threat to stop imports from the rest of world have given rise to a new debate on whether the world will go on the path of protectionism.
At the recent Davos meeting of the World Economic Forum, Prime Minister Modi had 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 commented adversely on this.
Generally, it is correct that if free trade is honestly adopted by all countries, it can benefit all. It is also correct that if we continue to protect inefficient domestic industry, inefficiencies would be in the system, hindering 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 they charge in their domestic market) their products all over the world.
The government of India has also initiated anti-dumping duties on more than 100 items coming from China. Imposition of anti-dumping duties is a tedious job, because the government has to investigate these thoroughly.
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 safeguard the interest of domestic industry against dumping. In fact, if India is able to safeguard and promote domestic industry while
following the international trade agreement using flexibilities available therein, it would be a welcome step. It is unfortunate that people who are criticising the government for being protectionist have generally not studied whether there is any breach of international agreement or not.
After adoption of protectionist policies by the US government, other countries also need to think about the policy of free trade. Free trade cannot be one sided. We have to espouse our trade policy based on trends in other countries.
Ultimately, while free trade is good in theory, its success depends on the honesty with which different countries practice it.
The writer is Associate Professor, PGDAV College, University of Delhi.