Long after President Trump becomes history, the Trump presidency will be remembered as the biggest disruptor of international trade and commerce. In the last three years, Donald Trump has imposed trade sanctions on a number of countries including Iran, China, and Turkey and has expanded trade sanctions on Russia.
The US is or has been embroiled in trade wars with China, India, and even allies like Canada and Mexico; the overwhelming economic dominance of the US ensures that the affected countries agree to the terms imposed by the US or face economic ruin like Iran or a slowdown like China. At the World Economic Forum in Davos, President Trump publicly threatened the World Trade Organisation (WTO), which regulates 98 per cent of the world trade, and has 164 nations as members.
The words used by President Trump were: “WTO needs to be updated. It has to be changed. It has to be reformed.” Earlier too, Mr. Trump had stated that the US would pull out of WTO, if the WTO doesn’t “shape up” in the treatment of his country. Prior to his visit to India, President Trump said that the US was not treated well by India, but he liked PM Modi a lot. This is uncannily similar to what President Trump had said about President Xi Jinping of China, namely, President Xi Jinping was Mr. Trump’s best friend but the US had not been treated well by China. Incidentally, the US has imposed punitive tariffs on imports from China and negotiations between the two countries have been going on for months.
So far as India is concerned, after imposing huge tariffs on some Indian goods, last year, the US excluded India from the Generalized System of Preferences programme which had exempted Indian goods worth more than $ 6 billion from import duties. Barely a week ago, the US took India out of the ‘developing countries’ list whose exports are exempt from investigations about unfair subsidies. This last step dashes our hopes of being re-inducted in the GSP programme. As if the measures adopted by President Trump were not enough to jinx our foreign trade, our trade relations with China, which is our second largest trading partner after the US, are highly asymmetrical. China has a trade surplus of around $ 57 billion with us, on a trade of approximately $90 billion, because China discourages imports from India by putting up non-tariff barriers on our exports.
Instead of feeling concerned and taking steps to correct the trade imbalance, we have grown so dependent upon cheap Chinese imports that the industrial shutdown in China, after the coronavirus outbreak, has caused panic in the Indian market. With all these disruptions, our foreign trade is not doing too well. During the first 10 months of the current financial year, exports have gone down by 1.9 per cent, while imports have fallen by 8.1 per cent, and the trade deficit has touched $ 133.3 billion. This is indeed disheartening because successive Economic Surveys had identified exports as an engine for boosting our slowing economy. Counterintuitively, the current Union Budget has hiked import duties on a number of items which would make it difficult for us to become part of Global Value Chains, which could have pushed up both exports and manufacturing activities in our country.
In any case, our response to the quick changes in international trade relations has been characteristically flat-footed. While we were complimenting ourselves on climbing 14 places to be ranked at number 63 in the Ease of Doing Business Index, countries like Vietnam had lured most of the companies shifting out of China to its shores. We did not bother to find out which companies intended to shift out of China and the way to create a favourable operating atmosphere for such companies in India. Indeed, we seem to be working assiduously to drive away investment; when Jeff Bezos, the founder of Amazon, visited India last month and announced $ 1 billion investment and a million jobs, a senior cabinet minister said that Amazon was not doing a favour by investing in India. Similarly, Sunder Pichai’s remark that immigrants enrich a country, was taken as a criticism of the contentious Citizenship Amendment Act.
Rightwing leaders went hammer and tongs at Pichai calling him ‘literate but not educated.’ In the recent past, Ministers have got into unnecessary spats with entities like WhatsApp and Facebook. No wonder, MNCs are not particularly enamoured of building up a presence in India. The current foreign trade crisis has a faint silver lining. With China hamstrung because of the coronavirus scare, the present disruption can be an opportunity to expand our foreign trade, but only if we realise that the Indian economy is now strong enough to play a proactive role in world trade. Instead of fretting at being excluded from the list of developing countries, we should start behaving like a developed country, by taking on the US and China at their own game.
Doubtless, some bold changes would be required in our approach to foreign trade. First, the Government will have to eschew the tendency of treating GST rates and import duties as pure revenue raising measures but also to consider their impact on our foreign trade. Exports of many goods are inextricably linked with imports of related goods, so thoughtlessly raising import duties may have a negative effect on exports. To say that the GST regime takes care of such concerns would be to shut our eyes to reality; there are any number of instances of exporters running around for Customs duty refunds. We would also require a deep study of the Chinese production and trade model. It is clear that China follows a Stateled mercantilist approach to trade and investment policy and is not an open market-oriented trade regime.
Yet, the exact processes by which it undercuts our goods in our own markets should be fully investigated. Till we have a tax and pricing regime which makes our products competitive in the domestic market we would continue to import from China at the same unhealthy levels, regardless of the effect of such imports on domestic industry. Then, we have to actively promote our industries by policy initiatives rather than by playing around with Customs duties which merely increase inefficiencies in production. The bottomline is that robust policies can put us on the path to becoming an economic superpower while poorly thought out policies can do untold harm to trade and industry. For example, Tirupur in Tamil Nadu had a flourishing hosiery manufacturing industry but demonetisation and GST have taken the shine out of Tirupur.
Surat in Gujarat, which is the leader in the manufacture of man-made fabrics, has a similar story to tell. Both industrial hubs would take a long time to recover from these self-inflicted wounds. The WTO, which ensured non-discrimination and reciprocity in world trade to the advantage of less-developed countries, has been hamstrung by US tactics of unilateral hikes in import tariffs, preventing the appointment of new judges to the appellate body of the WTO and the reported move of the US to walk out from the WTO’s government procurement agreement. The total dominance of the US in world trade has proved detrimental to the long-term interest of all nations. India has to adapt to the new and emerging realities, but for a long-term solution, along with the EU and other BRICS countries, India has to think of an alternative model for world trade, probably, a new WTO.
(The writer is a retired Principal Chief Commissioner of Income-Tax)