By Disha Rawal
“Protectionism can be as dangerous as terrorism”, Prime Minister Narendra Modi stated at the World Economic Forum at Davos in January. While India has consistently opposed the developed countries’ protectionist policies at international trade forums, it has now reverted to high trade tariffs itself, with the average being a very high 13.5%. In contrast, the United States’ average tariffs stand at 3.5%, and the corresponding number for China is 9%. Clearly, India has contradicted its own announced policies, in order to develop the ‘Make in India’ strategy. However, how sustainable is this strategy, and how diplomatically viable is it?
Wronging international actors
The US has pushed for lowering tariffs in India, especially on information technology and automobile imports. Ford and Volkswagen, which are important economic actors even inside the country, have objected to these tariffs. Interestingly, Indian motorbike imports into the US have zero tariffs. Reportedly, the US Trade Representative office is currently ‘very negative’ towards Indian exports. The US is now seeking to impose a ‘reciprocal tax’ on Indian exports, which may have negative repercussions for India.
Will the protectionism strategy pay off?
Tariffs can only be a short-term strategy if analysts are to be believed. The manufacturing sector in India faces problems which relate to lack of infrastructure, lack of appropriate skills, and strong labour laws. More importantly, the preparedness that the Indian industry has towards absorbing new technologies, especially those which relate to automation, is low. This may create an even wider gulf with respect to other manufacturing giants.
Even in the short term, if US and China actually impose reciprocal taxes, then it will only hurt India. For instance, the India-US trade deficit is at its highest right now, which is a good sign for India. If, however, Indian exports lose out on competitiveness, then this figure will decline.
Tapping opportunities and mitigating threats
These tariffs can, however, be used to give a breather to the domestic industry while taking steps to consolidate quality and competitiveness in the meanwhile, because tariffs clearly cannot be a long-term arrangement. However, in the current scenario, no such measures have been announced. A coherent programme is needed to counter this, especially because the real problem with India’s trade is China. There is a $50 billion trade deficit with China, and that can be used as leverage to move some Chinese manufacturing units to India and create long-term opportunities.
Even if India has to enjoy more influence in trade platforms on diplomatic grounds, it will have to bring tariffs below WTO rates. India’s anti-protectionism crusade will otherwise lose all legitimacy.
Featured Image Source: Flickr
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